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September 30, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04656
Ellsworth Growth and Income Fund Ltd.
(Exact name of registrant as specified in charter)
One Corporate Center
Rye, New York 10580-1422
(Address of principal executive offices) (Zip code)
James A. Dinsmore
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580-1422
(Name and address of agent for service)
Registrant’s telephone number, including area
code: 1-800-422-3554
Date of fiscal year end: September 30
Date of reporting period: September 30, 2023
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission
to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of
1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection,
and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A
registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid
Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden
estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. | Reports to Stockholders. |
| (a) | The Report to Shareholders is attached herewith. |
|
Ellsworth Growth and Income Fund Ltd.
Annual Report — September 30, 2023 |
|
![](https://www.sec.gov/Archives/edgar/data/793040/000182912623007915/ecf_001.jpg) |
|
|
|
James A. Dinsmore, CFA
BA, Cornell University MBA, Rutgers University
|
To Our Shareholders,
For the fiscal year ended September 30, 2023, the net asset value (NAV) total return of the Ellsworth Growth and Income Fund Ltd. was 2.71%, compared with total returns of 7.5% and 7.9% for the ICE Bank of America U.S. Convertibles Index and the Bloomberg Balanced U.S. Convertibles Index, respectively. The total return for the Fund’s publicly traded shares was 6.99%. The Fund’s NAV per share was $9.00, while the price of the publicly traded shares closed at $8.05 on the NYSE American. See page 4 for additional performance information.
Enclosed are the financial statements, including the schedule of investments, as of September 30, 2023.
Investment Objective and Strategy (Unaudited)
The Fund’s primary investment objective is to provide income and the potential for capital appreciation, which objectives the Fund considers to be relatively equal over the long term due to the nature of the securities in which it invests. The Fund invests primarily in convertible and equity securities.
As
permitted by regulations adopted by the Securities and Exchange Commission, paper copies
of the Fund’s annual and semiannual shareholder reports will no longer be sent by mail,
unless you specifically request paper copies of the reports. Instead, the reports will be
made available on the Fund’s website (www.gabelli.com), and you will be notified by
mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected
by this change and you need not take any action. To elect to receive all future reports on
paper free of charge, please contact your financial intermediary, or, if you invest directly
with the Fund, you may call 800-422-3554 or send an email request to info@gabelli.com.
|
Performance Discussion (Unaudited)
During the fourth calendar quarter 2022, Ellsworth’s NAV rose 1.41%. This outpaced the convertible market as measured by the BAML All Convertibles Index, which was up 1.59% for the quarter. For the year 2022, performance was held back by the Fund’s use of leverage. In past years, leverage has helped NAV returns, but this year, as we faced widening credit spreads and contracting multiples that moved our market lower, the leverage worked against us. While it has been a difficult year, convertibles have outperformed their underlying equities, and now offer us a unique opportunity. Many convertibles are trading well below par, with yields to maturity often reaching double digits. These issues moved higher in the quarter, while many of our equity sensitive holdings added to the positive performance.
For the first calendar quarter 2023, Ellsworth’s NAV was up 4.0%. This outpaced the convertible market as measured by the ICE BofA US Convertible Index, which was up 3.8% for the quarter. Convertibles have remained less volatile than their underlying equities through this tumultuous time, and continue to offer us a unique opportunity. Many convertibles are trading well below par, with yields to maturity sometimes reaching double digits. These issues will remain less volatile than equities while grinding higher towards par over time. In the quarter, these issues provided a solid base for performance while some of our high conviction equity sensitive and common stock holdings moved higher, leading to the outperformance.
The convertible market had a strong second quarter 2023, highlighted by a significant rally in June that accounted for half of the year to date performance. This rally was broad in scope, with equity sensitive convertibles leading the way. We have maintained a more balanced profile than the broader market, which helps us reduce volatility while still participating in upside like we saw in June. Convertibles have remained less volatile than their underlying equities this year and continue to offer us a unique opportunity. We continue to see convertible issuers focus on the balance sheet. Many companies have addressed investor concerns by issuing more manageable converts and buying back or exchanging some percentage of their existing debt. This can be an accretive transaction for the company and usually improves the credit. Transactions like this will help the fixed income equivalent segment of our portfolio outperform, while often offering us a more attractive way to invest in a particular company.
The convertible market declined in the third calendar quarter, marking the first down quarter in over a year. The decline was felt broadly across the market, driven by a combination of weakness in underlying equities and rising interest rates. Despite this, convertibles have remained less volatile than their underlying equities this year, and continue to offer us a unique opportunity. Convertibles that are trading below par with yields to maturity comparable to fixed income will remain less volatile than equities, while accreting toward par. During the quarter, pricing of these fixed income equivalent issues was negatively impacted by rising interest rates. Many of these issues are short in duration, so we believe this trend will reverse as we approach maturity over the coming 2-3 years.
Among our stronger performing positions for the fiscal year were: Chart Industries, Inc., 6.750%, 12/15/28 (2.2% of total investments as of September 30, 2023) which manufactures and sells engineered cryogenic equipment for the industrial gas and clean energy markets in the United States and internationally; Broadcom Inc. (2.0%) which designs, develops, and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide; and Kaleyra Inc., 6.125%, 06/01/26 (1.0%) is a global group providing mobile communication services for financial institutions and enterprises worldwide.
Some of the weaker holdings in the portfolio included: American Tower Corp. (1.0%), one of the largest global REITs, is a leading independent owner, operator, and developer of multitenant communications real estate;
NextEra Energy Inc. (0.7%), through its subsidiaries, generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America; and Wolfspeed Inc., 0.250%, 2/15/28 (1.7%), which operates as a powerhouse semiconductor company focusing on silicon carbide and gallium nitride (GaN) technologies in Europe, Hong Kong, China, rest of Asia-Pacific, the United States, and internationally.
We appreciate your continued confidence and trust.
The
views expressed reflect the opinions of the Fund’s portfolio manager and Gabelli Funds,
LLC, the Adviser, as of the date of this report and are subject to change without notice
based on changes in market, economic, or other conditions. These views are not intended to
be a forecast of future events and are no guarantee of future results.
|
Comparative Results
Average
Annual Returns through September 30, 2023 (a) (b) (Unaudited)
| |
1
Year | | |
3
Year | | |
5
Year | | |
10
Year | | |
Since
Inception (6/30/86) | |
The
Ellsworth Growth and Income Fund Ltd. (ECF) | |
| | | |
| | | |
| | | |
| | | |
| | |
NAV
Total Return (c) | |
| 2.71 | % | |
| (3.77 | )% | |
| 3.51 | % | |
| 6.21 | % | |
| 7.35 | % |
Investment
Total Return (d) | |
| 6.99 | | |
| (2.43 | ) | |
| 3.34 | | |
| 7.70 | | |
| 7.86 | |
ICE
Bank of America U.S. Convertibles Index | |
| 7.49 | | |
| 3.06 | | |
| 8.35 | | |
| 8.83 | | |
| N/A | (e) |
Bloomberg
Balanced U.S. Convertibles Index | |
| 7.91 | | |
| 2.27 | | |
| 6.73 | | |
| 5.69 | | |
| N/A | (f) |
|
(a) |
The
Fund’s fiscal year ends on September 30. |
| (b) | Returns
represent past performance and do not guarantee future results. Investment returns and the
principal value of an investment will fluctuate. The Fund’s use of leverage may magnify
the volatility of net asset value changes versus funds that do not employ leverage. When
shares are sold, they may be worth more or less than their original cost. Current performance
may be lower or higher than the performance data presented. Visit www.gabelli.com for performance
information as of the most recent month end. The ICE Bank of America U.S. Convertibles Index
is a market value weighted index of all dollar denominated convertible securities that are
exchangeable into U.S. equities that have a market value of more than $50 million. The Bloomberg
Balanced U.S. Convertibles Index is a market value weighted index that tracks the performance
of publicly placed, dollar denominated convertible securities that are between 40% and 80%
sensitive to movements in their underlying common stocks. Dividends and interest income are
considered reinvested. You cannot invest directly in an index. |
|
(c) |
Total
returns and average annual returns reflect changes in the NAV per share, reinvestment of distributions at NAV on the ex-dividend
date for the period beginning November 2015, and are net of expenses. Total returns and average annual returns were not adjusted
for the 2004 rights offering. For the period from December 2008 through October 2015, distributions were reinvested on
the payable date using market prices. From inception through November 2008, distributions were reinvested on the payable date
using NAV. Since inception return is based on an initial NAV of $9.30. |
|
(d) |
Total
returns and average annual returns reflect changes in closing market values on the NYSE American and reinvestment of distributions.
Total returns and average annual returns were not adjusted for the 2004 rights offering. Since inception return is based on an initial
offering price of $10.00. |
|
(e) |
The
ICE Bank of America U.S. Convertibles Index inception date is December 31, 1994. |
|
(f) |
The
Bloomberg Balanced U.S. Convertibles Index inception date is January 1, 2003. |
Investors
should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing.
COMPARISON OF CHANGE IN VALUE
OF A $10,000 INVESTMENT IN
ELLSWORTH GROWTH AND INCOME FUND LTD (INVESTMENT TOTAL RETURN), ICE BANK OF
AMERICA U.S. CONVERTIBLES INDEX & BLOOMBERG BALANCED U.S. CONVERTIBLES INDEX
(Unaudited)
Average
Annual Total Returns* |
|
1
Year |
5
Year |
10
Year |
Investment |
6.99% |
3.34% |
7.70% |
![](https://www.sec.gov/Archives/edgar/data/793040/000182912623007915/ecf_002.jpg)
| * | Past
performance is not predictive of future results. The performance tables and graph do not
reflect the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. |
Summary of Portfolio Holdings (Unaudited)
The following tables present portfolio holdings as a percent of total investments as of September 30, 2023:
Ellsworth Growth and Income Fund Ltd.
Energy
and Utilities | |
| 15.7 | % |
Computer
Software and Services | |
| 15.3 | % |
Health
Care | |
| 11.9 | % |
Telecommunications | |
| 7.9 | % |
Semiconductors | |
| 7.9 | % |
Real
Estate Investment Trusts | |
| 7.7 | % |
U.S.
Government Obligations | |
| 7.5 | % |
Consumer
Services | |
| 4.7 | % |
Financial
Services | |
| 4.5 | % |
Security
Software | |
| 2.3 | % |
Business
Services | |
| 2.3 | % |
Diversified
Industrial | |
| 2.2 | % |
Communications
Equipment | |
| 2.1 | % |
Entertainment | |
| 1.7 | % |
Consumer
Products | |
| 1.5 | % |
Transportation | |
| 0.9 | % |
Cable
and Satellite | |
| 0.9 | % |
Computer
Hardware | |
| 0.9 | % |
Food
and Beverage | |
| 0.7 | % |
Automotive:
Parts and Accessories | |
| 0.7 | % |
Airlines | |
| 0.6 | % |
Materials | |
| 0.1 | % |
| |
| 100.0 | % |
The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (the SEC) for the first and third quarters of each fiscal year on Form N-PORT. Shareholders may obtain this information at www.gabelli.com or by calling the Fund at 800-GABELLI (800-422-3554). The Fund’s Form N-PORT is available on the SEC’s website at www.sec.gov and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
Proxy Voting
The Fund files Form N-PX with its complete proxy voting record for the twelve months ended June 30, no later than August 31 of each year. A description of the Fund’s proxy voting policies, procedures, and how each Fund voted proxies relating to portfolio securities is available without charge, upon request, by (i) calling 800-GABELLI (800-422-3554); (ii) writing to The Gabelli Funds at One Corporate Center, Rye, NY 10580-1422; or (iii) visiting the SEC’s website at www.sec.gov.
Ellsworth
Growth and Income Fund Ltd.
Schedule
of Investments — September 30, 2023
Principal
Amount |
|
|
|
|
Cost |
|
|
Market
Value |
|
| | | |
CONVERTIBLE CORPORATE BONDS — 71.5% | |
| | | |
Airlines —
0.6% | |
| | | |
| | |
$ | 930,000 | | |
Southwest
Airlines Co., | |
| | | |
| | |
| | | |
1.250%,
05/01/25 | |
$ | 939,401 | | |
$ | 926,512 | |
| | | |
| |
| | | |
| | |
| | | |
Automotive: Parts and Accessories — 0.7% | |
| 750,000 | | |
Rivian
Automotive Inc., | |
| | | |
| | |
| | | |
4.625%,
03/15/29(a) | |
| 750,000 | | |
| 1,089,750 | |
| | | |
| |
| | | |
| | |
| | | |
Business
Services — 1.8% | |
| | | |
| | |
| 2,000,000 | | |
BigBear.ai
Holdings Inc., | |
| | | |
| | |
| | | |
6.000%,
12/15/26(a) | |
| 2,000,000 | | |
| 1,370,000 | |
| 2,000,000 | | |
Perficient
Inc., | |
| | | |
| | |
| | | |
0.125%,
11/15/26 | |
| 1,920,124 | | |
| 1,612,600 | |
| | | |
| |
| 3,920,124 | | |
| 2,982,600 | |
| | | |
Cable
and Satellite — 0.9% | |
| | | |
| | |
| 1,000,000 | | |
DISH
Network Corp., | |
| | | |
| | |
| | | |
3.375%,
08/15/26 | |
| 820,562 | | |
| 606,000 | |
| 1,415,000 | | |
fuboTV
Inc., | |
| | | |
| | |
| | | |
3.250%,
02/15/26 | |
| 1,345,998 | | |
| 938,145 | |
| | | |
| |
| 2,166,560 | | |
| 1,544,145 | |
| | | |
Communications
Equipment — 2.1% | |
| | | |
| | |
| 1,700,000 | | |
Kaleyra
Inc., | |
| | | |
| | |
| | | |
6.125%,
06/01/26(a) | |
| 1,705,210 | | |
| 1,668,209 | |
| 2,000,000 | | |
Lumentum
Holdings Inc., | |
| | | |
| | |
| | | |
1.500%,
12/15/29(a) | |
| 1,959,387 | | |
| 1,823,000 | |
| | | |
| |
| 3,664,597 | | |
| 3,491,209 | |
| | | |
Computer
Hardware — 0.9% | |
| | | |
| | |
| 2,000,000 | | |
3D
Systems Corp., | |
| | | |
| | |
| | | |
Zero
Coupon, 11/15/26 | |
| 1,567,199 | | |
| 1,454,000 | |
| | | |
| |
| | | |
| | |
| | | |
Computer Software and Services — 12.9% | |
| 1,500,000 | | |
Akamai
Technologies Inc., | |
| | | |
| | |
| | | |
1.125%,
02/15/29(a) | |
| 1,499,266 | | |
| 1,520,250 | |
| 4,000,000 | | |
Bandwidth
Inc., | |
| | | |
| | |
| | | |
0.250%,
03/01/26 | |
| 3,830,140 | | |
| 3,228,000 | |
| 1,625,000 | | |
Cardlytics
Inc., | |
| | | |
| | |
| | | |
1.000%,
09/15/25 | |
| 1,642,435 | | |
| 1,008,475 | |
| 1,500,000 | | |
CSG
Systems International Inc., | |
| | | |
| | |
| | | |
3.875%,
09/15/28(a) | |
| 1,501,650 | | |
| 1,467,150 | |
| 1,915,000 | | |
Edgio
Inc., | |
| | | |
| | |
| | | |
3.500%,
08/01/25 | |
| 1,848,386 | | |
| 1,660,675 | |
| 2,590,000 | | |
i3
Verticals LLC, | |
| | | |
| | |
| | | |
1.000%,
02/15/25 | |
| 2,541,476 | | |
| 2,407,081 | |
| 2,000,000 | | |
Match
Group Financeco 3 Inc., | |
| | | |
| | |
| | | |
2.000%,
01/15/30(a) | |
| 1,882,877 | | |
| 1,751,142 | |
| 1,750,000 | | |
PAR
Technology Corp., | |
| | | |
| | |
| | | |
2.875%,
04/15/26 | |
| 1,706,008 | | |
| 1,992,900 | |
Principal
Amount | | |
| |
Cost | | |
Market
Value | |
$ | 2,000,000 | | |
Progress
Software Corp., | |
| | | |
| | |
| | | |
1.000%,
04/15/26 | |
$ | 2,001,714 | | |
$ | 2,068,000 | |
| 1,430,000 | | |
PROS
Holdings Inc., | |
| | | |
| | |
| | | |
2.250%,
09/15/27 | |
| 1,423,302 | | |
| 1,514,370 | |
| 2,000,000 | | |
Shift4
Payments Inc., | |
| | | |
| | |
| | | |
Zero
Coupon, 12/15/25 | |
| 1,991,193 | | |
| 1,978,000 | |
| 2,170,000 | | |
Veritone
Inc., | |
| | | |
| | |
| | | |
1.750%,
11/15/26 | |
| 1,896,763 | | |
| 787,927 | |
| | | |
| |
| 23,765,210 | | |
| 21,383,970 | |
| | | |
Consumer
Products — 0.8% | |
| | | |
| | |
| 1,325,000 | | |
Post
Holdings Inc., | |
| | | |
| | |
| | | |
2.500%,
08/15/27 | |
| 1,334,390 | | |
| 1,320,363 | |
| | | |
| |
| | | |
| | |
| | | |
Consumer
Services — 4.7% | |
| | | |
| | |
| 1,550,000 | | |
Live
Nation Entertainment Inc., | |
| | | |
| | |
| | | |
3.125%,
01/15/29(a) | |
| 1,595,423 | | |
| 1,611,225 | |
| 2,350,000 | | |
Marriott
Vacations Worldwide Corp., | |
| | | |
| | |
| | | |
3.250%,
12/15/27(a) | |
| 2,341,901 | | |
| 2,056,250 | |
| | | |
NCL
Corp. Ltd. | |
| | | |
| | |
| 720,000 | | |
5.375%,
08/01/25 | |
| 726,719 | | |
| 840,600 | |
| 682,000 | | |
1.125%,
02/15/27 | |
| 682,000 | | |
| 567,765 | |
| 2,505,000 | | |
Stride
Inc., | |
| | | |
| | |
| | | |
1.125%,
09/01/27 | |
| 2,379,658 | | |
| 2,644,027 | |
| | | |
| |
| 7,725,701 | | |
| 7,719,867 | |
| | | |
Energy
and Utilities — 14.3% | |
| | | |
| | |
| 1,900,000 | | |
Alliant
Energy Corp., | |
| | | |
| | |
| | | |
3.875%,
03/15/26(a) | |
| 1,909,088 | | |
| 1,844,900 | |
| 2,026,000 | | |
Array
Technologies Inc., | |
| | | |
| | |
| | | |
1.000%,
12/01/28 | |
| 1,864,136 | | |
| 2,312,679 | |
| 800,000 | | |
Bloom
Energy Corp., | |
| | | |
| | |
| | | |
3.000%,
06/01/28(a) | |
| 809,293 | | |
| 802,480 | |
| 2,000,000 | | |
CMS
Energy Corp., | |
| | | |
| | |
| | | |
3.375%,
05/01/28(a) | |
| 2,000,368 | | |
| 1,885,000 | |
| 2,000,000 | | |
Duke
Energy Corp., | |
| | | |
| | |
| | | |
4.125%,
04/15/26(a) | |
| 2,000,000 | | |
| 1,946,000 | |
| 950,000 | | |
Nabors
Industries Inc., | |
| | | |
| | |
| | | |
1.750%,
06/15/29(a) | |
| 1,017,336 | | |
| 840,275 | |
| | | |
NextEra
Energy Partners LP | |
| | | |
| | |
| 2,000,000 | | |
Zero
Coupon, 06/15/24(a) | |
| 1,908,759 | | |
| 1,902,000 | |
| 2,500,000 | | |
2.500%,
06/15/26(a) | |
| 2,411,382 | | |
| 2,132,500 | |
| 2,000,000 | | |
Northern
Oil and Gas Inc., | |
| | | |
| | |
| | | |
3.625%,
04/15/29(a) | |
| 2,099,643 | | |
| 2,480,580 | |
| 1,375,000 | | |
Ormat
Technologies Inc., | |
| | | |
| | |
| | | |
2.500%,
07/15/27 | |
| 1,375,000 | | |
| 1,340,625 | |
| 2,000,000 | | |
PPL
Capital Funding Inc., | |
| | | |
| | |
| | | |
2.875%,
03/15/28(a) | |
| 1,972,226 | | |
| 1,830,000 | |
| 1,500,000 | | |
Stem
Inc., | |
| | | |
| | |
| | | |
4.250%,
04/01/30(a) | |
| 1,500,000 | | |
| 1,218,000 | |
See
accompanying notes to financial statements.
Ellsworth
Growth and Income Fund Ltd.
Schedule
of Investments (Continued) — September 30, 2023
Principal
Amount | | |
| |
Cost | | |
Market
Value | |
| | | |
CONVERTIBLE CORPORATE BONDS (Continued) | |
| | | |
Energy
and Utilities (Continued) | |
| | | |
| | |
$ | 1,990,000 | | |
Sunnova
Energy International Inc., | |
| | | |
| | |
| | | |
2.625%,
02/15/28 | |
$ | 1,879,001 | | |
$ | 1,232,805 | |
| 2,000,000 | | |
The
Southern Co., | |
| | | |
| | |
| | | |
3.875%,
12/15/25(a) | |
| 2,004,059 | | |
| 1,954,000 | |
| | | |
| |
| 24,750,291 | | |
| 23,721,844 | |
| | | |
Entertainment —
1.1% | |
| | | |
| | |
| 1,815,000 | | |
Liberty
Media Corp.-Liberty Formula One, | |
| | | |
| | |
| | | |
2.250%,
08/15/27 | |
| 1,754,790 | | |
| 1,775,070 | |
| | | |
| |
| | | |
| | |
| | | |
Financial
Services — 4.5% | |
| | | |
| | |
| 1,500,000 | | |
Bread
Financial Holdings Inc., | |
| | | |
| | |
| | | |
4.250%,
06/15/28(a) | |
| 1,515,059 | | |
| 1,632,150 | |
| 900,000 | | |
Envestnet
Inc., | |
| | | |
| | |
| | | |
2.625%,
12/01/27(a) | |
| 910,323 | | |
| 824,850 | |
| 1,250,000 | | |
HCI
Group Inc., | |
| | | |
| | |
| | | |
4.750%,
06/01/42 | |
| 1,250,000 | | |
| 1,181,250 | |
| 2,750,000 | | |
LendingTree
Inc., | |
| | | |
| | |
| | | |
0.500%,
07/15/25 | |
| 2,245,382 | | |
| 2,193,125 | |
| 2,100,000 | | |
SoFi
Technologies Inc., | |
| | | |
| | |
| | | |
Zero
Coupon, 10/15/26(a) | |
| 1,633,885 | | |
| 1,629,600 | |
| | | |
| |
| 7,554,649 | | |
| 7,460,975 | |
| | | |
Food
and Beverage — 0.7% | |
| | | |
| | |
| 1,500,000 | | |
The
Chefs’ Warehouse Inc., | |
| | | |
| | |
| | | |
2.375%,
12/15/28(a) | |
| 1,522,710 | | |
| 1,220,550 | |
| | | |
| |
| | | |
| | |
| | | |
Health
Care — 9.2% | |
| | | |
| | |
| 1,500,000 | | |
Amphastar
Pharmaceuticals Inc., | |
| | | |
| | |
| | | |
2.000%,
03/15/29(a) | |
| 1,514,885 | | |
| 1,498,500 | |
| 3,000,000 | | |
Coherus
Biosciences Inc., | |
| | | |
| | |
| | | |
1.500%,
04/15/26 | |
| 2,376,291 | | |
| 1,837,500 | |
| 2,125,000 | | |
CONMED
Corp., | |
| | | |
| | |
| | | |
2.250%,
06/15/27 | |
| 2,081,595 | | |
| 2,033,625 | |
| 1,000,000 | | |
Cutera
Inc., | |
| | | |
| | |
| | | |
2.250%,
03/15/26 | |
| 1,000,000 | | |
| 715,000 | |
| 750,000 | | |
Dexcom
Inc., | |
| | | |
| | |
| | | |
0.375%,
05/15/28(a) | |
| 773,273 | | |
| 669,000 | |
| | | |
Exact
Sciences Corp. | |
| | | |
| | |
| 1,000,000 | | |
0.375%,
03/01/28 | |
| 983,641 | | |
| 868,100 | |
| 1,200,000 | | |
2.000%,
03/01/30(a) | |
| 1,321,980 | | |
| 1,326,000 | |
| 2,300,000 | | |
Halozyme
Therapeutics Inc., | |
| | | |
| | |
| | | |
1.000%,
08/15/28 | |
| 2,230,708 | | |
| 2,159,125 | |
| 1,500,000 | | |
Insulet
Corp., | |
| | | |
| | |
| | | |
0.375%,
09/01/26 | |
| 1,526,852 | | |
| 1,474,500 | |
Principal
Amount | | |
| |
Cost | | |
Market
Value | |
$ | 1,015,000 | | |
Invacare
Corp., Escrow, | |
| | | |
| | |
| | | |
Zero
Coupon, 05/08/28(b) | |
$ | 0 | | |
$ | 0 | |
| 1,390,000 | | |
PetIQ
Inc., | |
| | | |
| | |
| | | |
4.000%,
06/01/26 | |
| 1,390,000 | | |
| 1,352,644 | |
| 1,500,000 | | |
TransMedics
Group Inc., | |
| | | |
| | |
| | | |
1.500%,
06/01/28(a) | |
| 1,523,402 | | |
| 1,362,150 | |
| | | |
| |
| 16,722,627 | | |
| 15,296,144 | |
| | | |
Materials —
0.1% | |
| | | |
| | |
| 345,000 | | |
Danimer
Scientific Inc., | |
| | | |
| | |
| | | |
3.250%,
12/15/26(a) | |
| 345,000 | | |
| 124,200 | |
| | | |
| |
| | | |
| | |
| | | |
Real Estate Investment Trusts — 2.8% | |
| 375,000 | | |
Braemar
Hotels & Resorts Inc., | |
| | | |
| | |
| | | |
4.500%,
06/01/26 | |
| 375,000 | | |
| 319,125 | |
| 317,000 | | |
Pebblebrook
Hotel Trust, | |
| | | |
| | |
| | | |
1.750%,
12/15/26 | |
| 317,000 | | |
| 264,505 | |
| | | |
Redwood
Trust Inc. | |
| | | |
| | |
| 2,000,000 | | |
5.625%,
07/15/24 | |
| 1,945,175 | | |
| 1,980,006 | |
| 1,000,000 | | |
7.750%,
06/15/27 | |
| 1,000,000 | | |
| 899,375 | |
| 1,330,000 | | |
Summit
Hotel Properties Inc., | |
| | | |
| | |
| | | |
1.500%,
02/15/26 | |
| 1,333,064 | | |
| 1,123,850 | |
| | | |
| |
| 4,970,239 | | |
| 4,586,861 | |
| | | |
Security
Software — 2.3% | |
| | | |
| | |
| 3,000,000 | | |
2U
Inc., | |
| | | |
| | |
| | | |
2.250%,
05/01/25 | |
| 2,897,198 | | |
| 1,821,000 | |
| 175,000 | | |
Rapid7
Inc., | |
| | | |
| | |
| | | |
1.250%,
03/15/29(a) | |
| 175,000 | | |
| 170,450 | |
| 1,515,000 | | |
Zscaler
Inc., | |
| | | |
| | |
| | | |
0.125%,
07/01/25 | |
| 1,522,813 | | |
| 1,827,090 | |
| | | |
| |
| 4,595,011 | | |
| 3,818,540 | |
| | | |
Semiconductors —
5.9% | |
| | | |
| | |
| 2,000,000 | | |
Impinj
Inc., | |
| | | |
| | |
| | | |
1.125%,
05/15/27 | |
| 1,910,954 | | |
| 1,743,800 | |
| 1,500,000 | | |
indie
Semiconductor Inc., | |
| | | |
| | |
| | | |
4.500%,
11/15/27(a) | |
| 1,534,158 | | |
| 1,549,500 | |
| 1,125,000 | | |
ON
Semiconductor Corp., | |
| | | |
| | |
| | | |
0.500%,
03/01/29(a) | |
| 1,125,757 | | |
| 1,240,875 | |
| 2,500,000 | | |
Semtech
Corp., | |
| | | |
| | |
| | | |
1.625%,
11/01/27(a) | |
| 2,352,155 | | |
| 2,348,750 | |
| 4,275,000 | | |
Wolfspeed
Inc., | |
| | | |
| | |
| | | |
1.875%,
12/01/29(a) | |
| 3,472,207 | | |
| 2,802,263 | |
| | | |
| |
| 10,395,231 | | |
| 9,685,188 | |
| | | |
Telecommunications —
4.3% | |
| | | |
| | |
| 2,060,000 | | |
8x8
Inc., | |
| | | |
| | |
| | | |
0.500%,
02/01/24 | |
| 2,070,749 | | |
| 1,987,903 | |
| | | |
Infinera
Corp. | |
| | | |
| | |
| 1,250,000 | | |
2.500%,
03/01/27 | |
| 1,218,520 | | |
| 1,106,204 | |
See
accompanying notes to financial statements.
Ellsworth
Growth and Income Fund Ltd.
Schedule
of Investments (Continued) — September 30, 2023
Principal
Amount | | |
| |
Cost | | |
Market
Value | |
| | | |
CONVERTIBLE CORPORATE BONDS (Continued) | |
| | | |
Telecommunications
(Continued) | |
| | | |
| | |
$ | 325,000 | | |
3.750%,
08/01/28 | |
$ | 325,000 | | |
$ | 304,260 | |
| 2,000,000 | | |
InterDigital
Inc., | |
| | | |
| | |
| | | |
3.500%,
06/01/27 | |
| 2,037,274 | | |
| 2,363,800 | |
| 1,500,000 | | |
Liberty
Latin America Ltd., | |
| | | |
| | |
| | | |
2.000%,
07/15/24 | |
| 1,449,166 | | |
| 1,417,500 | |
| | | |
| |
| 7,100,709 | | |
| 7,179,667 | |
| | | |
Transportation —
0.9% | |
| | | |
| | |
| 1,600,000 | | |
Air
Transport Services Group Inc., | |
| | | |
| | |
| | | |
3.875%,
08/15/29(a) | |
| 1,600,000 | | |
| 1,578,400 | |
| | | |
| |
| | | |
| | |
| | | |
TOTAL
CONVERTIBLE CORPORATE BONDS | |
| 127,144,439 | | |
| 118,359,855 | |
Shares | | |
| |
| | |
| |
| | | |
CONVERTIBLE PREFERRED STOCKS — 0.5% | |
| | | |
Business
Services — 0.0% | |
| | | |
| | |
| 809,253 | | |
Amerivon
Holdings LLC, | |
| | | |
| | |
| | | |
4.000%(b) | |
| 1,294,693 | | |
| 0 | |
| 272,728 | | |
Amerivon
Holdings LLC, common
equity units(b) | |
| 0 | | |
| 3 | |
| | | |
| |
| 1,294,693 | | |
| 3 | |
| | | |
Health
Care — 0.5% | |
| | | |
| | |
| 31,218 | | |
Invacare
Holdings Corp., Ser.
A, | |
| | | |
| | |
| | | |
9.000%(b) | |
| 780,444 | | |
| 780,450 | |
| | | |
| |
| | | |
| | |
| | | |
TOTAL
CONVERTIBLE PREFERRED STOCKS | |
| 2,075,137 | | |
| 780,453 | |
| | | |
| |
| | | |
| | |
| | | |
MANDATORY CONVERTIBLE SECURITIES(c) — 2.9% | |
| | | |
Diversified
Industrial — 2.2% | |
| | | |
| | |
| 55,606 | | |
Chart
Industries Inc., Ser. B, | |
| | | |
| | |
| | | |
6.750%,
12/15/25 | |
| 3,028,158 | | |
| 3,707,808 | |
| | | |
| |
| | | |
| | |
| | | |
Energy
and Utilities — 0.7% | |
| | | |
| | |
| 30,000 | | |
NextEra
Energy Inc., | |
| | | |
| | |
| | | |
6.926%,
09/01/25 | |
| 1,408,056 | | |
| 1,134,900 | |
| | | |
| |
| | | |
| | |
| | | |
TOTAL
MANDATORY CONVERTIBLE SECURITIES | |
| 4,436,214 | | |
| 4,842,708 | |
| | | |
| |
| | | |
| | |
| | | |
COMMON
STOCKS — 17.6% | |
| | | |
| | |
| | | |
Business
Services — 0.5% | |
| | | |
| | |
| 13,000 | | |
PayPal
Holdings Inc.† | |
| 532,384 | | |
| 759,980 | |
| | | |
| |
| | | |
| | |
| | | |
Computer Software and Services — 2.4% | |
| 12,300 | | |
Microsoft
Corp. | |
| 334,314 | | |
| 3,883,725 | |
Shares | | |
| |
Cost | | |
Market
Value | |
| | | |
Consumer
Products — 0.7% | |
| | | |
| | |
| 24,000 | | |
Unilever
plc, ADR | |
$ | 1,015,518 | | |
$ | 1,185,600 | |
| | | |
| |
| | | |
| | |
| | | |
Energy
and Utilities — 0.7% | |
| | | |
| | |
| 18,775 | | |
NextEra
Energy Inc. | |
| 1,334,781 | | |
| 1,075,620 | |
| | | |
| |
| | | |
| | |
| | | |
Entertainment —
0.6% | |
| | | |
| | |
| 12,500 | | |
The
Walt Disney Co.† | |
| 643,842 | | |
| 1,013,125 | |
| | | |
| |
| | | |
| | |
| | | |
Health
Care — 2.2% | |
| | | |
| | |
| 13,970 | | |
Invacare
Holdings Corp.†(b) | |
| 0 | | |
| 140 | |
| 22,651 | | |
Merck
& Co. Inc. | |
| 803,270 | | |
| 2,331,920 | |
| 40,000 | | |
Pfizer
Inc. | |
| 877,602 | | |
| 1,326,800 | |
| | | |
| |
| 1,680,872 | | |
| 3,658,860 | |
| | | |
Real
Estate Investment Trusts — 4.9% | |
| | | |
| | |
| 10,000 | | |
American
Tower Corp. | |
| 900,500 | | |
| 1,644,500 | |
| 16,100 | | |
Crown
Castle Inc. | |
| 1,136,377 | | |
| 1,481,683 | |
| 5,000 | | |
Equinix
Inc. | |
| 1,308,171 | | |
| 3,631,300 | |
| 7,000 | | |
SBA
Communications Corp. | |
| 710,771 | | |
| 1,401,190 | |
| | | |
| |
| 4,055,819 | | |
| 8,158,673 | |
| | | |
Semiconductors —
2.0% | |
| | | |
| | |
| 4,058 | | |
Broadcom
Inc. | |
| 1,341,254 | | |
| 3,370,493 | |
| | | |
| |
| | | |
| | |
| | | |
Telecommunications —
3.6% | |
| | | |
| | |
| 60,000 | | |
AT&T
Inc. | |
| 851,496 | | |
| 901,200 | |
| 24,619 | | |
T-Mobile
US Inc.† | |
| 1,678,163 | | |
| 3,447,891 | |
| 50,000 | | |
Verizon
Communications Inc. | |
| 1,697,148 | | |
| 1,620,500 | |
| | | |
| |
| 4,226,807 | | |
| 5,969,591 | |
| | | |
TOTAL
COMMON STOCKS | |
| 15,165,591 | | |
| 29,075,667 | |
Principal
Amount | | |
| |
| | |
| |
| | | |
U.S.
GOVERNMENT OBLIGATIONS — 7.5% | |
$ | 12,478,000 | | |
U.S.
Treasury Bills, | |
| | | |
| | |
| | | |
5.336% to 5.446%††, 11/09/23 to 03/14/24 | |
| 12,342,101 | | |
| 12,344,023 | |
|
|
|
|
| |
| | | |
| | |
TOTAL
INVESTMENTS — 100.0% | |
$ | 161,163,482 | | |
| 165,402,706 | |
| |
| | | |
| | |
Other
Assets and Liabilities (Net) | |
| | | |
| 605,040 | |
| |
| | | |
| | |
PREFERRED
SHARES | |
| | | |
| | |
(2,470,315
preferred shares outstanding) | |
| | | |
| (42,212,875 | ) |
| |
| | | |
| | |
NET
ASSETS — COMMON SHARES | |
| | | |
| | |
(13,748,708
common shares outstanding) | |
| | | |
$ | 123,794,871 | |
| |
| | | |
| | |
NET
ASSET VALUE PER COMMON SHARE | |
| | | |
| | |
($123,794,871
÷ 13,748,708 shares outstanding) | |
| | | |
$ | 9.00 | |
See
accompanying notes to financial statements.
Ellsworth
Growth and Income Fund Ltd.
Schedule
of Investments (Continued) — September 30, 2023
| (a) | Securities
exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These
securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers. |
| (b) | Security
is valued using significant unobservable inputs and is classified as Level 3 in the fair
value hierarchy. |
| (c) | Mandatory
convertible securities are required to be converted on the dates listed; they generally may
be converted prior to these dates at the option of the holder. |
| † | Non-income
producing security. |
| †† | Represents
annualized yields at dates of purchase. |
| ADR | American
Depositary Receipt |
See
accompanying notes to financial statements.
Ellsworth
Growth and Income Fund Ltd.
Statement of Assets and Liabilities
September 30, 2023
Assets: | |
| | |
Investments,
at value (cost $161,163,482) | |
$ | 165,402,706 | |
Cash | |
| 43,926 | |
Receivable
for investments sold | |
| 12 | |
Dividends
and interest receivable | |
| 804,923 | |
Deferred
offering expense | |
| 163,524 | |
Total
Assets | |
| 166,415,091 | |
Liabilities: | |
| | |
Distributions
payable | |
| 200,080 | |
Payable
for investment advisory fees | |
| 97,370 | |
Payable
for payroll expenses | |
| 29,667 | |
Payable
for accounting fees | |
| 7,500 | |
Payable
for legal and audit fees | |
| 28,100 | |
Payable
for shareholder services fees | |
| 24,811 | |
Other
accrued expenses | |
| 19,817 | |
Total
Liabilities | |
| 407,345 | |
Preferred
Shares: | |
| | |
Series
A Cumulative Preferred Shares (5.250%, $25 liquidation value, $0.01 par value, unlimited shares authorized with 1,167,315 shares
issued and outstanding) | |
| 29,182,875 | |
Series
B Preferred Shares (5.200%, $10 liquidation value, unlimited shares authorized with 1,303,000 shares issued and outstanding) | |
| 13,030,000 | |
Net
Assets Attributable to Common Shareholders | |
$ | 123,794,871 | |
| |
| | |
Net
Assets Attributable to Common Shareholders Consist of: | |
| | |
Paid-in
capital | |
$ | 120,046,250 | |
Total
distributable earnings | |
| 3,748,621 | |
Net
Assets | |
$ | 123,794,871 | |
| |
| | |
Net
Asset Value per Common Share: | |
| | |
($123,794,871
÷ 13,748,708 shares outstanding at $0.01 par value; unlimited number of shares authorized) | |
$ | 9.00 | |
Statement of Operations
For the Year Ended September 30, 2023
Investment Income: | |
| | |
Dividends | |
$ | 1,239,998 | |
Interest | |
| 4,256,805 | |
Total Investment Income | |
| 5,496,803 | |
Expenses: | |
| | |
Investment advisory fees | |
| 1,257,912 | |
Trustees’ fees | |
| 132,217 | |
Shareholder communications expenses | |
| 101,740 | |
Legal and audit fees | |
| 98,102 | |
Payroll expenses | |
| 78,767 | |
Shareholder services fees | |
| 67,153 | |
Accounting fees | |
| 45,000 | |
Custodian fees | |
| 16,947 | |
Interest expense | |
| 1,365 | |
Miscellaneous expenses | |
| 70,868 | |
Total Expenses | |
| 1,870,071 | |
Less: | |
| | |
Expenses paid indirectly by broker (See Note 5) | |
| (2,687 | ) |
Net Expenses | |
| 1,867,384 | |
Net Investment Income | |
| 3,629,419 | |
| |
| | |
Net Realized and
Unrealized Gain/(Loss) on Investments: | |
| | |
Net realized gain on investments | |
| 6,835,736 | |
Net change in unrealized appreciation/depreciation: | |
| | |
on investments | |
| (4,146,493 | ) |
Net Realized and
Unrealized Gain/(Loss) on Investments | |
| 2,689,243 | |
Net Increase in
Net Assets Resulting from Operations | |
| 6,318,662 | |
Total Distributions to Preferred Shareholders | |
| (2,568,749 | ) |
Net Increase in
Net Assets Attributable to Common Shareholders Resulting from Operations | |
$ | 3,749,913 | |
See accompanying notes to financial statements.
Ellsworth Growth and Income Fund Ltd.
Statement of Changes in Net Assets Attributable
to Common Shareholders
|
|
Year
Ended
September 30, 2023 |
|
|
Year
Ended September 30,
2022 |
|
Operations: | |
| | | |
| | |
Net
investment income | |
$ | 3,629,419 | | |
$ | 1,211,817 | |
Net
realized gain on investments | |
| 6,835,736 | | |
| 4,874,085 | |
Net
change in unrealized appreciation/depreciation on investments | |
| (4,146,493 | ) | |
| (56,826,223 | ) |
Net
Increase/(Decrease) in Net Assets Resulting from Operations | |
| 6,318,662 | | |
| (50,740,321 | ) |
| |
| | | |
| | |
Distributions
to Preferred Shareholders from Accumulated Earnings | |
| (2,568,749 | ) | |
| (1,850,301 | ) |
| |
| | | |
| | |
Net
Increase/(Decrease) in Net Assets Attributable to Common Shareholders Resulting from Operations | |
| 3,749,913 | | |
| (52,590,622 | ) |
| |
| | | |
| | |
Distributions
to Common Shareholders: | |
| | | |
| | |
Accumulated
earnings | |
| (6,384,526 | ) | |
| (20,361,432 | ) |
Return
of capital | |
| (763,384 | ) | |
| — | |
Total
Distributions to Common Shareholders | |
| (7,147,910 | ) | |
| (20,361,432 | ) |
| |
| | | |
| | |
Fund
Share Transactions: | |
| | | |
| | |
Net
increase in net assets from common shares issued upon reinvestment of distributions | |
| 635,918 | | |
| 5,154,319 | |
Net
decrease in net assets from repurchase of common shares | |
| (261,930 | ) | |
| (2,068,339 | ) |
Net
increase in net assets from repurchase of preferred shares | |
| 78,268 | | |
| 2,575 | |
Offering
costs for preferred shares charged to paid-in capital | |
| — | | |
| (142,500 | ) |
Adjustment
to offering costs for preferred shares charged to paid-in capital | |
| 17,983 | | |
| — | |
Net
Increase in Net Assets from Fund Share Transactions | |
| 470,239 | | |
| 2,946,055 | |
| |
| | | |
| | |
Net
Decrease in Net Assets Attributable to Common Shareholders | |
| (2,927,758 | ) | |
| (70,005,999 | ) |
| |
| | | |
| | |
Net
Assets Attributable to Common Shareholders: | |
| | | |
| | |
Beginning
of year | |
| 126,722,629 | | |
| 196,728,628 | |
End
of year | |
$ | 123,794,871 | | |
$ | 126,722,629 | |
See accompanying notes to financial statements.
Ellsworth Growth
and Income Fund Ltd.
Financial Highlights
Selected data for a common share of beneficial
interest outstanding throughout each year:
| |
Year
Ended September 30, | |
| |
2023 | | |
2022 | | |
2021 | | |
2020 | | |
2019 | |
Operating
Performance: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
asset value, beginning of year | |
$ | 9.25 | | |
$ | 14.57 | | |
$ | 13.15 | | |
$ | 11.42 | | |
$ | 11.07 | |
Net
investment income | |
| 0.26 | | |
| 0.09 | | |
| 0.13 | | |
| 0.16 | | |
| 0.20 | |
Net
realized and unrealized gain/(loss) on investments | |
| 0.20 | | |
| (3.74 | ) | |
| 2.75 | | |
| 2.50 | | |
| 0.77 | |
Total
from investment operations | |
| 0.46 | | |
| (3.65 | ) | |
| 2.88 | | |
| 2.66 | | |
| 0.97 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Distributions
to Preferred Shareholders: (a) | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
investment income | |
| (0.09 | ) | |
| (0.02 | ) | |
| (0.01 | ) | |
| (0.01 | ) | |
| (0.03 | ) |
Net
realized gain | |
| (0.10 | ) | |
| (0.11 | ) | |
| (0.11 | ) | |
| (0.11 | ) | |
| (0.09 | ) |
Total
distributions to preferred shareholders | |
| (0.19 | ) | |
| (0.13 | ) | |
| (0.12 | ) | |
| (0.12 | ) | |
| (0.12 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Increase/(Decrease) in Net Assets Attributable to Common Shareholders Resulting from Operations | |
| 0.27 | | |
| (3.78 | ) | |
| 2.76 | | |
| 2.54 | | |
| 0.85 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Distributions
to Common Shareholders: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
investment income | |
| (0.23 | ) | |
| (0.19 | ) | |
| (0.17 | ) | |
| (0.14 | ) | |
| (0.12 | ) |
Net
realized gain | |
| (0.23 | ) | |
| (1.31 | ) | |
| (1.16 | ) | |
| (0.67 | ) | |
| (0.37 | ) |
Return
of capital | |
| (0.06 | ) | |
| — | | |
| — | | |
| — | | |
| — | |
Total
distributions to common shareholders | |
| (0.52 | ) | |
| (1.50 | ) | |
| (1.33 | ) | |
| (0.81 | ) | |
| (0.49 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Fund
Share Transactions: | |
| | | |
| | | |
| | | |
| | | |
| | |
Decrease
in net asset value from common shares issued upon reinvestment of distributions | |
| (0.01 | ) | |
| (0.05 | ) | |
| (0.01 | ) | |
| (0.00 | )(b) | |
| (0.01 | ) |
Increase
in net asset value from repurchase of common shares (includes transaction costs) | |
| 0.00 | (b) | |
| 0.02 | | |
| — | | |
| — | | |
| — | |
Increase
in net asset value from repurchase of preferred shares | |
| 0.01 | | |
| 0.00 | (b) | |
| — | | |
| — | | |
| — | |
Offering
costs and adjustment to offering costs for preferred shares charged to paid-in capital | |
| 0.00 | (b) | |
| (0.01 | ) | |
| — | | |
| — | | |
| — | |
Total
Fund share transactions | |
| 0.00 | (b) | |
| (0.04 | ) | |
| (0.01 | ) | |
| (0.00 | )(b) | |
| (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Asset Value Attributable to Common Shareholders, End of Year | |
$ | 9.00 | | |
$ | 9.25 | | |
$ | 14.57 | | |
$ | 13.15 | | |
$ | 11.42 | |
NAV
total return † | |
| 2.71 | % | |
| (28.73 | )% | |
| 21.75 | % | |
| 23.56 | % | |
| 7.89 | % |
Market
value, end of year | |
$ | 8.05 | | |
$ | 8.01 | | |
$ | 13.36 | | |
$ | 11.55 | | |
$ | 10.49 | |
Investment
total return †† | |
| 6.99 | % | |
| (31.71 | )% | |
| 27.12 | % | |
| 18.60 | % | |
| 6.98 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Ratios
to Average Net Assets and Supplemental Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
assets including liquidation value of preferred shares, end of year (in 000’s) | |
$ | 166,008 | | |
$ | 181,713 | | |
$ | 226,729 | | |
$ | 203,596 | | |
$ | 178,692 | |
Net
assets attributable to common shares, end of year (in 000’s) | |
$ | 123,795 | | |
$ | 126,723 | | |
$ | 196,729 | | |
$ | 173,596 | | |
$ | 148,692 | |
Ratio
of net investment income to average net assets attributable to common shares before preferred share distributions | |
| 2.74 | % | |
| 0.74 | % | |
| 0.79 | % | |
| 1.36 | % | |
| 1.80 | % |
Ratio
of operating expenses to average net assets attributable to common shares (c)(d) | |
| 1.41 | % | |
| 1.16 | % | |
| 1.01 | % | |
| 1.23 | % | |
| 1.20 | % |
Portfolio
turnover rate | |
| 47 | % | |
| 37 | % | |
| 34 | % | |
| 52 | % | |
| 52 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cumulative
Preferred Shares: | |
| | | |
| | | |
| | | |
| | | |
| | |
5.250%
Series A Preferred | |
| | | |
| | | |
| | | |
| | | |
| | |
Liquidation
value, end of year (in 000’s) | |
$ | 29,183 | | |
$ | 29,961 | | |
$ | 30,000 | | |
$ | 30,000 | | |
$ | 30,000 | |
Total
shares outstanding (in 000’s) | |
| 1,167 | | |
| 1,198 | | |
| 1,200 | | |
| 1,200 | | |
| 1,200 | |
Liquidation
preference per share | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | |
Average
market value (e) | |
$ | 23.04 | | |
$ | 24.82 | | |
$ | 26.10 | | |
$ | 25.59 | | |
$ | 24.64 | |
Asset
coverage per share (f) | |
$ | 98.32 | | |
$ | 82.61 | | |
$ | 188.94 | | |
$ | 169.66 | | |
$ | 148.91 | |
See accompanying notes to financial statements.
Ellsworth Growth
and Income Fund Ltd.
Financial Highlights
(Continued)
Selected data for a common share of beneficial
interest outstanding throughout each year:
| |
Year
Ended September 30, | |
| |
2023 | | |
2022 | | |
2021 | | |
2020 | | |
2019 | |
5.200%
Series B Preferred | |
| | | |
| | | |
| | | |
| | | |
| | |
Liquidation
value, end of year (in 000’s) | |
$ | 13,030 | | |
$ | 25,030 | | |
| — | | |
| — | | |
| — | |
Total
shares outstanding (in 000’s) | |
| 1,303 | | |
| 2,503 | | |
| — | | |
| — | | |
| — | |
Liquidation
preference per share | |
$ | 10.00 | | |
$ | 10.00 | | |
| — | | |
| — | | |
| — | |
Average
market value (e)(g) | |
$ | 10.00 | | |
| — | | |
| — | | |
| — | | |
| — | |
Asset
coverage per share (f) | |
$ | 39.33 | | |
$ | 33.04 | | |
| — | | |
| — | | |
| — | |
Asset
Coverage (h) | |
| 393 | % | |
| 330 | % | |
| 756 | % | |
| 679 | % | |
| 596 | % |
† | Based
on net asset value per share, adjusted for reinvestment of distributions at net asset value
on the ex-dividend date. |
†† | Based
on market value per share, adjusted for reinvestment of distributions at prices obtained
under the Fund’s dividend reinvestment plan. |
(a) | Calculated
based on average common shares outstanding on the record dates throughout the years. |
(b) | Amount
represents less than $0.005 per share. |
(c) | The
Fund received credits from a designated broker who agreed to pay certain Fund operating expenses.
For all fiscal years presented, there was no impact on the expense ratios. |
(d) | Ratio
of operating expenses to average net assets including liquidation value of preferred shares
for the fiscal years ended September 30, 2023, 2022, 2021, 2020, and 2019 would have been
1.02%, 0.95%, 0.88%, 1.03%, 0.99%, and 0.96%, respectively. (e) Based on weekly prices. |
(f) | |
(g) | |
(h) | Asset
coverage is calculated by combining all series of preferred stock. |
See
accompanying notes to financial statements.
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements
1. Organization. The Ellsworth Growth and Income Fund Ltd. is organized as a Delaware statutory trust.
The Fund is a diversified closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the 1940 Act). The Fund commenced investment
operations on July 1, 1986.
The Fund’s primary investment objective is to provide income and the potential for capital
appreciation, which objectives the Fund considers to be relatively equal over the
long term due to the nature of the securities in which it invests. The Fund invests
primarily in convertible and equity securities.
2. Significant Accounting Policies. As an investment company, the Fund follows the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting
principles (GAAP) that may require the use of management estimates and assumptions
in the preparation of its financial statements. Actual results could differ from those
estimates. The following is a summary of significant accounting policies followed
by the Fund in the preparation of its financial statements.
The global outbreak of the novel coronavirus disease, known as COVID-19, has caused
adverse effects on many companies, sectors, nations, regions, and the markets in general,
and may continue for an unpredictable duration. The effects of this pandemic may materially
impact the value and performance of the Fund, its ability to buy and sell fund investments
at appropriate valuations, and its ability to achieve its investment objectives.
Security Valuation. Portfolio securities listed or traded on a nationally recognized securities exchange
or traded in the U.S. over-the-counter market for which market quotations are readily
available are valued at the last quoted sale price or a market’s official closing price as of the close of business on the day the securities are
being valued. If there were no sales that day, the security is valued at the average
of the closing bid and asked prices or, if there were no asked prices quoted on that
day, then the security is valued at the closing bid price on that day. If no bid or
asked prices are quoted on such day, the security is valued at the most recently available
price or, if the Board of Trustees (the Board) so determines, by such other method
as the Board shall determine in good faith to reflect its fair market value. Portfolio
securities traded on more than one national securities exchange or market are valued
according to the broadest and most representative market, as determined by Gabelli
Funds, LLC (the Adviser).
Portfolio securities primarily traded on a foreign market are generally valued at
the preceding closing values of such securities on the relevant market, but may be
fair valued pursuant to procedures established by the Board if market conditions change significantly after the close
of the foreign market, but prior to the close of business on the day the securities
are being valued. Debt obligations for which market quotations are readily available
are valued at the average of the latest bid and asked prices. If there were no asked
prices quoted on such day, the securities are valued using the closing bid price,
unless the Board determines such amount does not reflect the securities’ fair value, in which case these securities will be fair valued as determined by the
Board. Certain securities are valued principally using dealer quotations. Futures
contracts are valued at the closing settlement price of the exchange or board of trade
on which the applicable contract is traded. OTC futures and options on futures for
which market quotations are readily available will be valued by quotations received
from a pricing service or, if no quotations are available from a pricing service,
by quotations obtained from one or more dealers in the instrument in question by the Adviser.
Securities and assets for which market quotations are not readily available are fair
valued as determined by the Board. Fair valuation methodologies and procedures may
include, but are not limited to: analysis and review of available financial and non-financial
information about the company; comparisons with the valuation and
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
changes in valuation of similar securities, including a comparison of foreign securities
with the equivalent U.S. dollar value American Depositary Receipt securities at the
close of the U.S. exchange; and evaluation of any other information that could be
indicative of the value of the security.
The inputs and valuation techniques used to measure fair value of the Fund’s investments are summarized into three levels as described in the hierarchy below:
| ● | Level 1 — quoted prices in active markets for identical
securities; |
| ● | Level 2 — other significant observable inputs (including
quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.); and |
| ● | Level 3 — significant unobservable inputs (including the
Board’s determinations as to the fair value of investments). |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input
both individually and in the aggregate that is significant to the fair value measurement.
The inputs or methodology used for valuing securities are not necessarily an indication
of the risk associated with investing in those securities. The summary of the Fund’s investments in securities by inputs used to value the Fund’s investments as of September 30, 2023 is as follows:
| |
Valuation Inputs |
|
|
| |
|
|
Level 1
Quoted Prices |
|
|
Level
2
Other Significant
Observable Inputs |
|
|
Level
3
Significant
Unobservable
Inputs (a) |
|
|
Total
Market Value
at 09/30/23 |
|
INVESTMENTS
IN SECURITIES: | |
| | | |
| | | |
| | | |
| | |
ASSETS
(Market Value): | |
| | | |
| | | |
| | | |
| | |
Convertible
Corporate Bonds (b) | |
| — | | |
$ | 118,359,855 | | |
| — | | |
$ | 118,359,855 | |
Convertible
Preferred Stocks (b) | |
| — | | |
| — | | |
$ | 780,453 | | |
| 780,453 | |
Mandatory
Convertible Securities(b) | |
$ | 4,842,708 | | |
| — | | |
| — | | |
| 4,842,708 | |
Common
Stocks: | |
| | | |
| | | |
| | | |
| | |
Other
Industries (b) | |
| 29,075,527 | | |
| — | | |
| 140 | | |
| 29,075,667 | |
Total
Common Stocks | |
| 29,075,527 | | |
| — | | |
| 140 | | |
| 29,075,667 | |
U.S.
Government Obligations | |
| — | | |
| 12,344,023 | | |
| — | | |
| 12,344,023 | |
TOTAL
INVESTMENTS IN SECURITIES – ASSETS | |
$ | 33,918,235 | | |
$ | 130,703,878 | | |
$ | 780,593 | | |
$ | 165,402,706 | |
| (a) | The inputs for these securities are not readily available and
are derived based on the judgment of the Adviser according to procedures approved by the Board. |
| (b) | Please refer to the Schedule of Investments for the industry
classifications of these portfolio holdings. |
During the fiscal year ended September 30, 2023, the Fund did not have transfers into or out of Level 3. The Fund’s policy is to recognize transfers among Levels as of the beginning of the reporting
period.
Additional Information to Evaluate Qualitative Information.
General. The
Fund uses recognized industry pricing services – approved by the Board and unaffiliated with the Adviser – to value most
of its securities, and uses broker quotes provided by market makers of securities not valued by these and other recognized pricing
sources. Several different pricing feeds are received to value domestic equity securities, international equity securities,
preferred equity securities, and fixed income securities. The data within these feeds are ultimately sourced from major stock
exchanges and trading systems where these securities trade. The prices supplied by external sources are checked by obtaining
quotations
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
or actual transaction prices from market participants. If a price obtained from the
pricing source is deemed unreliable, prices will be sought from another pricing service
or from a broker/dealer that trades that security or similar securities.
Fair Valuation. Fair valued securities may be common or preferred equities, warrants, options, rights,
or fixed income obligations. Where appropriate, Level 3 securities are those for which
market quotations are not available, such as securities not traded for several days,
or for which current bids are not available, or which are restricted as to transfer.
When fair valuing a security, factors to consider include recent prices of comparable
securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or
cash flow of the issuer, or cost if the preceding factors do not apply. A significant
change in the unobservable inputs could result in a lower or higher value in Level
3 securities. The circumstances of Level 3 securities are frequently monitored to
determine if fair valuation measures continue to apply.
The Adviser reports quarterly to the Board the results of the application of fair
valuation policies and procedures. These may include backtesting the prices realized
in subsequent trades of these fair valued securities to fair values previously recognized.
Investments in Other Investment Companies.
The Fund may invest, from time to time, in shares of other investment companies (or entities that would be considered investment
companies but are excluded from the definition pursuant to certain exceptions under the 1940 Act) (the Acquired Funds) in accordance
with the 1940 Act and related rules. Shareholders in the Fund would bear the pro rata portion of the periodic expenses of the Acquired
Funds in addition to the Fund’s expenses. During the fiscal year ended September 30, 2023, the Fund did not incur any periodic
expenses charged by Acquired Funds.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments, and other assets and liabilities are translated into U.S.
dollars at current exchange rates. Purchases and sales of investment securities, income,
and expenses are translated at the exchange rate prevailing on the respective dates
of such transactions. Unrealized gains and losses that result from changes in foreign
exchange rates and/or changes in market prices of securities have been included in
unrealized appreciation/depreciation on investments and foreign currency translations. Net realized
foreign currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions, and the difference between
the amounts of interest and dividends recorded on the books of the Fund and the amounts
actually received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase trade date and subsequent sale
trade date is included in realized gain/(loss) on investments.
Foreign Securities. The Fund may directly purchase securities of foreign issuers. Investing in securities
of foreign issuers involves special risks not typically associated with investing in
securities of U.S. issuers. The risks include possible revaluation of currencies,
the inability to repatriate funds, less complete financial information about companies,
and possible future adverse political and economic developments. Moreover, securities
of many foreign issuers and their markets may be less liquid and their prices more
volatile than securities of comparable U.S. issuers.
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
Foreign Taxes. The Fund may be subject to foreign taxes on income, gains on investments, or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes
and recoveries as applicable, based upon its current interpretation of tax rules and
regulations that exist in the markets in which it invests.
Restricted Securities. The Fund may invest up to 20% of its net assets in securities for which the markets
are restricted. Restricted securities include securities whose disposition is subject
to substantial legal or contractual restrictions. The sale of restricted securities
often requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities may
sell at a price lower than similar securities that are not subject to restrictions on
resale. Securities freely saleable among qualified institutional investors under special
rules adopted by the SEC may be treated as liquid if they satisfy liquidity standards
established by the Board. The continued liquidity of such securities is not as well
assured as that of publicly traded securities, and accordingly the Board will monitor
their liquidity. For the restricted security held as of September 30, 2023, please refer to the Schedule of Investments.
Securities Transactions and Investment Income. Securities transactions are accounted for on the trade date with realized gain/(loss) on investments determined by using the identified cost
method. Interest income (including amortization of premium and accretion of discount)
is recorded on an accrual basis. Premiums and discounts on debt securities are amortized
using the effective yield to maturity method or amortized to earliest call date, if
applicable. Dividend income is recorded on the ex-dividend date, except for certain
dividends from foreign securities that are recorded as soon after the ex-dividend date as the Fund becomes aware
of such dividends. For certain securities known as “contingent payment debt instruments,”
Federal tax regulations require the Fund to record non-cash, “contingent” interest
income in addition to interest income actually received.
Distributions to Shareholders. Distributions to common shareholders are recorded on the ex-dividend date. The characterization of distributions to shareholders is based on income and capital
gains as determined in accordance with federal income tax regulations, which may differ
from income and capital gains as determined under GAAP. These differences are primarily
due to differing treatments of income and gains on various investment securities and
foreign currency transactions held by the Fund, timing differences, and differing
characterizations of distributions made by the Fund. Distributions from net investment income
for federal income tax purposes include net realized gains on foreign currency transactions.
These book/tax differences are either temporary or permanent in nature. To the extent
these differences are permanent, adjustments are made to the appropriate capital accounts
in the period when the differences arise. Permanent differences were primarily due
to redesignation of dividends paid and reclassification of convertible bond premiums at disposition. These reclassifications have no impact on the NAV of the
Fund.
Under the Fund’s current common share distribution policy, the Fund declares and pays quarterly distributions
from net investment income, capital gains, and paid-in capital. The actual source
of the distribution is determined after the end of the year. Pursuant to this policy, distributions during
the year may be made in excess of required distributions. To the extent such distributions
are made from current earnings and profits, they are considered ordinary income or
long term capital gains. The Fund’s current distribution policy may restrict the Fund’s ability to pass through to shareholders all of its net realized long term capital
gains as a Capital Gain Dividend and may cause such gains to be treated as ordinary
income, subject to the maximum federal income tax rate. Distributions sourced from
paid-in capital should not be considered as dividend yield or the total return from
an investment in the Fund. The Board will continue to monitor the Fund’s distribution level, taking into consideration
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
the Fund’s NAV and the financial market environment. The Fund’s distribution policy is subject to modification by the Board at any time.
Distributions to shareholders of the Fund’s 5.250% Series A and 5.200% Series B Cumulative Preferred Shares (Preferred Shares)
are recorded on a daily basis and are determined as described in Note 6.
The tax character of distributions paid during the fiscal years ended September 30, 2023 and 2022 was as follows:
| |
Year Ended September 30, 2023 | | |
Year Ended September 30, 2022 | |
| |
Common | | |
Preferred | | |
Common | | |
Preferred | |
Distributions paid from: | |
| | | |
| | | |
| | | |
| | |
Ordinary income (inclusive of short term capital gains) | |
$ | 3,300,318 | | |
$ | 1,327,849 | | |
$ | 3,141,773 | | |
$ | 285,502 | |
Net long term capital gains | |
| 3,084,208 | | |
| 1,240,900 | | |
| 17,219,659 | | |
| 1,564,799 | |
Return of capital | |
| 763,384 | | |
| — | | |
| — | | |
| — | |
Total distributions paid | |
$ | 7,147,910 | | |
$ | 2,568,749 | | |
$ | 20,361,432 | | |
$ | 1,850,301 | |
Provision for Income Taxes. The Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). It
is the policy of the Fund to comply with the requirements of the Code applicable to regulated investment companies and to distribute
substantially all of its net investment company taxable income and net capital gains.
Therefore, no provision for federal income taxes is required.
As of September 30, 2023, the components of accumulated earnings on a tax basis were as follows:
Net unrealized appreciation on investments | |
$ |
3,948,701 | |
Other
temporary differences* | |
|
(200,080 | ) |
Total | |
$ |
3,748,621 | |
| * | Other
temporary differences are due to preferred share class distributions payable. |
At September 30, 2023, the temporary differences between book basis and tax basis net unrealized
appreciation on investments were primarily due to amortization of bond premium and
investments in partnerships.
The following summarizes the tax cost of investments and the related net unrealized
appreciation at September 30, 2023:
|
|
Cost |
|
|
Gross
Unrealized
Appreciation |
|
|
Gross
Unrealized
Depreciation |
|
|
Net
Unrealized
Appreciation |
|
Investments | |
$ | 161,454,005 | | |
$ | 18,101,779 | | |
$ | (14,153,078 | ) | |
$ | 3,948,701 | |
The Fund is required to evaluate tax positions taken or expected to be 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 applicable
tax authority. Income tax and related interest and penalties would be recognized by
the Fund as tax expense in the Statement of Operations if the tax positions were deemed
not to meet the more-likely-than-not threshold. During the fiscal year ended September 30, 2023, the Fund did not incur any income tax, interest or penalties. As of September 30, 2023, the Adviser has reviewed the open tax years and concluded that there
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
was no tax impact to the Fund’s net assets or results of operations. The Fund’s current federal and state tax returns for the prior three fiscal years remain open,
subject to examination. On an ongoing basis, the Adviser will monitor the Fund’s tax positions to determine if adjustments to this conclusion are necessary.
3. Investment Advisory Agreement. The Fund has entered into an investment advisory agreement (the Advisory Agreement) with the Adviser which provides that the Fund will pay the Adviser
a fee, computed weekly and paid monthly, equal on an annual basis to 0.80% of the
first $100,000,000 of the Fund’s average weekly net assets including the liquidation value of preferred shares and
0.55% of the Fund’s average weekly net assets including the liquidation value of preferred shares in
excess of $100,000,000. In accordance with the Advisory Agreement, the Adviser provides
a continuous investment program for the Fund’s portfolio and oversees the administration of all aspects of the Fund’s business and affairs.
4. Portfolio Securities. Purchases and sales of securities during the fiscal year ended September 30, 2023, other than short term securities and U.S. Government obligations, aggregated $73,860,581
and $83,928,778, respectively.
5.Transactions with Affiliates and Other Arrangements.
During the fiscal year ended September 30, 2023, the Fund received credits from a designated broker who agreed to pay certain Fund operating expenses.
The amount of such expenses paid through this directed brokerage arrangement during
this period was $2,687.
The cost of calculating the Fund’s NAV per share is a Fund expense pursuant to the Advisory Agreement between the Fund
and the Adviser. Under the sub-administration agreement with Bank of New York Mellon,
the fees paid include the cost of calculating the Fund’s NAV. The Fund reimburses the Adviser for this service. During the fiscal year ended
September 30, 2023, the Fund accrued $45,000 in accounting fees in the Statement of Operations.
As per the approval of the Board, the Fund compensates officers of the Fund, who are
employed by the Fund and are not employed by the Adviser (although the officers may
receive incentive based variable compensation from affiliates of the Adviser). During
the fiscal year ended September 30, 2023, the Fund accrued $78,767 in payroll expenses in the Statement of Operations.
The Fund pays retainer and per meeting fees to Trustees not affiliated with the Adviser,
plus specified amounts to the Lead Trustee and Audit Committee Chairman. Trustees
are also reimbursed for out of pocket expenses incurred in attending meetings. Trustees
who are directors or employees of the Adviser or an affiliated company receive no
compensation or expense reimbursement from the Fund.
6. Capital. The Fund is authorized to issue an unlimited number of common shares of beneficial
interest (par value $0.01). The Board has authorized the repurchase of the Fund’s common shares on the open market when the shares are trading at a discount of 10%
or more (or such other percentage as the Board may determine from time to time) from
the NAV of the shares. During the fiscal years ended September 30, 2023 and 2022, the Fund repurchased and retired 32,934 and 222,248 of its common
shares at investments of $261,930 and $2,068,339, respectively, at average discounts
of approximately 16.01% and 13.42% from NAV.
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
Transactions in shares of common shares of beneficial interest for the fiscal years
ended September 30, 2023 and 2022 were as follows:
| |
Year
Ended | | |
Year
Ended | |
| |
September 30,
2023 | | |
September 30,
2022 | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | |
Increase
in net assets from common shares issued upon reinvestment of distributions | |
| 75,976 | | |
$ | 635,918 | | |
| 428,456 | | |
$ | 5,154,319 | |
Decrease
in net assets from repurchase of common shares | |
| (32,934 | ) | |
| (261,930 | ) | |
| (222,248 | ) | |
| (2,068,339 | ) |
Net
increase | |
| 43,042 | | |
$ | 373,988 | | |
| 206,208 | | |
$ | 3,085,980 | |
The Fund’s Declaration of Trust, as amended, authorizes the issuance of an unlimited number
of preferred shares, par value $0.01. The Preferred Shares are senior to the common shares and result in the financial
leveraging of the common shares. Such leveraging tends to magnify both the risks and
opportunities to common shareholders. Dividends on Preferred Shares are cumulative.
The Fund is required by the 1940 Act and by the Fund’s Statement of Preferences to meet certain asset coverage tests with respect to the
Preferred Shares. If the Fund fails to meet these requirements and does not correct
such failure, the Fund may be required to redeem, in part or in full, the Preferred
Shares at their respective liquidation values plus an amount equal to the accumulated
and unpaid dividends whether or not declared on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset coverage requirements
could restrict the Fund’s ability to pay dividends to common shareholders and could lead to sales of portfolio
securities at inopportune times. The income received on the Fund’s assets may vary in a manner unrelated to the fixed rates, which could have either
a beneficial or detrimental impact on net investment income and gains available to
common shareholders.
The liquidation value of the Series A Preferred is $25 per share. The Series A Preferred
has an annual dividend rate of 5.25% and is callable at the Fund’s option. The Board has authorized the repurchase of the Series A Preferred in the
open market at prices less than the $25 liquidation value per share. During the fiscal
years ended September 30, 2023 and 2022, the Fund repurchased and retired 31,113 and 1,572 Series A Preferred,
at investments of $699,557 and $36,725 at average discounts of approximately 10.10%
and 6.59%, from its liquidation value.
On July 1, 2022, the Fund issued 2,503,000 shares of Series B Cumulative Preferred Shares (Series
B Preferred) receiving $24,887,500 million after the deduction of offering expenses
of $124,517, and issued 120,000 shares of Series B Preferred on May 4, 2023, receiving $1,190,000 after deducting offering expenses. The Series B Preferred
shares have a liquidation value of $10 per share, and were issued with an annual dividend
rate of 4.40%. On April 17, 2023, the Board approved an increase in the Series B annual dividend rate to 5.20%.
On June 26, 2023, 1,320,000 shares of Series B Preferred were put back to the Fund at their
liquidation preference of $10 per share. The Series B Preferred are puttable on June 26, 2024 and are callable after June 26, 2024. Distributions are paid semiannually at an annual rate of 5.20%. At September 30, 2023, 1,303,000 shares of Series B Preferred were outstanding and accrued dividends
amounted to $178,801.
Ellsworth Growth
and Income Fund Ltd.
Notes to Financial
Statements (Continued)
The following table summarizes Cumulative Preferred Shares information:
Series | |
Issue
Date | |
|
Authorized | | |
Number
of Shares Outstanding at 9/30/2023 | | |
Net
Proceeds | | |
2023
Dividend Rate Range | |
|
Dividend
Rate at 9/30/2023 | | |
Accrued
Dividends at 9/30/2023 | |
A
5.250% | |
September 18, 2017 | |
|
unlimited | | |
| 1,167,315 | | |
$ | 28,855,381 | | |
Fixed
Rate | |
|
| 5.250 | % | |
$ | 21,279 | |
B
5.200% | |
July 1, 2022 | |
|
unlimited | | |
| 1,303,000 | | |
$ | 24,887,500 | | |
Fixed Rate | |
|
| 5.200 | % | |
$ | 178,801 | |
The holders of Preferred Shares generally are entitled to one vote per share held
on each matter submitted to a vote of shareholders of the Fund and will vote together
with holders of common shares as a single class. The holders of Preferred Shares voting together as a single class also have the right currently to
elect two Trustees and, under certain circumstances, are entitled to elect a majority
of the Board of Trustees. In addition, the affirmative vote of a majority of the votes
entitled to be cast by holders of all outstanding shares of the preferred shares,
voting as a single class, will be required to approve any plan of reorganization adversely
affecting the preferred shares, and the approval of two-thirds of each class, voting separately, of the Fund’s outstanding voting stock must approve the conversion of the Fund from a closed-end
to an open-end investment company. The approval of a majority (as defined in the 1940
Act) of the outstanding preferred shares and a majority (as defined in the 1940 Act)
of the Fund’s outstanding voting securities are required to approve certain other actions, including
changes in the Fund’s investment objectives or fundamental investment policies.
7. Convertible Securities Concentration. It is the Fund’s policy to invest at least 65% of its assets in convertible securities. Although convertible securities derive part of their value from that of
the securities into which they are convertible, they are not considered derivative
financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive
to price changes of their underlying securities. Thus they expose the Fund to greater
downside risk than traditional convertible securities, but generally less than that
of the underlying common stock.
8. Indemnifications. The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had
prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
9. Subsequent Events. Management has evaluated the impact on the Fund of all subsequent events occurring through the date the financial statements were issued and has determined that there
were no subsequent events requiring recognition or disclose in the financial statements.
Ellsworth Growth
and Income Fund Ltd.
Report of Independent
Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Ellsworth Growth and Income Fund Ltd.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Ellsworth Growth & Income Fund Ltd. (the “Fund”), including
the schedule of investments, as of September 30, 2023, the related statements of operations for the year then ended, the statements
of changes in net assets and the financial highlights for each of the two years in
the period then ended, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Fund as of September 30, 2023, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the two years in the period then ended,
in conformity with accounting principles generally accepted in the United States of
America.
The financial highlights for each of the three years in the period ended September 30, 2021 have been audited by other auditors, whose report dated November 24, 2021 expressed unqualified opinion on such financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Fund in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control
over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of September 30,
2023 by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
|
![](https://www.sec.gov/Archives/edgar/data/793040/000182912623007915/ecf_003.jpg) |
|
TAIT WELLER & BAKER LLP |
Philadelphia, PA
November 29, 2023
We have served as the auditor of one or more investment companies in the Gabelli Fund Complex since 2022.
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Unaudited)
Delaware Statutory Trust Act – Control Share Acquisitions
The Fund is organized as a Delaware statutory trust and thus is subject to the control
share acquisition statute contained in Subchapter III of the Delaware Statutory Trust
Act (the “DSTA Control Share Statute”). The DSTA Control Share Statute applies to
any closed-end investment company organized as a Delaware statutory trust and listed
on a national securities exchange, such as the Fund. The DSTA Control Share Statute
became automatically applicable to the Fund on August 1, 2022.
The DSTA Control Share Statute defines “control beneficial interests” (referred to
as “control shares” herein) by reference to a series of voting power thresholds and
provides that a holder of control shares acquired in a control share acquisition has
no voting rights under the Delaware Statutory Trust Act (“DSTA”) or the Fund’s Governing Documents with respect to the control shares acquired in the control share
acquisition, except to the extent approved by the Fund’s shareholders by the affirmative vote of two–thirds of all the votes entitled to
be cast on the matter, excluding all interested shares (generally, shares held by
the acquiring person and their associates and shares held by Fund insiders).
The DSTA Control Share Statute provides for a series of voting power thresholds above which shares are considered control shares. Whether one of these thresholds
of voting power is met is determined by aggregating the holdings of the acquiring
person as well as those of his, her or its “associates.” These thresholds are:
| ● | 10% or more, but less than 15% of all voting power; |
| ● | 15% or more, but less than 20% of all voting power; |
| ● | 20% or more, but less than 25% of all voting power; |
| ● | 25% or more, but less than 30% of all voting power; |
| ● | 30% or more, but less than a majority of all voting power;
or |
| ● | a majority or more of all voting power. |
Under the DSTA Control Share Statute, once a threshold is reached, an acquirer has
no voting rights with respect to shares in excess of that threshold (i.e., the “control
shares”) until approved by a vote of shareholders, as described above, or otherwise
exempted by the Fund’s Board of Trustees. The DSTA Control Share Statute contains a statutory process for
an acquiring person to request a shareholder meeting for the purpose of considering
the voting rights to be accorded control shares. An acquiring person must repeat this
process at each threshold level.
Under the DSTA Control Share Statute, an acquiring person’s “associates” are broadly defined to include, among others, relatives of the acquiring
person, anyone in a control relationship with the acquiring person, any investment
fund or other collective investment vehicle that has the same investment adviser as
the acquiring person, any investment adviser of an acquiring person that is an investment
fund or other collective investment vehicle and any other person acting or intending
to act jointly or in concert with the acquiring person.
Voting power under the DSTA Control Share Statute is the power (whether such power
is direct or indirect or through any contract, arrangement, understanding, relationship
or otherwise) to directly or indirectly exercise or direct the exercise of the voting
power of shares of the Fund in the election of the Fund’s Trustees (either generally or with respect to any subset, series or class of trustees,
including any Trustees elected solely by a particular series or class of shares, such
as the preferred shares). Thus, Fund preferred shares, including the
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
Series B Preferred Shares, acquired in excess of the above thresholds would be considered
control shares with respect to the preferred share class vote for two Trustees.
Any control shares of the Fund acquired before August 1, 2022, are not subject to the DSTA Control Share Statute; however, any further acquisitions
on or after August 1, 2022, are considered control shares subject to the DSTA Control Share Statute.
The DSTA Control Share Statute requires shareholders to disclose to the Fund any control
share acquisition within 10 days of such acquisition, and also permits the Fund to
require a shareholder or an associate of such person to disclose the number of shares
owned or with respect to which such person or an associate thereof can directly or
indirectly exercise voting power. Further, the DSTA Control Share Statute requires
a shareholder or an associate of such person to provide to the Fund within 10 days
of receiving a request therefor from the Fund any information that the Fund’s Trustees reasonably believe is necessary or desirable to determine whether a control
share acquisition has occurred.
The DSTA Control Share Statute permits the Fund’s Board of Trustees, through a provision in the Fund’s Governing Documents or by Board action alone, to eliminate the application of the
DSTA Control Share Statute to the acquisition of control shares in the Fund specifically,
generally, or generally by types, as to specifically identified or unidentified existing
or future beneficial owners or their affiliates or associates or as to any series
or classes of shares. The DSTA Control Share Statute does not provide that the Fund
can generally “opt out” of the application of the DSTA Control Share Statute; rather, specific acquisitions or classes of acquisitions may be exempted by the Fund’s Board of Trustees, either in advance or retroactively, but other aspects of the
DSTA Control Share Statute, which are summarized above, would continue to apply. The
DSTA Control Share Statute further provides that the Board of Trustees is under no
obligation to grant any such exemptions.
The foregoing is only a summary of the material term of the DSTA Control Share Statute.
Shareholders should consult their own counsel with respect to the application of the DSTA Control
Share Statute to any particular circumstance. Some uncertainty around the general
application under the 1940 Act of state control share statutes exists as a result
of recent court decisions. Additionally, in some circumstances uncertainty may also
exist in how to enforce the control share restrictions contained in state control
share statutes against beneficial owners who hold their shares through financial intermediaries.
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
SUMMARY OF FUND EXPENSES
The following table shows the Fund’s expenses, which are borne directly or indirectly by holders of the Fund’s common shares, including preferred shares offering expenses, as a percentage of
net assets attributable to common shares. The table is based on the capital structure
of the Fund as of September 30, 2023. The purpose of the table and example below is to help you understand all
fees and expenses that you, as a holder of common shares, would bear directly or indirectly.
Shareholder
Transaction Expenses | |
| | |
Sales
Load (as a percentage of offering price) | |
| — | %(a) |
Offering
Expenses Borne by the Fund (as a percentage of offering price) | |
| — | %(a) |
Dividend
Reinvestment and Voluntary Cash Purchase Plan Fees | |
| | |
Purchase
Transactions | |
$ | 1.25 | (b) |
One-time
Fee for Deposit of Share Certificates | |
$ | 7.50 | (b) |
| |
Percentages of Net Assets | |
Annual Expenses | |
Attributable to Common Shares | |
Management Fees | |
| 0.94 | %(c) |
Interest Expense | |
| — | % |
Other Expenses | |
| 0.49 | %(d) |
Total Annual Expenses | |
| 1.43 | % |
Dividends on Preferred Shares | |
| 1.78 | %(e) |
Total Annual Expenses and Dividends on Preferred | |
| 3.21 | % |
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
For a more complete description of the various costs and expenses a common shareholder
would bear in connection with the issuance and ongoing maintenance of any preferred shares or notes
issued by the Fund, see “Risk Factors and Special Considerations—Special Risks to
Holders of Common Shares—Leverage Risk.”
The following example illustrates the expenses you would pay on a $1,000 investment
in common shares, assuming a 5% annual portfolio total return.* The actual amounts
in connection with any offering will be set forth in the Prospectus Supplement if
applicable.
| |
1
Year | | |
3
Year | | |
5
Year | | |
10
Year | |
Total
Expenses Incurred | |
$ | 32 | | |
$ | 99 | | |
$ | 168 | | |
$ | 352 | |
* | The
example should not be considered a representation of future expenses. The example is based
on total Annual Expenses and Dividends on Preferred Shares shown in the table above and assumes
that the amounts set forth in the table do not change and that all distributions are reinvested
at net asset value. Actual expenses may be greater or less than those assumed. Moreover,
the Fund’s actual rate of return may be greater or less than the hypothetical 5% return
shown in the example. |
The example includes Dividends on Preferred Shares. If Dividends on Preferred Shares
were not included in the example calculation, the expenses for the 1-, 3-, 5- and
10-year periods in the table above would be as follows (based on the same assumptions as above): $15, $45, $78, and $172.
The Fund’s common shares are listed on the NYSE American under the trading or ticker symbol
“ECF.” The Fund’s Series A Preferred are listed on the NYSE American under the ticker symbol “ECF
Pr A.” The Fund’s common shares have historically traded at a discount to the Fund’s net asset value. Since the Fund commenced trading on the NYSE American, the Fund’s common shares have traded at a premium to net asset value as high as 10.99% and
a discount to net asset value as low as (32.89)%.
The following table sets forth for the quarters indicated, the high and low sale prices
on the NYSE American per share of our common shares and the net asset value and the
premium or discount from net asset value per share at which the common shares were
trading, expressed as a percentage of net asset value, at each of the high and low
sale prices provided.
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common Share Market Price | | |
Corresponding Net Asset Value
(“NAV”) Per Share | | |
Corresponding Premium or Discount as a % of NAV | |
Quarter Ended | |
High | | |
Low | | |
High | | |
Low | | |
High | | |
Low | |
September 30, 2021 | |
$ | 15.37 | | |
$ | 13.22 | | |
$ | 14.99 | | |
$ | 14.64 | | |
| (2.53 | )% | |
| (9.69 | )% |
December 31, 2021 | |
$ | 14.72 | | |
$ | 11.82 | | |
$ | 15.36 | | |
$ | 13.05 | | |
| (4.17 | )% | |
| (9.43 | )% |
March 31, 2022 | |
$ | 12.31 | | |
$ | 9.09 | | |
$ | 13.44 | | |
$ | 11.32 | | |
| (8.41 | )% | |
| (12.54 | )% |
June 30, 2022 | |
$ | 10.78 | | |
$ | 8.32 | | |
$ | 12.30 | | |
$ | 9.51 | | |
| (12.36 | )% | |
| (12.51 | )% |
September 30, 2022 | |
$ | 10.01 | | |
$ | 8.08 | | |
$ | 11.06 | | |
$ | 9.31 | | |
| (9.49 | )% | |
| (13.21 | )% |
March 31, 2023 | |
$ | 9.09 | | |
$ | 7.90 | | |
$ | 10.34 | | |
$ | 9.33 | | |
| (11.94 | )% | |
| (15.33 | )% |
June 30, 2023 | |
$ | 8.60 | | |
$ | 7.76 | | |
$ | 9.77 | | |
$ | 9.36 | | |
| (11.98 | )% | |
| (17.09 | )% |
September 30, 2023 | |
$ | 8.85 | | |
$ | 8.04 | | |
$ | 9.94 | | |
$ | 8.97 | | |
| (10.97 | )% | |
| (10.37 | )% |
The last reported price for our common shares on September 30, 2023 was $8.05 per share. As of September 30, 2023, the net asset value per share of the Fund’s common shares was $9.00. Accordingly, the Fund’s common shares traded at a discount to net asset value of (10.56)% on September 30, 2023.
Outstanding Securities
The following information regarding the Fund’s outstanding securities is as of September 30, 2023.
Title of Class | |
Amount
Authorized | | |
Amount
Held by
Fund or
for its
Account | | |
Amount
Outstanding
Exclusive of Amount
Held by
Fund | |
Common Shares | |
1,000,000,000 | | |
— | | |
13,748,708 | |
Series A Cumulative | |
Unlimited | | |
— | | |
1,167,315 | |
Preferred Shares | |
| | |
| | |
| |
Series B Preferred Shares | |
3,000,000 | | |
— | | |
1,303,000 | |
Unresolved SEC Staff Comments
The Fund does not believe that there are any material unresolved written comments, received 180 days or more before September 30, 2023 from the Staff of the SEC regarding any of the Fund’s periodic or current reports under the Securities Exchange Act of 1934 or the Investment
Company Act of 1940, or its registration statement.
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
Selected data for a common share of beneficial interest outstanding throughout each
year:
| |
Year
Ended September 30, | |
| |
2017 | | |
2016 | | |
2015 | | |
2014 | | |
2013 | |
Operating
Performance: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
asset value, beginning of year | |
$ | 9.60 | | |
$ | 9.45 | | |
$ | 10.29 | | |
$ | 9.54 | | |
$ | 8.48 | |
Net
investment income | |
| 0.18 | | |
| 0.20 | | |
| 0.13 | | |
| 0.14 | | |
| 0.18 | |
Net
realized and unrealized gain/(loss) on investments | |
| 0.93 | | |
| 0.76 | | |
| (0.35 | ) | |
| 0.80 | | |
| 1.15 | |
Total
from investment operations | |
| 1.11 | | |
| 0.96 | | |
| (0.22 | ) | |
| 0.94 | | |
| 1.33 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Distributions
to Preferred Shareholders: (a) | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
investment income | |
| (0.00 | )(b) | |
| — | | |
| — | | |
| — | | |
| — | |
Net
realized gain | |
| (0.00 | )(b) | |
| — | | |
| — | | |
| — | | |
| — | |
Total
distributions to preferred shareholders | |
| (0.00 | )(b) | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Increase/(Decrease) in Net Assets Attributable to Common Shareholders Resulting from Operations | |
| 1.11 | | |
| 0.96 | | |
| (0.22 | ) | |
| 0.94 | | |
| 1.33 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Distributions
to Common Shareholders: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
investment income | |
| (0.23 | ) | |
| (0.26 | ) | |
| (0.25 | ) | |
| (0.24 | ) | |
| (0.26 | ) |
Net
realized gain | |
| (0.21 | ) | |
| (0.53 | ) | |
| (0.43 | ) | |
| — | | |
| — | |
Total
distributions to common shareholders | |
| (0.44 | ) | |
| (0.79 | ) | |
| (0.68 | ) | |
| (0.24 | ) | |
| (0.26 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Fund
Share Transactions: | |
| | | |
| | | |
| | | |
| | | |
| | |
Decrease
in net asset value from common shares issued upon reinvestment of distributions | |
| (0.01 | ) | |
| (0.04 | ) | |
| (0.00 | )(b) | |
| — | | |
| (0.01 | ) |
Increase
in net asset value from repurchase of common shares (includes transaction costs) | |
| 0.01 | | |
| 0.02 | | |
| 0.06 | | |
| 0.05 | | |
| 0.00 | (b) |
Offering
costs for preferred shares charged to paid-in capital | |
| (0.09 | ) | |
| — | | |
| — | | |
| — | | |
| — | |
Total
Fund share transactions | |
| (0.09 | ) | |
| (0.02 | ) | |
| 0.06 | | |
| 0.05 | | |
| (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Asset Value Attributable to Common Shareholders, End of Year | |
$ | 10.18 | | |
$ | 9.60 | | |
$ | 9.45 | | |
$ | 10.29 | | |
$ | 9.54 | |
NAV
total return† | |
| 10.89 | % | |
| 10.64 | % | |
| (0.78 | )% | |
| 10.92 | % | |
| 16.45 | % |
Market
value, end of year | |
$ | 9.26 | | |
$ | 8.19 | | |
$ | 7.82 | | |
$ | 8.65 | | |
$ | 7.87 | |
Investment
total return†† | |
| 18.89 | % | |
| 15.98 | % | |
| (2.32 | )% | |
| 13.03 | % | |
| 10.84 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Ratios
to Average Net Assets and Supplemental Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
assets including liquidation value of preferred shares, end of year (in 000’s) | |
$ | 161,015 | | |
| — | | |
| — | | |
| — | | |
| — | |
Net
assets attributable to common shares, end of year (in 000’s) | |
$ | 131,015 | | |
$ | 123,905 | | |
$ | 120,948 | | |
$ | 135,267 | | |
$ | 128,814 | |
Ratio
of net investment income to average net assets attributable to common shares | |
| 1.92 | % | |
| 2.19 | % | |
| 1.40 | % | |
| 1.30 | % | |
| 1.90 | % |
Ratio
of operating expenses to average net assets attributable to common shares before reimbursement | |
| 1.08 | %(c) | |
| 1.10 | %(c) | |
| 1.10 | % | |
| 1.10 | % | |
| 1.10 | % |
Ratio
of operating expenses to average net assets attributable to common shares net of reimbursement | |
| 1.08 | %(c) | |
| 1.10 | %(c) | |
| 1.10 | % | |
| 1.10 | % | |
| 1.10 | % |
Ratio
of operating expenses to average net assets including liquidation value of preferred shares before reimbursement | |
| 1.07 | %(c) | |
| — | | |
| — | | |
| — | | |
| — | |
Ratio
of operating expenses to average net assets including liquidation value of preferred shares net of reimbursement | |
| 1.07 | %(c) | |
| — | | |
| — | | |
| — | | |
| — | |
Portfolio
turnover rate | |
| 32.0 | % | |
| 38.0 | % | |
| 45.0 | % | |
| 48.0 | % | |
| 48.0 | % |
Ellsworth Growth
and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
| |
Year Ended
September 30, | |
| |
2017 | | |
2016 | | |
2015 | | |
2014 | | |
2013 | |
Cumulative
Preferred Shares: | |
| | | |
| | | |
| | | |
| | | |
| | |
5.250%
Series A Preferred | |
| | | |
| | | |
| | | |
| | | |
| | |
Liquidation
value, end of year (in 000’s) | |
$ | 30,000 | | |
| — | | |
| — | | |
| — | | |
| — | |
Total
shares outstanding (in 000’s) | |
| 1,200 | | |
| — | | |
| — | | |
| — | | |
| — | |
Liquidation
preference per share | |
$ | 25.00 | | |
| — | | |
| — | | |
| — | | |
| — | |
Average
market value(d) | |
$ | 25.14 | | |
| — | | |
| — | | |
| — | | |
| — | |
Asset
coverage per share | |
$ | 134.18 | | |
| — | | |
| — | | |
| — | | |
| — | |
Asset
Coverage | |
| 537 | % | |
| — | | |
| — | | |
| — | | |
| — | |
† | For
the years ended September 30, 2017 and 2016, the return was based on net asset value
per share, adjusted for reinvestment of distributions at net asset value on the ex-dividend
date. For the fiscal years ended on September 30, 2013 through 2015, returns were based
on the market price on the payable date. |
†† | Based
on market value per share, adjusted for reinvestment of distributions at prices obtained
under the Fund’s dividend reinvestment plan. |
(a) | Calculated
based on average common shares outstanding on the record dates throughout the year. |
(b) | Amount
represents less than $0.005 per share. |
(c) | The
Fund received credits from a designated broker who agreed to pay certain Fund operating expenses.
For the years ended September 30, 2017 and 2016, there was no impact on the expense
ratios. |
(d) | Based
on weekly prices. |
CHANGES OCCURRING DURING THE PRIOR FISCAL PERIOD
The following information is a summary of certain changes during the most recent fiscal
year ended September 30, 2023. This information may not reflect all of the changes that have occurred since
you purchased shares of the Fund.
During the Fund’s most recent fiscal year, there were no material changes to the Fund’s investment objective or policies that have not been approved by shareholders or
in the principal risk factors associated with an investment in the Fund.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund invests primarily in convertible securities with the objectives of providing
income and the potential for capital appreciation (which objectives the Fund considers
to be relatively equal, over the long term, due to the nature of the securities in
which it invests).
These investment objectives may be modified in the future by the Board without the
approval of a majority, as defined in the 1940 Act, of the outstanding voting securities
of the Fund. The Fund will provide stockholders with at least 60 days’ written notice prior to implementation of any changes to these investment objectives.
There can be no assurance that the Fund will achieve its investment objectives.
Investment Policies
As a fundamental investment policy, the Fund will invest, under normal market conditions,
at least 65% of its total assets in convertible securities (that is, bonds, debentures, corporate notes or preferred stock
that are convertible into common stock) and common stock received upon conversion
or exchange of securities and retained in the Fund’s portfolio to permit orderly disposition or to establish long-term holding periods
for U.S. federal income tax purposes.
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
The Fund is not required to sell securities for the purpose of assuring that 65% of its total assets are invested in convertible securities.
Convertible securities include debt securities and preferred stocks which are convertible into, or carry the right to purchase, common stock. The debt security or preferred stock may itself be convertible into or exchangeable for common stock, or the conversion privilege may be evidenced by warrants attached to the security or acquired as part of a unit with the security. A convertible security may also be structured so that it is convertible at the option of the holder or of the issuer, or subject to mandatory conversion.
The Fund may invest in convertible securities rated below investment grade by the established rating services (“Ba” or lower by Moody’s Investors Service, Inc. (“Moody’s”) or “BB” or lower by Standard & Poor’s Ratings Services (“Standard & Poor’s” or “S&P”)) or in unrated securities which are in the judgment of the Fund’s investment adviser of equivalent quality. Securities rated below investment grade, commonly referred to as “junk bonds,” or “high yield” securities, are predominantly speculative, involve major risk exposure to adverse conditions and include securities of issuers in default, which are likely to have the lowest rating. The average maturity and average duration of the Fund’s investments in debt securities is expected to vary and the Fund does not target any particular average maturity or average duration.
Under normal market conditions, the remaining 35% or less of the Fund’s total assets may be invested in other securities, including non-convertible equity and debt securities, options, warrants, U.S. Government or agency obligations, or repurchase agreements or they may be held as cash or cash equivalents. The Fund may invest in non-convertible equity securities of any market capitalization. The Fund does not intend to participate in derivative transactions other than options transactions as described herein. See “Investment Objectives and Policies—Certain Investment Practices—Options.”
The Fund may invest up to 10% of its total assets, taken at market value, in securities of foreign issuers, including issuers located in emerging markets. Securities convertible or exchangeable for common stock of U.S. companies, and U.S. dollar-denominated securities convertible or exchangeable for American Depositary Receipts that at the time of purchase (i) are listed on the NYSE, NYSE American or the NASDAQ National Market, or (ii) the underlying issuers of which meet the then prevailing earnings requirement for listing on the NYSE and also file Form 20-F (or comparable form) with the SEC are not subject to this limitation.
The Fund may invest up to 20% of its net assets in securities that are illiquid. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment.
While the Fund does not, as a matter of investment policy, seek to gain exposure to any particular sectors, it has recently had significant exposure to the healthcare and information technology sectors.
The Fund may lend securities representing up to 10% of its total assets, taken at market value, to securities firms and financial institutions such as banks and trust companies and receive therefor collateral in cash or securities issued or guaranteed by the United States Government (“Government Securities”) which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Fund may lend its portfolio securities in accordance with its investment policies and restrictions.
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
The Fund’s investment policy of investing at least 65% of its total assets in normal circumstances in convertible securities is a fundamental policy that cannot be changed without the affirmative vote of a majority, as defined in the 1940 Act, of the outstanding voting securities (voting together as a single class) of the Fund (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). The Fund has issued preferred shares and may in the future issue additional series of preferred shares. Accordingly, the affirmative vote of the holders of a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund voting as a separate class (which for this purposes and under the 1940 Act means the lesser of (i) 67% of the preferred shares, as a single class, represented at a meeting at which more than 50% of the Fund’s outstanding preferred shares are represented or (ii) more than 50% of the outstanding preferred shares) would also be required to change a fundamental policy. Unless specifically stated as such, no other policy of the Fund is fundamental and each policy may be changed by the Board without shareholder approval. The percentage and ratings limitations stated herein and in the SAI apply only at the time an investment is made. Thus, a later increase or decrease in percentage resulting from a change in the values of portfolio securities or amount of total assets will not be considered a violation of any of the foregoing restrictions.
Gabelli Funds, LLC (the “Investment Adviser”), a New York limited liability company, with offices at One Corporate Center, Rye, New York 10580-1422, serves as investment adviser to the Fund.
Principal Investment Practices and Policies
Convertible Securities. The Fund will invest primarily in convertible securities, including bonds, debentures, corporate notes, preferred stock or other securities which may be exchanged or converted into a predetermined number of the issuer’s underlying common stock during a specified time period. Prior to their conversion, convertible securities have the same overall characteristics as non-convertible debt securities insofar as they generally provide a stable stream of income with generally higher yields than those of equity securities of the same or similar issuers. Convertible securities rank senior to common stock in an issuer’s capital structure. They are of a higher credit quality and entail less risk than an issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.
The Fund is also permitted to invest in certain other securities with innovative structures in the convertible securities market. These include “mandatory conversion” securities, which consist of debt securities or preferred stocks that convert automatically into common stock of the same or a different issuer at a specified date and conversion ratio.
The market value of a convertible security may be viewed as comprised of two components: its “investment value,” which is its value based on its yield without regard to its conversion feature; and its “conversion value,” which is its value attributable to the underlying common stock obtainable on conversion. The investment value of a convertible security is influenced by changes in interest rates and the yield of similar non-convertible securities, with investment value declining as interest rates increase and increasing as interest rates decrease. The conversion value of a convertible security is influenced by changes in the market price of the underlying common stock. If, because of a low price of the underlying common stock, the conversion value is low relative
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the convertible security will be increasingly influenced by its conversion value, and the convertible security may sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed income security.
Accordingly, convertible securities have unique investment characteristics because (i) they have relatively high yields as compared to common stocks, (ii) they have defensive characteristics since they provide a fixed return even if the market price of the underlying common stock declines, and (iii) they provide the potential for capital appreciation if the market price of the underlying common stock increases.
A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision or indenture pursuant to which the convertible security is issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to surrender the security for redemption, convert it into the underlying common stock or sell it to a third party. Before the Fund purchases a convertible security it will review carefully the redemption provisions of the security.
There may be additional types of convertible securities with features not specifically referred to herein in which the Fund may invest consistent with its investment objectives and policies. For a discussion of risk factors of convertible securities, see “Risk Factors and Special Considerations—Convertible Securities Risk.”
Equity Securities. The Fund invests in equity securities (such as common stock and preferred stock).
Common stocks represent the residual ownership interest in the issuer and holders of common stock are entitled to the income and increase in the value of the assets and business of the issuer after all of its debt obligations and obligations to preferred shareholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Equity securities also include preferred stock (whether or not convertible into common stock) and debt securities convertible into or exchangeable for common or preferred stock. Preferred stock has a preference over common stock in liquidation (and generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similarly stated yield characteristics. The market value of preferred stock will also generally reflect whether (and if so when) the issuer may force holders to sell their preferred stock back to the issuer and whether (and if so when) the holders may force the issuer to buy back their preferred stock. Generally speaking, the right of the issuer to repurchase the preferred stock tends to reduce any premium at which the preferred stock might otherwise trade due to interest rate or credit factors, while the right of the holders to require the issuer to repurchase the preferred stock tends to reduce any discount at which the preferred stock might otherwise trade due to interest rate or credit factors. In addition, some preferred stocks are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred stocks, whereby
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
the issuer does not have an obligation to make up any arrearages to its shareholders. There is no assurance that dividends or distributions on non-cumulative preferred stocks in which the Fund invests will be declared or otherwise made payable.
Securities that are convertible into or exchangeable for preferred or common stock are liabilities of the issuer but are generally subordinated to more senior elements of the issuer’s balance sheet. Although such securities also generally reflect an element of conversion value, their market value also varies with interest rates and perceived credit risk. Many convertible securities are not investment grade, that is, not rated “BBB” or better by S&P or “Baa” or better by Moody’s or considered by the Investment Adviser to be of similar quality. Preferred stocks and convertible securities may have many of the same characteristics and risks as nonconvertible debt securities.
Non-Investment Grade Securities. The Fund may invest in securities rated below investment grade by recognized statistical rating agencies or unrated securities of comparable quality, including securities of issuers in default, which are likely to have the lowest rating. These securities, which may be preferred shares or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s or unrated securities considered by the Investment Adviser to be of comparable quality are referred to in the financial press as “junk bonds” or “high yield” securities.
Generally, such non-investment grade securities and unrated securities of comparable quality offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions, and (ii) are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality securities. In addition, such comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because such non-investment grade securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issue, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.
In addition, the market value of non-investment grade securities is more volatile than that of higher quality securities, and the markets in which such lower rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value.
Moreover, the lack of a liquid trading market may restrict the availability of securities for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell securities at their fair value in order to respond to changes in the economy or the financial markets.
Non-investment grade securities and unrated securities of comparable quality also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed income securities),
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of nonconvertible bonds and preferred stocks moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
The Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As part of its investments in non-investment grade securities, the Fund may invest in securities of issuers in default. The Fund will make an investment in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations or emerge from bankruptcy protection and the value of these securities will appreciate. By investing in securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of the securities will not otherwise appreciate.
In addition to using statistical rating agencies and other sources, the Investment Adviser also performs its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Fixed income securities, including lower grade securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and comparable unrated securities has experienced periods of significantly adverse price and liquidity several times, particularly at or around times of economic recession. Past market
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recessions have adversely affected the value of such securities and the ability of certain issuers of such securities to repay principal and pay interest thereon or to refinance such securities. The market for those securities may react in a similar fashion in the future.
Investment Grade Securities. The Fund may also invest in investment grade non-convertible securities. Such securities include those rated at “Baa” and higher by Moody’s or at “BBB” and higher by S&P.
Leverage. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt) so long as its total assets, less certain ordinary course liabilities, exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred shares and debt outstanding. Any such preferred shares may be convertible in accordance with the SEC staff guidelines, which may permit the Fund to obtain leverage at attractive rates.
The use of leverage magnifies the impact of changes in net asset value, which means that, all else being equal, the use of leverage results in outperformance on the upside and underperformance on the downside. In addition, if the cost of leverage exceeds the return on the securities acquired with the proceeds of leverage, the use of leverage will diminish rather than enhance the return to the Fund. The use of leverage generally increases the volatility of returns to the Fund. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with any mandatory redemption terms of any outstanding preferred shares. See “Risk Factors and Special Considerations—Special Risks to Holders of Common Shares—Leverage Risk.
In the event the Fund had both outstanding preferred shares and senior securities representing debt at the same time, the Fund’s obligations to pay dividends or distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and/or interest payments due and owing with respect to its outstanding senior debt securities. Accordingly, the Fund’s issuance of senior securities representing debt would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
Subject to the requirements of Rule 18f-4 under the 1940 Act, the Fund may enter into derivative transactions, including transactions that have economic leverage embedded in them. Rule 18f-4 defines “derivatives transactions” as (1) any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument, under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination, whether as margin or settlement payment or otherwise; and (2) any short sale borrowing. Derivatives transactions entered into by the Fund in compliance with Rule 18f-4 will not be considered senior securities for purposes of computing the asset coverage requirements described above. Economic leverage exists when the Fund achieves the right to a return on a capital base that exceeds the investment which the Fund has contributed to the instrument achieving a return. Derivative transactions that the Fund may enter into and the risks associated with them
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are described elsewhere in this Annual Report. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
If the Fund enters into any reverse repurchase agreements or similar financing transactions obligating the Fund to make future payments, the Fund must either treat all such transactions as derivatives transactions for all purposes under Rule 18f-4 or otherwise comply with the asset coverage requirements described above and combine the aggregate amount of indebtedness associated with all such transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the Fund’s asset coverage ratio limit requirements. To the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Fund’s obligations under such transactions the Fund may “cover” its obligations by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration. The asset coverage requirements under section 18 of the 1940 Act and the limits and conditions imposed by Rule 18f-4 may limit or restrict portfolio management or result in the Fund maintaining securities positions it would otherwise liquidate.
Foreign Securities. The Fund may invest up to 10% of its total assets, taken at market value, in securities of foreign issuers, including issuers located in emerging markets. Foreign investments may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies may be less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets and imposition of withholding taxes on dividend or interest payments.
American Depositary Receipts. The Fund may invest in American Depositary Receipts (“ADRs”). The Fund’s investment in ADRs is subject to its overall limitation on investing in foreign securities, unless certain conditions pertaining to ADRs are met. Such investment may entail certain risks similar to foreign securities. ADRs are certificates representing an ownership interest in a security or a pool of securities issued by a foreign issuer and deposited with the depositary, typically a bank, and held in trust for the investor. The economies of many of the countries in which the issuer of a security underlying an ADR principally engages in business may not be as developed as the United States’ economy and may be subject to significantly different forces. Political or social instability, expropriation or confiscatory taxation, and limitations on the removal of funds or other assets could adversely affect the value of the Fund’s investments in such securities. The value of the securities underlying ADRs could fluctuate as exchange rates change between U.S. dollars and the currency of the country in which the foreign company is located. In addition, foreign companies are not registered with the SEC and are generally not subject to the regulatory controls imposed on U.S. issuers and, as a consequence, there is generally less publicly available information about foreign companies than is available about domestic companies. Foreign companies are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies.
Loans, Participation Interests and Assignments. The Fund may invest in loans, including assignments and participation interests. A loan in which the Fund may invest typically is originated, negotiated and structured by a
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syndicate of lenders consisting of commercial banks, thrift institutions, insurance companies, finance companies or other financial institutions, which is administered on behalf of the syndicate by an agent bank. The investment by the Fund in a loan may take the form of participation interests or assignments. Participation interests may be acquired from a lender or other participants. If the Fund purchases a participation interest either from a lender or a participant, the Fund will not have established any direct contractual relationship with the borrower. The Fund would be required to rely on the lender or the participant that sold the participation interest not only for the enforcement of the Fund’s rights against the borrower but also for the receipt and processing of payments due to the Fund under the loans. The Fund is thus subject to the credit risk of both the borrower and a participant. Lenders and participants interposed between the Fund and a borrower, together with agent banks, are referred to herein as “Intermediate Participants.”
On the other hand, if the Fund purchases an assignment from a lender, the Fund will generally become a “lender” for purposes of the relevant loan agreement, with direct contractual rights thereunder and under any related collateral security documents in favor of the lenders. An assignment from a lender gives the Fund the right to receive payments of principal and interest and other amounts directly from the borrower and to enforce its rights as a lender directly against the borrower. The Fund will not act as an agent bank guarantor, sole negotiator or sole structurer with respect to a loan.
Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the borrower, in the event the Borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would be involved if the Fund could enforce its rights directly against the borrower. Moreover, under the terms of a participation, the Fund may be regarded as a creditor of the Intermediate Participant (rather than of the borrower), so that the Fund may also be subject to the risk that the Intermediate Participant may become insolvent. Further, in the event of the bankruptcy or insolvency of the borrower, the obligation of the borrower to repay the loan may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct by the agent bank or Intermediate Participant.
Restricted and Illiquid Securities. The Fund may invest up to 20% of its net assets in securities that are illiquid. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) and securities eligible for resale pursuant to Rule 144A thereunder. Section 4(a)(2) and Rule 144A securities may, however, be treated as liquid by the Investment Adviser pursuant to procedures adopted by the Board, which require consideration of factors such as trading activity, availability of market quotations and number of dealers willing to purchase the security. If the Fund invests in Rule 144A securities, the level of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.
It may be difficult to sell such securities at a price representing the fair value until such time as such securities may be sold publicly. Where registration is required, a considerable period may elapse between a decision to sell the securities and the time when it would be permitted to sell. Thus, the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund may also acquire securities through private placements under which it may agree to contractual restrictions on the resale of such securities. Such restrictions might prevent their sale at a time when such sale would otherwise be desirable.
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Other Investment Practices
U.S. Government Obligations. U.S. government securities in which the Fund invests include debt obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an agency or instrumentality of the U.S. government. Some U.S. government securities, such as U.S. Treasury bills, Treasury Notes, and Treasury Bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported only by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government to purchase the agency’s obligations, such as securities of the Federal National Mortgage Association; or (iii) only the credit of the issuer. No assurance can be given that the U.S. government will provide financial support in the future to U.S. government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States. Securities guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or any of its agencies, authorities or instrumentalities; and (ii) participations in loans made to non-U.S. governments or other entities that are so guaranteed. The secondary market for certain of these participations is limited and, therefore, may be regarded as illiquid.
Short Sales. The Fund may make short sales of securities which it owns or which it has the right to acquire through conversion or exchange of other securities it owns. In a short sale the Fund does not immediately deliver the securities sold and does not receive the proceeds from the sale. The Fund is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. The Fund may not make short sales or maintain a short position if, after giving effect to such short sale, or if, as a result of maintaining such short position, more than 25% of the Fund’s total assets, taken at market value, are held as collateral for such sales.
The Fund will normally close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund. The Fund may, however, close out any short sale of common stock through the conversion or exchange of securities or the exercise of warrants or rights it owns, or through the delivery of common stock already held by the Fund.
The short sale of a security is considered a speculative investment technique. The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a long position the Fund may have in such security or a security convertible into or exchangeable for such security, or when, for tax or other reasons, the Fund does not want to sell the security it owns. In such case, any future losses in the Fund’s long position should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns, either directly or indirectly, and, in the case where the Fund owns convertible securities, changes with the conversion premiums. When the Fund makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale in order to satisfy its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to deliver any payments received on such borrowed securities, such as dividends.
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Warrants. The The Fund may invest in warrants. Warrants are, in effect, longer term call options. They give the holder the right to purchase a given number of shares of a particular company at specified prices within certain periods of time. The purchaser of a warrant expects that the market price of the security will exceed the purchase price of the warrant plus the exercise price of the warrant, thus giving him a profit. Since the market price may never exceed the exercise price before the expiration date of the warrant, the purchaser of the warrant risks the loss of the entire purchase price of the warrant. Warrants generally trade in the open market and may be sold rather than exercised. Warrants are sometimes sold in unit form with other securities of an issuer. Units of warrants and common stock may be employed in financing young, unseasoned companies. The purchase price of a warrant varies with the exercise price of the warrant, the current market value of the underlying security, the life of the warrant and various other investment factors.
If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash, U.S. government securities or other highly liquid debt securities) and the maintenance of collateral with its custodian.
Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Lending of Portfolio Securities. The Fund may lend securities representing up to 10% of its total assets, taken at market value, to securities firms and financial institutions such as banks and trust companies and receive therefor collateral in cash or Government Securities which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The purpose of such loans, generally, is to permit the borrower to use such securities for delivery to purchasers when such borrower has sold short. If cash collateral is received by the Fund, it is invested in short term money market securities, and a portion of the yield received in respect of such investment is retained by the Fund. Alternatively, if securities are delivered to the Fund as collateral, the Fund and the borrower negotiate a rate for the loan premium to be received by the Fund for lending its portfolio securities. In either event, the total yield on the Fund’s portfolio is increased by loans of its portfolio securities. The Fund intends to retain record ownership of loaned securities in order to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. Such loans are terminable at any time. The Fund may pay reasonable finder’s, administrative and custodial fees in connection with such loans. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. In determining whether the Fund will lend securities to a particular borrower, the Fund will consider all relevant facts and circumstances, including the creditworthiness of the borrower.
Repurchase Agreements. As part of its strategy for the temporary investment of cash balances, the Fund may enter into repurchase agreements with maturities of not more than seven days, pertaining to Government Securities with member banks of the Federal Reserve System or “primary dealers” (as designated by the Federal Reserve Bank of New York) in such securities. Repurchase agreements may be seen as loans by the Fund collateralized by underlying securities. Under the terms of a typical repurchase agreement, the Fund acquires an underlying security for a relatively short period (not more than one week) subject to an obligation of the seller to repurchase, and the Fund to resell, the security at an agreed price and time. This arrangement
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results in a fixed rate of return to the Fund that is not subject to market fluctuations during the holding period. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed in or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible decline in the value of the underlying securities during the period in which it seeks to assert these rights. The Fund will not invest more than 5% of its total assets, taken at market value, in repurchase agreements with any single vendor. The Investment Adviser, acting under the supervision of the Board, reviews the creditworthiness of those banks and dealers with which the Fund enters into repurchase agreements to evaluate these risks and monitors on an ongoing basis the value of the securities subject to repurchase agreements to ensure that the value is maintained at the required level. The Fund does not enter into repurchase agreements with the Investment Adviser or any of its affiliates.
Temporary Defensive Investments. The assets of the Fund are normally invested in convertible securities. However, when a temporary defensive posture is believed by the Investment Adviser to be warranted (“temporary defensive periods”), the Fund may without limitation hold cash or invest all or a portion of its assets in money market instruments and repurchase agreements in respect of those instruments. The money market instruments in which the Fund may invest are obligations of the U.S. government, its agencies or instrumentalities; commercial paper rated “A-1” or higher by S&P or “Prime-1” by Moody’s; and certificates of deposit and bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation. During temporary defensive periods, the Fund may also invest to the extent permitted by applicable law in shares of money market mutual funds. Money market mutual funds are investment companies and the investments in those companies by the Fund are in some cases subject to certain fundamental investment restrictions and applicable law. As a shareholder in a mutual fund, the Fund will bear its ratable share of its expenses, including management fees, and will remain subject to payment of the fees to the Investment Adviser, with respect to assets so invested. The Fund may find it more difficult to achieve its investment objectives during temporary defensive periods.
Options. The Fund may from time to time, to a limited extent, invest its net assets in put options on common stock or market indices and may write covered call options and may purchase call options to close out written covered call options. The Fund may not sell (write) call options on more than 25% of its total assets, taken at market value, and then only if such options are covered, or invest more than 2% of its total assets, taken at market value, in the purchase of put options on common stocks owned by the Fund or which it has an immediate right to acquire through the conversion or exchange of other securities which it owns, or on one or more broadly based stock market indices. The Fund may only write or purchase options listed on a national securities exchange. Except as stated herein, the Fund may not engage in options transactions.
A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right, in return for a premium, to sell to the seller the underlying security at a specified price. The seller of the put option has the obligation to buy the underlying security upon exercise at the exercise price.
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The Fund may write covered call options in order to receive additional income in the form of premiums which it is paid for writing options, and for hedging purposes in order to protect against possible declines in the market values of the stocks or convertible securities held in its portfolio. A call option is “covered” if the Fund owns the underlying instrument covered by the call or has an immediate right to acquire that instrument upon conversion or exchange of other instruments held in its portfolio.
If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction can be effected when the Fund so desires.
The Fund realizes a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund realizes a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. Gains and losses on investments in options depend, in part, on the ability of the Investment Adviser to predict correctly the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of securities underlying the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which provides a secondary market for an option of the same series or in a private transaction. Although the Fund generally purchases or writes only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position.
The Fund may also purchase put options on one or more broadly based stock market indices when it wishes to protect all or part of its portfolio securities against a general market decline. The put on the index will increase in value if the level of the index declines; any such increase in value would serve to offset in whole or in part any decline in the value of the Fund’s portfolio.
The Fund’s purchase and sale of put options on stock indices will be subject to the same risks described above with respect to transactions in stock options on individual stocks. In addition, the distinctive characteristics of options on indices create certain risks that are not present with stock options.
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The Fund’s ability to effectively hedge all or a portion of the securities in its portfolio in anticipation of or during a market decline through transactions in put options on stock indices depends on the degree to which price movements in the underlying index correlate with the price movements in the Fund’s portfolio securities. Since the Fund’s portfolio securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, the Fund will bear the risk that the prices of its portfolio securities being hedged will not move in the same amount as the prices of the Fund’s put options on the stock indices. It is also possible that there may be a negative correlation between the index and the Fund’s portfolio securities which would result in a loss on both such portfolio securities and the put options on stock indices acquired by the Fund.
There are several risks associated with transactions in options. For example, there are significant differences between the securities markets and the options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The ability of the Fund to utilize options successfully will depend on the Investment Adviser’s ability to predict pertinent market investments, which cannot be assured. Although the Investment Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund’s writing of put and call options, there can be no assurance that the Fund will succeed in any option-writing program it undertakes.
Investment Restrictions. The Fund has adopted certain fundamental investments policies designed to limit investment risk and maintain portfolio diversification. Fundamental policies may not be changed without the vote of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Fund (voting together as a single class subject to class approval rights of any preferred shares). The Fund may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares, if any.
The Fund’s investment objectives are not fundamental and may be modified by the Board without shareholder approval.
Portfolio Turnover. The Fund will buy and sell securities to accomplish its investment objectives. The investment policies of the Fund may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates.
Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less). Higher portfolio turnover may decrease the after-tax return to individual investors in the Fund to the extent it results in a decrease of the long term capital gains portion of distributions to shareholders.
The Fund anticipates that its annual portfolio turnover rate will generally not exceed 100%. For the fiscal years ended September 30, 2022 and September 30, 2023, the portfolio turnover rates of the Fund were 37% and 47%, respectively.
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Further information on the investment objectives and policies of the Fund is set forth in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special considerations associated with investing in the Fund.
General Risks
Market Risk. The market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. The value of a security may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Equity securities generally have greater price volatility than fixed income securities. Credit ratings downgrades may also negatively affect securities held by the Fund. Even when markets perform well, there is no assurance that the investments held by the Fund will increase in value along with the broader market.
In addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a national or global level. For instance, war, terrorism, market manipulation, government defaults, government shutdowns, political changes or diplomatic developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental disasters can all negatively impact the securities markets, which could cause the Fund to lose value. These events could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and significantly adversely impact the economy. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, has in the past resulted, and may in the future result, in a government shutdown, which could have an adverse impact on the Fund’s investments and operations. Additional and/or prolonged U.S. federal government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Governmental and quasi-governmental authorities and regulators throughout the world have previously responded to serious economic disruptions with a variety of significant fiscal and monetary policy changes, including, but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund’s investments. Any market disruptions could also prevent the Fund from executing advantageous investment decisions in a timely manner. To the extent that the Fund focuses its investments in a region enduring geopolitical market disruption, it will face higher risks of loss, although the increasing interconnectivity between global economies and financial markets can lead to events or conditions in one country, region or financial market adversely impacting a different country, region or financial
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market. Thus, investors should closely monitor current market conditions to determine whether the Fund meets their individual financial needs and tolerance for risk.
Current market conditions may pose heightened risks with respect to the Fund’s investment in fixed income securities. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. Any interest rate increases in the future could cause the value of the Fund to decrease. Recently, inflation levels have been at their highest point in nearly 40 years and the Federal Reserve has been engaged in a campaign to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases, the real value of the Fund’s common stock and distributions therefore may decline.
Exchanges and securities markets may close early, close late or issue trading halts on specific securities or generally, which may result in, among other things, the Fund being unable to buy or sell certain securities or financial instruments at an advantageous time or accurately price its portfolio investments.
Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.
The value of a convertible security is influenced by the value of the underlying equity security. Convertible debt securities and preferred stocks may depreciate in value if the market value of the underlying equity security declines or if rates of interest increase. In addition, although debt securities are liabilities of a corporation which the corporation is generally obligated to repay at a specified time, debt securities, particularly convertible debt securities, are often subordinated to the claims of some or all of the other creditors of the corporation.
Mandatory conversion securities (securities that automatically convert into equity securities at a future date) may limit the potential for capital appreciation and, in some instances, are subject to complete loss of invested capital. Other innovative convertibles include “equity-linked” securities, which are securities or derivatives that may have fixed, variable, or no interest payments prior to maturity, may convert (at the option of the holder or on a mandatory basis) into cash or a combination of cash and common stock, and may be structured to limit the potential for capital appreciation. Equity-linked securities may be illiquid and difficult to value and may be subject to greater credit risk than that of other convertibles. Moreover, mandatory conversion securities and equity-linked securities have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.
Preferred stocks are equity securities in the sense that they do not represent a liability of the corporation. In the event of liquidation of the corporation, and after its creditors have been paid or provided for, holders of preferred stock are generally entitled to a preference as to the assets of the corporation before any distribution may be made to the holders of common stock. Debt securities normally do not have voting rights. Preferred stocks may have no voting rights or may have voting rights only under certain circumstances.
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Credit Risk. Credit risk is the risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies that issue convertible securities may be small to medium-size, and they often |
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have low credit ratings. In addition, the credit rating of a company’s convertible securities is generally lower than that of its conventional debt securities. Convertible securities are normally considered “junior” securities—that is, the company usually must pay interest on its conventional debt before it can make payments on its convertible securities. Credit risk could be high for the Fund, because it could invest in securities with low credit quality. The lower a debt security is rated, the greater its default risk. As a result, the Fund may incur cost and delays in enforcing its rights against the issuer. |
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Market Risk. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convert-ible securities, but generally less than that of the underlying common stock. |
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Interest Rate Risk for Convertible Securities. The Fund may be subject to a greater risk of rising inter-est rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of convertible securities held by the Fund. Convertible securities are particularly sensitive to interest rate changes when their predetermined conversion price is much higher than the issuing company’s common stock. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.” |
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Sector Risk. Sector risk is the risk that returns from the economic sectors in which convertible securities are concentrated will trail returns from other economic sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible securities market in general. These periods have, in the past, lasted for as long as several years. Moreover, the sectors that dominate this market change over time. |
Equity Risk. Investing in the Fund involves equity risk, which is the risk that the securities held by the Fund will fall in market value due to adverse market and economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate and the particular circumstances and performance of particular companies whose securities the Fund holds. An investment in the Fund represents an indirect economic stake in the securities owned by the Fund, which are for the most part traded on securities exchanges or in the OTC markets. The market value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The net asset value of the Fund may at any point in time be worth less than the amount at the time the shareholder invested in the Fund, even after taking into account any reinvestment of distributions.
Common Stock Risk. Common stock of an issuer in the Fund’s portfolio may decline in price for a variety of reasons, including if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Common stock in which the Fund invests is structurally subordinated as to income and residual value to preferred stock, bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stock or debt instruments of such issuers. In addition, while common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in those returns.
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Preferred Stock Risk. There are special risks associated with the Fund’s investing in preferred securities, including:
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Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer div-idends or distributions for a stated period without any adverse consequences to the issuer. If the Fund owns a preferred security that is deferring its dividends or distributions, the Fund may be required to report income for tax purposes although it has not yet received such income. |
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Non-Cumulative Dividends. Some preferred securities are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred security held by the Fund determine not to pay dividends or distributions on such security, the Fund’s return from that security may be adversely affected. There is no assurance that dividends or distributions on non-cumulative preferred securities in which the Fund invests will be declared or otherwise made payable. |
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Subordination. Preferred securities are subordinated to bonds and other debt instruments in an issuer’s capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security instruments. |
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Liquidity. Preferred securities may be substantially less liquid than many other securities, such as com-mon stocks or U.S. government securities. |
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Limited Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may be entitled to elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. |
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Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. A redemption by the issuer may negatively impact the return of the security held by the Fund. |
Warrants and Rights. The Fund may invest in warrants and rights (including those acquired in units or attached to other securities) which entitle the holder to buy equity securities at a specific price for or at the end of a specific period of time. The Fund will do so only if the underlying equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund’s portfolio.
Investing in rights and warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and thus can be a riskier investment. The value of a right or warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the Fund whose equity underlies the warrant, a change in the perception as to the future price of the underlying security, or any combination thereof. Rights and warrants generally pay no dividends and confer no voting or other rights other than the right to purchase the underlying security.
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Fixed Income Securities Risks. Fixed income securities in which the Fund may invest are generally subject to the following risks:
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Interest Rate Risk. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. See “—General Risks—Interest Rate Risks Generally.” |
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Issuer Risk. Issuer risk is the risk that the value of an income- or dividend-paying security may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuer’s goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer. |
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Credit Risk. Credit risk is the risk that one or more income- or dividend-paying securities in the Fund’s portfolio will decline in price or fail to pay interest/distributions or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio se-curity is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. See “—Non-Investment Grade Securities.” The degree of credit risk depends on the issuer’s financial condition and on the terms of the securities. |
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Prepayment Risk. Prepayment risk is the risk that during periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For income- or dividend-paying securities, such payments often occur during periods of declining interest rates, forcing the Fund to re-invest in lower yielding securities, resulting in a possible decline in the Fund’s income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“call protection”). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. |
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Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Fund portfolio’s current earnings rate. |
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Duration and Maturity Risk. The Fund has no set policy regarding portfolio maturity or duration of the fixed-income securities it may hold. The Investment Adviser may seek to adjust the duration or maturity of the Fund’s fixed-income holdings based on its assessment of current and projected market conditions and all other factors that the Investment Adviser deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instrument’s expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. |
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Duration can be a useful tool to estimate anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates), the magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Fund’s shares and that actual price movements in the Fund’s portfolio may differ significantly from duration-based estimates.
Duration differs from maturity in that it takes into account a security’s yield, coupon payments and its principal payments in addition to the amount of time until the security matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Investment Adviser’s assessment of current and projected market conditions will be correct or that any strategy to adjust duration or maturity will be successful at any given time.
LIBOR Risk. The Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (“LIBOR”) to determine payment obligations, financing terms, hedging strategies or investment value. The Fund’s investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Fund may also reference LIBOR.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. LIBOR can no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling, euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published or are no longer representative. Overnight and 12-month US dollar LIBOR settings permanently ceased as of June 30, 2023. 1-, 3-, and 6-month U.S. dollar LIBOR settings will continue to be published using a synthetic methodology until September 2024. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions
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to a new reference rate. Neither the effect of the LIBOR transition process nor its ultimate success can yet be known.
As an alternative to LIBOR, the Financial Reporting Council, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, recommended replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by reference to short-term repurchase agreements, backed by Treasury securities. Abandonment of, or modifications to, LIBOR could have adverse impacts on newly issued financial instruments and any of our existing financial instruments which reference LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including, but not limited to, the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect the return on, value of and market for securities linked to such rates.
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Moreover, these alternative rate-setting provisions may not be designed for regular use in an environment where LIBOR ceases to be published, and may be an ineffective fallback following the discontinuation of LIBOR.
On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022, which among other things, provides for the use of interest rates based on SOFR in certain contracts currently based on LIBOR and a safe harbor from liability for utilizing SOFR-based interest rates as a replacement for LIBOR. The elimination of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Interest Rate Risk Generally. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced.
The magnitude of these fluctuations in the market price of bonds and other income- or dividend-paying securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Fund’s investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management. To the extent the Fund invests in debt securities that
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may be prepaid at the option of the obligor, the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. government securities. A security backed by the “full faith and credit” of the U.S. government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other income- or dividend-paying securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Fund’s use of leverage will tend to increase the Fund’s interest rate risk. The Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Fund also may invest in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Fund holds variable or floating rate instruments, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the net asset value of the Fund’s common shares.
Corporate Bonds Risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of intermediate and longer-term corporate bonds is generally more sensitive to changes in interest rates than is the market value of shorter term corporate bonds. The market value of a corporate bond also may be affected by factors directly related to the issuer, such as investors’ perceptions of the creditworthiness of the issuer, the issuer’s financial performance, perceptions of the issuer in the market place, performance of management of the issuer, the issuer’s capital structure and use of financial leverage and demand for the issuer’s goods and services. Certain risks associated with investments in corporate bonds are described elsewhere in this Annual Report in further detail, including under “—Fixed Income Securities Risks—Credit Risk,” “—Fixed Income Securities Risks—Interest Rate Risk,” “—Fixed Income Securities Risks— Prepayment Risk,” and “—General Risks—Inflation Risk.” There is a risk that the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument. Corporate bonds of below investment grade quality are often high risk and have speculative characteristics and may be particularly susceptible to adverse issuer-specific developments. Corporate bonds of below investment grade quality are subject to the risks described herein under”—Non-Investment Grade Securities.”
Non-Investment Grade Securities (Principal). The Fund may invest in below investment-grade securities, also known as “junk bonds” or “high-yield securities.” These securities, which may be preferred stock or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s (or unrated securities of comparable quality) are referred to in the financial press as “junk bonds” or “high yield” securities and generally pay a premium above the yields of
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U.S. government securities or securities of investment grade issuers because they are subject to greater risks than these securities. These risks, which reflect their speculative character, include the following:
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potentially greater sensitivity to general economic or industry conditions; |
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potential lack of attractive resale opportunities (illiquidity); and |
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additional expenses to seek recovery from issuers who default. |
In addition, the prices of these non-investment grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Non-investment grade securities tend to be less liquid than investment grade securities. The market value of non-investment grade securities may be more volatile than the market value of investment grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short term market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition and the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer’s current financial condition. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issuer, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.
Non-investment grade rated securities also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed income securities), the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of bonds and dividend-paying securities moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently. The Fund may be subject to a greater risk of rising interest rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of below investment grade securities. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.”
The Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio
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investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments in non-investment grade securities, the Fund may invest in the securities of issuers in default. The Fund invests in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations and emerge from bankruptcy protection and that the value of such issuers’ securities will appreciate. By investing in the securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of these securities will not otherwise appreciate.
In addition to using statistical rating agencies and other sources, the Investment Adviser will also perform its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Fixed income securities, including non-investment grade securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and comparable unrated securities has at various times, particularly during times of economic recession, experienced substantial reductions in market value and liquidity. Past recessions have adversely affected the ability of certain issuers of such securities to repay principal and pay interest thereon. The market for those securities could react in a similar fashion in the event of any future economic recession.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. This risk may be elevated compared to historical market conditions because of recent monetary policy measures and the current interest rate environment. Inflation rates may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund shareholders. As inflation increases, the real value of the Fund’s shares and dividends may decline. In addition, during any periods of rising inflation, interest rates of any debt securities held by the Fund would likely increase, which would tend to further reduce returns to shareholders. This risk is greater for fixed-income instruments with longer maturities.
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U.S. Government Securities and Credit Rating Downgrade Risk. The Fund may invest in direct obligations of the government of the United States or its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders of the securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations may fluctuate. In addition, not all U.S. government securities are backed by the full faith and credit of the United States; some are the obligation solely of the entity through which they are issued. There is no guarantee that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so by law.
In 2011, S&P lowered its long term sovereign credit rating on the U.S. to “AA+” from “AAA.” The downgrade by S&P increased volatility in both stock and bond markets, resulting in higher interest rates and higher Treasury yields, and increased the costs of all kinds of debt. On August 1, 2023, Fitch Ratings lowered its long-term sovereign credit rating on the U.S. to “AA+” from “AAA.” This and any further downgrades of U.S. credit ratings could have significant adverse effects on the U.S. economy generally and could result in significant adverse impacts on issuers of securities held by the Fund itself. The Investment Adviser cannot predict the effects of similar events in the future on the U.S. economy and securities markets or on the Fund’s portfolio. The Investment Adviser monitors developments and seeks to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objectives, but there can be no assurance that it will be successful in doing so and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments.
Smaller Companies Investment Risk. The Fund may invest in the securities of smaller, less seasoned companies. Smaller companies offer investment opportunities and additional risks. They may not be well known to the investing public, may not be significantly owned by institutional investors and may not have steady earnings growth. These companies may have limited product lines and markets, as well as shorter operating histories, less experienced management and more limited financial resources than larger companies. In addition, the securities of such companies may be more vulnerable to adverse general market or economic developments, more volatile in price, have wider spreads between their bid and ask prices and have significantly lower trading volumes than the securities of larger capitalization companies. As such, securities of these smaller companies may be less liquid than those of larger companies, and may experience greater price fluctuations than larger companies. In addition, small-cap or mid-cap company securities may not be widely followed by investors, which may result in reduced demand.
As a result, the purchase or sale of more than a limited number of shares of the securities of a smaller company may affect its market price. The Investment Adviser may need a considerable amount of time to purchase or sell its positions in these securities, particularly when other Investment Adviser-managed accounts or other investors are also seeking to purchase or sell them.
The securities of smaller capitalization companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger capitalization securities or the market as a whole. In addition, smaller capitalization securities may be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in smaller capitalization securities requires a longer-term view.
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Securities of emerging companies may lack an active secondary market and may be subject to more abrupt or erratic price movements than securities of larger, more established companies or stock market averages in general. Competitors of certain companies, which may or may not be in the same industry, may have substantially greater financial resources than the companies in which the Fund may invest.
Foreign Securities Risk. Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers and such securities may be more volatile than those of issuers located in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes, which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not be eligible for the special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign issuers classified as passive foreign investment companies may be subject to additional taxation risk.
There may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures that could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities.
The Fund also may purchase ADRs or U.S. dollar denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust companies in respect of securities of foreign issuers held on deposit for use in the U.S. securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
The following provides more detail on certain pronounced risks with foreign investing:
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Foreign Currency Risk. The Fund may invest in companies whose securities are denominated or quot-ed in currencies other than U.S. dollars or have significant operations or markets outside of the United States. In such instances, the Fund will be exposed to currency risk, including the risk of fluctuations in the exchange rate between U.S. dollars (in which the Fund’s shares are denominated) and such foreign currencies, the risk of currency devaluations and the risks of non-exchangeability and blockage. As non- |
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U.S. securities may be purchased with and payable in currencies of countries other than the U.S. dollar, the value of these assets measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Fluctuations in currency rates may adversely affect the ability of the Investment Adviser to acquire such securities at advantageous prices and may also adversely affect the performance of such assets.
Certain non-U.S. currencies, primarily in developing countries, have been devalued in the past and might face devaluation in the future. Currency devaluations generally have a significant and adverse impact on the devaluing country’s economy in the short and intermediate term and on the financial condition and results of companies’ operations in that country. Currency devaluations may also be accompanied by significant declines in the values and liquidity of equity and debt securities of affected governmental and private sector entities generally. To the extent that affected companies have obligations denominated in currencies other than the devalued currency, those companies may also have difficulty in meeting those obligations under such circumstances, which in turn could have an adverse effect upon the value of the Fund’s investments in such companies. There can be no assurance that current or future developments with respect to foreign currency devaluations will not impair the Fund’s investment flexibility, its ability to achieve its investment objectives or the value of certain of its foreign currency-denominated investments.
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Tax Consequences of Foreign Investing. The Fund’s transactions in foreign currencies, foreign curren-cy-denominated debt obligations and certain foreign currency options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could increase or decrease the Fund’s ordinary income distributions to you, and may cause some or all of the Fund’s previously distributed income to be classified as a return of capital. In certain cases, the Fund may make an election to treat gain or loss attributable to certain investments as capital gain or loss. |
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EMU and Redenomination Risk. As the European debt crisis progressed, the possibility of one or more Eurozone countries exiting the European Monetary Union (“EMU”), or even the collapse of the Euro as a common currency, arose, creating significant volatility at times in currency and financial markets gen-erally. The effects of the collapse of the Euro, or of the exit of one or more countries from the EMU, on the U.S. and global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. Any partial or com-plete dissolution of the EMU could have significant adverse effects on currency and financial markets, and on the values of the Fund’s portfolio investments. If one or more EMU countries were to stop using the Euro as its primary currency, the Fund’s investments in such countries may be redenominated into a different or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition, securities or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and valuation risk to a greater extent than similar investments currently denominated in Euros. To the extent a currency used for redenomination purposes is not specified in respect of certain EMU-related investments, or should the Euro cease to be used entirely, the currency in which such investments are denominated may be unclear, making such investments particularly difficult |
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to value or dispose of. The Fund may incur additional expenses to the extent it is required to seek judicial or other clarification of the denomination or value of such securities. |
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Emerging Markets Risk. The considerations noted above in “Foreign Securities Risk” are generally inten-sified for investments in emerging market countries. Emerging market countries typically have economic and political systems that are less fully developed, and can be expected to be less stable than those of more developed countries. Investing in securities of companies in emerging markets may entail special risks relating to potential political and economic instability and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment, the lack of hedging instruments and restrictions on repatriation of capital invested. Economies of such countries can be subject to rapid and unpredictable rates of inflation or deflation. Emerging securities markets are substantially smaller, less developed, less liquid and more volatile than the major securities markets. The limited size of emerging securities markets and limited trading volume compared to the volume of trading in U.S. securities could cause prices to be erratic for reasons apart from factors that affect the quality of the securities. For ex-ample, limited market size may cause prices to be unduly influenced by traders who control large posi-tions. Adverse publicity and investors’ perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. Other risks include high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; overdependence on exports, including gold and natural resources exports, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal systems; and less reliable securities custodial services and settlement practices. Certain emerging markets may also face other significant internal or external risks, including the risk of war and civil unrest. For all of these reasons, investments in emerging markets may be considered speculative. |
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Eurozone Risk. A number of countries in the EU have experienced, and may continue to experience, severe economic and financial difficulties. In particular, many EU nations are susceptible to economic risks associated with high levels of debt, notably due to investments in sovereign debt of countries such as Greece, Italy, Spain, Portugal, and Ireland. As a result, financial markets in the EU have been subject to increased volatility and declines in asset values and liquidity. Responses to these financial problems by European governments, central banks, and others, including austerity measures and reforms, may not work, may result in social unrest, and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets, and asset valuations around the world. Greece, Ireland, and Portugal have already received one or more “bailouts” from other Eurozone member states, and it is unclear how much additional funding they will require or if additional Eurozone member states will require bailouts in the future. One or more other countries may also abandon the euro and/or withdraw from the EU, placing its currency and banking system in jeopardy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching. |
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Brexit Risk. Pursuant to an agreement setting out the terms on which the United Kingdom may leave the European Union (the “EU”)(“Brexit”), the United Kingdom formally withdrew from the EU, effective |
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January 31, 2020, and the United Kingdom remained in the EU’s customs union and single market until December 31, 2020. The United Kingdom and the EU have entered into a Trade and Cooperation Agree-ment (the “TCA”), which came into full force on May 1, 2021, and set out the foundation of the economic and legal framework for trade between the United Kingdom and the EU. As the TCA is a new legal frame-work, its implementation may result in uncertainty in its application and periods of volatility in both the United Kingdom and wider European markets. Moreover, while the TCA regulates a number of important areas, significant parts of the United Kingdom economy are not addressed in detail by the TCA, including in particular the services sector, which represents the largest component of the United Kingdom’s econ-omy. Due to political uncertainty, it is not possible to anticipate the form or nature of the future trading relationship between the United Kingdom and the EU. While certain measures have been proposed and/ or implemented within the United Kingdom and at the EU level or at the member state level, which are designed to minimize disruption in the financial markets, it is not currently possible to de-termine whether such measures would achieve their intended effects. Notwithstanding the foregoing, the extent of the impact of the withdrawal and the resulting economic arrangements in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear and may lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. For example, during this period of uncertainty, the negative impact on not only the United Kingdom and European economies, but the broader global economy, could be significant, potentially resulting in increased market and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and other currencies and volatility in global currency markets generally), and illiquidity and lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Additional risks associated with Brexit include macroeconomic risk to the United Kingdom and European economies, impetus for further dis-integration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like us), prejudice to financial services businesses that are conducting business in the EU and which are based in the United Kingdom, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations, and the unavailability of timely information as to expected legal, tax and other regimes. Any further exits from the EU, or the possibility of such exits, would likely cause additional market disruption globally and introduce new legal and regulatory uncertainties.
In addition, certain European countries have recently experienced negative interest rates on certain fixed-income instruments. A negative interest rate policy is an unconventional central bank monetary policy tool where nominal target interest rates are set with a negative value (i.e., below zero percent) intended to help create self-sustaining growth in the local economy. Negative interest rates may result in heightened market volatility and may detract from the Fund’s performance to the extent the Fund is exposed to such interest rates. Among other things, these developments have adversely affected the value and exchange rate of the euro and pound sterling, and any similar developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
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To the extent the Fund has exposure to European markets or to transactions tied to the value of the euro, these events could negatively affect the value and liquidity of the Fund’s investments. All of these developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
Restricted and Illiquid Securities Risk. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment. Unregistered securities often can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund’s inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. The Fund may be unable to sell illiquid investments when it desires to do so, resulting in the Fund obtaining a lower price or being required to retain the investment. Illiquid investments generally must be valued at fair value, which is inherently less precise than utilizing market values for liquid investments, and may lead to differences between the price a security is valued for determining the Fund’s net asset value and the price the Fund actually receives upon sale.
Special Risks Related to Investment in Derivatives. The Fund may participate in certain derivative transactions, as described herein. Such transactions entail certain execution, market, liquidity, hedging and tax risks. Participation in derivatives transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Investment Adviser’s prediction of movements in the direction of the securities or other referenced instruments or markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Risks inherent in the use of derivative transactions include:
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dependence on the Investment Adviser’s ability to predict correctly movements in the direction of the relevant measure; |
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imperfect correlation between the price of the derivative instrument and movements in the prices of the referenced assets; |
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the fact that skills needed to use these strategies are different from those needed to select portfolio securities; |
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the possible absence of a liquid secondary market for any particular instrument at any time; |
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the possible need to defer closing out certain positions to avoid adverse tax consequences; |
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the possible inability of the Fund to purchase or sell a security or instrument at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security or instrument at a disadvantageous time due to a need for the Fund to remain in compliance with the 1840 Act restrictions regarding derivatives transactions; and |
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the creditworthiness of counterparties. |
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Certain derivatives may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the ability of the Fund to act upon economic events occurring in the foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) less trading volume. Exchanges on which derivatives are traded may impose limits on the positions that the Fund may take in certain circumstances.
Many over-the-counter (“OTC”) derivatives are valued on the basis of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative and the price which the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Fund’s net asset value and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments.
Furthermore, the Fund’s ability to engage in hedging transactions may also be adversely affected by rules adopted by the U.S. Commodity Futures Trading Commission, or the “CFTC.” The Dodd-Frank Act has made broad changes to the OTC derivatives market, granted significant new authority to the CFTC and the SEC to regulate OTC derivatives (swaps and security-based swaps) and participants in these markets. The Dodd-Frank Act is intended to regulate the OTC derivatives market by requiring many derivative transactions to be cleared and traded on an exchange, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether. The CFTC has implemented mandatory clearing and exchange-trading of certain OTC derivatives contracts including many standardized interest rate swaps and credit default index swaps. The CFTC continues to approve contracts for central clearing. Exchange-trading and central clearing are expected to reduce counterparty credit risk by substituting the clearinghouse as the counterparty to a swap and increase liquidity, but exchange-trading and central clearing do not make swap transactions risk-free. Uncleared swaps, such as non-deliverable foreign currency forwards, are subject to certain margin requirements that mandate the posting and collection of minimum margin amounts. This requirement may result in the Fund and its counterparties posting higher margin amounts for uncleared swaps than would otherwise be the case. Certain rules require centralized reporting of detailed information about many types of cleared and uncleared swaps. Reporting of swap data may result in greater market transparency, but may subject the Fund to additional administrative burdens, and the safeguards established to protect trader anonymity may not function as expected.
In addition, on October 28, 2020, the SEC adopted new regulations governing the use of derivatives by closed-end funds (“Rule 18f-4”), which the Fund was required to comply with as of August 19, 2022. As a result, the Fund is required to implement and comply with the Rule 18f-4 limits on the amount of derivatives the Fund can enter into, eliminate the asset segregation framework previously used to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the limits would result in a statutory violation and require the Fund, if the Fund’s use of derivatives is more than a limited specified exposure amount (10% of net assets), to establish and maintain a comprehensive derivatives risk management program and appoint a
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derivatives risk manager. These requirements may limit the ability of the Fund to invest in derivatives, engage in securities lending activities, short sales, reverse repurchase agreements and similar financing transactions. Additionally, Rule 18f-4 and the SEC’s corresponding recission and withdrawal of prior guidance and relief related to asset segregation and asset coverage requirements under section 18 of the 1940 Act may affect the Fund’s ability to implement its investment strategy, pursue its investment objectives and may increase the cost of the Fund’s investments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Fund’s hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. Future CFTC or SEC rulemakings could potentially further limit or completely restrict the Fund’s ability to use these instruments as a part of the Fund’s investment strategy, increase the costs of using these instruments or make them less effective. Limits or restrictions applicable to the counterparties with which we engage in derivative transactions could also prevent us from using these instruments or affect the pricing or other factors relating to these instruments, or may change the availability of certain investments. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
Counterparty Risk. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Fund’s clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties.
Short Sales Risk. Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund
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replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash and liquid securities) and the maintenance of collateral with its Custodian. Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Short selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale), the borrowed securities must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Fund to the risk of uncapped losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. There is the risk that the securities borrowed by the Fund in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a time when other short-sellers of the security are receiving similar requests, a “short squeeze” can occur, and the Fund may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most disadvantageous time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
In September 2008, in response to spreading turmoil in the financial markets, the SEC temporarily banned short selling in the stocks of numerous financial services companies, and also promulgated new disclosure requirements with respect to short positions held by investment managers. The SEC’s temporary ban on short selling of such stocks has since expired, but should similar restrictions and/or additional disclosure requirements be promulgated, especially if market turmoil occurs, the Fund may be forced to cover short positions more quickly than otherwise intended and may suffer losses as a result. Such restrictions may also adversely affect the ability of the Fund to execute its investment strategies generally. Similar emergency orders were also instituted in non-U.S. markets in response to increased volatility. The Fund’s ability to engage in short sales is also restricted by various regulatory requirements relating to short sales.
Significant Holdings Risk. The Fund may invest up to 25% of its total assets in securities of a single industry. Should the Fund choose to do so, the net asset value of the Fund will be more susceptible to factors affecting those particular types of companies, which, depending on the particular industry, may include, among others: governmental regulation; inflation; cost increases in raw materials, fuel and other operating expenses; technological innovations that may render existing products and equipment obsolete; and increasing interest rates resulting in high interest costs on borrowings needed for capital investment, including costs associated with compliance with environmental and other regulations. In such circumstances, the Fund’s investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of industries.
Healthcare Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by companies in the healthcare sector. The profitability of companies in the healthcare sector may be affected by legislative activities and extensive government regulations, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation,
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changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of a company’s patents may adversely affect that company’s profitability. Many healthcare companies are subject to extensive civil litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly, and such efforts ultimately may be unsuccessful. Companies in the healthcare sector may be thinly capitalized and may be susceptible to product obsolescence.
Information Technology Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by information technology companies. Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect on profit margins. These companies are heavily dependent on patent protection and the expiration of or infringement on patents may adversely affect the profitability of such companies.
The securities of information technology companies tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation, product and/or service obsolescence, unpredictable changes in growth rates and competition for the services of qualified personnel. In addition, a rising interest rate environment tends to negatively affect information technology companies. These companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices. Further, those information technology companies seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings.
Financial Services Company Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by financial services companies. Financial services are generally involved in banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, financial investments, or real estate.
Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares. As of September 30, 2023, the amount of leverage represented approximately 25% of the Fund’s net assets. The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds that have a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for any preferred shares or debt outstanding. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise deleverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent the
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Fund is leveraged in its investment operations, the Fund will be subject to substantial risk of loss. The Fund cannot assure that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, to the extent the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code. For more information regarding the risks of a leverage capital structure to holders of the Fund’s common shares, see “—Special Risks to Holders of Common Shares—Leverage Risk.”
Market Discount Risk. The Fund is a diversified, closed-end management investment company. Whether investors will realize gains or losses upon the sale of additional securities of the Fund will depend upon the market price of the securities at the time of sale, which may be less or more than the Fund’s net asset value per share or the liquidation value of any Fund preferred shares issued. Since the market price of any additional securities the Fund may issue will be affected by such factors as the Fund’s dividend and distribution levels (which are in turn affected by expenses), dividend and distribution stability, net asset value, market liquidity, the relative demand for and supply of such securities in the market, general market and economic conditions and other factors beyond the control of the Fund, we cannot predict whether any such securities will trade at, below or above net asset value or at, below or above their public offering price or at, below or above their liquidation value, as applicable. For example, common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their securities of the Fund soon after the completion of a public offering for such securities. The risk of a market price discount from net asset value is separate and in addition to the risk that net asset value itself may decline. The Fund’s securities are designed primarily for long term investors, and investors in the shares should not view the Fund as a vehicle for trading purposes.
Long Term Objective; Not a Complete Investment Program. The Fund is intended for investors seeking long term growth of capital. The Fund is not meant to provide a vehicle for those who wish to play short term swings in the stock market. An investment in shares of the Fund should not be considered a complete investment program. Each shareholder should take into account the Fund’s investment objectives as well as the shareholder’s other investments when considering an investment in the Fund.
Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Investment Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Fund, except as set forth in the Fund’s governing documents. The authority for all such decisions is generally delegated to the Board, who in turn, has delegated the day-to-day management of the Fund’s investment activities to the Investment Adviser, subject to oversight by the Board.
Dependence on Key Personnel. The Investment Adviser is dependent upon the expertise of Mr. James Dinsmore, who serves as the Fund’s portfolio manager, in providing advisory services with respect to the Fund’s investments. If the Investment Adviser were to lose the services of Mr. James Dinsmore, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could
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be found for Mr. James Dinsmore in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as localized wars, instability, new and ongoing pandemics (such as COVID-19), epidemics or outbreaks of infectious diseases in certain parts of the world, natural/environmental disasters in certain parts of the world, terrorist attacks in the United States and around the world, trade or tariff arrangements, social and political discord, debt crises, sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, historical adversaries and the international community generally, new and continued political unrest in various countries, the exit or potential exit of one or more countries from the EU or the Economic and Monetary Union, continued changes in the balance of political power among and within the branches of the U.S. government, and government shutdowns, among others, may result in market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide.
The consequences of the conflict between Russia and Ukraine, including international sanctions, the potential impact on inflation and increased disruption to supply chains may impact our portfolio companies, result in an economic downturn or recession either globally or locally in the U.S. or other economics, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited “cold” wars or in the form a virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on the Fund’s returns and net asset value. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, may in the future result in additional government shutdowns, which could have a material adverse effect on the Funds’ investments and operations. In addition, the Funds’ ability to raise additional capital in the future through the sale of securities could be materially affected by a government shutdown. Additional and/or prolonged U.S. government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree.
Periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
While the extreme volatility and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007 and 2008 had, until the recent coronavirus (COVID-19) outbreak, generally subsided, uncertainty and periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
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The occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. It is not known how long the securities markets may be affected by similar events, and the effects of similar events in the future on the U.S. economy and securities markets cannot be predicted. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
As previously discussed, Brexit has led to volatility in the financial markets of the UK and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The decision made in the British referendum may also lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund and its investments to execute its respective strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these changes on the value of our assets or the Fund’s common shares or market conditions generally, is uncertain.
Economic Events and Market Risk. Periods of market volatility remain, and may continue to occur in the future, in response to various political, social and economic events both within and outside of the United States. These conditions have resulted in, and in many cases continue to result in, greater price volatility, less liquidity, widening credit spreads and a lack of price transparency, with many securities remaining illiquid and of uncertain value. Such market conditions may adversely affect the Fund, including by making valuation of some of the Fund’s securities uncertain and/or result in sudden and significant valuation increases or declines in the Fund’s holdings. If there is a significant decline in the value of the Fund’s portfolio, this may impact the asset coverage levels for the Fund’s outstanding leverage.
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Risks resulting from any future debt or other economic crisis could also have a detrimental impact on the global economic recovery, the financial condition of financial institutions and our business, financial condition and results of operation. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. To the extent uncertainty regarding the U.S. or global economy negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected. Downgrades to the credit ratings of major banks could result in increased borrowing costs for such banks and negatively affect the broader economy. Moreover, Federal Reserve policy, including with respect to certain interest rates, may also adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. Market volatility, rising interest rates and/or a return to unfavorable economic conditions could impair the Fund’s ability to achieve its investment objectives.
Regulation and Government Intervention Risk. Changes enacted by the current presidential administration could significantly impact the regulation of financial markets in the U.S. Areas subject to potential change, amendment or repeal include trade and foreign policy, corporate tax rates, energy and infrastructure policies, the environment and sustainability, criminal and social justice initiatives, immigration, healthcare and the oversight of certain federal financial regulatory agencies and the Federal Reserve. Certain of these changes can, and have, been effectuated through executive order. For example, the current administration has taken steps to rejoin the Paris climate accord of 2015 and incentivize certain clean energy technologies, cancel the Keystone XL pipeline, provide military support to Ukraine and change immigration enforcement priorities. Other potential changes that could be pursued by the current presidential administration could include an increase in the corporate income tax rate; changes to regulatory enforcement priorities; and spending on clean energy and infrastructure. It is not possible to predict which, if any, of these actions will be taken or, if taken, their effect on the economy, securities markets or the financial stability of the U.S. The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and the Fund’s ability to achieve its investment objectives.
Additional risks arising from the differences in expressed policy preferences among the various constituencies in the branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have a material adverse effect on the Fund’s net asset value.
In addition, the rules dealing with the U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain
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dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these and other changes is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund’s shares and their indirect effect on the value of the Fund’s assets, Fund shares or market conditions generally.
In addition, the U.S. government has proposed and adopted multiple regulations that could have a long-lasting impact on the Fund and on the closed-end fund industry in general. The SEC’s final rules and amendments that modernize reporting and disclosure, along with other potential upcoming regulations, could, among other things, restrict the Fund’s ability to engage in transactions, and/or increase overall expenses of the Fund.
The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and its ability to achieve its investment objective(s).
Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
Loans of Portfolio Securities Risk. Consistent with applicable regulatory requirements and the Fund’s investment restrictions, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times collateralized by cash or cash equivalents which are maintained at all times in an amount equal to at least 100% of the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short term highly liquid obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale. The Fund’s loans of portfolio securities will be collateralized in accordance with applicable regulatory requirements, which means that “cash equivalents” accepted as collateral will be limited to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or irrevocable letters of credit issued by a bank (other than a borrower of the Fund’s portfolio securities or any affiliate of such borrower) which qualifies as a custodian bank for an investment company under the 1940 Act. The Fund’s ability to lend portfolio securities may be limited by rating agency guidelines (if any).
A loan may generally be terminated by the borrower on one business days’ notice, or by the Fund at any time thereby requiring the borrower to redeliver the borrowed securities within the normal and customary settlement time for securities transactions. If the borrower fails to deliver the loaned securities within the normal and customary settlement time for securities transactions, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral pledged by the borrower. As with any extensions of credit, there are risks of delay in recovery and in some cases even
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loss of rights in the collateral should the borrower of the securities violate the terms of the loan or fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Investment Adviser to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund.
The risks associated with loans of portfolio securities are substantially similar to those associated with repurchase agreements. Thus, if the counterparty to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund’s ability to sell the collateral and the Fund would suffer a loss. Moreover, because the Fund will reinvest any cash collateral it receives, as described above, the Fund is subject to the risk that the value of the investments it makes will decline and result in losses to the Fund. These losses, in extreme circumstances such as the 2007-2009 financial crisis, could be substantial and have a significant adverse impact on the Fund and its shareholders. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund’s investment in such loaned securities. The Fund will pay reasonable finder’s, administrative and custodial fees in connection with a loan of its securities, and may also pay fees to one or more securities lending agents and/or pay other fees or rebates to borrowers.
Investment Dilution Risk. The Fund’s investors do not have preemptive rights to any shares the Fund may issue in the future. The Fund’s Declaration of Trust authorizes it to issue an unlimited number of shares. The Board may make certain amendments to the Declaration of Trust. After an investor purchases shares, the Fund may sell additional shares or other classes of shares in the future or issue equity interests in private offerings. To the extent the Fund issues additional equity interests after an investor purchases its shares, such investor’s percentage ownership interest in the Fund will be diluted.
Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund or its shareholders. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability of the Fund to pursue its investment strategies. Similarly, the Biden administration has indicated that it intends to modify key aspects of the Code, including by increasing corporate and individual tax rates. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in the Fund.
We cannot assure you what percentage of the distributions paid on the Fund’s shares, if any, will consist of tax-advantaged qualified dividend income or long term capital gains or what the tax rates on various types of income will be in future years.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, meet certain asset diversification tests, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its “investment company
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taxable income.” Statutory limitations on distributions on the common shares if the Fund fails to satisfy the 1940 Act’s asset coverage requirements could jeopardize the Fund’s ability to meet such distribution requirements. While the Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary in order to maintain compliance with such asset coverage requirements, there can be no assurance that such actions can be effected in time to meet the Code requirements. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The resulting corporate taxes would materially reduce the Fund’s net assets and the amount of cash available for distribution to shareholders. For a more complete discussion of these and other U.S. federal income tax considerations.
1940 Act Regulation. The Fund is a registered closed-end investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
Legislation Risk. At any time after the date of this Annual Report, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation may change the way in which the Fund itself is regulated. The Investment Adviser cannot predict the effects of any new governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Fund’s ability to achieve its investment objectives.
Reliance on Service Providers Risk. The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Fund’s operations and financial performance. Failure by any service provider to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Fund’s performance and returns to shareholders. The termination of the Fund’s relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect on the Fund’s performance and returns to shareholders.
Cyber Security Risk. 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 are becoming increasingly common and more sophisticated, and may be perpetrated by computer hackers, cyber-terrorists or others engaged in corporate espionage. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders 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
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invests, which may cause the Fund’s investment in such issuers to lose value. There have been a number of recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well as cyberattacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments. Although service providers typically have policies and procedures, business continuity plans and/or risk management systems intended to identify and mitigate cyber incidents, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber security policies, plans and systems put in place by its service providers or any other third parties whose operations may affect the Fund or its shareholders. 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.
Because technology is consistently changing, new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks have not been identified or prepared for, or that an attack may not be detected, which puts limitations on the Fund’s ability to plan for or respond to a cyber attack. In addition to deliberate cyber attacks, unintentional cyber incidents can occur, such as the inadvertent release of confidential information by the Fund or its service providers. Like other funds and business enterprises, the Fund and its service providers are subject to the risk of cyber incidents occurring from time to time.
Misconduct of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Adviser or the Fund’s service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Fund’s service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting he Fund’s business prospects or future marketing activities. Despite the Investment Adviser’s due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Adviser’s due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Investment Adviser will identify or prevent any such misconduct.
Anti-Takeover Provisions. The Agreement and Declaration of Trust and By-Laws of the Fund include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to an open-end fund.
Special Risks to Holders of Common Shares
Dilution Risk. If the Fund determines to conduct a rights offering to subscribe for common shares, holders of common shares may experience dilution or accretion of the aggregate net asset value of their common shares. Such dilution or accretion will depend upon whether (i) such shareholders participate in the rights offering and (ii) the Fund’s net asset value per common share is above or below the subscription price on the expiration date of the rights offering.
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Shareholders who do not exercise their subscription rights may, at the completion of such an offering, own a smaller proportional interest in the Fund than if they exercised their subscription rights. As a result of such an offering, a shareholder may experience dilution in net asset value per share if the subscription price per share is below the net asset value per share on the expiration date. If the subscription price per share is below the net asset value per share of the Fund’s shares on the expiration date, a shareholder will experience an immediate dilution of the aggregate net asset value of such shareholder’s shares if the shareholder does not participate in such an offering and the shareholder will experience a reduction in the net asset value per share of such shareholder’s shares whether or not the shareholder participates in such an offering. The Fund cannot state precisely the extent of this dilution (if any) if the shareholder does not exercise such shareholder’s subscription rights because the Fund does not know what the net asset value per share will be when the offer expires or what proportion of the subscription rights will be exercised.
Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares and is also permitted to use other types of financial leverage, such as through the issuance of debt securities or additional preferred shares and borrowing from financial institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding. As of September 30, 2023 the amount of leverage represented approximately 25% of the Fund’s net assets.
The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for the preferred shares. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in its investment operations, the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code.
Any decline in the net asset value of the Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of the Fund’s portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. The Fund might be in danger of failing to maintain the required asset coverage of the borrowings, notes or preferred shares, or of losing its ratings on its notes or preferred shares or, in an extreme case, the Fund’s
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current investment income might not be sufficient to meet the distribution or interest requirements on the preferred shares, or notes. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the preferred shares or notes.
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Preferred Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common shares to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net rate of return on the Fund’s investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate on the preferred shares or the interest rate on the notes plus the management fee annual rate of 0.80% of the first $100,000,000 of average weekly net assets and 0.55% of average weekly net assets in excess of $100,000,000 exceeds the net rate of return on the Fund’s portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares or notes. (The Fund’s “net” assets for this purpose includes the liquidation of any preferred shares out-standing.) If the Fund has insufficient investment income and gains, all or a portion of the distributions to preferred shareholders or interest payments to note holders would come from the common shareholders’ capital. Such distributions and interest payments reduce the net assets attributable to common share-holders and do not reduce the principal due to noteholders on maturity or the liquidation preference to which preferred shareholders are entitled. The Prospectus Supplement relating to any sale of preferred shares will set forth dividend rate on such preferred shares. |
In addition, the Fund would pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred shares or notes, including the advisory fees on the incremental assets attributable to the preferred shares or notes.
Holders of preferred shares and notes may have different interests than holders of common shares and may at times have disproportionate influence over the Fund’s affairs. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt, such as notes) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding, which is referred to as the “asset coverage” required by the 1940 Act. In the event the Fund fails to maintain an asset coverage of 100% for any notes outstanding for certain periods of time, the 1940 Act requires that either an event of default be declared or that the holders of such notes have the right to elect a majority of the Fund’s Trustees until asset coverage recovers to 110%. In addition, holders of preferred shares, voting separately as a single class, have the right (subject to the rights of noteholders) to elect two members of the Board at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the Trustees until such arrearage is completely eliminated. In addition, preferred shareholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion of the Fund to open-end status, and accordingly can veto any such changes. Further, interest on notes will be payable when due as described in a Prospectus Supplement and if the Fund does not pay interest when due, it will trigger an event of default and the Fund expects to be restricted from declaring dividends and making other distributions with respect to common shares and preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority in principal amount of a series of outstanding notes or the trustee
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will be able to declare the principal amount of that series of notes immediately due and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring distributions on, or repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of declaring distributions on preferred shares). The Fund’s common shares are structurally subordinated as to income and residual value to any preferred shares or notes in the Fund’s capital structure, in terms of priority to income and payment in liquidation.
Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of the Fund’s common shares and preferred shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund’s ability to maintain its qualification as a RIC for U.S. federal income tax purposes. While the Fund intends to redeem its preferred shares or notes to the extent necessary to enable the Fund to distribute its income as required to maintain its qualification as a RIC under the Code, there can be no assurance that such actions can be effected in time to meet the Code requirements.
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Portfolio Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain attractive credit quality ratings for preferred shares or notes, the Fund must comply with investment quality, diversification and other guidelines established by the relevant rating agencies. These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. In the event that a rating on the Fund’s preferred shares or notes is lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred shares or notes, and the common shares of the Fund will lose the potential benefits associated with a leveraged capital structure. |
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Impact on Common Shares. Assuming that leverage will (1) be equal in amount to approximately 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), and (2) charge interest or involve dividend payments at a projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), then the annual return generated by the Fund’s portfolio (net of estimated ex-penses) must exceed approximately 1.36% of the Fund’s total net assets in order to cover such interest or dividend payments and other expenses specifically related to leverage. Of course, these numbers are merely estimates, used for illustration. Actual dividend rates, interest or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above. |
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of net investment income of the Fund, realized gains or losses of the Fund and changes in the value of the securities held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects leverage representing 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), the Fund’s current projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), a management fee at an annual rate of 0.55% of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses attributable to any
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outstanding preferred shares of 0.04% of the Fund’s net assets attributable to common shares. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See “Risk Factors and Special Considerations.”
Assumed Return on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
Corresponding Return to Common Shareholder | |
| (15.53 | )% | |
| (8.82 | )% | |
| (2.12 | )% | |
| 4.58 | % | |
| 11.29 | % |
Common share total return is composed of two elements—the common share distributions paid by the Fund (the amount of which is largely determined by the taxable income of the Fund (including realized gains or losses) after paying interest on any debt and/or dividends on any preferred shares) and unrealized gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy total return. For example, to assume a total return of 0% the Fund must assume that the income it receives on its investments is entirely offset by expenses and losses in the value of those investments.
Market Discount Risk. As described above in “–General Risks—Market Discount Risk,” common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their common shares of the Fund soon after completion of a public offering. The common shares of the Fund are designed primarily for long-term investors and investors in the shares should not view the Fund as a vehicle for trading purposes.
Special Risks to Holders of Preferred Shares
Illiquidity Prior to Exchange Listing. Prior to an offering, there will be no public market for any series of fixed rate preferred shares. In the event any series of fixed rate preferred shares are issued, we expect to apply to list such shares on a national securities exchange, which will likely be the NYSE American. However, during an initial period, which is not expected to exceed 30 days after the date of its initial issuance, such shares may not be listed on any securities exchange. During such period, the underwriters may make a market in such shares, though they will have no obligation to do so. Consequently, an investment in such shares may be illiquid during such period.
Market Price Fluctuation. Fixed rate preferred shares may trade at a premium to or discount from liquidation value for various reasons, including changes in interest rates, perceived credit quality and other factors.
Special Risks to Holders of Notes
An investment in our notes is subject to special risks. Our notes are not likely to be listed on an exchange or automated quotation system. We cannot assure you that any market will exist for our notes or if a market does exist, whether it will provide holders with liquidity. Broker-dealers that maintain a secondary trading market for the notes are not required to maintain this market, and the Fund is not required to redeem notes if an attempted
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
secondary market sale fails because of a lack of buyers. To the extent that our notes trade, they may trade at a price either higher or lower than their principal amount depending on interest rates, the rating (if any) on such notes and other factors.
Special Risks of Notes to Holders of Preferred Shares
As provided in the 1940 Act, and subject to compliance with the Fund’s investment limitations, the Fund may issue notes. In the event the Fund were to issue such securities, the Fund’s obligations to pay dividends or make distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and interest payments due and owing with respect to its outstanding notes. Accordingly, the Fund’s issuance of notes would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
Special Risks to Holders of Notes and Preferred Shares
Common Share Repurchases. Repurchases of common shares by the Fund may reduce the net asset coverage of the notes and preferred shares, which could adversely affect their liquidity or market prices.
Common Share Distribution Policy. In the event the Fund does not generate a total return from dividends and interest received and net realized capital gains in an amount at least equal to its distributions for a given year, the Fund may return capital as part of its distribution. This would decrease the asset coverage per share with respect to the Fund’s notes or preferred shares, which could adversely affect their liquidity or market prices. For the fiscal year ended September 30, 2023, the Fund made distributions of $0.52 per common share, none of which constituted a return of capital. The composition of each distribution is estimated based on earnings as of the record date for the distribution. The actual composition of each distribution may change based on the Fund’s investment activity through the end of the calendar year.
Credit
Quality Ratings. The Fund may obtain credit quality ratings for its preferred shares or notes; however, it is not required
to do so and may issue preferred shares or notes without any rating. If rated, the Fund does not impose any minimum rating necessary
to issue such preferred shares or notes. In order to obtain and maintain attractive credit quality ratings for preferred shares or
notes, if desired, the Fund’s portfolio must satisfy over-collateralization tests established by the relevant rating agencies.
These tests are more difficult to satisfy to the extent the Fund’s portfolio securities are of lower credit quality, longer
maturity or not diversified by issuer and industry.
These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. A rating (if any) by a rating agency does not eliminate or necessarily mitigate the risks of investing in our preferred shares or notes, and a rating may not fully or accurately reflect all of the securities’ credit risks. A rating (if any) does not address liquidity or any other market risks of the securities being rated. A rating agency could downgrade the rating of our notes or preferred shares, which may make such securities less liquid in the
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
secondary market. If a rating agency downgrades the rating assigned to notes or preferred shares, we may alter our portfolio or redeem the preferred securities or notes under certain circumstances.
Special Risk to Holders of Subscription Rights
There is a risk that changes in market conditions may result in the underlying common or preferred shares purchasable upon exercise of the subscription rights being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the subscription rights. Investors who receive subscription rights may find that there is no market to sell rights they do not wish to exercise. If investors exercise only a portion of the rights, the number of common or preferred shares issued may be reduced, and the common or preferred shares may trade at less favorable prices than larger offerings for similar securities.
HOW THE FUND MANAGES RISK
Investment Restrictions
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations are fundamental and may not be changed without the approval of the holders of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Fund (voting together as a single class subject to class approval rights of any preferred shares). The Fund may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares, if any.
INVESTMENT RESTRICTIONS
Fundamental Restrictions and Policies
The Fund operates under the following restrictions that constitute fundamental policies under the 1940 Act that, except as otherwise noted, cannot be changed without the affirmative vote of a majority, as defined in the 1940 Act, of the outstanding voting securities (voting together as a single class) of the Fund. The Fund has issued preferred shares and may in the future issue additional series of preferred shares. Accordingly, the affirmative vote of the holders of a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund voting as a separate class would also be required to change a fundamental policy. Except as otherwise noted, all percentage limitations set forth below apply immediately after a purchase or initial investment and any subsequent change in any applicable percentage resulting from market fluctuations does not require any action. The Fund may not:
(1) with respect to 85% of its total assets, taken at market value, invest in securities of any one issuer (other than the United States or its agencies or instrumentalities) if immediately after and as a result of such investment more than 5% of the total assets of the Fund, taken at market value, would be invested in the securities of such issuer, or more than 10% of the outstanding securities, or more than 10% of the outstanding voting securities, of such issuer would be owned by the Fund;
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
(2) invest more than 25% of its total assets, taken at market value, in the securities of issuers in any particular industry; this restriction does not apply to Government Securities, which the Fund may purchase temporarily and for defensive purposes;
(3) make personal loans or loans to persons who control or are under common control with the Fund, or lend its portfolio securities in excess of 10% of its total assets, taken at market value; this restriction does not prevent the Fund from purchasing debt obligations, entering into repurchase agreements, or investing in loans, including assignments and participation interests;
(4) invest in repurchase agreements maturing in more than seven days or invest more than 5% of its total assets, taken at market value, in repurchase agreements with any single vendor;
(5) purchase any securities on margin, except that the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities;
(6) borrow money or issue senior securities to the extent such borrowing or issuance would violate the 1940 Act;
(7) underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act in selling portfolio securities;
(8) sell (write) call options on more than 25% of its total assets, taken at market value, and then only if such options are “covered,” i.e., they are written on common stocks owned by the Fund or which the Fund has an immediate right to acquire through conversion or exchange of other securities; or invest more than 2% of its total assets, taken at market value, in the purchase of put options on common stocks owned by the Fund or which it has an immediate right to acquire through conversion or exchange of other securities and in the purchase of put options on one or more broadly based stock market indices; the Fund may enter into closing transactions with respect to call options which it has written; the Fund may only write or purchase options listed on a national securities exchange; except as stated above the Fund may not engage in options transactions;
(9) make short sales of securities or maintain a short position, unless at all times when a short position is open the Fund owns, or has the immediate right to acquire through conversion or exchange, an equal amount of such securities, and not more than 25% of its total assets, taken at market value, are held as collateral for such sales;
(10) invest more than 10% of its total assets, taken at market value, in the securities of foreign issuers, except that this limitation shall not apply to (a) securities convertible into or exchangeable for common stock of U.S. companies, or (b) U.S. dollar-denominated securities convertible into or exchangeable for American Depositary Receipts that at the time of purchase (i) are listed on the New York Stock Exchange (“NYSE”), the NYSE American or the NASDAQ National Market, or (ii) the underlying issuers of which met the then prevailing earnings requirement for listing on the NYSE and also file Form 20-F (or comparable form) with the SEC;
(11) make investments for the purpose of exercising control or management, except in connection with a merger of the Fund and another investment company or the acquisition by the Fund of all or substantially all of the assets or voting securities of another investment company;
(12) purchase or sell commodities or commodity contracts; or
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
(13) purchase real estate or sell real estate unless acquired as a result of ownership of securities or other instruments; this restriction does not prevent the Fund from investing in issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, including without limitation real estate investment trusts, or investing in securities that are secured by real estate or interests therein.
For purposes of restriction (2) above, assets allocated to any bank loan where the Fund does not assume a contractual lending relationship with the borrower will be treated as being invested in the industry of the applicable financial intermediary and the industry of the borrower.
With respect to investment restriction (6), the 1940 Act permits the Fund to borrow money in amounts of up to one-third of the Fund’s total assets from banks for any purpose, and to borrow up to 5% of the Fund’s total assets from banks or other lenders for temporary purposes. The Fund’s total assets include the amounts being borrowed. To limit the risks attendant to borrowing, the 1940 Act requires the Fund to maintain at all times an “asset coverage” of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the Fund’s total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Borrowing money to increase portfolio holdings is known as “leveraging.” Certain trading practices and investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject to the 1940 Act restrictions. The investment restriction regarding borrowing money, described above, will be interpreted to permit the Fund to (a) engage in trading practices and investments that may be considered to be borrowing or to involve leverage to the extent permitted by the 1940 Act, (b) engage in securities lending in accordance with the SEC staff guidance and interpretations and (c) settle securities transactions within the ordinary settlement cycle for such transactions.
Also with respect to investment restriction (6), the 1940 Act permits the Fund to issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt, such as notes) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares (measured by liquidation value) and debt outstanding, which is referred to as the “asset coverage” required by the 1940 Act. The 1940 Act also generally restricts the Fund from declaring cash distributions on, or repurchasing, common or preferred shares unless outstanding debt securities have an asset coverage of 300% (200% in the case of declaring distributions on preferred shares), or from declaring cash distributions on, or repurchasing, common shares unless preferred shares have an asset coverage of 200% (in each case, after giving effect to such distribution or repurchase).
Non-Fundamental Restrictions and Policies
The Fund has adopted the following non-fundamental restrictions and policies which may be changed by the Fund’s Board of Trustees without the approval of a majority of the Fund’s outstanding voting securities as defined in the 1940 Act. The Fund will:
(1) not purchase the securities of an issuer if, after giving effect to such purchase, more than 20% of its net assets would be invested in illiquid securities;
(2) not purchase or sell interests in oil, gas or other mineral exploration or development programs; this policy does not prevent the Fund from investing in issuers that invest, deal or otherwise engage in transactions involving oil,
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
gas or other mineral exploration or development programs or interests therein, or investing in securities that are secured by oil, gas or other mineral exploration or development programs or interests therein; and
(3) not make loans to any persons; this policy does not prevent the Fund from lending its portfolio securities to the extent permitted by its fundamental restrictions and policies, or prevent the Fund from purchasing debt obligations, entering into repurchase agreements, or investing in loans, including assignments and participation interests.
The percentage restrictions on investments set forth above apply only at the time an investment is made. Thus, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total assets will not be considered a violation of any of the foregoing restrictions. Although restriction (3), above, is non-fundamental, the Fund will not modify the non-fundamental policy set forth in restriction (3) above unless such modification is authorized by a majority of the Fund’s outstanding voting securities (voting together as a single class) as defined in the 1940 Act (including separate authorization by the holders of a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund voting as a separate class).
Additionally, the Fund is and may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares. Neither the Fund’s investment objectives nor, except as expressly stated above or elsewhere in the prospectus or the SAI, any of its policies are fundamental, and each may be modified by the Board without shareholder approval.
ADDITIONAL INVESTMENT POLICIES
Additional Investment Policies
Contingent Convertible Securities. One type of convertible security in which the Fund may invest is contingent convertible securities, sometimes referred to as “CoCos.” CoCos are a form of hybrid debt security issued by banking institutions that are intended to either automatically convert into equity or have their principal written down upon the occurrence of certain “trigger events,” which may include a decline in the issuer’s capital below a specified threshold level, increase in the issuer’s risk weighted assets, the share price of the issuer falling to a particular level for a certain period of time and certain regulatory events. CoCos’ unique equity conversion or principal write-down features are tailored to the issuing banking institution and its regulatory requirements.
CoCos are a newer form of instrument and the regulatory environment for these instruments continues to evolve. Because the market for such securities is evolving, it is uncertain how the larger market for CoCos would react to a trigger event, coupon cancellation, write-down of par value or coupon suspension (as described below) applicable to a single issuer. Following conversion of a CoCo, because the common stock of the issuer may not pay a dividend, investors in such securities could experience reduced yields or no yields at all.
Loss Absorption Risk. CoCos have fully discretionary coupons. This means coupons can potentially be cancelled at the banking institution’s discretion or at the request of the relevant regulatory authority in order to help the bank absorb losses. The liquidation value of a CoCo may be adjusted downward to below the original par value or written off entirely under certain circumstances. The write-down of the security’s par value may occur automatically and would not entitle holders to institute bankruptcy proceedings against the issuer. In addition,
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
an automatic write-down could result in a reduced income rate if the dividend or interest payment associated with the security is based on the security’s par value. Coupon payments may also be subject to approval by the issuer’s regulator and may be suspended in the event there are insufficient distributable reserves. Due to uncertainty surrounding coupon payments, CoCos may be volatile and their price may decline rapidly in the event that coupon payments are suspended.
Subordinated Instruments. CoCos will, in the majority of circumstances, be issued in the form of subordinated debt instruments in order to provide the appropriate regulatory capital treatment prior to a conversion. Accordingly, in the event of liquidation, dissolution or winding-up of an issuer prior to a conversion having occurred, the rights and claims of the holders of the CoCos, such as the Fund, against the issuer in respect of or arising under the terms of the CoCos shall generally rank junior to the claims of all holders of unsubordinated obligations of the issuer. In addition, if the CoCos are converted into the issuer’s underlying equity securities following a conversion event (i.e., a “trigger”), each holder will be subordinated due to their conversion from being the holder of a debt instrument to being the holder of an equity instrument. Such conversion may be automatic.
Unpredictable Market Value Fluctuate. The value of CoCos is unpredictable and will be influenced by many factors including, without limitation: (i) the creditworthiness of the issuer and/or fluctuations in such issuer’s applicable capital ratios; (ii) supply and demand for the CoCos; (iii) general market conditions and available liquidity; and (iv) economic, financial and political events that affect the issuer, its particular market or the financial markets in general.
Traditional Preferred Securities. Traditional preferred securities generally pay fixed or adjustable rate dividends to investors and generally have a “preference” over common stock in the payment of dividends and the liquidation of a company’s assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common stock. In order to be payable, distributions on such preferred securities must be declared by the issuer’s board of directors. Income payments on typical preferred securities currently outstanding are cumulative, causing dividends and distributions to accumulate even if not declared by the board of directors or otherwise made payable. In such a case all accumulated dividends must be paid before any dividend on the common stock can be paid. However, some traditional preferred stocks are non-cumulative, in which case dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred stock held by the Fund determine not to pay dividends on such stock, the amount of dividends the Fund pays may be adversely affected. There is no assurance that dividends or distributions on the preferred securities in which the Fund invests will be declared or otherwise made payable.
Preferred shareholders usually have no right to vote for corporate directors or on other matters. Shares of preferred stock have a liquidation value that generally equals the original purchase price at the date of issuance. The market value of preferred securities may be affected by favorable and unfavorable changes impacting companies in which the Fund invests and by actual and anticipated changes in tax laws, such as changes in corporate income tax rates or the “Dividends Received Deduction.” Because the claim on an issuer’s earnings represented by preferred securities may become onerous when interest rates fall below the rate payable on such securities, the issuer may redeem the securities. Thus, in declining interest rate environments in particular, the Fund’s holdings, if any, of higher rate-paying fixed rate preferred securities may be reduced and the Fund
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
may be unable to acquire securities of comparable credit quality paying comparable rates with the redemption proceeds.
Trust Preferred Securities. The Fund may invest in trust preferred securities. Trust preferred securities are typically issued by corporations, generally in the form of interest bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the trust preferred securities have not been made), these trust preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors. Trust preferred securities have many of the key characteristics of equity due to their subordinated position in an issuer’s capital structure and because their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows.
Trust preferred securities include but are not limited to trust originated preferred securities (“TOPRS®”); monthly income preferred securities (“MIPS®”); quarterly income bond securities (“QUIBS®”); quarterly income debt securities (“QUIDS®”); quarterly income preferred securities (“QUIPSSM”); corporate trust securities (“CORTS®”); public income notes (“PINES®”); and other trust preferred securities.
Trust preferred securities are typically issued with a final maturity date, although some are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuer’s option for a specified time without default. No redemption can typically take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market repurchases without regard to whether all payments have been paid.
Many trust preferred securities are issued by trusts or other special purpose entities established by operating companies and are not a direct obligation of an operating company. At the time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the operating company (with terms comparable to those of the trust or special purpose entity securities), which enables the operating company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity is generally required to be treated as transparent for Federal income tax purposes such that the holders of the trust preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments on the trust preferred securities are treated as interest rather than dividends for Federal income tax purposes. The trust or special purpose entity in turn would be a holder of the operating company’s debt and would have priority with respect to the operating company’s earnings and profits over the operating company’s common shareholders, but would typically be subordinated to other
Ellsworth Growth and Income Fund Ltd.
Additional Fund Information (Continued) (Unaudited)
classes of the operating company’s debt. Typically a preferred share has a rating that is slightly below that of its corresponding operating company’s senior debt securities.
Securities of Investment Companies. To the extent permitted by law, the Fund may invest in investment company securities, including preferred shares and the common equity of such companies. Investments in the common equity of investment companies will cause the Fund to bear a ratable share of any such investment company’s expenses, including management fees. The Fund will also remain obligated to pay management fees to the Investment Adviser with respect to the assets invested in any securities of another investment company. In these circumstances, holders of the Fund’s common shares will be subject to duplicative investment expenses.
Sovereign Government and Supranational Debt. The Fund may invest in all types of debt securities of governmental issuers in all countries, including emerging market countries. These sovereign debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions located in emerging market countries; debt securities issued by government owned, controlled or sponsored entities located in emerging market countries; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the above issuers; or debt securities issued by supranational entities such as the World Bank. A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development.
Sovereign government and supranational debt involve all the risks described in this Annual Report regarding foreign and emerging markets investments as well as the risk of debt moratorium, repudiation or renegotiation. In addition, investments in sovereign debt involve special risks. Foreign governmental issuers of debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due. In the event of default, there may be limited or no legal recourse in that, generally, remedies for defaults must be pursued in the courts of the defaulting party. Political conditions, especially a sovereign entity’s willingness to meet the terms of its debt obligations, are of considerable significance. The ability of a foreign sovereign issuer, especially an emerging market country, to make timely payments on its debt obligations will also be strongly influenced by the sovereign issuer’s balance of payments, including export performance, its access to international credit facilities and investments, fluctuations of interest rates and the extent of its foreign reserves. The cost of servicing external debt will also generally be adversely affected by rising international interest rates, as many external debt obligations bear interest at rates which are adjusted based upon international interest rates. Also, there can be no assurance that the holders of commercial bank loans to the same sovereign entity may not contest payments to the holders of sovereign debt in the event of default under commercial bank loan agreements. In addition, there is no bankruptcy proceeding with respect to sovereign debt on which a sovereign has defaulted and the Fund may be unable to collect all or any part of its investment in a particular issue. Foreign investment in certain sovereign debt is restricted or controlled to varying degrees, including requiring governmental approval for the repatriation of income, capital or proceeds of sales by foreign investors. These restrictions or controls may at times limit or preclude foreign investment in certain sovereign debt and increase the costs and expenses of the Fund.
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Unaudited) (Continued)
MANAGEMENT OF THE FUND
Trustees and Officers
The business and affairs of the Fund are managed
under the direction of the Fund’s Board of Trustees. Information pertaining to the Trustees and Officers of the Fund is set forth
below. The Fund’s Statement of Additional Information includes additional information about the Fund’s Trustees and is available
without charge, upon request, by calling 800-GABELLI (800-422-3554) or by writing to Ellsworth Growth and Income Fund Ltd. at One Corporate
Center, Rye, NY 10580-1422.
Name,
Position(s)
Address1
and Year of Birth |
|
Term
of
Office and
Length of
Time Served2 |
|
Number
of
Funds
in Fund
Complex
Overseen
by Trustee3 |
|
Principal
Occupation(s)
During Past Five Years |
|
Other
Directorships
Held by Trustee4 |
|
|
|
|
|
|
|
|
|
INTERESTED TRUSTEES5: |
|
|
|
|
|
|
|
|
|
|
Mario
J. Gabelli, CFA
Trustee and Chairman
1942 |
|
Since
2015* |
|
31 |
|
Chair,
Co-Chief Executive Officer, and Chief Investment Officer– Value Portfolios of GAMCO Investors, Inc. and Chief Investment Officer
– Value Portfolios of Gabelli Funds, LLC and GAMCO Asset Management, Inc.; Director/Trustee or Chief Investment Officer of
other registered investment companies within the Gabelli Fund Complex; Chief Executive Officer of GGCP, Inc.; Executive Chair of
Associated Capital Group, Inc. |
|
Director
of Morgan Group Holding Co. (holding company) (2001-2019); Chairman of the Board and Chief Executive Officer of LICT Corp. (multimedia
and communication services company); Director of CIBL, Inc. (broadcasting and wireless communications); Director of ICTC Group Inc.
(communications) (2013-2018) |
|
|
|
|
|
|
|
|
|
James
A. Dinsmore, CFA
Trustee & President
1982 |
|
Since
2013** |
|
1 |
|
Portfolio
Manager for Gabelli Funds, LLC; President of the Bncroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd.; Executive Vice
President of the Bancroft Fund Ltd. (2013-2015); Executive Vice President of the Ellsworth Growth and Income Fund Ltd. (January 2013-February
2014); Vice President of the Ellsworth Growth and Income Fund Ltd. and the Bancroft Fund Ltd. (2009-2012) |
|
— |
|
|
|
|
|
|
|
INDEPENDENT TRUSTEES6: |
|
|
|
|
|
|
|
|
|
Kinchen
C. Bizzell
Trustee
1954 |
|
Since
2008*** |
|
2 |
|
Managing
Director of Drexel Hamilton (securities broker-dealer); Private Investor (2017-2020); Managing Director of CAVU Securities (securities
broker- dealer) (2013- 2016); Investor Relations Managing Director (1998-2013) and Senior Counselor (after 2013) at Burson- Marsteller
(global public relations and communications) |
|
— |
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Unaudited) (Continued)
Name,
Position(s)
Address1
and Year of Birth |
|
Term
of
Office and
Length of
Time Served2 |
|
Number
of
Funds
in Fund
Complex
Overseen
by Trustee3 |
|
Principal
Occupation(s)
During Past Five Years |
|
Other
Directorships
Held by Trustee4 |
|
|
|
|
|
|
|
|
|
Elizabeth
C. Bogan
Trustee
1944 |
|
Since
1986** |
|
12 |
|
Former
Senior Lecturer in Economics at Princeton University |
|
— |
|
|
|
|
|
|
|
|
|
James
P. Conn
Trustee
1938 |
|
Since
2015*** |
|
23 |
|
Former
Managing Director and Chief Investment Officer of Financial Security Assurance Holdings Ltd. (1992-1998) |
|
— |
|
|
|
|
|
|
|
|
|
Frank
J. Fahrenkopf, Jr.7
Trustee
1939 |
|
Since
2015*** |
|
11 |
|
Co-Chairman
of the Commission on Presidential Debates; Former President and Chief Executive Officer of the American Gaming Association (1995-2013);
Former Chairman of the Republican National Committee (1983- 1989) |
|
Director
of First Republic Bank (banking); Director of Eldorado Resorts, Inc. (casino entertainment company) |
|
|
|
|
|
|
|
|
|
Daniel
D. Harding
Trustee
1952 |
|
Since
2007* |
|
3 |
|
Managing
General Partner of the Global Equity Income Fund (private investment fund); Director of Reef Consulting & Investment (private
equity firm); former Director of TRC (private asset management); former General Partner of Latitude Capital Partners, LLC (private
investment) |
|
Atlantic
Health Systems, Ocean Reef Community Foundation and Ocean Reef Medical Center Foundation |
|
|
|
|
|
|
|
|
|
Michael
J. Melarkey8
Trustee
1949 |
|
Since
2015*** |
|
24 |
|
Of
Counsel in the law firm of McDonald Carano Wilson LLP; Partner in the law firm of Avansino, Melarkey, Knobel, Mulligan & McKenzie
(1980-2015) |
|
Chairman
of Southwest Gas Corporation (natural gas utility) |
|
|
|
|
|
|
|
|
|
Nicolas
W. Platt8
Trustee
1953 |
|
Since
1997* |
|
2 |
|
Private
Investor; Member of NYSE American LLC Committee on Securities; Township Committee Member, Harding, New Jersey; Former Mayor of Township
of Harding, New Jersey (2013-2016); Managing Director of FTI Consulting Inc. (international consulting company) (March 2009-May 2011) |
|
— |
|
|
|
|
|
|
|
|
|
Anthonie
C. van Ekris7
Trustee
1934 |
|
Since
2015** |
|
23 |
|
Chairman
and Chief Executive Officer of BALMAC International, Inc.(global import/ export company) |
|
— |
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Unaudited) (Continued)
Name,
Position(s)
Address1
and Year of Birth |
|
Term of Office and
Length of Time Served9 |
|
Principal
Occupation(s)
During Past Five Years |
|
|
|
|
|
OFFICERS: |
|
|
|
|
|
|
|
|
|
James
A. Dinsmore,
CFA
Trustee & President
1982 |
|
Since
2013 |
|
Portfolio
Manager for Gabelli Funds, LLC; President of the Bncroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd.; Executive Vice
President of the Bancroft Fund Ltd. (2013-2015); Executive Vice President of the Ellsworth Growth and Income Fund Ltd. (January 2013-February
2014); Vice President of the Ellsworth Growth and Income Fund Ltd. and the Bancroft Fund Ltd. (2009-2012) |
|
|
|
|
|
John
C. Ball
President, Treasurer,
Principal Financial &
Accounting Officer
1976 |
|
Since
2017 |
|
Senior
Vice President (since 2018) and other positions (2017 – 2018) of GAMCO Investors, Inc.; Chief Executive Officer, G. Distributors,
LLC since 2020; Officer of registered investment companies within the Gabelli Fund Complex since 2017; Vice President and Assistant
Treasurer of AMG Funds, 2014-2017 |
|
|
|
|
|
Peter
Goldstein
Secretary & Vice
President
1953 |
|
Since
2020 |
|
General
Counsel, GAMCO Investors, Inc. and Chief Legal Officer, Associated Capital Group, Inc. since 2021; General Counsel and Chief Compliance
Officer, Buckingham Capital Management, Inc. (2012-2020); Chief Legal Officer and Chief Compliance Officer, The Buckingham Research
Group, Inc. (2012-2020) |
|
|
|
|
|
Richard
J. Walz
Chief Compliance
Officer
1959 |
|
Since
2015 |
|
Chief
Compliance Officer of registered investment companies within the Fund Complex since 2013 |
|
|
|
|
|
Laurissa
M. Martire
Vice President and
Ombudsman
1976 |
|
Since
2015 |
|
Vice
President and/or Ombudsman of closed-end funds within the Gabelli Fund Complex; Senior Vice President (since 2019) and other positions
(2003-2019) of GAMCO Investors, Inc. |
|
|
|
|
|
Bethany
A. Uhlein
Vice President and
Ombudsman
1990 |
|
Since
2017 |
|
Vice
President and/or Ombudsman of closed-end funds within the Gabelli Fund Complex since 2017; Senior Vice President (since 2021) of
GAMCO Investors, Inc. |
| 1 | Address:
One Corporate Center, Rye, NY 10580-1422, unless otherwise noted. |
| 2 | The
Fund’s Board of Trustees is divided into three classes, each class having a term of
three years. Each year the term of office of one class expires and the successor or successors
elected to such class serve for a three year term. The three year term for each class expires
as follows: |
| * | Term
expires at the Fund’s 2024 Annual Meeting of Shareholders or until their successors
are duly elected and qualified. |
|
** |
Term
expires at the Fund’s 2025 Annual Meeting of Shareholders or until their successors are duly elected and qualified. |
|
*** |
Term
expires at the Fund’s 2026 Annual Meeting of Shareholders or until their successors are duly elected and qualified. |
Each
officer will hold office for an indefinite term until the date he or she resigns or retires or until his or her successor is elected
and qualified.
| 3 | The
“Fund Complex” includes all the U.S. registered investment companies that are
considered part of the same fund complex as the Fund because they have common or affiliated
investment advisers. |
| 4 | This
column includes only directorships of companies required to report to the SEC under the Securities
Exchange Act of 1934, as amended, i.e., public companies, or other investment companies registered
under the 1940 Act. |
| 5 | “Interested
person” of the Fund, as defined in the 1940 Act. Messrs. Gabelli and Dinsmore are each
considered to be an “interested person”of the Fund because of their affiliation
with the Fund’s Adviser. |
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Unaudited) (Continued)
| 6 | Trustees
who are not considered to be “interested persons” of the Fund as defined in the
1940 Act are considered to be “Independent” Trustees. |
| 7 | Mr. Fahrenkopf’s
daughter, Leslie F. Foley, serves as a director of other funds in the Fund Complex. Mr. van
Ekris is an independent director of Gabelli International Ltd., Gabelli Fund LDC, Gama Capital
Opportunities Master Ltd., and GAMCO International SICAV, all of which may be deemed to be
controlled by Mario J. Gabelli and/or affiliates and, in that event, would be deemed to be
under common control with the Fund’s Adviser. |
| 8 | This
Trustee is elected solely by and represents the shareholders of the preferred shares issued
by this Fund. |
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
General
The Fund’s Board has overall responsibility for the management of the Fund. The Board decides upon matters of general policy and reviews the actions of the Investment Adviser, Gabelli Funds, LLC, One Corporate Center, Rye, New York 10580-1422, and the Sub-Administrator (as defined below). Pursuant to an investment advisory agreement between the Fund and the Investment Adviser (the “Investment Advisory Agreement”), the Investment Adviser, under the supervision of the Board, provides a continuous investment program for the Fund’s portfolio; provides investment research and makes and executes recommendations for the purchase and sale of securities; and provides all facilities and personnel, including officers required for its administrative management, and pays the compensation of Trustees of the Fund who are officers or employees of the Investment Adviser or its affiliates. As compensation for its services rendered and the related expenses borne by the Investment Adviser, the Fund pays the Investment Adviser a monthly fee, computed an annual rate of 0.80% of the first $100,000,000 of the Fund’s average weekly net assets and 0.55% of the Fund’s average weekly net assets in excess of $100,000,000. The Fund’s average weekly net assets shall be determined at the end of each month on the basis of the Fund’s average net assets for each week during the month. The assets for each weekly period shall be determined by averaging the net assets at the end of a week with the net assets at the end of the prior week. The value of the Fund’s average weekly net assets shall be deemed to be the average weekly value of the Fund’s total assets minus the sum of the Fund’s liabilities (such liabilities do not include the aggregate liquidation preference of any outstanding preferred shares and accumulated dividends, if any, on those shares). Therefore, the Fund will pay an advisory fee on any assets attributable to certain types of leverage it uses. Consequently, if the Fund has preferred shares outstanding, the investment management fees and other expenses as a percentage of net assets attributable to common shares may be higher than if the Fund does not utilize a capital structure leveraged with preferred equity.
Because the investment advisory fee is based on a percentage of the Fund’s net assets without deduction for the liquidation preference of any outstanding preferred shares, the Investment Adviser may have a conflict of interest in the input it provides to the Board regarding whether to use or increase the Fund’s use of preferred share leverage. The Board bases its decision, with input from the Investment Adviser, regarding whether and how much preferred share leverage to use for the Fund on its assessment of whether such use of leverage is in the best interests of the Fund, and the Board seeks to manage the Investment Adviser’s potential conflict of interest by retaining the final decision on these matters and by periodically reviewing the Fund’s performance and use of leverage.
The Investment Adviser
The Investment Adviser is a New York limited liability company which serves as an investment adviser to registered investment companies with combined aggregate net assets of approximately $19.7 billion as of September 30, 2023. The Investment Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended, and is a wholly owned subsidiary of GAMCO Investors, Inc. (“GBL”). Mr. Gabelli owns a majority of the stock of GGCP, Inc. (“GGCP”) which holds a majority of the capital stock and voting power of GBL. The Investment Adviser has several affiliates that provide investment advisory services: GAMCO Asset Management Inc., a wholly owned subsidiary of GBL, acts as investment adviser for individuals, pension trusts, profit sharing trusts, and endowments, and as a sub-adviser to certain third-party investment funds, which include registered investment companies, having assets under management of approximately of $11.0 billion as
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
of September 30, 2023; Teton Advisors, Inc., and its wholly owned investment adviser, Keeley Teton Advisers, LLC, with assets under management of approximately $1.4 billion as of June 30, 2023, acts as investment adviser to The TETON Westwood Funds, the KEELEY Funds, and separately managed accounts; and Gabelli & Company Investment Advisers, Inc. (formerly, Gabelli Securities, Inc.), a wholly owned subsidiary of Associated Capital Group, Inc. (“Associated Capital”), acts as investment adviser for certain alternative investment products, consisting primarily of risk arbitrage and merchant banking limited partnerships and offshore companies, with assets under management of approximately $1.6 billion as of September 30, 2023. Teton Advisors, Inc., was spun off by GBL in March 2009 and is an affiliate of GBL by virtue of Mr. Gabelli’s ownership of GGCP, the principal shareholder of Teton Advisors, Inc., as of September 30, 2023. Associated Capital was spun off from GBL on November 30, 2015, and is an affiliate of GBL by virtue of Mr. Gabelli’s ownership of GGCP, the principal shareholder of Associated Capital.
A discussion regarding the basis for the Fund’s Board approval of the Investment Advisory Agreement with the Investment Adviser is available in this Annual Report.
Payment of Expenses
The Investment Adviser is obligated to pay expenses associated with providing the services contemplated by the Investment Advisory Agreement including compensation of and office space for its officers and employees connected with investment and economic research, trading and investment management and administration of the Fund (but excluding costs associated with the calculation of the net asset value and allocated costs of the chief compliance officer function and officers of the Fund who are employed by the Fund and are not employed by the Investment Adviser although such officers may receive incentive based variable compensation from affiliates of the Investment Adviser), as well as the fees of all Trustees of the Fund who are officers or employees of the Investment Adviser or its affiliates.
In addition to the fees of the Investment Adviser, the Fund, and indirectly the holders of its common shares, is responsible for the payment of all its other expenses incurred in the operation of the Fund, which include, among other things, underwriting compensation and reimbursements in connection with sales of the Fund’s securities, expenses for legal and the Fund’s independent registered public accounting firm’s services, stock exchange listing fees and expenses, costs of printing proxies, share certificates and shareholder reports, charges of the Fund’s Custodian, any sub-custodian and any transfer agent and distribution disbursing agent, expenses in connection with the Automatic Dividend Reinvestment Plan and the Voluntary Cash Purchase Plan, SEC fees and preparation of filings with the SEC, fees and expenses of Trustees who are not officers or employees of the Investment Adviser or its affiliates, accounting and printing costs, the Fund’s pro rata portion of membership fees in trade organizations, compensation and other expenses of officers and employees of the Fund (including, but not limited to, the Chief Compliance Officer, Vice President and Ombudsman) as approved by the Fund’s Trustees, fidelity bond coverage for the Fund’s officers and employees, Trustees’ and officers’ errors and omissions insurance coverage, interest, brokerage costs, taxes, expenses of qualifying the Fund’s shares for sale in various states, expenses of personnel performing shareholder servicing functions, rating agency fees, organizational expenses, litigation and other extraordinary or non-recurring expenses and other expenses properly payable by the Fund.
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
Selection of Securities Brokers
The Investment Advisory Agreement contains provisions relating to the selection of securities brokers to effect the portfolio transactions of the Fund. Under those provisions, the Investment Adviser may (i) direct Fund portfolio brokerage to G.research, LLC (“G.research”), an affiliate of the Investment Adviser, or to other broker-dealer affiliates of the Investment Adviser and (ii) pay commissions to brokers other than G.research that are higher than might be charged by another qualified broker to obtain brokerage and/or research services considered by the Investment Adviser to be useful or desirable for its investment management of the Fund and/ or its other investment advisory accounts or those of any investment adviser affiliated with it. The SAI contains further information about the Investment Advisory Agreement, including a more complete description of the investment advisory and expense arrangements, exculpatory and brokerage provisions, as well as information on the brokerage practices of the Fund.
Portfolio Managers
James Dinsmore, CFA, joined Gabelli Funds, LLC in 2015. He currently serves as a portfolio manager of Gabelli Funds, LLC and manages several other funds within the Gabelli/Teton Fund Complex. Mr. Dinsmore received a B.A. in Economics from Cornell University and an M.B.A. degree from Rutgers University.
James Dinsmore is primarily responsible for day-to-day management of the Fund.
Non-Resident Trustee
Anthonie C. van Ekris is not a U.S. resident and substantially all of his assets may be located outside of the United States. Mr. van Ekris does not have an agent for service of process in the United States. As a result, it may be difficult for U.S. investors to effect service of process upon Mr. van Ekris within the United States or to realize judgments of courts of the United States predicated upon civil liabilities under the federal securities laws of the United States. In addition, it is not certain that civil liabilities predicated upon the federal securities laws on which a valid judgment of a court in the United States is obtained would be enforceable in the courts of the jurisdictions in which Mr. van Ekris resides. Further, it is not certain that such courts would enforce, in an original action, liabilities against Mr. van Ekris predicated solely on U.S. federal securities laws.
Sub-Administrator
The Investment Adviser has entered into a sub-administration agreement with BNY Mellon Investment Servicing (US) Inc. (the “Sub-Administrator”) pursuant to which the Sub-Administrator provides certain administrative services necessary for the Fund’s operations which do not include the investment and portfolio management services provided by the Investment Adviser. For these services and the related expenses borne by the Sub-Administrator, the Investment Adviser pays an annual fee based on the value of the aggregate average daily net assets of all funds under its administration managed by the Investment Adviser, GAMCO and Teton Advisors, Inc. as follows: 0.0275%—first $10 billion, 0.0125%—exceeding $10 billion but less than $15 billion, 0.01%— over $15 billion but less than $20 billion and 0.008% over $20 billion. The Sub-Administrator has its principal office at 301 Bellevue Parkway, Wilmington, Delaware 19809.
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
NET ASSET VALUE
The net asset value of the Fund’s shares is computed based on the market value of the securities it holds and is determined daily as of the close of the regular trading day on the NYSE. For purposes of determining the Fund’s net asset value per share, portfolio securities listed or traded on a nationally recognized securities exchange or traded in the U.S. over-the-counter market for which market quotations are readily available are valued at the last quoted sale price or a market’s official closing price as of the close of business on the day the securities are being valued. If there were no sales that day, the security is valued at the mean of the closing bid and asked prices, or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day. If no bid or ask prices are quoted on such day, the security will be valued based on written or standing instructions from the Investment Adviser, which has been appointed Valuation Designee pursuant to Rule 2a-5 under the 1940 Act (“Rule 2a-5”) by the Board. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by the Valuation Designee.
Portfolio securities primarily traded on a foreign market are generally valued at the preceding closing values of such securities on the relevant market, but may be fair valued by the Valuation Designee under procedures adopted pursuant to Rule 2a-5 if market conditions change significantly after the close of the foreign market but prior to the close of business on the day the securities are being valued. Debt instruments with remaining maturities of 60 days or less that are not credit impaired are valued at amortized cost, unless the Valuation Designee determines such amount does not reflect the securities’ fair value, in which case these securities will be fair valued as determined by the Valuation Designee. Debt instruments having a maturity greater than 60 days for which market quotations are readily available are valued at the average of the latest bid and asked prices. If there were no asked prices quoted on such day, the security is valued using the closing bid price. Futures contracts are valued at the closing settlement price of the exchange or board of trade on which the applicable contract is traded.
Options are valued using market quotations. When market quotations are not readily available, options are valued from broker quotes. In limited circumstances when neither market quotations nor broker quotes are readily available, options are valued using a Black Scholes model.
Securities and assets for which market quotations are not readily available are fair valued as determined by the Valuation Designee. Fair valuation methodologies and procedures may include, but are not limited to: analysis and review of available financial and non-financial information about the company; comparisons to the valuation and changes in valuation of similar securities, including a comparison of foreign securities to the equivalent U.S. dollar value ADR securities at the close of the U.S. exchange; and evaluation of any other information that could be indicative of the value of the security.
The Fund obtains valuations on the basis of prices provided by a pricing service monitored by the Valuation Designee. All other investment assets, including restricted and not readily marketable securities, are valued in good faith at fair value by the Valuation Designee under procedures adopted pursuant to Rule 2a-5.
Ellsworth
Growth and Income Fund Ltd.
Additional
Fund Information (Continued) (Unaudited)
In addition, whenever developments in one or more securities markets after the close of the principal markets for one or more portfolio securities and before the time as of which the Fund determines its net asset value would, if such developments had been reflected in such principal markets, likely have more than a minimal effect on the Fund’s net asset value per share, the Valuation Designee may fair value such portfolio securities based on available market information as of the time the Fund determines its net asset value.
NYSE American Closings. The holidays (as observed) on which the NYSE American is closed, and therefore days upon which shareholders will not be able to purchase or sell common shares currently are: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day, and on the preceding Friday or subsequent Monday when a holiday falls on a Saturday or Sunday, respectively.
Ellsworth
Growth and Income Fund Ltd.
Board
Consideration and Re-Approval of Investment Advisory Agreement (Unaudited)
At its meeting on May 17, 2023, the Board of Trustees (Board) of the Fund approved the continuation of the investment advisory agreement with the Adviser for the Fund on the basis of the recommendation by the trustees who are not interested persons of the Fund (the Independent Board Members). The following paragraphs summarize the material information and factors considered by the Independent Board Members as well as their conclusions relative to such factors.
Nature, Extent, and Quality of Services. The Independent Board Members considered information regarding the portfolio managers, the depth of the analyst pool available to the Adviser and the portfolio managers, the scope of supervisory, administrative, shareholder, and other services supervised or provided by the Adviser and the absence of significant service problems reported to the Board. The Independent Board Members noted the experience, length of service, and reputation of the portfolio managers as well as the Independent Board Members’ satisfaction with the performance of the portfolio managers since the Adviser assumed control of the Fund in 2015.
The Independent Board Members also noted that they were impressed with the overall quality of the materials relating to the Board’s consideration of the Advisory Agreement.
Investment Performance. The Independent Board Members reviewed the performance of the Fund for the one, three, five, and ten year periods (as of March 31, 2023) against a peer group of 11 other convertible funds prepared by the Adviser (the Adviser Peer Group) and against a larger peer group of 27 other closed-end funds constituting the Fund’s Lipper category (Closed-End Core, Convertible and Value Equity Funds) (the Lipper Peer Group). The Independent Board Members noted that the Fund’s performance was in the fourth quartile for the one year and three year periods, and in the third quartile for five year and ten year periods for the Adviser Peer Group, and in the fourth quartile for the one year, three year, and ten year periods, and in the third quartile for the five year period for the Lipper Peer Group. The Independent Board Members then discussed the utility of these comparisons, noting the inclusion of unlevered open-end funds in the applicable peer groups and the impact of the Fund’s leveraged capital structure in the challenging market for convertible securities over the past year. The Independent Board Members noted that the Fund’s performance compared more favorably with leveraged closed-end funds included in the Adviser Peer Group, recognizing that the Fund had the best performance of this subset of the Adviser Peer Group over the three year period. The Independent Board Members discussed how this result was consistent with their overall view of the high quality portfolio management services the Adviser provides to the Fund.
Profitability. The Independent Board Members reviewed summary data regarding the profitability of the Fund to the Adviser both with an administrative overhead charge and without such a charge and noted the Adviser’s estimated pre-tax operating margin attributable to the Fund in both scenarios.
Economies of Scale. The Independent Board Members discussed the major elements of the Adviser’s cost structure and the relationship of those elements to potential economies of scale. The Independent Board Members noted that the Fund was a closed-end fund and unlikely to realize any economies of scale potentially available through growth in the absence of additional offerings.
Sharing of Economies of Scale. The Independent Board Members noted that the Fund’s advisory fee contained a reduction for assets in excess of $100 million, which would indicate a sharing even if economies of scale were not experienced at such a low asset level.
Ellsworth
Growth and Income Fund Ltd.
Board
Consideration and Re-Approval of Investment Advisory Agreement (Unaudited) (Continued)
Service and Cost Comparisons. The Independent Board Members compared the expense ratios of the investment management fee, other expenses, and total expenses of the Fund with similar expense ratios of the Adviser Peer Group and the Lipper Peer Group. The Independent Board Members noted that the Adviser’s management fee includes substantially all administrative services for the Fund as well as investment advisory services. The Independent Board Members noted that within the Adviser Peer Group, the Fund’s investment management fee was above the Adviser Peer Group average and total expense ratio was below the Adviser Peer Group average. It was noted that within the Adviser Peer Group, 3 of the other 11 funds employ leverage. The Independent Board Members further noted that the Fund’s investment management fee was above the Lipper Peer Group average and total expense ratio was below the Lipper Peer Group average. The Independent Board Members also noted that the management fee structure was different from that in effect for most of the Gabelli funds, in that it contains a reduction for assets in excess of $100 million and is lower than the management fees in effect for most other Gabelli funds due to the retention of the Fund’s historical fee structure when the Adviser assumed the management of the Fund in 2015.
Conclusions. The Independent Board Members concluded that the Fund enjoyed highly experienced portfolio management services and good ancillary services, and that the Fund’s performance record has been acceptable since the Adviser assumed control of the Fund in 2015. The Independent Board Members concluded that the profitability to the Adviser of managing the Fund was acceptable and that economies of scale were not a significant factor in their thinking at this point. The Independent Board Members did not view the potential profitability of ancillary services as material to their decision. On the basis of the foregoing and without assigning particular weight to any single conclusion, the Independent Board Members determined to recommend continuation of the Advisory Agreement to the full Board.
Based on a consideration of all these factors in their totality, the Board Members, including all of the Independent Board Members, determined that the Fund’s advisory fee was appropriate in light of the quality of services provided and in light of the other factors described above that the Board deemed relevant. Accordingly, the Board Members determined to approve the continuation of the Fund’s Advisory Agreement. The Board Members based their decision on evaluations of all these factors as a whole and did not consider any one factor as all important or controlling.
ELLSWORTH
GROWTH AND INCOME FUND LTD.
INCOME
TAX INFORMATION (Unaudited)
September 30,
2023
Cash Dividends and Distributions
|
|
Payable
Date |
|
Record
Date |
|
|
Ordinary
Investment
Income (a) |
|
|
Long
Term
Capital
Gains |
|
|
Return
of
Capital |
|
|
Total
Amount Paid
Per Share (b) |
|
|
Dividend
Reinvestment
Price |
|
Common
Stock | |
|
|
12/28/22 | |
11/23/22 | | |
$ | 0.05330 | | |
$ | 0.07670 | | |
| — | | |
$ | 0.13000 | | |
$ | 8.37000 | |
|
|
03/24/23 | |
03/17/23 | | |
| 0.08020 | | |
| 0.04980 | | |
| — | | |
| 0.13000 | | |
| 7.98760 | |
|
|
06/23/23 | |
06/15/23 | | |
| 0.08020 | | |
| 0.04980 | | |
| — | | |
| 0.13000 | | |
| 8.37640 | |
|
|
09/22/23 | |
09/15/23 | | |
| 0.08020 | | |
| 0.04980 | | |
| — | | |
| 0.13000 | | |
| 8.25980 | |
|
|
| |
| | |
$ | 0.29390 | | |
$ | 0.22610 | | |
| — | | |
$ | 0.52000 | | |
| | |
5.250%
Series A Cumulative Preferred Shares | |
|
|
12/27/22 | |
12/19/22 | | |
$ | 0.1344190 | | |
$ | 0.1937060 | | |
| — | | |
$ | 0.3281250 | | |
| | |
|
|
03/27/23 | |
03/20/23 | | |
| 0.2023810 | | |
| 0.1257440 | | |
| — | | |
| 0.3281250 | | |
| | |
|
|
06/26/23 | |
06/16/23 | | |
| 0.2023810 | | |
| 0.1257440 | | |
| — | | |
| 0.3281250 | | |
| | |
|
|
09/26/23 | |
09/19/23 | | |
| 0.2023810 | | |
| 0.1257440 | | |
| — | | |
| 0.3281250 | | |
| | |
|
|
| |
| | |
$ | 0.7415620 | | |
$ | 0.5709380 | | |
| — | | |
$ | 1.3125000 | | |
| | |
5.200%
Series B Cumulative Preferred Shares | |
|
|
12/27/22 | |
12/19/22 | | |
$ | 0.1770610 | | |
$ | 0.0368270 | | |
| — | | |
$ | 0.21389 | | |
| | |
|
|
06/26/23 | |
06/16/23 | | |
| 0.1451490 | | |
| 0.0901840 | | |
| — | | |
| 0.23533 | | |
| | |
|
|
| |
| | |
$ | 0.3222100 | | |
$ | 0.1270110 | | |
| — | | |
$ | 0.44922 | | |
| | |
Corporate Dividends Received Deduction, Qualified Dividend Income, and U.S. Government Securities Income
For the fiscal year ended September 30,
2023, the Fund paid to common shareholders, 5.250% Series A Cumulative Preferred shareholders and 5.200% Series B Cumulative Preferred
shareholders ordinary income distributions (inclusive of short term capital gains) totaling $0.2939, $0.741562 and $0.32221 per share,
respectively, and long term capital gains totaling $4,325,108 or the maximum allowable. The distribution of long term capital gains has
been designated as a capital gain dividend by the Fund’s Board of Trustees. For the fiscal year ended September 30, 2023,
18.24% of the ordinary income distribution qualifies for the dividends received deduction available to corporations. The Fund designates
20.31% of the ordinary income distribution as qualified dividend income pursuant to the Jobs and Growth Tax Relief Reconciliation Act
of 2003. The Fund designates 63.58% of the ordinary income distribution as qualified interest income pursuant to the Tax Relief, Unemployment
Reauthorization, and Job Creation Act of 2010. The Fund designates 100% of the ordinary income distribution as qualified short term capital
gain pursuant to the American Jobs Creation Act of 2004.
U.S. Government Income:
The percentage of the
ordinary income distribution paid by the Fund during the fiscal year ended September 30, 2023 which was derived from U.S.
Treasury securities was 14.65%. Such income is exempt from state and local tax in all states. However, many states, including New
York and California, allow a tax exemption for a portion of the income earned only if a mutual fund has invested at least 50% of its
assets at the end of each quarter of the Fund’s fiscal year in U.S. Government securities. Ellsworth Growth and Income Fund
Ltd. did not meet this strict requirement in 2023. The percentage of U.S. Government securities held as of September 30, 2023
was 2.0%. Due to the diversity in state and local tax law, it is recommended that you consult your personal tax adviser as to the
applicability of the information provided to your specific situation.
ELLSWORTH
GROWTH AND INCOME FUND LTD.
INCOME
TAX INFORMATION (Unaudited) (Continued)
September 30,
2023
Historical
Distribution Summary
| |
| | |
Short
Term | | |
Long
Term | | |
| |
| |
Investment | | |
Capital | | |
Capital | | |
Total | |
| |
Income(a) | | |
Gains(a) | | |
Gains | | |
Distributions(b) | |
Common Shares | | |
| | | |
| | |
2023 | |
$ | 0.23510 | | |
$ | 0.05880 | | |
$ | 0.22610 | | |
$ | 0.52000 | |
2022 | |
| 0.17614 | | |
| 0.03939 | | |
| 1.28447 | | |
| 1.50000 | |
2021 | |
| 0.16753 | | |
| 0.30571 | | |
| 0.85676 | | |
| 1.33000 | |
2020 | |
| 0.19826 | | |
| 0.16445 | | |
| 0.44729 | | |
| 0.81000 | |
2019 | |
| 0.20397 | | |
| 0.04528 | | |
| 0.24075 | | |
| 0.49000 | |
2018 | |
| 0.19370 | | |
| 0.07520 | | |
| 0.21120 | | |
| 0.48010 | |
2017 | |
| 0.22827 | | |
| 0.00173 | | |
| 0.21000 | | |
| 0.44000 | |
5.250% Series A Cumulative Preferred Shares | | |
| | | |
| | |
2023 | |
$ | 0.59344 | | |
$ | 0.14812 | | |
$ | 0.57094 | | |
$ | 1.31250 | |
2022 | |
| 0.16551 | | |
| 0.03701 | | |
| 1.10998 | | |
| 1.31250 | |
2021 | |
| 0.16532 | | |
| 0.30168 | | |
| 0.84550 | | |
| 1.31250 | |
2020 | |
| 0.32127 | | |
| 0.26647 | | |
| 0.72476 | | |
| 1.31250 | |
2019 | |
| 0.54998 | | |
| 0.12128 | | |
| 0.64124 | | |
| 1.31250 | |
2018 | |
| 0.54510 | | |
| 0.22027 | | |
| 0.57630 | | |
| 1.34167 | |
5.200% Series B Cumulative Preferred Shares | | |
| | | |
| | |
2023 | |
$ | 0.28680 | | |
$ | 0.03541 | | |
$ | 0.12701 | | |
$ | 0.44922 | |
|
(a) |
Taxable
as ordinary income for Federal tax purposes. |
|
(b) |
Total
amounts may differ due to rounding. |
All designations
are based on financial information available as of the date of each annual report and, accordingly, are subject to change. For each
item, it is the intention of the Fund to designate the maximum amount permitted under the Internal Revenue Code and the regulations
thereunder.
ELLSWORTH GROWTH AND INCOME FUND LTD.
AND YOUR PERSONAL PRIVACY
Who are we?
The Ellsworth Growth and Income Fund Ltd.is a closed-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940. We are managed by Gabelli Funds, LLC, which is affiliated with GAMCO Investors, Inc., a publicly held company that has subsidiaries that provide investment advisory services for a variety of clients.
What kind of non-public information do we collect about you if you become a fund shareholder?
When you purchase shares of the Fund on the NYSE American, you have the option of registering directly with our transfer agent in order, for example, to participate in our dividend reinvestment plan.
|
● |
Information you give us on your application form. This could include your name, address, telephone number, social security number, bank account number, and other information. |
|
● |
Information about your transactions with us. This would include information about the shares that you buy or sell; it may also include information about whether you sell or exercise rights that we have issued from time to time. If we hire someone else to provide services — like a transfer agent — we will also have information about the transactions that you conduct through them. |
What information do we disclose and to whom do we disclose it?
We do not disclose any non-public personal information about our customers or former customers to anyone other than our affiliates, our service providers who need to know such information, and as otherwise permitted by law. If you want to find out what the law permits, you can read the privacy rules adopted by the Securities and Exchange Commission. They are in volume 17 of the Code of Federal Regulations, Part 248. The Commission often posts information about its regulations on its website, www. sec.gov.
What do we do to protect your personal information?
We restrict access to non-public personal information about you to the people who need to know that information in order to provide services to you or the fund and to ensure that we are complying with the laws governing the securities business. We maintain physical, electronic, and procedural safeguards to keep your personal information confidential.
Ellsworth
Growth and Income Fund Ltd.
One
Corporate Center
Rye,
NY 10580-1422
(Y)our Portfolio Manager Biography
James A. Dinsmore, CFA, joined Gabelli Funds, LLC in 2015. He currently serves as a portfolio manager of Gabelli Funds, LLC and manages several funds within the Fund Complex. Mr. Dinsmore received a BA in Economics from Cornell University and an MBA degree from Rutgers University.
Consultant to Portfolio Manager
Thomas H. Dinsmore, CFA, joined Gabelli Funds, LLC in 2015. He currently serves as a consultant to Gabelli Funds, LLC. Previously Mr. Dinsmore was Chairman and CEO of Dinsmore Capital Management; CEO and Portfolio Manager of Bancroft Fund Ltd; and CEO, Portfolio Manager, and co-founder of Ellsworth Growth and Income Fund Ltd. He received a BS in Economics from the Wharton School of Business and an MA degree in Economics from Fairleigh Dickinson University.
The net asset value per share appears in the Publicly Traded Funds column, under the heading “Specialized Equity Funds,” in Monday’s The Wall Street Journal. It is also listed in Barron’s Mutual Funds/Closed End Funds section under the heading “Convertible Securities Funds.”
The net asset value per share may be obtained each day by calling (914) 921-5070 or visiting www.gabelli.com.
The NASDAQ symbol for the net asset value is “XECFX.”
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that the Fund may from time to time purchase its common shares in the open market when the Fund’s shares are trading at a discount of 10% or more from the net asset value of the shares. The Fund may also, from time to time, purchase its preferred shares in the open market when the preferred shares are trading at a discount to the liquidation value.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLANS
Enrollment in the Plan
It is the policy of Ellsworth Growth & Income Fund Ltd. to automatically reinvest dividends payable to common shareholders. As a “registered” shareholder you automatically become a participant in the Fund’s Automatic Dividend Reinvestment Plan (the “Plan”). The Plan authorizes the Fund to credit common shares to participants upon an income dividend or a capital gains distribution regardless of whether the shares are trading at a discount or a premium to net asset value. All distributions to shareholders whose shares are registered in their own names will be automatically reinvested pursuant to the Plan in additional shares of the Fund. Plan participants may send their share certificates to American Stock Transfer (“AST”) to be held in their dividend reinvestment account. Registered shareholders wishing to receive their distributions in cash must submit this request in writing to:
The Ellsworth Growth and Income Fund Ltd.
c/o American Stock Transfer
6201 15th Avenue
Brooklyn, NY 11219
Shareholders requesting this cash election must include the shareholder’s name and address as they appear on the share certificate. Shareholders with additional questions regarding the Plan or requesting a copy of the terms of the Plan, may contact AST at (888) 888-0314
If your shares are held in the name of a broker, bank, or nominee, you should contact such institution. If such institution is not participating in the Plan, your account will be credited with a cash dividend. In order to participate in the Plan through such institution, it may be necessary for you to have your shares taken out of “street name” and re-registered in your own name. Once registered in your own name your distributions will be automatically reinvested. Certain brokers participate in the Plan. Shareholders holding shares in “street name” at participating institutions will have dividends automatically reinvested. Shareholders wishing a cash dividend at such institution must contact their broker to make this change.
The number of common shares distributed to participants in the Plan in lieu of cash dividends is determined in the following manner. Under the Plan, for the first three calendar quarter distributions, whenever the market price of the Fund’s common shares is equal to or exceeds net asset value at the time shares are valued for purposes of determining the number of shares equivalent to the cash dividends or capital gains distribution, participants are issued common shares valued at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then current market price of the Fund’s common shares. The valuation date is the dividend or distribution payment date or, if that date is not a NYSE American trading day, the next trading day. If the net asset value of the common shares at the time of valuation exceeds the market price of the common shares, participants will receive newly issued common shares from the Fund valued at market price. For the fourth calendar quarter distribution, and in connection with any fiscal year-end distribution of capital gains or dividend from net investment income, the Fund will make the distribution or dividend in shares issued at the lower of market price or net asset value. If the Fund should declare a dividend or capital gains distribution payable only in cash, AST will buy common shares in the open market, or on the NYSE American, or elsewhere, for the participants’ accounts, except that AST will endeavor to terminate purchases in the open market and cause the Fund to issue shares at net asset value if, following the commencement of such purchases, the market value of the common shares exceeds the then current net asset value.
The automatic reinvestment of dividends and capital gains distributions will not relieve participants of any income tax which may be payable on such distributions. A participant in the Plan will be treated for federal income tax purposes as having received, on a dividend payment date, a dividend or distribution in an amount equal to the cash the participant could have received instead of shares.
Voluntary Cash Purchase Plan
The Voluntary Cash Purchase Plan is yet another vehicle for our shareholders to increase their investment in the Fund. In order to participate in the Voluntary Cash Purchase Plan, shareholders must have their shares registered in their own name.
Participants in the Voluntary Cash Purchase Plan have the option of making additional cash payments to AST for investments in the Fund’s common shares at the then current market price. Shareholders may send an amount from $100 to $10,000. AST will use these funds to purchase shares in the open market on or about the 15th of each month. AST will charge each shareholder who participates a pro rata share of the brokerage commissions. Brokerage charges for such purchases are expected to be less than the usual brokerage charge for such transactions. It is suggested that any voluntary cash payments be sent to American Stock Transfer, 6201 15th Avenue, Brooklyn, NY 11219 such that AST receives such payments approximately 10 days before the investment date.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLANS
(Continued)
Funds not received at least five days before the investment date shall be held for investment until the next purchase date. A payment may be withdrawn without charge if notice is received by AST at least 48 hours before such payment is to be invested.
Shareholders wishing to liquidate shares held at AST must do so in writing or by telephone. Please submit your request to the above mentioned address or telephone number. Include in your request your name, address, and account number. Brokerage charges are expected to be less than the usual brokerage charge for such transactions.
For more information regarding the Automatic Dividend Reinvestment Plan and Voluntary Cash Purchase Plan, brochures are available by calling (914) 921-5070 or by writing directly to the Fund.
The Fund reserves the right to amend or terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to written notice of the change sent to the members of the Plan at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by AST on at least 90 days written notice to participants in the Plan.
![](https://www.sec.gov/Archives/edgar/data/793040/000182912623007915/ecf_004.jpg)
| (a) | The registrant, as of the end of the period covered by this
report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed
by the registrant or a third party. |
| (c) | There
have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant’s
principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code
of ethics description. |
| (d) | The registrant has not granted any waivers, including an
implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item’s
instructions. |
| Item
3. | Audit
Committee Financial Expert. |
As of the end of the period covered by the report,
the registrant’s Board of Directors has determined that Daniel D. Harding is qualified to serve as an audit committee financial
expert serving on its audit committee and that he is “independent,” as defined by Item 3 of Form N-CSR.
| Item
4. | Principal
Accountant Fees and Services. |
Audit Fees
| (a) | The aggregate fees billed for each of the last two fiscal
years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements
or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those
fiscal years are $24,000 for 2022 and $21,600 for 2023. |
Audit-Related Fees
| (b) | The aggregate fees billed in each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements
and are not reported under paragraph (a) of this Item are $0 for 2022 and $0 for 2023. |
Tax Fees
| (c) | The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $3,500 for
2022 and $3,500 for 2023. |
All Other Fees
| (d) | The aggregate fees billed in each of the last two fiscal
years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c)
of this Item are $0 for 2022 and $0 for 2023. This relates to updating the registrant’s registration statement. |
| (e)(1) | Disclose the audit committee’s pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. |
Pre-Approval Policies and Procedures. The Audit Committee (“Committee”)
of the registrant is responsible for pre-approving (i) all audit and permissible non-audit services to be provided by the independent
registered public accounting firm to the registrant and (ii) all permissible non-audit services to be provided by the independent registered
public accounting firm to the Adviser, Gabelli Funds, LLC, and any affiliate of Gabelli Funds, LLC (“Gabelli”) that provides
services to the registrant (a “Covered Services Provider”) if the independent registered public accounting firm’s engagement
related directly to the operations and financial reporting of the registrant. The Committee may delegate its responsibility to pre-approve
any such audit and permissible non-audit services to the Chairperson of the Committee, and the Chairperson must report to the Committee,
at its next regularly scheduled meeting after the Chairperson’s pre-approval of such services, his or her decision(s). The Committee
may also establish detailed pre-approval policies and procedures for pre-approval of such services in accordance with applicable laws,
including the delegation of some or all of the Committee’s pre-approval responsibilities to the other persons (other than Gabelli
or the registrant’s officers). Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i)
the permissible non-audit services were not recognized by the registrant at the time of the engagement to be non-audit services; and (ii)
such services are promptly brought to the attention of the Committee and approved by the Committee or Chairperson prior to the completion
of the audit.
| (e)(2) | The percentage of services described in each of paragraphs (b) through (d) of this
Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: |
| (f) | The percentage of hours expended on the principal accountant’s
engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons
other than the principal accountant’s full-time, permanent employees was less than fifty percent. |
| (g) | The aggregate non-audit fees billed by the registrant’s
accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal
years of the registrant was $3,500 for 2022 and $3,500 for 2023. |
| (h) | The registrant’s audit committee of the board of directors
has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal
accountant’s independence. |
| (j) | The registrant is not a foreign issuer. |
| Item
5. | Audit
Committee of Listed Registrants. |
| (a) | The registrant has a separately designated audit committee
consisting of the following members: Kinchen C. Bizzell, Elizabeth C. Bogan, and Daniel D. Harding. |
| (b) | If applicable, provide the disclosure required by Rule 10A-3(d)
under the Exchange Act (17 CFR 240.10A-3(d)) regarding an exemption from the listing standards for audit committees. |
| (a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period
is included as part of the report to shareholders filed under Item 1 of this form. |
| Item
7. | Disclosure
of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
The Proxy Voting Policies are attached herewith.
SECTION HH
The Voting of Proxies on Behalf of Clients
(This section pertains to all affiliated SEC registered investment advisers)
Rule 206(4)-6 under the Investment Advisers Act of 1940 and Rule 30b1-4 under the Investment Company Act of 1940 require investment advisers to adopt
written policies and procedures governing the voting of proxies on behalf of their
clients.
These procedures will be used by GAMCO Asset Management Inc., Gabelli Funds, LLC,
Gabelli & Company Investment Advisers, Inc., and Teton Advisors, Inc. (collectively,
the “Advisers”) to determine how to vote proxies relating to portfolio securities
held by their clients, including the procedures that the Advisers use when a vote
presents a conflict between the interests of the shareholders of an investment company
managed by one of the Advisers, on the one hand, and those of the Advisers; the principal
underwriter; or any affiliated person of the investment company, the Advisers, or
the principal underwriter. These procedures will not apply where the Advisers do not have voting discretion or
where the Advisers have agreed to with a client to vote the client’s proxies in accordance with specific guidelines or procedures supplied by the client
(to the extent permitted by ERISA).
The Proxy Voting Committee was originally formed in April 1989 for the purpose of formulating guidelines and reviewing proxy statements within
the parameters set by the substantive proxy voting guidelines originally published
in 1988 and updated periodically, a copy of which are appended as Exhibit A. The Committee will include representatives of Research, Administration, Legal, and
the Advisers. Additional or replacement members of the Committee will be nominated by the Chairman
and voted upon by the entire Committee.
Meetings are held on an as needed basis to form views on the manner in which the Advisers
should vote proxies on behalf of their clients.
In general, the Director of Proxy Voting Services, using the Proxy Guidelines, and
the analysts of GAMCO Investors, Inc. (“GBL”), will determine how to vote on each
issue. For non-controversial matters, the Director of Proxy Voting Services may vote the
proxy if the vote is: (1) consistent with the recommendations of the issuer’s Board of Directors and not contrary to the Proxy Guidelines; (2) consistent with
the recommendations of the issuer’s Board of Directors and is a non-controversial issue not covered by the Proxy Guidelines;
or (3) the vote is contrary to the recommendations of the Board of Directors but is
consistent with the Proxy Guidelines. In those instances, the Director of Proxy Voting Services or the Chairman of the Committee
may sign and date the proxy statement indicating how each issue will be voted.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-1 |
All matters identified by the Chairman of the Committee, the Director of Proxy Voting
Services or the Legal Department as controversial, taking into account the recommendations
of the analysts of GBL, will be presented to the Proxy Voting Committee. If the Chairman of the Committee, the Director of Proxy Voting Services or the Legal
Department has identified the matter as one that (1) is controversial; (2) would benefit
from deliberation by the Proxy Voting Committee; or (3) may give rise to a conflict
of interest between the Advisers and their clients, the Chairman of the Committee
will initially determine what vote to recommend that the Advisers should cast and
the matter will go before the Committee.
|
A. |
Conflicts of Interest. |
The Advisers have implemented these proxy voting procedures in order to prevent conflicts
of interest from influencing their proxy voting decisions. By following the Proxy Guidelines and the analysts of GBL, the Advisers are able to
avoid, wherever possible, the influence of potential conflicts of interest. Nevertheless, circumstances may arise in which one or more of the Advisers are faced
with a conflict of interest or the appearance of a conflict of interest in connection
with its vote. In general, a conflict of interest may arise when an Adviser knowingly does business
with an issuer, and may appear to have a material conflict between its own interests
and the interests of the shareholders of an investment company managed by one of the
Advisers regarding how the proxy is to be voted. A conflict also may exist when an Adviser has actual knowledge of a material business
arrangement between an issuer and an affiliate of the Adviser.
In practical terms, a conflict of interest may arise, for example, when a proxy is
voted for a company that is a client of one of the Advisers, such as GAMCO Asset Management
Inc. A conflict also may arise when a client of one of the Advisers has made a shareholder
proposal in a proxy to be voted upon by one or more of the Advisers. The Director of Proxy Voting Services, together with the Legal Department, will scrutinize
all proxies for these or other situations that may give rise to a conflict of interest
with respect to the voting of proxies.
| B. | Operation of Proxy Voting Committee |
For matters submitted to the Committee, each member of the Committee will receive,
prior to the meeting, a copy of the proxy statement, a summary of any views provided
by the Chief Investment Officer and any recommendations by GBL analysts. The Chief Investment Officer or the GBL analysts may be invited to present their viewpoints. If the Director of Proxy Voting Services or the Legal Department believe that the
matter before the committee is one with respect to which a conflict of interest may
exist between the Advisers and their clients, counsel may provide an opinion to the Committee concerning the conflict. If the matter is one in which the interests of the clients of one or more of the Advisers
may diverge, counsel may so advise and the Committee may make different recommendations
as to different clients. For any matters where the recommendation may trigger appraisal rights, counsel may
provide an opinion concerning the likely risks and merits of such an appraisal action.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-2 |
Each matter submitted to the Committee will be determined by the vote of a majority
of the members present at the meeting. Should the vote concerning one or more recommendations be tied in a vote of the Committee,
the Chairman of the Committee will cast the deciding vote. The Committee will notify the proxy department of its decisions and the proxies will
be voted accordingly.
Although the Proxy
Guidelines express the normal preferences for the voting of any shares not covered by a contrary investment guideline provided by
the client, the Committee is not bound by the preferences set forth in the Proxy Guidelines and will review each matter on its own
merits. The Advisers subscribe to Institutional Shareholder Services Inc (“ISS”) and Glass Lewis & Co., LLC
(“Glass Lewis”), which supply current information on companies, matters being voted on, regulations, trends in proxy
voting and information on corporate governance issues. The information provided by ISS and GL is for informational purposes
only.
If the vote cast either by the analyst or as a result of the deliberations of the
Proxy Voting Committee runs contrary to the recommendation of the Board of Directors
of the issuer, the matter may be referred to legal counsel to determine whether an
amendment to the most recently filed Schedule 13D is appropriate.
| II. | Social Issues and Other Client Guidelines |
If a client has provided and the Advisers have accepted special instructions relating
to the voting of proxies, they should be noted in the client’s account file and forwarded to the proxy department. This is the responsibility of the investment professional or sales assistant for the
client. In accordance with Department of Labor guidelines, the Advisers’ policy is to vote on behalf of ERISA accounts in the best interest of the plan participants
with regard to social issues that carry an economic impact. Where an account is not governed by ERISA, the Advisers will vote shares held on behalf
of the client in a manner consistent with any individual investment/voting guidelines
provided by the client. Otherwise the Advisers may abstain with respect to those shares.
Specific to the Gabelli SRI Fund and the Gabelli Love Our Planet & People ETF, the Proxy Voting Committee will
rely on the advice of the portfolio managers of the Gabelli SRI Fund and the Gabelli Love Our Planet & People ETF to provide voting recommendations
on the securities held in the portfolios.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-3 |
| III. | Client Retention of Voting Rights |
If a client chooses to retain the right to vote proxies or if there is any change
in voting authority, the following should be notified by the investment professional
or sales assistant for the client.
- Operations
- Proxy Department
- Investment professional assigned to the account
In the event that the Board of Directors (or a Committee thereof) of one or more of
the investment companies managed by one of the Advisers has retained direct voting
control over any security, the Proxy Voting Department will provide each Board Member
(or Committee member) with a copy of the proxy statement together with any other relevant
information.
|
IV. |
Proxies of Certain Non-U.S. Issuers |
Proxy voting in certain countries requires “share-blocking.” Shareholders wishing to vote their proxies must deposit their shares shortly before
the date of the meeting with a designated depository. During the period in which the shares are held with a depository, shares that will
be voted at the meeting cannot be sold until the meeting has taken place and the shares
are returned to the clients’ custodian. Absent a compelling reason to the contrary, the Advisers believe that the benefit
to the client of exercising the vote is outweighed by the cost of voting and therefore,
the Advisers will not typically vote the securities of non-U.S. issuers that require
share-blocking.
In addition, voting proxies of issuers in non-U.S. markets may also give rise to a
number of administrative issues or give rise to circumstances under which voting would
impose a cost (real or implied) on its client which may cause the Advisers to abstain
from voting such proxies. For example, the Advisers may receive the notices for shareholder meetings without
adequate time to consider the proposals in the proxy or after the cut-off date for
voting. Other markets require the Advisers to provide local agents with power of attorney prior to implementing their respective voting
instructions on the proxy. Other markets may require disclosure of certain ownership information in excess of
what is required to vote in the U.S. market. Although it is the Advisers’ policies to vote the proxies for its clients for which they have proxy voting authority,
in the case of issuers in non-U.S. markets, we vote client proxies on a best efforts
basis.
The Proxy Voting Department will retain a record of matters voted upon by the Advisers
for their clients. The Advisers will supply information on how they voted a client’s proxy upon request from the client.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-4 |
The complete voting records for each registered investment company (the “Fund”) that
is managed by the Advisers will be filed on Form N-PX for the twelve months ended June 30th, no later than August 31st of each year. A description of the Fund’s proxy voting policies, procedures, and how the Fund voted proxies relating to portfolio
securities is available without charge, upon request, by (i) calling 800-GABELLI (800-422-3554);
(ii) writing to Gabelli Funds, LLC at One Corporate Center, Rye, NY 10580-1422; or
(iii) visiting the SEC’s website at www.sec.gov.
The Advisers’ proxy voting records will be retained in compliance with Rule 204-2 under the Investment Advisers Act.
1. Custodian banks, outside brokerage firms and clearing firms are responsible for forwarding
proxies directly to the Advisers.
Proxies are received in one of two forms:
|
● |
Shareholder Vote Instruction Forms (“VIFs”) - Issued by Broadridge Financial Solutions,
Inc. (“Broadridge”). Broadridge is an outside service contracted by the various institutions
to issue proxy materials. |
|
● |
Proxy cards which may be voted directly. |
2. Upon receipt of the proxy, the number of shares each form represents is logged into
the proxy system, electronically or manually, according to security.
3. Upon receipt of instructions from the proxy committee, the votes are cast and recorded
for each account.
Records have been maintained on the ProxyEdge system.
ProxyEdge records include:
Security Name and CUSIP Number
Date and Type of Meeting (Annual, Special, Contest)
Directors’ Recommendation (if
any)
How the Adviser voted for the client on item
4. VIFs are kept alphabetically by security. Records for the current proxy season are located in the Proxy Voting Department office. In preparation for the upcoming season, files are transferred to an offsite storage
facility during January/February.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-5 |
5. If a proxy card or VIF is received too late to be voted in the conventional matter,
every attempt is made to vote including:
| ● | When a solicitor has been retained, the solicitor is called.
At the solicitor’s direction, the proxy is faxed or sent electronically. |
| ● | In some circumstances VIFs can be faxed or sent electronically
to Broadridge up until the time of the meeting. |
6. In the case of a proxy contest, records are maintained for each opposing entity.
7. Voting in Person
a) At times it may be necessary to vote the shares in person. In this case, a “legal proxy” is obtained in the following manner:
| ● | Banks and brokerage firms using the services at Broadridge: |
Broadridge is notified that we wish to vote in person. Broadridge issues individual legal proxies and sends them back via email or overnight
(or the Adviser can pay messenger charges). A lead-time of at least two weeks prior to the meeting is needed to do this. Alternatively, the procedures detailed below for banks not using Broadridge may be
implemented.
| ● | Banks and brokerage firms issuing proxies directly: |
The bank is called and/or faxed and a legal proxy is requested.
All legal proxies should appoint:
“Representative of [Adviser name] with full power of substitution.”
b) The legal proxies are given to the person attending the meeting along with the limited
power of attorney.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-6 |
Appendix A
Proxy Guidelines
PROXY VOTING GUIDELINES
General Policy Statement
It is the policy of GAMCO Investors, Inc, and its affiliated advisers (collectively
“the Advisers”) to vote in the best economic interests of our clients. As we state in our Magna Carta of Shareholders Rights, established in May 1988, we are neither for nor against management. We are for shareholders.
At our first proxy committee meeting in 1989, it was decided that each proxy statement
should be evaluated on its own merits within the framework first established by our
Magna Carta of Shareholders Rights. The attached guidelines serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all of our research on the company, its directors, and
their short and long-term goals for the company. In cases where issues that we generally do not approve of are combined with other
issues, the negative aspects of the issues will be factored into the evaluation of
the overall proposals but will not necessitate a vote in opposition to the overall
proposals.
Board of Directors
We do not consider the election of the Board of Directors a routine issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
| ● | Historical responsiveness to shareholders |
This may include such areas as:
-Paying greenmail
-Failure to adopt shareholder resolutions receiving a majority of shareholder votes
|
● |
Nominating committee in place |
|
● |
Number of outside directors on the board |
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-7 |
Selection of Auditors
In general, we support the Board of Directors’ recommendation for auditors.
Blank Check Preferred Stock
We oppose the issuance of blank check preferred stock.
Blank check preferred stock allows the company to issue stock and establish dividends,
voting rights, etc. without further shareholder approval.
Classified Board
A classified board is one where the directors are divided into classes with overlapping
terms. A different class is elected at each annual meeting.
While a classified board promotes continuity of directors facilitating long range
planning, we feel directors should be accountable to shareholders on an annual basis. We will look at this proposal on a case-by-case basis taking into consideration the
board’s historical responsiveness to the rights of shareholders.
Where a classified board is in place we will generally not support attempts to change
to an annually elected board.
When an annually elected board is in place, we generally will not support attempts
to classify the board.
Increase Authorized Common Stock
The request to increase the amount of outstanding shares is considered on a case-by-case
basis.
Factors taken into consideration include:
| ● | Future use of additional shares |
-Stock split
-Stock option or other executive
compensation plan
-Finance growth of company/strengthen
balance sheet
-Aid in restructuring
-Improve credit rating
-Implement a poison pill or other takeover defense
|
● |
Amount of stock currently authorized but not yet issued or reserved for stock option
plans |
|
● |
Amount of additional stock to be authorized and its dilutive effect |
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-8 |
We will support this proposal if a detailed and verifiable plan for the use of the
additional shares is contained in the proxy statement.
Confidential Ballot
We support the idea that a shareholder’s identity and vote should be treated with confidentiality.
However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse the use of independent
Inspectors of Election.
Cumulative Voting
In general, we support cumulative voting.
Cumulative voting is a process by which a shareholder may multiply the number of directors
being elected by the number of shares held on record date and cast the total number
for one candidate or allocate the voting among two or more candidates.
Where cumulative voting is in place, we will vote against any proposal to rescind
this shareholder right.
Cumulative voting may result in a minority block of stock gaining representation on
the board. When a proposal is made to institute cumulative voting, the proposal will be reviewed
on a case-by-case basis. While we feel that each board member should represent all shareholders, cumulative
voting provides minority shareholders an opportunity to have their views represented.
Director Liability and Indemnification
We support efforts to attract the best possible directors by limiting the liability
and increasing the indemnification of directors, except in the case of insider dealing.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-9 |
Equal Access to the Proxy
The SEC’s rules provide for shareholder resolutions. However, the resolutions are limited in scope and there is a 500 word limit on proponents’ written arguments. Management has no such limitations. While we support equal access to the proxy, we would look at such variables as length
of time required to respond, percentage of ownership, etc.
Fair Price Provisions
Charter provisions requiring a bidder to pay all shareholders a fair price are intended
to prevent two-tier tender offers that may be abusive. Typically, these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders should be entitled
to receive the same benefits.
Reviewed on a case-by-case basis.
Golden Parachutes
Golden parachutes are severance payments to top executives who are terminated or demoted
after a takeover.
We support any proposal that would assure management of its own welfare so that they
may continue to make decisions in the best interest of the company and shareholders
even if the decision results in them losing their job. We do not, however, support excessive golden parachutes. Therefore, each proposal will be decided on a case-by- case basis.
Anti-Greenmail Proposals
We do not support greenmail. An offer extended to one shareholder should be extended to all shareholders equally
across the board.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-10 |
Limit Shareholders’ Rights to Call Special Meetings
We support the right of shareholders to call a special meeting.
Reviewed on a case-by-case basis.
Consideration of Nonfinancial Effects of a Merger
This proposal releases the directors from only looking at the financial effects of
a merger and allows them the opportunity to consider the merger’s effects on employees, the community, and consumers.
As a fiduciary, we are obligated to vote in the best economic interests of our clients. In general, this proposal does not allow us to do that. Therefore, we generally cannot support this proposal.
Reviewed on a case-by-case basis.
Mergers, Buyouts, Spin-Offs, Restructurings
Each of the above is considered on a case-by-case basis. According to the Department of Labor, we are not required to vote for a proposal simply
because the offering price is at a premium to the current market price. We may take into consideration the long term interests of the shareholders.
Military Issues
Shareholder proposals regarding military production must be evaluated on a purely
economic set of criteria for our ERISA clients. As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according to the
client’s direction when applicable. Where no direction has been given, we will vote in the best economic interests of
our clients. It is not our duty to impose our social judgment on others.
Northern Ireland
Shareholder proposals requesting the signing of the MacBride principles for the purpose
of countering the discrimination of Catholics in hiring practices must be evaluated
on a purely economic set of criteria for our ERISA clients. As such, decisions will be made on a case-by-case basis.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-11 |
In voting on this proposal for our non-ERISA clients, we will vote according to client
direction when applicable. Where no direction has been given, we will vote in the best economic interests of
our clients. It is not our duty to impose our social judgment on others.
Opt Out of State Anti-Takeover Law
This shareholder proposal requests that a company opt out of the coverage of the state’s takeover statutes. Example: Delaware law requires that a buyer must acquire at least 85% of the company’s stock before the buyer can exercise control unless the board approves.
We consider this on a case-by-case basis. Our decision will be based on the following:
| ● | Management history of responsiveness to shareholders |
| ● | Other mitigating factors |
Poison Pill
In general, we do not endorse poison pills.
In certain cases where management has a history of being responsive to the needs of
shareholders and the stock is very liquid, we will reconsider this position.
Reincorporation
Generally, we support reincorporation for well-defined business reasons. We oppose reincorporation if proposed solely for the purpose of reincorporating in
a state with more stringent anti-takeover statutes that may negatively impact the
value of the stock.
Stock Incentive Plans
Director and Employee Stock incentive plans are an excellent way to attract, hold
and motivate directors and employees. However, each incentive plan must be evaluated on its own merits, taking into consideration
the following:
| ● | Dilution of voting power or earnings per share by more than
10%. |
| ● | Kind of stock to be awarded, to whom, when and how much. |
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-12 |
| ● | Amount of stock already authorized but not yet issued under
existing stock plans. |
| ● | The successful steps taken by management to maximize shareholder
value. |
Supermajority Vote Requirements
Supermajority vote requirements in a company’s charter or bylaws require a level of voting approval in excess of a simple majority
of the outstanding shares. In general, we oppose supermajority-voting requirements. Supermajority requirements often exceed the average level of shareholder participation. We support proposals’ approvals by a simple majority of the shares voting.
Reviewed on a case-by-case basis.
Limit Shareholders Right to Act by Written Consent
Written consent allows shareholders to initiate and carry on a shareholder action
without having to wait until the next annual meeting or to call a special meeting. It permits action to be taken by the written consent of the same percentage of the
shares that would be required to effect proposed action at a shareholder meeting.
Reviewed on a case-by-case basis.
“Say-on-Pay” / “Say-When-on-Pay” / “Say-on-Golden-Parachutes”
Required under the Dodd-Frank Act; these proposals are non-binding advisory votes
on executive compensation. We will generally vote with the Board of Directors’ recommendation(s) on advisory votes on executive compensation (“Say-on-Pay”), advisory
votes on the frequency of voting on executive compensation (“Say-When-on-Pay”) and
advisory votes relating to extraordinary transaction executive compensation (“Say-on-Golden-Parachutes”). In those instances when we believe that it is in our clients’ best interest, we may abstain or vote against executive compensation and/or the frequency
of votes on executive compensation and/or extraordinary transaction executive compensation
advisory votes.
Proxy Access
Proxy access is a tool used to attempt to promote board accountability by requiring that a company’s proxy materials contain not only the names of management nominees, but also any
candidates nominated by long-term shareholders holding at least a certain stake in
the company. We will review proposals regarding proxy access on a case-by-case basis taking into account the provisions of the proposal, the company’s current governance structure, the successful steps taken by management to maximize
shareholder value, as well as other applicable factors.
Revised: August 16, 2023 | INTERNAL USE ONLY |
| |
HH-13 |
| Item
8. | Portfolio
Managers of Closed-End Management Investment Companies. |
Effective October 1, 2023, Mr. Thomas H. Dinsmore is no longer
a portfolio manager of the Fund.
Portfolio Managers
James Dinsmore serves as Portfolio Manager of
the Ellsworth Growth and Income Fund.
Portfolio Management
James Dinsmore, CFA, joined Gabelli Funds, LLC in 2015. Mr. J. Dinsmore
currently serves as a portfolio manager of the Fund and several funds within the Gabelli/GAMCO Funds complex. Mr. J. Dinsmore received
a BA in Economics from Cornell University and an MBA from Rutgers University.
Ellsworth Growth & Income Fund (As of September 30, 2022)
Name of
Portfolio
Manager or
Team Member |
Type
of
Accounts |
Total
No. of Accounts
Managed |
Total
Assets |
No.
of Accounts where
Advisory Fee is
Based on Performance |
Total
Assets in Accounts where
Advisory Fee is
Based on Performance |
James A. Dinsmore |
Registered Investment Companies: |
3 |
$246.8 million |
0 |
$0 |
|
Other Pooled Investment Vehicles: |
1 |
$6.0 million |
0 |
$0 |
|
Other Accounts: |
8 |
$8.9 million |
0 |
$0 |
Potential Conflicts of Interests
As reflected above, the Portfolio Manager manages accounts in addition
to the Fund. Actual or apparent conflicts of interest may arise when the Portfolio Manager also has day-to-day management responsibilities
with respect to one or more other accounts. These potential conflicts include:
Allocation of Limited Time and
Attention. As indicated above, the Portfolio Manager manages multiple accounts. As a result, he will not be able to devote all
of his time to the management of the Fund. The Portfolio Manager, therefore, may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts as might be the case if he were to devote all of his attention to the management of only the Fund.
Allocation of Limited Investment Opportunities. As indicated
above, the Portfolio Manager manages managed accounts with investment strategies and/or policies that are similar to the Fund. In these
cases, if the Portfolio Manager identifies an investment opportunity that may be suitable for multiple accounts, a fund may not be able
to take full advantage of that opportunity because the opportunity may be allocated among all or many of these accounts or other accounts
managed primarily by other Portfolio Managers of the Investment Adviser, and their affiliates. In addition, in the event a Portfolio Manager
determines to purchase a security for more than one account in an aggregate amount that may influence the market price of the security,
accounts that purchased or sold the security first may receive a more favorable price than accounts that made subsequent transactions.
Pursuit of Differing Strategies. At times, the Portfolio Manager
may determine that an investment opportunity may be appropriate for only some of the accounts for which he exercises investment responsibility,
or may decide that certain of the funds or accounts should take differing positions with respect to a particular security. In these cases,
the Portfolio Manager may execute differing or opposite transactions for one or more accounts which may affect the market price of the
security or the execution of the transaction, or both, to the detriment of one or more other accounts.
Variation in Compensation. A conflict of interest may arise
where the financial or other benefits available to the Portfolio Manager differs among the accounts that he/she manages. If the structure
of the Investment Adviser’s management fee or the Portfolio Manager’s compensation differs among accounts (such as where certain
accounts pay higher management fees or performance based management fees), the Portfolio Manager may be motivated to favor certain accounts
over others. The Portfolio Manager also may be motivated to favor accounts in which they have an investment interest, or in which the
Investment Adviser, or their affiliates have investment interests. Similarly, the desire to maintain assets under management or to enhance
a Portfolio Manager’s performance record or to derive other rewards, financial or otherwise, could influence the Portfolio Manager
in affording preferential treatment to those accounts that could most significantly benefit the Portfolio Manager. For example, as reflected
above, if the Portfolio Manager manages accounts which have performance fee arrangements, certain portions of their compensation will
depend on the achievement of performance milestones on those accounts. The Portfolio Manager could be incented to afford preferential
treatment to those accounts and thereby be subject to a potential conflict of interest. The Investment Adviser, and the Funds have adopted
compliance policies and procedures that are designed to address the various conflicts of interest that may arise for the Investment Adviser
and their staff members. However, there is no guarantee that such policies and procedures will be able to detect and prevent every situation
in which an actual or potential conflict may arise.
Compensation Structure for the Portfolio
Manager. The compensation for the Portfolio Manager for the Fund is structured to enable the Investment Adviser to attract and
retain highly qualified professionals in a competitive environment. The Portfolio Manager receives a compensation package that
includes a minimum draw or base salary and incentive based variable compensation based on a percentage of net revenue received by
the Investment Adviser for managing the Fund to the extent that the amount exceeds a minimum level of compensation. Net revenues are
determined by deducting from gross investment management fees certain of the firm’s expenses (other than the Portfolio
Manager’s compensation) allocable to the Fund (the incentive based variable compensation for managing other accounts is also
based on a percentage of net revenues to the investment adviser for managing the account). These methods of compensation are based
on the premise that superior long term performance in managing a portfolio should be rewarded with higher compensation as a result
of growth of assets through appreciation and net investment activity. The level of incentive based variable compensation is based on
an evaluation by the Investment Adviser’s parent, GAMI of quantitative and qualitative performance evaluation criteria.
Ownership of Shares in the Fund
James Dinsmore owns and $10,001 $50,000 of shares in the Fund as of September 30, 2023.
| Item
9. | Purchases
of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
REGISTRANT PURCHASES OF EQUITY
SECURITIES
Period |
(a)
Total Number of
Shares (or Units)
Purchased) |
(b)
Average Price
Paid per Share
(or Unit) |
(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs |
(d)
Maximum Number
(or Approximate
Dollar Value)
of Shares (or Units)
that May Yet be
Purchased Under the
Plans or Programs |
Month #1
4/01/2023 through 4/30/2023 |
Common 9,000
Preferred Series A N/A Preferred Series B N/A |
Common $8.04
Preferred Series A N/A Preferred Series B N/A |
Common 9,000
Preferred Series A N/A Preferred Series B N/A |
Common 13,779,241 - 9,000 = 13,770,241
Preferred Series A 1,167,315 Preferred Series B 2,623,000 |
Month #2
5/01/2023 through 5/31/2023 |
Common 21,534
Preferred Series A N/A Preferred Series B N/A |
Common $7.86
Preferred Series A N/A Preferred Series B N/A |
Common 21,534
Preferred Series A N/A Preferred Series B N/A |
Common 13,770,241 - 21,534 = 13,748,707
Preferred Series A 1,167,315 Preferred Series B 2,623,000 |
Month #3
06/01/2023 through 06/30/2023 |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common 13,748,707
Preferred Series A 1,167,315 Preferred Series B 1,303,000 |
Month #4
07/01/2023 through 07/31/2023 |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common 13,748,707
Preferred Series A 1,167,315 Preferred Series B 1,303,000 |
Month #5
08/01/2023 through 08/31/2023 |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common 13,748,707
Preferred Series A 1,167,315 Preferred Series B 1,303,000 |
Month #6
09/01/2023 through 09/30/2023 |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common N/A
Preferred Series A N/A Preferred Series B N/A |
Common 13,748,707
Preferred Series A 1,167,315 Preferred Series B 1,303,000 |
Total |
Common 30,534
Preferred Series A N/A Preferred Series B N/A |
Common $7.90
Preferred Series A N/A Preferred Series B N/A |
Common 30,534
Preferred Series A N/A Preferred Series B N/A |
N/A |
Footnote columns (c) and (d) of the table, by disclosing the following
information in the aggregate for all plans or programs publicly announced:
| a. | The date each plan or program was announced The notice
of the potential repurchase of common and preferred shares occurs semiannually in the Fund’s shareholder reports in accordance
with Section 23(c) of the Investment Company Act of 1940, as amended. |
| b. | The dollar amount (or share or unit amount) approved
Any or all common shares outstanding may be repurchased when the Fund’s common shares are trading at a discount of 10% or more
from the net asset value of the shares. Any or all preferred shares outstanding may be repurchased when the Fund’s preferred shares
are trading at a discount to the liquidation value of $25.00. |
| c. | The expiration date (if any) of each plan or program
The Fund’s repurchase plans are ongoing. |
| d. | Each plan or program that has expired during the period covered
by the table The Fund’s repurchase plans are ongoing. |
| e. | Each plan or program the registrant has determined to terminate
prior to expiration, or under which the registrant does not intend to make further purchases. The Fund’s repurchase plans
are ongoing. |
| Item
10. | Submission
of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures
by which the shareholders may recommend nominees to the registrant’s Board of Directors, where those changes were implemented after
the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required
by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
| Item
11. | Controls
and Procedures. |
| (a) | The registrant’s principal executive and principal
financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c)))
are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph,
based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
| (b) | There were no changes in the registrant’s internal
control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the period
covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting. |
| Item
12. | Disclosure
of Securities Lending Activities for Closed-End Management Investment Companies. |
| (a) | If the registrant is a closed-end management investment company,
provide the following dollar amounts of income and fees/compensation related to the securities lending activities of the registrant during
its most recent fiscal year: |
| (1) | Gross income from securities lending activities; $0 |
| (2) | All fees and/or compensation for each of the following securities
lending activities and related services: any share of revenue generated by the securities lending program paid to the securities lending
agent(s) (“revenue split”); fees paid for cash collateral management services (including fees deducted from a pooled cash
collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue
split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to
the securities lending program that are not included in the revenue split, including a description of those other fees; $0 |
| (3) | The aggregate fees/compensation disclosed pursuant to paragraph
(2); $0 and |
| (4) | Net income from securities lending activities (i.e., the
dollar amount in paragraph (1) minus the dollar amount in paragraph (3)). $0 |
| (b) | If the registrant is a closed-end management investment company,
describe the services provided to the registrant by the securities lending agent in the registrant’s most recent fiscal year. N/A |
(a)(2)(1) |
| Not applicable. |
(a)(2)(2) |
| Not applicable. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) |
Ellsworth Growth and Income Fund Ltd. |
|
|
|
|
By (Signature and Title)* |
/s/ James A. Dinsmore |
|
|
James A. Dinsmore, Principal Executive Officer |
|
|
|
|
Date |
12/7/23 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* |
/s/ James A. Dinsmore |
|
|
James A. Dinsmore, Principal Executive Officer |
|
|
|
|
Date |
12/7/23 |
|
By (Signature and Title)* |
/s/ John C. Ball |
|
|
John C. Ball, Principal Financial Officer and Treasurer |
|
|
|
|
Date |
12/7/23 |
|
| * | Print the name and title of each signing officer under his or
her signature. |
EX-99.CODE ETH
SECTION S
Gabelli Funds, LLC
GAMCO Asset Management Inc.
G.research, LLC.
G.distributors, LLC
Gabelli & Partners, LLC
Gabelli & Company Investment Advisers, Inc.
The Code of Ethics applies to each Registered Investment Company or Private Fund Client or series thereof (each of which is considered to be a Company for this purpose) for which any of the Companies listed above presently or hereafter provides investment advisory or principal underwriting services, other than a money market fund or a fund that does not invest in Securities.
Introduction
This Code of Ethics establishes rules of conduct for persons who are associated with the companies named above or with the registered investment companies for which such companies provide investment advisory or principal underwriter services. The Code governs their personal investment and other investment-related activities.
The basic rule is very simple: we all have a fiduciary duty to put the client’s interests first. In particular, you are reminded that investment opportunities must be offered first to clients before the firms or staff may act on them. This is one of the important objectives that the procedures set forth in this Code are intended to accomplish. The rest of the rules elaborate this principle. Some of the rules are imposed specifically by law. For example, the laws that govern investment advisers specifically prohibit fraudulent activity, making statements that are not true or that are misleading or omit something that is significant in the context and engaging in manipulative practices. These are general words, of course, and over the years the courts, the regulators and investment advisers have interpreted these words and established codes of conduct for their employees and others who have access to their investment decisions and trading activities. Indeed, the rules obligate investment advisers to adopt written rules that are reasonably designed to prevent the illegal activities described above and must follow procedures that will enable them to prevent such activities.
The purpose of this Code is to reinforce and enhance the long-standing commitment of the firms to the highest standards of ethical business conduct. Our business depends on our reputation for integrity and principled business conduct, and this reputation, in turn, depends on the day-to-day actions of every staff member. Accordingly, we must avoid conflicts of interest, which may occur when your private interests interfere in any way, or even appear to interfere, with the interests of the firms or its clients. A conflict situation can arise when you take actions or have interests that make it difficult for you to perform your work objectively and effectively. Your obligation to conduct the firms’ business in an ethical manner includes the ethical handling of actual or apparent conflicts of interest between personal and business relationships, including full disclosure of such conflicts. Each staff member is responsible for conducting himself/herself in a lawful, honest and ethical manner at all times, and in accordance with all laws, rules and regulations applicable to our business, including this Code and all other internal policies and procedures adopted by the firms.
Revised: August 3, 2023 | S-1 | INTERNAL USE ONLY |
This Code is intended to assist the companies in fulfilling their obligations under the law. The first part lays out who the Code applies to, the second part deals with personal investment activities, the third part deals with other sensitive business practices, and subsequent parts deal with reporting and administrative procedures.
The Code is very important to the Companies and their staff members. Violations can not only cause the Companies embarrassment, loss of business, legal restrictions, fines, and other punishments, but for staff members, can lead to demotion, suspension, firing, ejection from the securities business, and very large fines.
|
A. |
The Code applies to each of the following: |
|
1. |
The Companies named or described at the top of page one of the Code and all entities that are under common management with these Companies or otherwise agree to be subject to the Code (“Affiliates”). A listing of the Affiliates, which is periodically updated, is attached as Exhibit A. |
|
2. |
Any officer, director or employee of any Company, Affiliate or Fund Client (as defined below) whose job regularly involves him/her in the investment process. This includes the formulation and making of investment recommendations and decisions, the purchase and sale of securities for Clients and the utilization of information about investment recommendations, decisions and trades. Due to the manner in which the Companies and the Affiliates conduct their business, every employee should assume that he or she is subject to the Code unless the Compliance Officer specifies otherwise.1 |
|
3. |
With respect to all of the Companies, Affiliates and Fund Clients, any natural person who Controls any of the Companies, Affiliates or Fund Clients and who obtains information regarding the Companies’ or the Affiliates’ investment recommendations or decisions. However, a person whose Control arises only as a result of his or her official position with such entity is excluded. Disinterested directors of Fund Clients and Independent Directors, for example, are excluded from coverage under this item. |
| 1 | Consultants,
interns and part-time employees may be subject to the restrictions and reporting requirements of personal investment activities promulgated
under the Code. |
Revised: August 3, 2023 | S-2 | INTERNAL USE ONLY |
|
4. |
As an exception, the Code does not apply to any director, officer or employee of any Fund Client with respect to which the Companies’ services do not involve the formulation or making of investment recommendations or decisions or the execution of portfolio transactions if that person is also a director, officer or employee of any entity that does perform such services. These individuals are covered by codes of ethics adopted by such entities. |
|
1. |
Access Persons. The (i) Companies, (ii) the persons described in items (A)2 and (A)3 above and (iii) such person’s Immediate Family, other than those excluded by item (A)4 above. |
|
2. |
Access Person Account. Other than Client Accounts, includes all advisory, brokerage, trust or other accounts over which one or more Access Persons has (i) a substantial proportionate economic interest or (ii) Control. Control is defined as having investment and/or trade discretion over the account. |
A substantial proportionate economic interest will generally be 25% of the equity in the account in the case of any single Access Person or 25% of the equity in the account in the case of all Access Persons in the aggregate. Interests in Private Fund Clients and similar indirect means of ownership of underlying securities shall also be treated as Access Person Accounts for purposes of this Code.2
As an exception, accounts in which one or more Access Persons and/or their immediate family have a substantial proportionate interest which are managed by an investment adviser who has no affiliation with the Companies and with respect to which no Access Person has, in the judgment of the Compliance Officer after reviewing the terms and circumstances, any direct or indirect influence or control over the investment or portfolio execution process are not Access Person Accounts.
| 2 | Affiliated
Mutual Funds and SICAV Funds (“Affiliated Mutual and SICAV Funds”) shall not be treated as Access Person Accounts for
purposes of this Code. Because there are investment limitations imposed by the Investment Company Act and applicable European Law over
the investment activity of Affiliated Mutual and SICAV Funds, the firms take the position that the indirect benefit potentially gained
by an Access Person through the trading activity of these Clients to the potential detriment of other Clients of the firms is sufficiently
mitigated. In addition, the firms have determined that the risk to other investors in Affiliated Mutual and SICAV Funds caused by subjecting
these Clients to the trading restrictions imposed by this Code outweigh the risks to other Clients of the firms that the firms will seek
to benefit the Access Person to the detriment of the firms’ other Clients. In addition, subject to the review of the Chief Compliance
Officer, market making accounts controlled by G.research, LLC and error accounts of Access Persons shall not be deemed Access Person
Accounts for purposes of this Code. |
Revised: August 3, 2023 | S-3 | INTERNAL USE ONLY |
As a further exception, subject to the provisions of Article II(I)7, bona fide market making accounts of G.research, LLC are not Access Person Accounts.
As a further exception, subject to the provisions of Article II(I)7, bona fide error accounts of the Companies and the Affiliates are not Access Person Accounts.
|
3. |
Affiliated
Mutual Funds. Registered open-end investment companies or series thereof advised or
sub-advised by any of the Companies or their Affiliates. |
|
4. |
Associate Portfolio Managers. Access Persons who are engaged in securities research and analysis for designated Clients or are responsible for investment recommendations for designated Clients but who are not principally responsible for investment decisions with respect to any Client Accounts. |
|
5. |
Clients. Persons that have investment advisory accounts maintained with any of the Companies or Affiliates by any person, other than Access Person Accounts. However, Fund Clients covered by item (A)(4) above are considered Client Accounts only with respect to employees specifically identified by the Compliance Officer as having regular information regarding investment recommendations or decisions or portfolio transactions for such Fund Clients. |
|
6. |
Client Accounts. Shall mean accounts of Clients (i) that are Controlled by an Access Person and (ii) in which no Access Person has a substantial proportionate economic interest; provided that, the Client pays a management, advisory or any other similar arms-length fee to the Access Person and the beneficiary of the Client Account is not an Immediate Family member of an Access Person. |
|
7. |
Companies.
The companies named or described at the top of page one of the Code. |
|
8. |
Compliance
Officer. The persons designated as the compliance officers of the Companies. |
|
9. |
Covered
Persons. The Companies, the Access Persons and the persons described in items A(3) and (A)4 above. |
|
10. |
Fund Clients. Clients that are Affiliated Mutual Funds, Private Fund Clients or a series thereof. |
Revised: August 3, 2023 | S-4 | INTERNAL USE ONLY |
|
11. |
Immediate Family. An Access Person’s spouse and Minor Descendants; provided that, with respect to accounts for the benefit of Minor Descendants who are not also Minor Children, an Access Person Controls such account. |
|
12. |
Independent
Directors. A director of any of the Companies or Affiliates, other than an investment advisor to a Fund Client, who would not
be an “interested person” of any of such entities under Section 2(a)(19) of the Investment Company Act of 1940 but for the fact
that he or she serves as such a director and may own beneficially securities of any such entity constituting less than 5% of the voting
securities thereof and may be an associated person of or own securities in a broker-dealer or parent company thereof and who does not
have any involvement in the day-to-day activities of any of the Companies or Fund Clients. |
|
13. |
Minor
Children. A child, whether natural or via adoption, of an Access Person, under the age of twenty-one years. |
|
14. |
Minor Descendants. Direct descendants of an Access Person, whether natural or via adoption, under the age of twenty-one years. |
|
15. |
Portfolio
Managers. Access Persons who are principally responsible for investment decisions with respect to any Client Accounts. |
|
16. |
Private
Fund Client. Any Client the securities of which were offered or sold pursuant to Section 3(c)(1) or the 3(c)(7) of the Investment
Company Act of 1940, as amended. |
|
17. |
Security.
Any financial instrument treated as a security for investment purposes and any related instrument such as a futures, forward or swap
contract entered into with respect to one or more securities, a basket of or an index of securities or components of securities. However,
the term security does not include securities issued by the Government of the United States, bankers’ acceptances, bank certificates
of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements, or shares of registered open-end
investment companies. Shares of affiliated registered open-end investment companies are not securities but are subject to special rules
under this Code. |
| II. | Restrictions
on Personal Investing Activities |
| A. | Basic
Restriction on Investing Activities |
If a purchase or sale order is pending or under active consideration for any Client Account by any Company or Affiliate, neither the same Security nor any related Security (such as an option, warrant, right, futures contract or convertible security) may be bought or sold for any Access Person Account.
Revised: August 3, 2023 | S-5 | INTERNAL USE ONLY |
| B. | Initial
Public Offerings |
No Security or related Security may be acquired in an initial public offering for any Access Person Account.
No Security may be bought or sold for the account of any Portfolio Manager or Associate Portfolio Manager, including any of the firms’ proprietary accounts managed by a Portfolio Manager or Associate Portfolio Manager, during the period commencing seven (7) calendar days prior to and ending seven (7) calendar days after the purchase or sale (or entry of an order for the purchase or sale) of that Security for any Client Account with respect to which such person has been designated a Portfolio Manager or Associate Portfolio Manager, unless the Client Account receives at least as good a price as the account of the Portfolio Manager or Associate Portfolio Manager by the transaction for the account of the Portfolio Manager or Associate Portfolio Manager.
In the event that a Security is bought or sold for the account of any Portfolio Manager or Associate Portfolio Manager within the Blackout Period at a price that is more advantageous than the price of the same Security bought or sold for any Client Account with respect to which such person has been designated a Portfolio Manager or Associate Portfolio Manager, then the price difference advantage of the Portfolio Manager or Associate Portfolio Manager account over the Client Account will be disgorged, in which case no violation will be deemed to have occurred; except where such price difference advantage is of a de minimis amount, in which case no disgorgement will be required. For purposes of the Blackout Period, a de minimis amount is defined as a price difference advantage in an amount of $250 or less per security.
|
D. |
Short-term Trading and Affiliated Mutual Funds |
No Security or related Security may, within a 30 calendar day holding period may be bought and sold or sold and bought at a profit for any Access Person Account if the Security or related Security was held at any time during that period in any Client Account, unless (i) the Client Account liquidates its position and (ii) no Access Person Account has a greater profit (on a proportionate per share basis) for dealing in the applicable Security than any such Client Account, in each case within such 30 day period.
No
Affiliated Mutual Fund, except the Gabelli U.S. Treasury Money Market Fund and the Gabelli ABC Fund, may be bought and sold within a
30 calendar day holding period (measured on a last-in first-out basis) for a single Access Person Account. The Gabelli U.S. Treasury
Money Market Fund shall be exempt from the 30 calendar day holding period. The ABC Fund shall have a 7 calendar day holding period (measured
on a last-in first-out basis).
Revised: August 3, 2023 | S-6 | INTERNAL USE ONLY |
Shares of Affiliated Mutual Funds purchased via automated investments or by reinvestment of dividends or capital gain distributions will not be subject to the holding period. Shares of Affiliated Mutual Funds held in 401(k) accounts administered by Charles Schwab will not be subject to the holding period where the shares were purchased under the following circumstances:
|
■ |
Shares purchased by reinvestment of dividends or capital gain distributions; |
|
■ |
Shares purchased in rollover transactions; |
|
■ |
Shares purchased for automatic contribution election; and |
|
■ |
Shares purchased for automated account rebalance. |
Exchange
Traded Funds (ETFs):
Generally, broad-based index ETFs are required to be pre-cleared as described in paragraph (I) and are subject
to the Blackout Period of paragraph (C), but are not subject to the Short-term Trading restrictions of paragraph (D) as it pertains to
the 30-day holding period in the first paragraph.
The Gabelli Exchange Traded Funds are required to be pre-cleared as described in paragraph (I) and are subject to the Blackout Period of paragraph (C) and the Short-term Trading restrictions of paragraph (D) as it pertains to the 30-day holding period in the first paragraph.
Securities that derive their value, at least in part, from an underlying asset (such as options, warrants, rights, swaps and futures contracts) may be bought and sold or sold and bought at a profit unless the underlying asset is subject to the restrictions set forth in paragraphs (A), (C), (D) and (I) or the exemptions set forth in paragraph (H).
However, rights that were received pro rata with other security holders are exempt from the 30 calendar day holding period set forth in paragraph (D).
Securities that are derived by the creation of an independent company through the sale or distribution of new shares of an existing company or division of a parent company is subject to the restrictions set forth in paragraphs (A), (C), (D) and (I), but exempt from the 30 calendar day hold requirement set forth in paragraph (D) or the exemptions set forth in paragraph (H).
Revised: August 3, 2023 | S-7 | INTERNAL USE ONLY |
Participation on an ongoing basis in an issuer’s dividend reinvestment or stock purchase plan, participation in any transaction over which no Access Person had any direct or indirect influence or control and involuntary transactions (such as mergers, inheritances, gifts, etc.) are exempt from the restrictions set forth in paragraphs (A), (C) and (D) above with case by case pre-clearance under paragraph (I) below.
Purchases and sales of the following Securities for Access Person Accounts are exempt from the restrictions set forth in paragraphs (A), (C) and the first sentence of paragraph (D) above if such purchases and sales comply with the pre-clearance requirements of paragraph (I) below:
|
1. |
Publicly traded non-convertible fixed income Securities rated at least “A”; |
|
2. |
Publicly traded equity Securities having a market capitalization in excess of $1.0 billion;3 |
|
3. |
Publicly traded equity Securities having a market capitalization in excess of $500 million if the transaction in question and the aggregate amount of such Securities and any related Securities purchased and sold for the Access Person Account in question during the preceding 30 calendar days does not exceed 100 shares; |
|
4. |
Municipal Securities; and |
|
5. |
Securities transactions that the Compliance Officer concludes are being effected for federal, state or local income tax purposes. |
| 6. | The
exercise of rights that were received pro rata with other security holders is exempt. |
| 7. | Securities
issued by the United States Government, banker’s acceptances, bank certificates of deposit and commercial paper. |
| 3 | Market
capitalization includes all classes of public shares outstanding that are convertible to common shares. |
Revised: August 3, 2023 | S-8 | INTERNAL USE ONLY |
|
I. |
Pre-Clearance of Personal Securities Transactions |
|
|
No
Security may be bought or sold for an Access Person Account unless: (i) the Access Person obtains prior approval from the Compliance
Officer or, in the absence of the Compliance Officer, from the General Counsel or a designee; or via an automated Compliance pre-clearance
system (ii) the approved transaction is completed on the same day approval is received; and (iii) the Compliance Officer or the General
Counsel or designee does not rescind such approval prior to execution of the transaction (See paragraph K below for details of the Pre-Clearance
Process.) |
The Compliance Officer will not approve purchases or sales of Securities that are not publicly traded, unless the Access Person provides full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of such person’s activities on behalf of any Client) and that the Companies would have no foreseeable interest in investing in such Security or any related Security for the account of any Client.
| 1. | No
Securities may be purchased or sold for any Access Person Account other than through the trading desk of G.research, LLC, unless express
permission is granted by the Compliance Officer. Such permission may be granted only on the condition that the third party broker supply
the Compliance Officer, on a timely basis, duplicate copies of confirmations of all personal Securities transactions for such Access
Person in the accounts maintained with such third party broker and copies of periodic statements for all such accounts. |
|
2. |
No Securities may be purchased or sold for any Access Person Account unless the particular transaction has been approved in writing by the Compliance Officer or, in his or her absence, the General Counsel of GAMCO Investors, Inc., Associated Capital Group, Inc. or their designees; or via an automated Compliance pre-clearance system. The Compliance Officer or a designee shall review reports from the trading desk (or, if applicable, confirmations from brokers) to assure that all transactions effected for Access Person Accounts are effected in compliance with this Code. A Trading Approval Form, attached as Exhibit B, must be completed and submitted to the Compliance Officer or a designee for approval prior to entry of an order. |
Revised: August 3, 2023 | S-9 | INTERNAL USE ONLY |
|
3. |
After reviewing the proposed trade, the level of potential investment interest on behalf of Clients in the Security in question and the Companies’ restricted lists, the Compliance Officer shall approve (or disapprove) a trading order on behalf of an Access Person as expeditiously as possible. The Compliance Officer will generally approve transactions described in paragraph (G) above unless the Security in question or a related security is on the Restricted List or the Compliance Officer believes for any other reason that the Access Person Account should not trade in such Security at such time. |
|
4. |
Once an Access Person’s Trading Approval Form is approved, the form must be forwarded to the trading desk (or, if a third party broker is permitted, to the Compliance Officer) for execution on the same day. If the Access Person’s trading order request is not approved, or is not executed on the same day it is approved, the clearance lapses although such trading order request may be resubmitted at a later date. |
|
5. |
In the absence of the Compliance Officer, an Access Person may submit his or her Trading Approval Form to the General Counsel of GAMCO Investors, Inc., Associated Capital Group, Inc. or a designee; or via an automated Compliance pre-clearance system. Trading approval for the Compliance Officer must be obtained from the General Counsel, and trading approval for the General Counsel must be obtained from the Compliance Officer or a designee. In no case will the Trading Desk accept an order for an Access Person Account unless it is accompanied by a signed Trading Approval Form; or a Trading Approval Form generated by an automated Compliance pre-clearance system that approves the trade. |
|
6. |
The Compliance Officer shall review all Trading Approval Forms, all initial, quarterly and annual disclosure certifications and the trading activities on behalf of all Client Accounts with a view to ensuring that all Covered Persons are complying with the spirit as well as the detailed requirements of this Code. The Compliance Officer will review all transactions in the market making accounts of G.research, LLC. and the error accounts of the Companies and the Affiliates in order to ensure that such transactions are bona fide market making or error transactions or are conducted in accordance with the requirements of this Article II. |
Revised: August 3, 2023 | S-10 | INTERNAL USE ONLY |
|
III. |
Other Investment-Related Restrictions |
No Access Person shall accept any gift or other item of more than $100 in value from any person or entity that does business with or on behalf of any Client.
No Access Person shall commence service on the Board of Directors of a publicly traded company or any company in which any Client Account has an interest without prior authorization from the Compliance Committee based upon a determination that the Board service would not be inconsistent with the interests of the Clients. The Compliance Committee shall include the senior Compliance Officer and the General Counsel of GAMCO Investors, Inc. and Associated Capital Group, Inc., and at least two of the senior executives from among the Companies.
|
IV. |
Reports and Additional Compliance Procedures |
|
A. |
Every Covered Person must submit a quarterly report (a form of which is appended as Exhibit C) containing the information set forth in paragraph (B) below with respect to transactions in any Security or Affiliated Mutual Fund in which such Covered Person has or by reason of such transaction acquires, any direct or indirect beneficial ownership (as defined in Exhibit D) in the Security, or Affiliated Mutual Fund and with respect to any account established by the Covered Person in which any Securities or Affiliated Mutual Funds were held for the direct or indirect benefit of the Covered Person; provided, however, that: |
|
1. |
a Covered Person who is required to make reports only because he or she is a director of one of the Fund Clients and who is a “disinterested” director thereof or who is an Independent Director need not make a report with respect to any transactions other than those where he or she knew or should have known in the course of his or her duties as a director that any Fund Client has made or makes a purchase or sale of the same or a related Security, or the investment adviser of any such Fund Client has considered causing any Fund Client to purchase or sell the same or a related Security, within 15 days before or after the purchase or sale of such Security or related Security by such director. |
|
2. |
a Covered Person need not make a report with respect to any transaction effected for, and Securities and Affiliated Mutual Funds held in, any account over which such person does not have any direct or indirect influence or control; and |
Revised: August 3, 2023 | S-11 | INTERNAL USE ONLY |
|
3. |
A Covered Person need not make a report with respect to any transaction in securities issued by the United States Government, banker’s acceptances, bank certificates of deposit and commercial paper. |
|
4. |
a Covered Person will be deemed to have complied with the requirements of this Article IV insofar as the Compliance Officer receives in a timely fashion duplicate monthly or quarterly brokerage statements or transaction confirmations on which all transactions required to be reported hereunder are described. |
|
B. |
A Covered Person must submit the report required by this Article to the Compliance Officer no later than 30 days after the end of the calendar quarter in which the transaction or account to which the report relates was effected or established, and the report must contain the date that the report is submitted. |
|
1. |
This report must contain the following information with respect to transactions: |
|
a. |
The date of the transaction, the title and number of shares and the principal amount of each Security and Affiliated Mutual Fund involved; |
|
b. |
The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
|
c. |
The price at which the transaction was effected; and |
|
d. |
The name of the broker, dealer or bank with or through whom the transaction was effected. |
|
2. |
This report must contain the following information with respect to accounts established: |
The name of the broker, dealer or bank with whom the account was established; and
The date the account was established.
| C. | Any
report submitted to comply with the requirements of this Article IV may contain a statement that the report shall not be construed as
an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the Security or Affiliated
Mutual Fund to which the report relates. A person need not make any report under this Article IV with respect to transactions effected
for, and Securities, and Affiliated Mutual Funds held in, any account over which the person has no direct or indirect influence or control. |
Revised: August 3, 2023 | S-12 | INTERNAL USE ONLY |
| D. | No
later than 10 days after beginning employment with any of the Companies or Affiliates or otherwise becoming a Covered Person, each Covered
Person (except for a “disinterested” director of the Fund Client or an Independent Director who is required to submit reports under this
Article IV solely by reason of being such a director) must submit a report, which must be current as of a date no more than 45 days prior
to the date of beginning employment, containing the following information: |
|
1. |
The title, number of shares and principal amount of each Security and Affiliated Mutual Fund in which the Covered Person had any direct or indirect beneficial ownership when the person became a Covered Person; |
|
2. |
The name of any broker, dealer or bank with whom the Covered Person maintained an account in which any Securities and Affiliated Mutual Fund were held for the direct or indirect benefit of the Covered Person as of the date the person became a Covered Person; and |
|
3. |
The date that the report is submitted. |
The form of such report is attached as Exhibit E.
| E. | Annually
each Covered Person must certify that he or she has read and understood the Code and recognizes that he or she is subject to such Code.
In addition, annually each Covered Person must certify that he or she has disclosed or reported all personal Securities and Affiliated
Mutual Fund transactions required to be disclosed or reported under the Code. Furthermore, each Covered Person (except for a “disinterested”
director of the Fund Client or an Independent Director who is required to submit reports under this Article IV solely by reason of being
such a director) annually must submit a report containing the following information (which information must be current as of a date no
more than 45 days before the report is submitted): |
|
1. |
The title, number of shares and principal amount of each Security and Affiliated Mutual Fund in which the Covered Person had any direct or indirect beneficial ownership held in an account not previously disclosed other than a G.research, affiliated funds or a firm-sponsored retirement plan account; |
|
2. |
The name of any broker, dealer or bank with whom the Covered Person maintains an account in which any Securities and Affiliated Mutual Funds are held for the direct or indirect benefit of the Covered Person in an account other than a G.research, affiliated funds or a firm-sponsored retirement plan account; and |
|
3. |
The date that the report is submitted. |
The form of such certification and report is attached as Exhibit F.
Revised: August 3, 2023 | S-13 | INTERNAL USE ONLY |
| F. | At
least annually (or quarterly in the case of Items 4 and 5 below), each of the Companies that has a Fund Client or that provides principal
underwriting services for a Fund Client shall, together with each Fund Client, furnish a written report to the Board of Directors of
the Fund Client that: |
|
1. |
Describes any issues arising under the Code since the last report. |
| 2. | Certifies
that the Companies have developed procedures concerning Covered Persons’ personal trading activities and reporting requirements
relevant to such Fund Clients that are reasonably necessary to prevent violations of the Code; |
| 3. | Recommends
changes, if any, to the Fund Clients’ or the Companies’ Codes of Ethics or procedures; |
| 4. | Provides
a summary of any material or substantive violations of this Code by Covered Persons with respect to such Fund Clients which occurred
during the past quarter and the nature of any remedial action taken; and |
| 5. | Describes
any material or significant exceptions to any provisions of this Code of Ethics as determined under Article VI below. |
| G. | The
Compliance Officer shall notify each employee of any of the Companies or Affiliates as to whether such person is considered to be an
Access Person or Covered Person and shall notify each other person that is considered to be an Access Person or Covered Person. |
|
|
The Compliance Officer or his or her designee will review all Trading Approval Forms, all initial, quarterly and annual disclosure certifications and the trading activities on behalf of all Client Accounts with a view to ensuring that all Covered Persons are complying with the spirit as well as the detailed requirements of the Code. |
|
|
All violations of the Code must be reported to the Chief Compliance Officer for the appropriate registered investment adviser. In addition, if a staff member becomes aware of or suspects a violation of the Code by any other staff member, the violation or suspected violation must be promptly reported to the Chief Compliance Officer or the General Counsel. Staff members may make such reports anonymously, and will not be retaliated against by any of the firms for reporting conduct that may constitute a violation of the Code. |
Revised: August 3, 2023 | S-14 | INTERNAL USE ONLY |
|
|
Upon discovering that a Covered Person has not complied with the requirements of this Code, the Chief Compliance Officer or the General Counsel will advise the Board of Directors of the relevant Company or of the relevant Fund Client. whichever is most appropriate under the circumstances, which may impose on that person whatever sanctions the Board deems appropriate, including, among other things, disgorgement of profit, censure, suspension or termination of employment. Material violations of requirements of this Code by employees of Covered Persons and any sanctions imposed in connection therewith shall be reported not less frequently than quarterly to the Board of Directors of any relevant Company or Fund Client, as applicable. |
|
|
The General Counsel will ensure that the Fund Clients and each Gabelli entity that has a Fund Client, furnish a written report to the Board of Directors of each Fund Client, annually or quarterly as required by the Code, containing the information set forth in Section IV(F) of the Code. |
The Compliance Committee of the Companies reserves the right to decide, on a case-by-case basis, exceptions to any provisions under this Code. Any exceptions made hereunder will be maintained in writing by the Compliance Committee and presented to the Board of Directors of any relevant Fund Client at its next scheduled meeting.
| VII. | Preservation
of Documents |
This Code, a copy of each report by a Covered Person, any written report made hereunder by the Companies or the Compliance Officer, lists of all persons required to make reports, a list of any exceptions, and the reasons therefore, with respect to Article II.B, and any records under Article II.G with respect to purchases pursuant to Article II.H above, shall be preserved with the records of the relevant Company and any relevant Fund Client for the period required by Rule 17j-1.
In accordance with the Investment Advisers Act, the following documents also will be preserved:
|
A. |
Records of all violations of the Code and any action taken as a result of such violation; |
|
B. |
Records of all written acknowledgements of receipt of the Code for all Access Persons for a five-year period; |
|
C. |
A list of all staff members who are or have been Access Persons during the past five years; and |
|
D. |
Records of any decision and supporting reasons for approving the acquisition of securities by Access Persons in limited offerings. |
Revised: August 3, 2023 | S-15 | INTERNAL USE ONLY |
| VIII. | Other
Laws, Rules and Statements of Policy |
Nothing contained in this Code shall be interpreted as relieving any Covered Person from acting in accordance with the provision of any applicable law, rule or regulation or any other statement of policy or procedure governing the conduct of such person adopted by the Companies, the Affiliates or the Fund Clients.
If any person has any question with regard to the applicability of the provisions of this Code generally or with regard to any Securities transaction or transactions, he or she should consult the Compliance Officer.
Revised: August 3, 2023 | S-16 | INTERNAL USE ONLY |
EXHIBIT A
LIST OF AFFILIATES OF THE COMPANIES
Associated Capital Group, Inc. |
Gabelli & Partners GmbH
Gabelli & Partners Italia LLC
Gabelli & Partners Italia L.P.
Gabelli & Partners Italia Management LLC
Gabelli & Partners Italia S.R.L. |
Gabelli Arbitrage Holdings LLC |
Gabelli Associates Fund |
Gabelli Associates Fund II, LP |
Gabelli Associates Limited |
Gabelli Associates Limited II E |
Gabelli Entertainment and Telecommunication Acquisition Corp.
Gabelli Fixed Income LLC |
Gabelli Fund, LDC |
Gabelli Global Partners, Ltd. |
Gabelli Global Partners Master Fund, Ltd. |
Gabelli Intermediate Credit Fund, LP
Gabelli Intermediate Credit Fund, Ltd. |
Gabelli International Limited
Gabelli Investment Partners International LLC
Gabelli Japan K.K. |
Gabelli Multimedia Partners, LP |
Gabelli Performance Partnership LP
Gabelli Securities International Limited (U.K.) |
Gabelli Securities International, Ltd. (Bermuda)
Gabelli Trading Holdings LLC
GAMA Capital Opportunities Ltd. |
GAMA Capital Opportunities Master Ltd. |
GAMA Capital Partners LP
GAMA Funds Holdings GmbH
GAMA Funds LLC |
GAMA Select Energy Plus Master Fund, Ltd. |
GAMCO Acquisitions LLC |
GAMCO Asset Management (UK) Ltd. |
GAMCO International Partners LLC |
GAMCO Investors, Inc. |
GAMCO Medical Opportunities, LP |
Gemini Capital Management LLC |
Gemini Capital Management Partners, LP |
Gemini Global Partners, LP
Greenwich Acquisition LLC
Greenwich PMV Acquisition Corp. |
Institutional Services Holdings, LLC
Morgan Group Holding Co. |
MJG Associates, Inc.
MJG IV Ltd.
PMV Consumer Acquisition Corp.
PMV Consumer Acquisition Holding Company LLC |
Revised: August 3, 2023 | S-17 | INTERNAL USE ONLY |
EXHIBIT B
PRE-CLEARANCE TRADING APPROVAL FORM
I, ______________________________________ (name), am an Access Person or authorized officer thereof and seek pre-clearance to engage in the transaction described below for the benefit of myself or another Access Person:
Acquisition or Disposition (circle one)
Name of Account: |
|
|
|
Account Number: |
|
|
|
Date of Request: |
|
|
|
Security: |
|
|
|
Amount or # of Shares: |
|
|
|
Broker: |
|
If the transaction involves a Security that is not publicly traded, a description of proposed transaction, source of investment opportunity and any potential conflicts of interest:
I hereby certify that, to the best of my knowledge, the transaction described herein is not prohibited by the Code of Ethics and that the opportunity to engage in the transaction did not arise by virtue of my activities on behalf of any Client.
Signature: |
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Print Name: |
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Approved or Disapproved (Circle One) |
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Date of Approval: |
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Signature: |
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Print Name: |
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If approval is granted, please forward this form to the trading desk (or if a third party broker is permitted, to the Compliance Officer) for immediate execution.
Revised: August 3, 2023 | S-18 | INTERNAL USE ONLY |
EXHIBIT C
QUARTERLY TRANSACTION REPORT
Report submitted by: |
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Print Name |
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This transaction report (the “Report”) is submitted pursuant to Section IV (B) of the Code of Ethics of the Companies and supplies information with respect to transactions in any Security or Affiliated Mutual Fund in which you, or an Access Person, may be deemed to have, or by reason of such transaction acquire, any direct or indirect beneficial ownership interest, and with respect to accounts established by you, or an Access Person, in which any Securities or Affiliated Mutual Funds were held for your direct or indirect benefit, or for the benefit of an Access Person, for the period specified below.1 If you were not employed by or affiliated with us during this entire period, amend the dates specified below to cover your period of employment or affiliation.
Unless the context otherwise requires, all terms used in the Report shall have the same meaning as set forth in the Code of Ethics.
If you have no reportable transactions or new accounts, sign and return this page only. If you have reportable transactions or new accounts, complete, sign and return page two only and include any attachments.
I HAD NO REPORTABLE SECURITIES OR AFFILIATED MUTUAL FUND TRANSACTIONS OR ACCOUNTS ESTABLISHED DURING THE PREVIOUS CALENDAR QUARTER. I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
| 1 | Every
employee is considered an Access Person and is therefore subject to the Firms’ Code of Ethics. Access Person Accounts, which exclude
Client Accounts, include all advisory, brokerage, trust or other accounts or forms of direct beneficial ownership in which one or more
Access Persons and/or one or more members of an Access Person’s immediate family have a substantial proportionate economic interest
or control. “Immediate family” is defined as your spouse and minor descendants. With respect to accounts for the benefit
of minor descendants who are not also minor children, any account that you control. Minor children is any child, whether natural or via
adoption, of an Access Person, under the age of twenty-one years. A substantial proportionate economic interest will generally be 25%
of the equity in the account in the case of any single Access Person or 25% of the equity in the account in the case of all Access Persons
in the aggregate. Interests in investment partnerships and similar indirect means of ownership of underlying securities shall also be
treated as Access Person Accounts for purposes of this Code. |
Revised: August 3, 2023 | S-19 | INTERNAL USE ONLY |
Page 2
QUARTERLY TRANSACTION REPORT
Report submitted by: |
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Print Name |
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The
following tables supply the information required by Section IV (B) of the Code of Ethics for the period specified below. All
transactions including transactions in Affiliated Mutual Funds and any new accounts established during the previous calendar quarter
must be listed below.2 Transactions reported on brokerage statements or duplicate confirmations actually received by the
Compliance Officer do not have to be listed although it is your responsibility to make sure that such statements or confirmations
are complete and have been received in a timely fashion. If you had transactions of the kind described above, you may simply state,
“See statements.”
Acknowledgement of the firms’ Privacy Policy and consent for the firms to receive trading information via electronic feed, duplicate statements and/or trade confirmations will be deemed to have been given for all approved accounts.
TRANSACTIONS |
Securities
(Name and Symbol) | |
Date
of
Transaction | |
Whether
Purchase,
Sale, Short
Sale or Other
Type of
Disposition or Acquisition | |
Quantity
of
Securities | |
Price
per Share
or Other Unit | |
Name
of Broker/ Dealer with
or through
Whom the
Transaction was
Effected | |
Nature
of
Ownership of
Securities | |
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NEW ACCOUNTS ESTABLISHED |
Name of Broker, Dealer or Bank | |
Account Number | |
Date Account Established |
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| 2 | Outside
accounts must be pre-cleared prior to being opened (See, Section T of the Compliance Manual). |
Revised: August 3, 2023 | S-20 | INTERNAL USE ONLY |
Page 3
Managed Accounts:
When the personal account of an access person is managed by a third party, or in the case of a trust where an access person is the grantor or beneficiary that provides a trustee with management authority over the trust, the access person should not, in any way, directly or indirectly have influence or control over the personal account/trust.
Please certify to one of the following:
| ☐ | I
do NOT have any accounts managed by a third party or trustee.3 |
| ☐ | I
do have account(s) managed by a third party or trustee and I do NOT have trade or investment discretion over the account(s). I
did not direct, suggest or consult a third party or trustee to make any purchases or sales of securities in the account(s) or trust during
the previous calendar quarter.3 |
| ☐ | I
do have account(s) managed by a third party or trustee and I have investment and/or trade discretion over at least one of the accounts
or trusts and did direct, suggest or consult the manager to make purchases or sales of securities in the account(s) or trust(s) during
the previous calendar quarter.3 |
I
CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION IN THIS REPORT IS TRUE
AND CORRECT FOR THE PREVIOUS CALENDAR QUARTER.
| 3 | Any
outside account of an Access Person that is managed by a third party, or in the case of a trust where an access person is the grantor
or beneficiary that provides a trustee with management authority over the trust, the access person should not, in any way, directly or
indirectly have influence or control over the personal account/trust. |
A hedge fund would be considered an account managed by a third party if it is managed as a separate account, but would not apply if you are one of other limited partners. An investment in a mutual fund managed by a third party would not apply because it is not solely for your benefit.
If you have an account or trust that was not previously disclosed, please list the details in the “New Accounts Established” section above and contact the Legal/Compliance department immediately.
Revised: August 3, 2023 | S-21 | INTERNAL USE ONLY |
EXHIBIT D
BENEFICIAL OWNERSHIP
For purposes of the attached Code of Ethics, “beneficial ownership” shall be interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except the determination of direct or indirect beneficial ownership shall apply to all securities that a Covered Person has or acquires. The term “beneficial ownership” of securities would include not only ownership of securities held be a Covered Person for his or her own benefit, whether in bearer form or registered in his or her name or otherwise, but also ownership of securities held for his or her benefit by others (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she is a member if he or she may exercise a controlling influence over the purchase, sale of voting of such securities, and securities owned by any corporation or similar entry in which he or she owns securities if the shareholder is a control-ling shareholder of the entity and has or shares investment control over the entity’s portfolio.
Ordinarily, this term would not include securities held by executors or administrators in estates in which a Covered Person is a legatee or beneficiary unless there is a specified legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent’s death.
Securities held in the name of another should be considered as beneficially owned by a Covered Person where such person enjoys “financial benefits substantially equivalent to ownership.” The Securities and Exchange Commission has said that, although the final determination of beneficial ownership is a question to be determined in the light of the facts of the particular case, generally a person is regarded as the beneficial owner of securities held in the name of his or her spouse and their minor children. Absent special circumstances such relationship ordinarily results in such person obtaining financial benefits substantially equivalent to ownership, e.g., application of the income derived from such securities to maintain a common home, or to meet expenses that such person otherwise would meet from other sources, or the ability to exercises a controlling influence over the purchase, sale or voting of such securities.
A Covered Person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contract, understanding, relationship, agreement, or other agreement, he or she obtains therefrom financial benefits substantially equivalent to those of ownership.
A Covered Person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he or she does not obtain therefrom the aforementioned benefits of ownership, if he or she can vest or re-vest title in himself/herself at once or at some future time.
Revised: August 3, 2023 | S-22 | INTERNAL USE ONLY |
EXHIBIT E
INITIAL HOLDINGS REPORT
Report submitted by: |
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Print Name |
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This initial holdings report (the “Report”) is submitted pursuant to Section IV (D) of the Code of Ethics of the Companies and supplies information with respect to any Security and Affiliated Mutual Fund in which you, or an Access Person, may be deemed to have, or by reason of such transaction acquire, any direct or indirect beneficial ownership interest, and with respect to accounts established by you, or an Access Person, in which any Securities or Affiliated Mutual Funds were held for your direct or indirect benefit, or the benefit of an Access Person, as of a date not more than 45 days ago.1
Unless the context otherwise requires, all terms used in the Report shall have the same meaning as set forth in the Code of Ethics.
If you have no reportable Securities, Affiliated Mutual Funds, or accounts, sign and return this page only. If you have reportable Securities, Affiliated Mutual Funds, or accounts, complete, sign and return Page 2 and any attachments.
I
HAVE NO REPORTABLE SECURITIES OR AFFILIATED MUTUAL FUND ACCOUNTS AS OF ___________________. I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS
AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
| 1 | Every
employee is considered an Access Person and is therefore subject to the Firms’ Code of Ethics. Access Person Accounts, which exclude
Client Accounts, include all advisory, brokerage, trust or other accounts or forms of direct beneficial ownership in which one or more
Access Persons and/or one or more members of an Access Person’s immediate family have a substantial proportionate economic interest
or control. “Immediate family” is defined as your spouse and minor descendants. With respect to accounts for the benefit
of minor descendants who are not also minor children, any account that you control. Minor children is any child, whether natural or via
adoption, of an Access Person, under the age of twenty-one years. A substantial proportionate economic interest will generally be 25%
of the equity in the account in the case of any single Access Person or 25% of the equity in the account in the case of all Access Persons
in the aggregate. Interests in investment partnerships and similar indirect means of ownership of underlying securities shall also be
treated as Access Person Accounts for purposes of this Code. |
Revised: August 3, 2023 | S-23 | INTERNAL USE ONLY |
Page 2
Initial holdings REPORT
Report submitted by: |
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Print Name |
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The following tables supply the information required by Section IV (D) of the Code of Ethics as of the date you became subject to the Code. Include all holdings of Affiliated Mutual Funds and attach your most recent statement(s).
Acknowledgement of the firms’ Privacy Policy and consent for the firms to receive trading information via electronic feed, duplicate statements and/or trade confirmations will be deemed to have been given for all approved accounts.2
SECURITIES HOLDINGS |
Securities
(Name and Symbol) | |
Quantity of
Securities | |
Name
of Broker/Dealer
Where Securities Are Held | |
Nature
of
Ownership of Securities |
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Accounts |
Name of Broker, Dealer or Bank | |
Account Number |
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| 2 | Outside
accounts must be pre-cleared prior to being opened (See, Section T of the Compliance Manual). |
Revised: August 3, 2023 | S-24 | INTERNAL USE ONLY |
Page 3
Managed Accounts:
When the personal account of an access person is managed by a third party, or in the case of a trust where an access person is the grantor or beneficiary that provides a trustee with management authority over the trust, the access person should not, in any way, directly or indirectly have influence or control over the personal account/trust.
Please certify to one of the following:
| ☐ | I
do NOT have any accounts managed by a third party or trustee.3 |
| ☐ | I
do have account(s) managed by a third party or trustee and I do NOT have trade or investment discretion over the account(s). I
did not direct, suggest or consult a third party or trustee to make any purchases or sales of securities in the account(s) or trust during
the previous calendar quarter.3 |
| ☐ | I
do have account(s) managed by a third party or trustee and I have investment and/or trade discretion over at least one of the accounts
or trusts and did direct, suggest or consult the manager to make purchases or sales of securities in the account(s) or trust(s) during
the previous calendar quarter.3 |
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND THAT, TO THE BEST OF MY KNOWLEDGE, THE INFORMATION IN THIS REPORT IS TRUE AND CORRECT AS OF __________________________________.
| 3 | Any
outside account of an Access Person that is managed by a third party, or in the case of a trust where an access person is the grantor
or beneficiary that provides a trustee with management authority over the trust, the access person should not, in any way, directly or
indirectly have influence or control over the personal account/trust. |
A hedge fund would be considered an account managed by a third party if it is managed as a separate account, but would not be a separate account if you are a limited partner. An investment in a mutual fund managed by a third party would not be a separate account because it is not solely for your benefit.
If you have an account or trust that was not previously disclosed, please list the details in the “New Accounts Established” section above and contact the Legal/Compliance department immediately.
Revised: August 3, 2023 | S-25 | INTERNAL USE ONLY |
EXHIBIT F
ANNUAL CERTIFICATION OF CODE OF ETHICS
|
A. |
I (a Covered Person) hereby certify that I have read and understand the Code of Ethics, and recognize that I am subject to and I am in Compliance with its provisions. In addition, I hereby certify that I have disclosed or reported all personal transactions in Securities and Affiliated Mutual Funds required to be disclosed or reported under the Code of Ethics. In addition, I have read and understand the firms’ Compliance Policies & Procedures Manual, Supervisory Policies & Procedures Manual, Code of Business Conduct, IT Staff Awareness and Whistleblower Policy posted on the firms’ Intranet website, and recognize that I am subject to and I am in compliance with its provisions; |
|
B. |
Within the last ten years there have been no complaints or disciplinary actions filed against me by any regulated securities or commodities exchange, any self-regulatory securities or commodities organization, any attorney general, or any governmental office or agency regulating insurance, securities, commodities or financial transactions in the United States, in any state of the United States, or in any other country; |
|
C. |
I have not within the last ten years been convicted of or acknowledged commission of any felony or misdemeanor arising out of my conduct as an employee, salesperson, officer, director, insurance agent, broker, dealer, underwriter, investment manager or investment advisor; and |
|
D. |
I have not been denied permission or otherwise enjoined by order, judgment or decree of any court of competent jurisdiction, regulated securities or commodities exchange, self-regulatory securities or commodities organization or other federal or state regulatory authority from acting as an investment advisor, securities or commodities broker or dealer, commodity pool operator or trading advisor or as an affiliated person or employee of any investment company, bank, insurance company or commodity broker, dealer, pool operator or trading advisor, or from engaging in or continuing any conduct or practice in connection with any such activity or the purchase or sale of any security. |
|
E. |
Unless I am exempt from filing an Annual Holdings Report (as a “disinterested” director of a Fund Client or an Independent Director of an Affiliate), I have attached a completed Annual Outside Accounts/Holdings Report which is accurate as of a date no more than 45 days ago. |
Print
Name: |
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Signature: |
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Date: |
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Revised: August 3, 2023 | S-26 | INTERNAL USE ONLY |
Annual
Outside Accounts/Holdings Report
Name: |
(Last name, First) |
|
Job Title/Department: |
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|
| ☐ | Neither
I nor anyone in my immediate family has Reportable Securities Accounts.1 |
|
☐ |
I have Reportable Securities Account(s)1 for my immediate family or myself outside the firm that was/were previously disclosed and approved by the Legal/Compliance department. The account(s) is/are listed below: |
|
☐ |
In 20xx, the following Reportable Securities Account(s)1 listed below was/were opened for my immediate family or myself and not previously disclosed to and approved by the Legal/Compliance Department: |
| 1 | Reportable
Securities Accounts include: |
|
● |
Advisory, brokerage, trust, mutual fund, or other accounts that you currently have open or are intending to open outside the firms, where you or your immediate family have a substantial proportionate economic interest or control. |
|
○ |
“Immediate family” is defined as your spouse and minor descendants. With respect to accounts for the benefit of minor descendants who are not also minor children, any account that you control. |
“Minor children” is any child, whether natural or via adoption, of an Access Person, under the age of twenty-one years. Every employee is considered an Access Person and is therefore subject to the Code of Ethics.
“Control” is defined as having investment and/or trade discretion over the account.
|
○ |
A “substantial proportionate economic interest” will generally be 25% of the equity in the account in the case of any single Access Person or 25% of the equity in the account in the case of all Access Persons in the aggregate. Interests in private fund clients and similar indirect means of ownership of underlying securities shall also be treated as Access Person Accounts. |
| * | Excluded
from the definition of mutual fund accounts are non-brokerage accounts that can only hold a single family of mutual funds (i.e., direct
investment mutual fund accounts). |
|
● |
Any outside account of an Access Person that is managed by a third party, or in the case of a trust where an access person is the grantor or beneficiary that provides a trustee with management authority over the trust, the access person should not, in any way, directly or indirectly have influence or control over the personal account/trust. [Note: a hedge fund would be considered an account managed by a third party if it is managed as a separate account, but would not be a separate account if you are a limited partner. An investment in a mutual fund managed by a third party would not be a separate account because it is not solely for your benefit]. |
Failure
to disclose an account is a violation of the firms’ Code of Ethics. Along with this signed form, please enclose a copy of
your most recent statement for each new Reportable Securities Account(s) listed below:
Print Your Name: |
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Signature: |
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Date: |
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Revised: August 3, 2023 | S-27 | INTERNAL USE ONLY |
1. Account Title:
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Account Number:
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Firm Name:
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Firm Address: |
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For Internal Use Only↓ |
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Receiving Statements & Confirms? |
2. Account Title:
|
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Account Number:
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Firm Name:
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Firm Address: |
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For Internal Use Only↓ |
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Receiving Statements & Confirms? |
3. Account Title:
|
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Account Number:
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Firm Name:
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Firm Address: |
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For
Internal Use Only↓ |
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Receiving Statements & Confirms? |
4. Account Title:
|
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Account Number:
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Firm Name:
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Firm Address: |
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For Internal Use Only↓ |
|
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Receiving Statements & Confirms? |
For additional accounts, please make a copy of this page. |
Page 2 of 2 |
Revised: August 3, 2023 | S-28 | INTERNAL USE ONLY |
Exhibit 99.CERT
Certification
Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I, James A. Dinsmore, certify that:
| 1. | I have reviewed this report on Form N-CSR of Ellsworth Growth and Income Fund Ltd.; |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered
by this report; |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations,
changes in net assets, and cash flows (if the financial statements are required to include
a statement of cash flows) of the registrant as of, and for, the periods presented in this
report; |
| 4. | The
registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940) and internal control over financial reporting (as defined
in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| (a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed
such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation;
and |
| (d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The
registrant’s other certifying officer(s) and I have disclosed to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions): |
| (a) | All
significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and |
| (b) | Any
fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: |
12/7/23
|
|
/s/ James A. Dinsmore |
|
|
James A. Dinsmore, Principal Executive Officer |
Certification
Pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act
I,
John C. Ball, certify that:
| 1. | I have reviewed this report on Form N-CSR of Ellsworth Growth and Income Fund Ltd.; |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered
by this report; |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations,
changes in net assets, and cash flows (if the financial statements are required to include
a statement of cash flows) of the registrant as of, and for, the periods presented in this
report; |
| 4. | The
registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940) and internal control over financial reporting (as defined
in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| (a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed
such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation;
and |
| (d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The
registrant’s other certifying officer(s) and I have disclosed to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions): |
| (a) | All
significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and |
| (b) | Any
fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: |
12/7/23 |
|
/s/ John C. Ball |
|
|
John C. Ball, Principal Financial Officer and Treasurer |
Exhibit
99.906 CERT
Certification
Pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act
I, James A. Dinsmore, Principal Executive Officer of Ellsworth Growth and Income Fund Ltd. (the “Registrant”), certify that:
| 1. | The
Form N-CSR of the Registrant (the “Report”) fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Registrant. |
Date: |
12/7/23 |
|
/s/ James A. Dinsmore |
|
|
James A. Dinsmore, Principal Executive Officer |
I, John C. Ball, Principal Financial Officer and Treasurer of Ellsworth Growth and Income Fund Ltd. (the “Registrant”), certify
that:
| 1. | The
Form N-CSR of the Registrant (the “Report”) fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Registrant. |
Date: |
12/7/23 |
|
/s/ John C. Ball |
|
|
John C. Ball, Principal Financial Officer and Treasurer |
v3.23.3
N-2 - USD ($)
|
3 Months Ended |
6 Months Ended |
12 Months Ended |
Sep. 30, 2023 |
Jun. 30, 2023 |
Sep. 30, 2022 |
Jun. 30, 2022 |
Mar. 31, 2022 |
Dec. 31, 2021 |
Sep. 30, 2021 |
Mar. 31, 2023 |
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2019 |
Prospectus: |
|
|
|
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Document Period End Date |
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Sep. 30, 2023
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Cover [Abstract] |
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Entity Central Index Key |
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0000793040
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Amendment Flag |
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false
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Document Type |
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N-CSR
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Entity Registrant Name |
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Ellsworth Growth and Income Fund Ltd.
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Fee Table [Abstract] |
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Shareholder Transaction Expenses [Table Text Block] |
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Shareholder
Transaction Expenses | |
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Sales
Load (as a percentage of offering price) | |
| — | %(a) |
Offering
Expenses Borne by the Fund (as a percentage of offering price) | |
| — | %(a) |
Dividend
Reinvestment and Voluntary Cash Purchase Plan Fees | |
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Purchase
Transactions | |
$ | 1.25 | (b) |
One-time
Fee for Deposit of Share Certificates | |
$ | 7.50 | (b) |
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Sales Load [Percent] |
[1] |
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0.00%
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Other Transaction Expenses [Abstract] |
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Other Transaction Expenses [Percent] |
[1] |
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0.00%
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Annual Expenses [Table Text Block] |
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Percentages of Net Assets | |
Annual Expenses | |
Attributable to Common Shares | |
Management Fees | |
| 0.94 | %(c) |
Interest Expense | |
| — | % |
Other Expenses | |
| 0.49 | %(d) |
Total Annual Expenses | |
| 1.43 | % |
Dividends on Preferred Shares | |
| 1.78 | %(e) |
Total Annual Expenses and Dividends on Preferred | |
| 3.21 | % |
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Management Fees [Percent] |
[2] |
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0.94%
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Interest Expenses on Borrowings [Percent] |
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0.00%
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Dividend Expenses on Preferred Shares [Percent] |
[3] |
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1.78%
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Other Annual Expenses [Abstract] |
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Other Annual Expenses [Percent] |
[4] |
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0.49%
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Total Annual Expenses [Percent] |
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1.43%
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Net Expense over Assets [Percent] |
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3.21%
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Expense Example [Table Text Block] |
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The following example illustrates the expenses you would pay on a $1,000 investment
in common shares, assuming a 5% annual portfolio total return.* The actual amounts
in connection with any offering will be set forth in the Prospectus Supplement if
applicable.
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1
Year | | |
3
Year | | |
5
Year | | |
10
Year | |
Total
Expenses Incurred | |
$ | 32 | | |
$ | 99 | | |
$ | 168 | | |
$ | 352 | |
* | The
example should not be considered a representation of future expenses. The example is based
on total Annual Expenses and Dividends on Preferred Shares shown in the table above and assumes
that the amounts set forth in the table do not change and that all distributions are reinvested
at net asset value. Actual expenses may be greater or less than those assumed. Moreover,
the Fund’s actual rate of return may be greater or less than the hypothetical 5% return
shown in the example. |
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Expense Example, Year 01 |
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$ 32
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Expense Example, Years 1 to 3 |
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99
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Expense Example, Years 1 to 5 |
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168
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Expense Example, Years 1 to 10 |
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$ 352
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Purpose of Fee Table , Note [Text Block] |
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The following table shows the Fund’s expenses, which are borne directly or indirectly by holders of the Fund’s common shares, including preferred shares offering expenses, as a percentage of
net assets attributable to common shares. The table is based on the capital structure
of the Fund as of September 30, 2023. The purpose of the table and example below is to help you understand all
fees and expenses that you, as a holder of common shares, would bear directly or indirectly.
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Basis of Transaction Fees, Note [Text Block] |
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as a percentage of offering price
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Other Expenses, Note [Text Block] |
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“Other
Expenses” are estimated based on the Fund’s fiscal year ended on September 30,
2023.
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Financial Highlights [Abstract] |
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Senior Securities Averaging Method, Note [Text Block] |
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Based on weekly prices.
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General Description of Registrant [Abstract] |
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Investment Objectives and Practices [Text Block] |
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INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund invests primarily in convertible securities with the objectives of providing
income and the potential for capital appreciation (which objectives the Fund considers
to be relatively equal, over the long term, due to the nature of the securities in
which it invests).
These investment objectives may be modified in the future by the Board without the
approval of a majority, as defined in the 1940 Act, of the outstanding voting securities
of the Fund. The Fund will provide stockholders with at least 60 days’ written notice prior to implementation of any changes to these investment objectives.
There can be no assurance that the Fund will achieve its investment objectives.
Investment Policies
As a fundamental investment policy, the Fund will invest, under normal market conditions,
at least 65% of its total assets in convertible securities (that is, bonds, debentures, corporate notes or preferred stock
that are convertible into common stock) and common stock received upon conversion
or exchange of securities and retained in the Fund’s portfolio to permit orderly disposition or to establish long-term holding periods
for U.S. federal income tax purposes.
The Fund is not required to sell securities for the purpose of assuring that 65% of its total assets are invested in convertible securities.
Convertible securities include debt securities and preferred stocks which are convertible into, or carry the right to purchase, common stock. The debt security or preferred stock may itself be convertible into or exchangeable for common stock, or the conversion privilege may be evidenced by warrants attached to the security or acquired as part of a unit with the security. A convertible security may also be structured so that it is convertible at the option of the holder or of the issuer, or subject to mandatory conversion.
The Fund may invest in convertible securities rated below investment grade by the established rating services (“Ba” or lower by Moody’s Investors Service, Inc. (“Moody’s”) or “BB” or lower by Standard & Poor’s Ratings Services (“Standard & Poor’s” or “S&P”)) or in unrated securities which are in the judgment of the Fund’s investment adviser of equivalent quality. Securities rated below investment grade, commonly referred to as “junk bonds,” or “high yield” securities, are predominantly speculative, involve major risk exposure to adverse conditions and include securities of issuers in default, which are likely to have the lowest rating. The average maturity and average duration of the Fund’s investments in debt securities is expected to vary and the Fund does not target any particular average maturity or average duration.
Under normal market conditions, the remaining 35% or less of the Fund’s total assets may be invested in other securities, including non-convertible equity and debt securities, options, warrants, U.S. Government or agency obligations, or repurchase agreements or they may be held as cash or cash equivalents. The Fund may invest in non-convertible equity securities of any market capitalization. The Fund does not intend to participate in derivative transactions other than options transactions as described herein. See “Investment Objectives and Policies—Certain Investment Practices—Options.”
The Fund may invest up to 10% of its total assets, taken at market value, in securities of foreign issuers, including issuers located in emerging markets. Securities convertible or exchangeable for common stock of U.S. companies, and U.S. dollar-denominated securities convertible or exchangeable for American Depositary Receipts that at the time of purchase (i) are listed on the NYSE, NYSE American or the NASDAQ National Market, or (ii) the underlying issuers of which meet the then prevailing earnings requirement for listing on the NYSE and also file Form 20-F (or comparable form) with the SEC are not subject to this limitation.
The Fund may invest up to 20% of its net assets in securities that are illiquid. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment.
While the Fund does not, as a matter of investment policy, seek to gain exposure to any particular sectors, it has recently had significant exposure to the healthcare and information technology sectors.
The Fund may lend securities representing up to 10% of its total assets, taken at market value, to securities firms and financial institutions such as banks and trust companies and receive therefor collateral in cash or securities issued or guaranteed by the United States Government (“Government Securities”) which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Fund may lend its portfolio securities in accordance with its investment policies and restrictions.
The Fund’s investment policy of investing at least 65% of its total assets in normal circumstances in convertible securities is a fundamental policy that cannot be changed without the affirmative vote of a majority, as defined in the 1940 Act, of the outstanding voting securities (voting together as a single class) of the Fund (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). The Fund has issued preferred shares and may in the future issue additional series of preferred shares. Accordingly, the affirmative vote of the holders of a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund voting as a separate class (which for this purposes and under the 1940 Act means the lesser of (i) 67% of the preferred shares, as a single class, represented at a meeting at which more than 50% of the Fund’s outstanding preferred shares are represented or (ii) more than 50% of the outstanding preferred shares) would also be required to change a fundamental policy. Unless specifically stated as such, no other policy of the Fund is fundamental and each policy may be changed by the Board without shareholder approval. The percentage and ratings limitations stated herein and in the SAI apply only at the time an investment is made. Thus, a later increase or decrease in percentage resulting from a change in the values of portfolio securities or amount of total assets will not be considered a violation of any of the foregoing restrictions.
Gabelli Funds, LLC (the “Investment Adviser”), a New York limited liability company, with offices at One Corporate Center, Rye, New York 10580-1422, serves as investment adviser to the Fund.
Principal Investment Practices and Policies
Convertible Securities. The Fund will invest primarily in convertible securities, including bonds, debentures, corporate notes, preferred stock or other securities which may be exchanged or converted into a predetermined number of the issuer’s underlying common stock during a specified time period. Prior to their conversion, convertible securities have the same overall characteristics as non-convertible debt securities insofar as they generally provide a stable stream of income with generally higher yields than those of equity securities of the same or similar issuers. Convertible securities rank senior to common stock in an issuer’s capital structure. They are of a higher credit quality and entail less risk than an issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.
The Fund is also permitted to invest in certain other securities with innovative structures in the convertible securities market. These include “mandatory conversion” securities, which consist of debt securities or preferred stocks that convert automatically into common stock of the same or a different issuer at a specified date and conversion ratio.
The market value of a convertible security may be viewed as comprised of two components: its “investment value,” which is its value based on its yield without regard to its conversion feature; and its “conversion value,” which is its value attributable to the underlying common stock obtainable on conversion. The investment value of a convertible security is influenced by changes in interest rates and the yield of similar non-convertible securities, with investment value declining as interest rates increase and increasing as interest rates decrease. The conversion value of a convertible security is influenced by changes in the market price of the underlying common stock. If, because of a low price of the underlying common stock, the conversion value is low relative
to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the convertible security will be increasingly influenced by its conversion value, and the convertible security may sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed income security.
Accordingly, convertible securities have unique investment characteristics because (i) they have relatively high yields as compared to common stocks, (ii) they have defensive characteristics since they provide a fixed return even if the market price of the underlying common stock declines, and (iii) they provide the potential for capital appreciation if the market price of the underlying common stock increases.
A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision or indenture pursuant to which the convertible security is issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to surrender the security for redemption, convert it into the underlying common stock or sell it to a third party. Before the Fund purchases a convertible security it will review carefully the redemption provisions of the security.
There may be additional types of convertible securities with features not specifically referred to herein in which the Fund may invest consistent with its investment objectives and policies. For a discussion of risk factors of convertible securities, see “Risk Factors and Special Considerations—Convertible Securities Risk.”
Equity Securities. The Fund invests in equity securities (such as common stock and preferred stock).
Common stocks represent the residual ownership interest in the issuer and holders of common stock are entitled to the income and increase in the value of the assets and business of the issuer after all of its debt obligations and obligations to preferred shareholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Equity securities also include preferred stock (whether or not convertible into common stock) and debt securities convertible into or exchangeable for common or preferred stock. Preferred stock has a preference over common stock in liquidation (and generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similarly stated yield characteristics. The market value of preferred stock will also generally reflect whether (and if so when) the issuer may force holders to sell their preferred stock back to the issuer and whether (and if so when) the holders may force the issuer to buy back their preferred stock. Generally speaking, the right of the issuer to repurchase the preferred stock tends to reduce any premium at which the preferred stock might otherwise trade due to interest rate or credit factors, while the right of the holders to require the issuer to repurchase the preferred stock tends to reduce any discount at which the preferred stock might otherwise trade due to interest rate or credit factors. In addition, some preferred stocks are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred stocks, whereby
the issuer does not have an obligation to make up any arrearages to its shareholders. There is no assurance that dividends or distributions on non-cumulative preferred stocks in which the Fund invests will be declared or otherwise made payable.
Securities that are convertible into or exchangeable for preferred or common stock are liabilities of the issuer but are generally subordinated to more senior elements of the issuer’s balance sheet. Although such securities also generally reflect an element of conversion value, their market value also varies with interest rates and perceived credit risk. Many convertible securities are not investment grade, that is, not rated “BBB” or better by S&P or “Baa” or better by Moody’s or considered by the Investment Adviser to be of similar quality. Preferred stocks and convertible securities may have many of the same characteristics and risks as nonconvertible debt securities.
Non-Investment Grade Securities. The Fund may invest in securities rated below investment grade by recognized statistical rating agencies or unrated securities of comparable quality, including securities of issuers in default, which are likely to have the lowest rating. These securities, which may be preferred shares or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s or unrated securities considered by the Investment Adviser to be of comparable quality are referred to in the financial press as “junk bonds” or “high yield” securities.
Generally, such non-investment grade securities and unrated securities of comparable quality offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions, and (ii) are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality securities. In addition, such comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because such non-investment grade securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issue, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.
In addition, the market value of non-investment grade securities is more volatile than that of higher quality securities, and the markets in which such lower rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value.
Moreover, the lack of a liquid trading market may restrict the availability of securities for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell securities at their fair value in order to respond to changes in the economy or the financial markets.
Non-investment grade securities and unrated securities of comparable quality also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed income securities),
the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of nonconvertible bonds and preferred stocks moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
The Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As part of its investments in non-investment grade securities, the Fund may invest in securities of issuers in default. The Fund will make an investment in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations or emerge from bankruptcy protection and the value of these securities will appreciate. By investing in securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of the securities will not otherwise appreciate.
In addition to using statistical rating agencies and other sources, the Investment Adviser also performs its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Fixed income securities, including lower grade securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and comparable unrated securities has experienced periods of significantly adverse price and liquidity several times, particularly at or around times of economic recession. Past market
recessions have adversely affected the value of such securities and the ability of certain issuers of such securities to repay principal and pay interest thereon or to refinance such securities. The market for those securities may react in a similar fashion in the future.
Investment Grade Securities. The Fund may also invest in investment grade non-convertible securities. Such securities include those rated at “Baa” and higher by Moody’s or at “BBB” and higher by S&P.
Leverage. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt) so long as its total assets, less certain ordinary course liabilities, exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred shares and debt outstanding. Any such preferred shares may be convertible in accordance with the SEC staff guidelines, which may permit the Fund to obtain leverage at attractive rates.
The use of leverage magnifies the impact of changes in net asset value, which means that, all else being equal, the use of leverage results in outperformance on the upside and underperformance on the downside. In addition, if the cost of leverage exceeds the return on the securities acquired with the proceeds of leverage, the use of leverage will diminish rather than enhance the return to the Fund. The use of leverage generally increases the volatility of returns to the Fund. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with any mandatory redemption terms of any outstanding preferred shares. See “Risk Factors and Special Considerations—Special Risks to Holders of Common Shares—Leverage Risk.
In the event the Fund had both outstanding preferred shares and senior securities representing debt at the same time, the Fund’s obligations to pay dividends or distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and/or interest payments due and owing with respect to its outstanding senior debt securities. Accordingly, the Fund’s issuance of senior securities representing debt would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
Subject to the requirements of Rule 18f-4 under the 1940 Act, the Fund may enter into derivative transactions, including transactions that have economic leverage embedded in them. Rule 18f-4 defines “derivatives transactions” as (1) any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument, under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination, whether as margin or settlement payment or otherwise; and (2) any short sale borrowing. Derivatives transactions entered into by the Fund in compliance with Rule 18f-4 will not be considered senior securities for purposes of computing the asset coverage requirements described above. Economic leverage exists when the Fund achieves the right to a return on a capital base that exceeds the investment which the Fund has contributed to the instrument achieving a return. Derivative transactions that the Fund may enter into and the risks associated with them
are described elsewhere in this Annual Report. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
If the Fund enters into any reverse repurchase agreements or similar financing transactions obligating the Fund to make future payments, the Fund must either treat all such transactions as derivatives transactions for all purposes under Rule 18f-4 or otherwise comply with the asset coverage requirements described above and combine the aggregate amount of indebtedness associated with all such transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the Fund’s asset coverage ratio limit requirements. To the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Fund’s obligations under such transactions the Fund may “cover” its obligations by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration. The asset coverage requirements under section 18 of the 1940 Act and the limits and conditions imposed by Rule 18f-4 may limit or restrict portfolio management or result in the Fund maintaining securities positions it would otherwise liquidate.
Foreign Securities. The Fund may invest up to 10% of its total assets, taken at market value, in securities of foreign issuers, including issuers located in emerging markets. Foreign investments may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies may be less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets and imposition of withholding taxes on dividend or interest payments.
American Depositary Receipts. The Fund may invest in American Depositary Receipts (“ADRs”). The Fund’s investment in ADRs is subject to its overall limitation on investing in foreign securities, unless certain conditions pertaining to ADRs are met. Such investment may entail certain risks similar to foreign securities. ADRs are certificates representing an ownership interest in a security or a pool of securities issued by a foreign issuer and deposited with the depositary, typically a bank, and held in trust for the investor. The economies of many of the countries in which the issuer of a security underlying an ADR principally engages in business may not be as developed as the United States’ economy and may be subject to significantly different forces. Political or social instability, expropriation or confiscatory taxation, and limitations on the removal of funds or other assets could adversely affect the value of the Fund’s investments in such securities. The value of the securities underlying ADRs could fluctuate as exchange rates change between U.S. dollars and the currency of the country in which the foreign company is located. In addition, foreign companies are not registered with the SEC and are generally not subject to the regulatory controls imposed on U.S. issuers and, as a consequence, there is generally less publicly available information about foreign companies than is available about domestic companies. Foreign companies are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies.
Loans, Participation Interests and Assignments. The Fund may invest in loans, including assignments and participation interests. A loan in which the Fund may invest typically is originated, negotiated and structured by a
syndicate of lenders consisting of commercial banks, thrift institutions, insurance companies, finance companies or other financial institutions, which is administered on behalf of the syndicate by an agent bank. The investment by the Fund in a loan may take the form of participation interests or assignments. Participation interests may be acquired from a lender or other participants. If the Fund purchases a participation interest either from a lender or a participant, the Fund will not have established any direct contractual relationship with the borrower. The Fund would be required to rely on the lender or the participant that sold the participation interest not only for the enforcement of the Fund’s rights against the borrower but also for the receipt and processing of payments due to the Fund under the loans. The Fund is thus subject to the credit risk of both the borrower and a participant. Lenders and participants interposed between the Fund and a borrower, together with agent banks, are referred to herein as “Intermediate Participants.”
On the other hand, if the Fund purchases an assignment from a lender, the Fund will generally become a “lender” for purposes of the relevant loan agreement, with direct contractual rights thereunder and under any related collateral security documents in favor of the lenders. An assignment from a lender gives the Fund the right to receive payments of principal and interest and other amounts directly from the borrower and to enforce its rights as a lender directly against the borrower. The Fund will not act as an agent bank guarantor, sole negotiator or sole structurer with respect to a loan.
Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the borrower, in the event the Borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would be involved if the Fund could enforce its rights directly against the borrower. Moreover, under the terms of a participation, the Fund may be regarded as a creditor of the Intermediate Participant (rather than of the borrower), so that the Fund may also be subject to the risk that the Intermediate Participant may become insolvent. Further, in the event of the bankruptcy or insolvency of the borrower, the obligation of the borrower to repay the loan may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct by the agent bank or Intermediate Participant.
Restricted and Illiquid Securities. The Fund may invest up to 20% of its net assets in securities that are illiquid. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) and securities eligible for resale pursuant to Rule 144A thereunder. Section 4(a)(2) and Rule 144A securities may, however, be treated as liquid by the Investment Adviser pursuant to procedures adopted by the Board, which require consideration of factors such as trading activity, availability of market quotations and number of dealers willing to purchase the security. If the Fund invests in Rule 144A securities, the level of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.
It may be difficult to sell such securities at a price representing the fair value until such time as such securities may be sold publicly. Where registration is required, a considerable period may elapse between a decision to sell the securities and the time when it would be permitted to sell. Thus, the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund may also acquire securities through private placements under which it may agree to contractual restrictions on the resale of such securities. Such restrictions might prevent their sale at a time when such sale would otherwise be desirable.
Other Investment Practices
U.S. Government Obligations. U.S. government securities in which the Fund invests include debt obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an agency or instrumentality of the U.S. government. Some U.S. government securities, such as U.S. Treasury bills, Treasury Notes, and Treasury Bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported only by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government to purchase the agency’s obligations, such as securities of the Federal National Mortgage Association; or (iii) only the credit of the issuer. No assurance can be given that the U.S. government will provide financial support in the future to U.S. government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States. Securities guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or any of its agencies, authorities or instrumentalities; and (ii) participations in loans made to non-U.S. governments or other entities that are so guaranteed. The secondary market for certain of these participations is limited and, therefore, may be regarded as illiquid.
Short Sales. The Fund may make short sales of securities which it owns or which it has the right to acquire through conversion or exchange of other securities it owns. In a short sale the Fund does not immediately deliver the securities sold and does not receive the proceeds from the sale. The Fund is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. The Fund may not make short sales or maintain a short position if, after giving effect to such short sale, or if, as a result of maintaining such short position, more than 25% of the Fund’s total assets, taken at market value, are held as collateral for such sales.
The Fund will normally close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund. The Fund may, however, close out any short sale of common stock through the conversion or exchange of securities or the exercise of warrants or rights it owns, or through the delivery of common stock already held by the Fund.
The short sale of a security is considered a speculative investment technique. The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a long position the Fund may have in such security or a security convertible into or exchangeable for such security, or when, for tax or other reasons, the Fund does not want to sell the security it owns. In such case, any future losses in the Fund’s long position should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns, either directly or indirectly, and, in the case where the Fund owns convertible securities, changes with the conversion premiums. When the Fund makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale in order to satisfy its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to deliver any payments received on such borrowed securities, such as dividends.
Warrants. The The Fund may invest in warrants. Warrants are, in effect, longer term call options. They give the holder the right to purchase a given number of shares of a particular company at specified prices within certain periods of time. The purchaser of a warrant expects that the market price of the security will exceed the purchase price of the warrant plus the exercise price of the warrant, thus giving him a profit. Since the market price may never exceed the exercise price before the expiration date of the warrant, the purchaser of the warrant risks the loss of the entire purchase price of the warrant. Warrants generally trade in the open market and may be sold rather than exercised. Warrants are sometimes sold in unit form with other securities of an issuer. Units of warrants and common stock may be employed in financing young, unseasoned companies. The purchase price of a warrant varies with the exercise price of the warrant, the current market value of the underlying security, the life of the warrant and various other investment factors.
If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash, U.S. government securities or other highly liquid debt securities) and the maintenance of collateral with its custodian.
Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Lending of Portfolio Securities. The Fund may lend securities representing up to 10% of its total assets, taken at market value, to securities firms and financial institutions such as banks and trust companies and receive therefor collateral in cash or Government Securities which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The purpose of such loans, generally, is to permit the borrower to use such securities for delivery to purchasers when such borrower has sold short. If cash collateral is received by the Fund, it is invested in short term money market securities, and a portion of the yield received in respect of such investment is retained by the Fund. Alternatively, if securities are delivered to the Fund as collateral, the Fund and the borrower negotiate a rate for the loan premium to be received by the Fund for lending its portfolio securities. In either event, the total yield on the Fund’s portfolio is increased by loans of its portfolio securities. The Fund intends to retain record ownership of loaned securities in order to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. Such loans are terminable at any time. The Fund may pay reasonable finder’s, administrative and custodial fees in connection with such loans. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. In determining whether the Fund will lend securities to a particular borrower, the Fund will consider all relevant facts and circumstances, including the creditworthiness of the borrower.
Repurchase Agreements. As part of its strategy for the temporary investment of cash balances, the Fund may enter into repurchase agreements with maturities of not more than seven days, pertaining to Government Securities with member banks of the Federal Reserve System or “primary dealers” (as designated by the Federal Reserve Bank of New York) in such securities. Repurchase agreements may be seen as loans by the Fund collateralized by underlying securities. Under the terms of a typical repurchase agreement, the Fund acquires an underlying security for a relatively short period (not more than one week) subject to an obligation of the seller to repurchase, and the Fund to resell, the security at an agreed price and time. This arrangement
results in a fixed rate of return to the Fund that is not subject to market fluctuations during the holding period. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed in or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible decline in the value of the underlying securities during the period in which it seeks to assert these rights. The Fund will not invest more than 5% of its total assets, taken at market value, in repurchase agreements with any single vendor. The Investment Adviser, acting under the supervision of the Board, reviews the creditworthiness of those banks and dealers with which the Fund enters into repurchase agreements to evaluate these risks and monitors on an ongoing basis the value of the securities subject to repurchase agreements to ensure that the value is maintained at the required level. The Fund does not enter into repurchase agreements with the Investment Adviser or any of its affiliates.
Temporary Defensive Investments. The assets of the Fund are normally invested in convertible securities. However, when a temporary defensive posture is believed by the Investment Adviser to be warranted (“temporary defensive periods”), the Fund may without limitation hold cash or invest all or a portion of its assets in money market instruments and repurchase agreements in respect of those instruments. The money market instruments in which the Fund may invest are obligations of the U.S. government, its agencies or instrumentalities; commercial paper rated “A-1” or higher by S&P or “Prime-1” by Moody’s; and certificates of deposit and bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation. During temporary defensive periods, the Fund may also invest to the extent permitted by applicable law in shares of money market mutual funds. Money market mutual funds are investment companies and the investments in those companies by the Fund are in some cases subject to certain fundamental investment restrictions and applicable law. As a shareholder in a mutual fund, the Fund will bear its ratable share of its expenses, including management fees, and will remain subject to payment of the fees to the Investment Adviser, with respect to assets so invested. The Fund may find it more difficult to achieve its investment objectives during temporary defensive periods.
Options. The Fund may from time to time, to a limited extent, invest its net assets in put options on common stock or market indices and may write covered call options and may purchase call options to close out written covered call options. The Fund may not sell (write) call options on more than 25% of its total assets, taken at market value, and then only if such options are covered, or invest more than 2% of its total assets, taken at market value, in the purchase of put options on common stocks owned by the Fund or which it has an immediate right to acquire through the conversion or exchange of other securities which it owns, or on one or more broadly based stock market indices. The Fund may only write or purchase options listed on a national securities exchange. Except as stated herein, the Fund may not engage in options transactions.
A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right, in return for a premium, to sell to the seller the underlying security at a specified price. The seller of the put option has the obligation to buy the underlying security upon exercise at the exercise price.
The Fund may write covered call options in order to receive additional income in the form of premiums which it is paid for writing options, and for hedging purposes in order to protect against possible declines in the market values of the stocks or convertible securities held in its portfolio. A call option is “covered” if the Fund owns the underlying instrument covered by the call or has an immediate right to acquire that instrument upon conversion or exchange of other instruments held in its portfolio.
If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction can be effected when the Fund so desires.
The Fund realizes a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund realizes a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. Gains and losses on investments in options depend, in part, on the ability of the Investment Adviser to predict correctly the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of securities underlying the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which provides a secondary market for an option of the same series or in a private transaction. Although the Fund generally purchases or writes only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position.
The Fund may also purchase put options on one or more broadly based stock market indices when it wishes to protect all or part of its portfolio securities against a general market decline. The put on the index will increase in value if the level of the index declines; any such increase in value would serve to offset in whole or in part any decline in the value of the Fund’s portfolio.
The Fund’s purchase and sale of put options on stock indices will be subject to the same risks described above with respect to transactions in stock options on individual stocks. In addition, the distinctive characteristics of options on indices create certain risks that are not present with stock options.
The Fund’s ability to effectively hedge all or a portion of the securities in its portfolio in anticipation of or during a market decline through transactions in put options on stock indices depends on the degree to which price movements in the underlying index correlate with the price movements in the Fund’s portfolio securities. Since the Fund’s portfolio securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, the Fund will bear the risk that the prices of its portfolio securities being hedged will not move in the same amount as the prices of the Fund’s put options on the stock indices. It is also possible that there may be a negative correlation between the index and the Fund’s portfolio securities which would result in a loss on both such portfolio securities and the put options on stock indices acquired by the Fund.
There are several risks associated with transactions in options. For example, there are significant differences between the securities markets and the options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The ability of the Fund to utilize options successfully will depend on the Investment Adviser’s ability to predict pertinent market investments, which cannot be assured. Although the Investment Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund’s writing of put and call options, there can be no assurance that the Fund will succeed in any option-writing program it undertakes.
Investment Restrictions. The Fund has adopted certain fundamental investments policies designed to limit investment risk and maintain portfolio diversification. Fundamental policies may not be changed without the vote of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Fund (voting together as a single class subject to class approval rights of any preferred shares). The Fund may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares, if any.
The Fund’s investment objectives are not fundamental and may be modified by the Board without shareholder approval.
Portfolio Turnover. The Fund will buy and sell securities to accomplish its investment objectives. The investment policies of the Fund may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates.
Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less). Higher portfolio turnover may decrease the after-tax return to individual investors in the Fund to the extent it results in a decrease of the long term capital gains portion of distributions to shareholders.
The Fund anticipates that its annual portfolio turnover rate will generally not exceed 100%. For the fiscal years ended September 30, 2022 and September 30, 2023, the portfolio turnover rates of the Fund were 37% and 47%, respectively.
Further information on the investment objectives and policies of the Fund is set forth in the SAI.
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Risk Factors [Table Text Block] |
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special considerations associated with investing in the Fund.
General Risks
Market Risk. The market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. The value of a security may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Equity securities generally have greater price volatility than fixed income securities. Credit ratings downgrades may also negatively affect securities held by the Fund. Even when markets perform well, there is no assurance that the investments held by the Fund will increase in value along with the broader market.
In addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a national or global level. For instance, war, terrorism, market manipulation, government defaults, government shutdowns, political changes or diplomatic developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental disasters can all negatively impact the securities markets, which could cause the Fund to lose value. These events could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and significantly adversely impact the economy. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, has in the past resulted, and may in the future result, in a government shutdown, which could have an adverse impact on the Fund’s investments and operations. Additional and/or prolonged U.S. federal government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Governmental and quasi-governmental authorities and regulators throughout the world have previously responded to serious economic disruptions with a variety of significant fiscal and monetary policy changes, including, but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund’s investments. Any market disruptions could also prevent the Fund from executing advantageous investment decisions in a timely manner. To the extent that the Fund focuses its investments in a region enduring geopolitical market disruption, it will face higher risks of loss, although the increasing interconnectivity between global economies and financial markets can lead to events or conditions in one country, region or financial market adversely impacting a different country, region or financial
market. Thus, investors should closely monitor current market conditions to determine whether the Fund meets their individual financial needs and tolerance for risk.
Current market conditions may pose heightened risks with respect to the Fund’s investment in fixed income securities. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. Any interest rate increases in the future could cause the value of the Fund to decrease. Recently, inflation levels have been at their highest point in nearly 40 years and the Federal Reserve has been engaged in a campaign to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases, the real value of the Fund’s common stock and distributions therefore may decline.
Exchanges and securities markets may close early, close late or issue trading halts on specific securities or generally, which may result in, among other things, the Fund being unable to buy or sell certain securities or financial instruments at an advantageous time or accurately price its portfolio investments.
Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.
The value of a convertible security is influenced by the value of the underlying equity security. Convertible debt securities and preferred stocks may depreciate in value if the market value of the underlying equity security declines or if rates of interest increase. In addition, although debt securities are liabilities of a corporation which the corporation is generally obligated to repay at a specified time, debt securities, particularly convertible debt securities, are often subordinated to the claims of some or all of the other creditors of the corporation.
Mandatory conversion securities (securities that automatically convert into equity securities at a future date) may limit the potential for capital appreciation and, in some instances, are subject to complete loss of invested capital. Other innovative convertibles include “equity-linked” securities, which are securities or derivatives that may have fixed, variable, or no interest payments prior to maturity, may convert (at the option of the holder or on a mandatory basis) into cash or a combination of cash and common stock, and may be structured to limit the potential for capital appreciation. Equity-linked securities may be illiquid and difficult to value and may be subject to greater credit risk than that of other convertibles. Moreover, mandatory conversion securities and equity-linked securities have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.
Preferred stocks are equity securities in the sense that they do not represent a liability of the corporation. In the event of liquidation of the corporation, and after its creditors have been paid or provided for, holders of preferred stock are generally entitled to a preference as to the assets of the corporation before any distribution may be made to the holders of common stock. Debt securities normally do not have voting rights. Preferred stocks may have no voting rights or may have voting rights only under certain circumstances.
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Credit Risk. Credit risk is the risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies that issue convertible securities may be small to medium-size, and they often |
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have low credit ratings. In addition, the credit rating of a company’s convertible securities is generally lower than that of its conventional debt securities. Convertible securities are normally considered “junior” securities—that is, the company usually must pay interest on its conventional debt before it can make payments on its convertible securities. Credit risk could be high for the Fund, because it could invest in securities with low credit quality. The lower a debt security is rated, the greater its default risk. As a result, the Fund may incur cost and delays in enforcing its rights against the issuer. |
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Market Risk. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convert-ible securities, but generally less than that of the underlying common stock. |
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Interest Rate Risk for Convertible Securities. The Fund may be subject to a greater risk of rising inter-est rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of convertible securities held by the Fund. Convertible securities are particularly sensitive to interest rate changes when their predetermined conversion price is much higher than the issuing company’s common stock. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.” |
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Sector Risk. Sector risk is the risk that returns from the economic sectors in which convertible securities are concentrated will trail returns from other economic sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible securities market in general. These periods have, in the past, lasted for as long as several years. Moreover, the sectors that dominate this market change over time. |
Equity Risk. Investing in the Fund involves equity risk, which is the risk that the securities held by the Fund will fall in market value due to adverse market and economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate and the particular circumstances and performance of particular companies whose securities the Fund holds. An investment in the Fund represents an indirect economic stake in the securities owned by the Fund, which are for the most part traded on securities exchanges or in the OTC markets. The market value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The net asset value of the Fund may at any point in time be worth less than the amount at the time the shareholder invested in the Fund, even after taking into account any reinvestment of distributions.
Common Stock Risk. Common stock of an issuer in the Fund’s portfolio may decline in price for a variety of reasons, including if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Common stock in which the Fund invests is structurally subordinated as to income and residual value to preferred stock, bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stock or debt instruments of such issuers. In addition, while common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in those returns.
Preferred Stock Risk. There are special risks associated with the Fund’s investing in preferred securities, including:
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Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer div-idends or distributions for a stated period without any adverse consequences to the issuer. If the Fund owns a preferred security that is deferring its dividends or distributions, the Fund may be required to report income for tax purposes although it has not yet received such income. |
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Non-Cumulative Dividends. Some preferred securities are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred security held by the Fund determine not to pay dividends or distributions on such security, the Fund’s return from that security may be adversely affected. There is no assurance that dividends or distributions on non-cumulative preferred securities in which the Fund invests will be declared or otherwise made payable. |
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Subordination. Preferred securities are subordinated to bonds and other debt instruments in an issuer’s capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security instruments. |
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Liquidity. Preferred securities may be substantially less liquid than many other securities, such as com-mon stocks or U.S. government securities. |
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Limited Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may be entitled to elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. |
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Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. A redemption by the issuer may negatively impact the return of the security held by the Fund. |
Warrants and Rights. The Fund may invest in warrants and rights (including those acquired in units or attached to other securities) which entitle the holder to buy equity securities at a specific price for or at the end of a specific period of time. The Fund will do so only if the underlying equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund’s portfolio.
Investing in rights and warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and thus can be a riskier investment. The value of a right or warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the Fund whose equity underlies the warrant, a change in the perception as to the future price of the underlying security, or any combination thereof. Rights and warrants generally pay no dividends and confer no voting or other rights other than the right to purchase the underlying security.
Fixed Income Securities Risks. Fixed income securities in which the Fund may invest are generally subject to the following risks:
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Interest Rate Risk. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. See “—General Risks—Interest Rate Risks Generally.” |
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Issuer Risk. Issuer risk is the risk that the value of an income- or dividend-paying security may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuer’s goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer. |
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Credit Risk. Credit risk is the risk that one or more income- or dividend-paying securities in the Fund’s portfolio will decline in price or fail to pay interest/distributions or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio se-curity is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. See “—Non-Investment Grade Securities.” The degree of credit risk depends on the issuer’s financial condition and on the terms of the securities. |
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Prepayment Risk. Prepayment risk is the risk that during periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For income- or dividend-paying securities, such payments often occur during periods of declining interest rates, forcing the Fund to re-invest in lower yielding securities, resulting in a possible decline in the Fund’s income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“call protection”). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. |
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Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Fund portfolio’s current earnings rate. |
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Duration and Maturity Risk. The Fund has no set policy regarding portfolio maturity or duration of the fixed-income securities it may hold. The Investment Adviser may seek to adjust the duration or maturity of the Fund’s fixed-income holdings based on its assessment of current and projected market conditions and all other factors that the Investment Adviser deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instrument’s expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. |
Duration can be a useful tool to estimate anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates), the magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Fund’s shares and that actual price movements in the Fund’s portfolio may differ significantly from duration-based estimates.
Duration differs from maturity in that it takes into account a security’s yield, coupon payments and its principal payments in addition to the amount of time until the security matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Investment Adviser’s assessment of current and projected market conditions will be correct or that any strategy to adjust duration or maturity will be successful at any given time.
LIBOR Risk. The Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (“LIBOR”) to determine payment obligations, financing terms, hedging strategies or investment value. The Fund’s investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Fund may also reference LIBOR.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. LIBOR can no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling, euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published or are no longer representative. Overnight and 12-month US dollar LIBOR settings permanently ceased as of June 30, 2023. 1-, 3-, and 6-month U.S. dollar LIBOR settings will continue to be published using a synthetic methodology until September 2024. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions
to a new reference rate. Neither the effect of the LIBOR transition process nor its ultimate success can yet be known.
As an alternative to LIBOR, the Financial Reporting Council, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, recommended replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by reference to short-term repurchase agreements, backed by Treasury securities. Abandonment of, or modifications to, LIBOR could have adverse impacts on newly issued financial instruments and any of our existing financial instruments which reference LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including, but not limited to, the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect the return on, value of and market for securities linked to such rates.
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Moreover, these alternative rate-setting provisions may not be designed for regular use in an environment where LIBOR ceases to be published, and may be an ineffective fallback following the discontinuation of LIBOR.
On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022, which among other things, provides for the use of interest rates based on SOFR in certain contracts currently based on LIBOR and a safe harbor from liability for utilizing SOFR-based interest rates as a replacement for LIBOR. The elimination of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Interest Rate Risk Generally. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced.
The magnitude of these fluctuations in the market price of bonds and other income- or dividend-paying securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Fund’s investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management. To the extent the Fund invests in debt securities that
may be prepaid at the option of the obligor, the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. government securities. A security backed by the “full faith and credit” of the U.S. government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other income- or dividend-paying securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Fund’s use of leverage will tend to increase the Fund’s interest rate risk. The Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Fund also may invest in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Fund holds variable or floating rate instruments, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the net asset value of the Fund’s common shares.
Corporate Bonds Risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of intermediate and longer-term corporate bonds is generally more sensitive to changes in interest rates than is the market value of shorter term corporate bonds. The market value of a corporate bond also may be affected by factors directly related to the issuer, such as investors’ perceptions of the creditworthiness of the issuer, the issuer’s financial performance, perceptions of the issuer in the market place, performance of management of the issuer, the issuer’s capital structure and use of financial leverage and demand for the issuer’s goods and services. Certain risks associated with investments in corporate bonds are described elsewhere in this Annual Report in further detail, including under “—Fixed Income Securities Risks—Credit Risk,” “—Fixed Income Securities Risks—Interest Rate Risk,” “—Fixed Income Securities Risks— Prepayment Risk,” and “—General Risks—Inflation Risk.” There is a risk that the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument. Corporate bonds of below investment grade quality are often high risk and have speculative characteristics and may be particularly susceptible to adverse issuer-specific developments. Corporate bonds of below investment grade quality are subject to the risks described herein under”—Non-Investment Grade Securities.”
Non-Investment Grade Securities (Principal). The Fund may invest in below investment-grade securities, also known as “junk bonds” or “high-yield securities.” These securities, which may be preferred stock or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s (or unrated securities of comparable quality) are referred to in the financial press as “junk bonds” or “high yield” securities and generally pay a premium above the yields of
U.S. government securities or securities of investment grade issuers because they are subject to greater risks than these securities. These risks, which reflect their speculative character, include the following:
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potentially greater sensitivity to general economic or industry conditions; |
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potential lack of attractive resale opportunities (illiquidity); and |
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additional expenses to seek recovery from issuers who default. |
In addition, the prices of these non-investment grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Non-investment grade securities tend to be less liquid than investment grade securities. The market value of non-investment grade securities may be more volatile than the market value of investment grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short term market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition and the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer’s current financial condition. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issuer, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.
Non-investment grade rated securities also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed income securities), the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of bonds and dividend-paying securities moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently. The Fund may be subject to a greater risk of rising interest rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of below investment grade securities. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.”
The Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio
investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments in non-investment grade securities, the Fund may invest in the securities of issuers in default. The Fund invests in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations and emerge from bankruptcy protection and that the value of such issuers’ securities will appreciate. By investing in the securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of these securities will not otherwise appreciate.
In addition to using statistical rating agencies and other sources, the Investment Adviser will also perform its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Fixed income securities, including non-investment grade securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and comparable unrated securities has at various times, particularly during times of economic recession, experienced substantial reductions in market value and liquidity. Past recessions have adversely affected the ability of certain issuers of such securities to repay principal and pay interest thereon. The market for those securities could react in a similar fashion in the event of any future economic recession.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. This risk may be elevated compared to historical market conditions because of recent monetary policy measures and the current interest rate environment. Inflation rates may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund shareholders. As inflation increases, the real value of the Fund’s shares and dividends may decline. In addition, during any periods of rising inflation, interest rates of any debt securities held by the Fund would likely increase, which would tend to further reduce returns to shareholders. This risk is greater for fixed-income instruments with longer maturities.
U.S. Government Securities and Credit Rating Downgrade Risk. The Fund may invest in direct obligations of the government of the United States or its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders of the securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations may fluctuate. In addition, not all U.S. government securities are backed by the full faith and credit of the United States; some are the obligation solely of the entity through which they are issued. There is no guarantee that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so by law.
In 2011, S&P lowered its long term sovereign credit rating on the U.S. to “AA+” from “AAA.” The downgrade by S&P increased volatility in both stock and bond markets, resulting in higher interest rates and higher Treasury yields, and increased the costs of all kinds of debt. On August 1, 2023, Fitch Ratings lowered its long-term sovereign credit rating on the U.S. to “AA+” from “AAA.” This and any further downgrades of U.S. credit ratings could have significant adverse effects on the U.S. economy generally and could result in significant adverse impacts on issuers of securities held by the Fund itself. The Investment Adviser cannot predict the effects of similar events in the future on the U.S. economy and securities markets or on the Fund’s portfolio. The Investment Adviser monitors developments and seeks to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objectives, but there can be no assurance that it will be successful in doing so and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments.
Smaller Companies Investment Risk. The Fund may invest in the securities of smaller, less seasoned companies. Smaller companies offer investment opportunities and additional risks. They may not be well known to the investing public, may not be significantly owned by institutional investors and may not have steady earnings growth. These companies may have limited product lines and markets, as well as shorter operating histories, less experienced management and more limited financial resources than larger companies. In addition, the securities of such companies may be more vulnerable to adverse general market or economic developments, more volatile in price, have wider spreads between their bid and ask prices and have significantly lower trading volumes than the securities of larger capitalization companies. As such, securities of these smaller companies may be less liquid than those of larger companies, and may experience greater price fluctuations than larger companies. In addition, small-cap or mid-cap company securities may not be widely followed by investors, which may result in reduced demand.
As a result, the purchase or sale of more than a limited number of shares of the securities of a smaller company may affect its market price. The Investment Adviser may need a considerable amount of time to purchase or sell its positions in these securities, particularly when other Investment Adviser-managed accounts or other investors are also seeking to purchase or sell them.
The securities of smaller capitalization companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger capitalization securities or the market as a whole. In addition, smaller capitalization securities may be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in smaller capitalization securities requires a longer-term view.
Securities of emerging companies may lack an active secondary market and may be subject to more abrupt or erratic price movements than securities of larger, more established companies or stock market averages in general. Competitors of certain companies, which may or may not be in the same industry, may have substantially greater financial resources than the companies in which the Fund may invest.
Foreign Securities Risk. Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers and such securities may be more volatile than those of issuers located in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes, which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not be eligible for the special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign issuers classified as passive foreign investment companies may be subject to additional taxation risk.
There may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures that could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities.
The Fund also may purchase ADRs or U.S. dollar denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust companies in respect of securities of foreign issuers held on deposit for use in the U.S. securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
The following provides more detail on certain pronounced risks with foreign investing:
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Foreign Currency Risk. The Fund may invest in companies whose securities are denominated or quot-ed in currencies other than U.S. dollars or have significant operations or markets outside of the United States. In such instances, the Fund will be exposed to currency risk, including the risk of fluctuations in the exchange rate between U.S. dollars (in which the Fund’s shares are denominated) and such foreign currencies, the risk of currency devaluations and the risks of non-exchangeability and blockage. As non- |
U.S. securities may be purchased with and payable in currencies of countries other than the U.S. dollar, the value of these assets measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Fluctuations in currency rates may adversely affect the ability of the Investment Adviser to acquire such securities at advantageous prices and may also adversely affect the performance of such assets.
Certain non-U.S. currencies, primarily in developing countries, have been devalued in the past and might face devaluation in the future. Currency devaluations generally have a significant and adverse impact on the devaluing country’s economy in the short and intermediate term and on the financial condition and results of companies’ operations in that country. Currency devaluations may also be accompanied by significant declines in the values and liquidity of equity and debt securities of affected governmental and private sector entities generally. To the extent that affected companies have obligations denominated in currencies other than the devalued currency, those companies may also have difficulty in meeting those obligations under such circumstances, which in turn could have an adverse effect upon the value of the Fund’s investments in such companies. There can be no assurance that current or future developments with respect to foreign currency devaluations will not impair the Fund’s investment flexibility, its ability to achieve its investment objectives or the value of certain of its foreign currency-denominated investments.
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Tax Consequences of Foreign Investing. The Fund’s transactions in foreign currencies, foreign curren-cy-denominated debt obligations and certain foreign currency options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could increase or decrease the Fund’s ordinary income distributions to you, and may cause some or all of the Fund’s previously distributed income to be classified as a return of capital. In certain cases, the Fund may make an election to treat gain or loss attributable to certain investments as capital gain or loss. |
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EMU and Redenomination Risk. As the European debt crisis progressed, the possibility of one or more Eurozone countries exiting the European Monetary Union (“EMU”), or even the collapse of the Euro as a common currency, arose, creating significant volatility at times in currency and financial markets gen-erally. The effects of the collapse of the Euro, or of the exit of one or more countries from the EMU, on the U.S. and global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. Any partial or com-plete dissolution of the EMU could have significant adverse effects on currency and financial markets, and on the values of the Fund’s portfolio investments. If one or more EMU countries were to stop using the Euro as its primary currency, the Fund’s investments in such countries may be redenominated into a different or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition, securities or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and valuation risk to a greater extent than similar investments currently denominated in Euros. To the extent a currency used for redenomination purposes is not specified in respect of certain EMU-related investments, or should the Euro cease to be used entirely, the currency in which such investments are denominated may be unclear, making such investments particularly difficult |
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to value or dispose of. The Fund may incur additional expenses to the extent it is required to seek judicial or other clarification of the denomination or value of such securities. |
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Emerging Markets Risk. The considerations noted above in “Foreign Securities Risk” are generally inten-sified for investments in emerging market countries. Emerging market countries typically have economic and political systems that are less fully developed, and can be expected to be less stable than those of more developed countries. Investing in securities of companies in emerging markets may entail special risks relating to potential political and economic instability and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment, the lack of hedging instruments and restrictions on repatriation of capital invested. Economies of such countries can be subject to rapid and unpredictable rates of inflation or deflation. Emerging securities markets are substantially smaller, less developed, less liquid and more volatile than the major securities markets. The limited size of emerging securities markets and limited trading volume compared to the volume of trading in U.S. securities could cause prices to be erratic for reasons apart from factors that affect the quality of the securities. For ex-ample, limited market size may cause prices to be unduly influenced by traders who control large posi-tions. Adverse publicity and investors’ perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. Other risks include high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; overdependence on exports, including gold and natural resources exports, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal systems; and less reliable securities custodial services and settlement practices. Certain emerging markets may also face other significant internal or external risks, including the risk of war and civil unrest. For all of these reasons, investments in emerging markets may be considered speculative. |
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Eurozone Risk. A number of countries in the EU have experienced, and may continue to experience, severe economic and financial difficulties. In particular, many EU nations are susceptible to economic risks associated with high levels of debt, notably due to investments in sovereign debt of countries such as Greece, Italy, Spain, Portugal, and Ireland. As a result, financial markets in the EU have been subject to increased volatility and declines in asset values and liquidity. Responses to these financial problems by European governments, central banks, and others, including austerity measures and reforms, may not work, may result in social unrest, and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets, and asset valuations around the world. Greece, Ireland, and Portugal have already received one or more “bailouts” from other Eurozone member states, and it is unclear how much additional funding they will require or if additional Eurozone member states will require bailouts in the future. One or more other countries may also abandon the euro and/or withdraw from the EU, placing its currency and banking system in jeopardy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching. |
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Brexit Risk. Pursuant to an agreement setting out the terms on which the United Kingdom may leave the European Union (the “EU”)(“Brexit”), the United Kingdom formally withdrew from the EU, effective |
January 31, 2020, and the United Kingdom remained in the EU’s customs union and single market until December 31, 2020. The United Kingdom and the EU have entered into a Trade and Cooperation Agree-ment (the “TCA”), which came into full force on May 1, 2021, and set out the foundation of the economic and legal framework for trade between the United Kingdom and the EU. As the TCA is a new legal frame-work, its implementation may result in uncertainty in its application and periods of volatility in both the United Kingdom and wider European markets. Moreover, while the TCA regulates a number of important areas, significant parts of the United Kingdom economy are not addressed in detail by the TCA, including in particular the services sector, which represents the largest component of the United Kingdom’s econ-omy. Due to political uncertainty, it is not possible to anticipate the form or nature of the future trading relationship between the United Kingdom and the EU. While certain measures have been proposed and/ or implemented within the United Kingdom and at the EU level or at the member state level, which are designed to minimize disruption in the financial markets, it is not currently possible to de-termine whether such measures would achieve their intended effects. Notwithstanding the foregoing, the extent of the impact of the withdrawal and the resulting economic arrangements in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear and may lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. For example, during this period of uncertainty, the negative impact on not only the United Kingdom and European economies, but the broader global economy, could be significant, potentially resulting in increased market and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and other currencies and volatility in global currency markets generally), and illiquidity and lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Additional risks associated with Brexit include macroeconomic risk to the United Kingdom and European economies, impetus for further dis-integration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like us), prejudice to financial services businesses that are conducting business in the EU and which are based in the United Kingdom, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations, and the unavailability of timely information as to expected legal, tax and other regimes. Any further exits from the EU, or the possibility of such exits, would likely cause additional market disruption globally and introduce new legal and regulatory uncertainties.
In addition, certain European countries have recently experienced negative interest rates on certain fixed-income instruments. A negative interest rate policy is an unconventional central bank monetary policy tool where nominal target interest rates are set with a negative value (i.e., below zero percent) intended to help create self-sustaining growth in the local economy. Negative interest rates may result in heightened market volatility and may detract from the Fund’s performance to the extent the Fund is exposed to such interest rates. Among other things, these developments have adversely affected the value and exchange rate of the euro and pound sterling, and any similar developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
To the extent the Fund has exposure to European markets or to transactions tied to the value of the euro, these events could negatively affect the value and liquidity of the Fund’s investments. All of these developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
Restricted and Illiquid Securities Risk. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment. Unregistered securities often can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund’s inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. The Fund may be unable to sell illiquid investments when it desires to do so, resulting in the Fund obtaining a lower price or being required to retain the investment. Illiquid investments generally must be valued at fair value, which is inherently less precise than utilizing market values for liquid investments, and may lead to differences between the price a security is valued for determining the Fund’s net asset value and the price the Fund actually receives upon sale.
Special Risks Related to Investment in Derivatives. The Fund may participate in certain derivative transactions, as described herein. Such transactions entail certain execution, market, liquidity, hedging and tax risks. Participation in derivatives transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Investment Adviser’s prediction of movements in the direction of the securities or other referenced instruments or markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Risks inherent in the use of derivative transactions include:
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dependence on the Investment Adviser’s ability to predict correctly movements in the direction of the relevant measure; |
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imperfect correlation between the price of the derivative instrument and movements in the prices of the referenced assets; |
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the fact that skills needed to use these strategies are different from those needed to select portfolio securities; |
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the possible absence of a liquid secondary market for any particular instrument at any time; |
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the possible need to defer closing out certain positions to avoid adverse tax consequences; |
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the possible inability of the Fund to purchase or sell a security or instrument at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security or instrument at a disadvantageous time due to a need for the Fund to remain in compliance with the 1840 Act restrictions regarding derivatives transactions; and |
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the creditworthiness of counterparties. |
Certain derivatives may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the ability of the Fund to act upon economic events occurring in the foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) less trading volume. Exchanges on which derivatives are traded may impose limits on the positions that the Fund may take in certain circumstances.
Many over-the-counter (“OTC”) derivatives are valued on the basis of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative and the price which the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Fund’s net asset value and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments.
Furthermore, the Fund’s ability to engage in hedging transactions may also be adversely affected by rules adopted by the U.S. Commodity Futures Trading Commission, or the “CFTC.” The Dodd-Frank Act has made broad changes to the OTC derivatives market, granted significant new authority to the CFTC and the SEC to regulate OTC derivatives (swaps and security-based swaps) and participants in these markets. The Dodd-Frank Act is intended to regulate the OTC derivatives market by requiring many derivative transactions to be cleared and traded on an exchange, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether. The CFTC has implemented mandatory clearing and exchange-trading of certain OTC derivatives contracts including many standardized interest rate swaps and credit default index swaps. The CFTC continues to approve contracts for central clearing. Exchange-trading and central clearing are expected to reduce counterparty credit risk by substituting the clearinghouse as the counterparty to a swap and increase liquidity, but exchange-trading and central clearing do not make swap transactions risk-free. Uncleared swaps, such as non-deliverable foreign currency forwards, are subject to certain margin requirements that mandate the posting and collection of minimum margin amounts. This requirement may result in the Fund and its counterparties posting higher margin amounts for uncleared swaps than would otherwise be the case. Certain rules require centralized reporting of detailed information about many types of cleared and uncleared swaps. Reporting of swap data may result in greater market transparency, but may subject the Fund to additional administrative burdens, and the safeguards established to protect trader anonymity may not function as expected.
In addition, on October 28, 2020, the SEC adopted new regulations governing the use of derivatives by closed-end funds (“Rule 18f-4”), which the Fund was required to comply with as of August 19, 2022. As a result, the Fund is required to implement and comply with the Rule 18f-4 limits on the amount of derivatives the Fund can enter into, eliminate the asset segregation framework previously used to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the limits would result in a statutory violation and require the Fund, if the Fund’s use of derivatives is more than a limited specified exposure amount (10% of net assets), to establish and maintain a comprehensive derivatives risk management program and appoint a
derivatives risk manager. These requirements may limit the ability of the Fund to invest in derivatives, engage in securities lending activities, short sales, reverse repurchase agreements and similar financing transactions. Additionally, Rule 18f-4 and the SEC’s corresponding recission and withdrawal of prior guidance and relief related to asset segregation and asset coverage requirements under section 18 of the 1940 Act may affect the Fund’s ability to implement its investment strategy, pursue its investment objectives and may increase the cost of the Fund’s investments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Fund’s hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. Future CFTC or SEC rulemakings could potentially further limit or completely restrict the Fund’s ability to use these instruments as a part of the Fund’s investment strategy, increase the costs of using these instruments or make them less effective. Limits or restrictions applicable to the counterparties with which we engage in derivative transactions could also prevent us from using these instruments or affect the pricing or other factors relating to these instruments, or may change the availability of certain investments. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
Counterparty Risk. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Fund’s clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties.
Short Sales Risk. Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash and liquid securities) and the maintenance of collateral with its Custodian. Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Short selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale), the borrowed securities must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Fund to the risk of uncapped losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. There is the risk that the securities borrowed by the Fund in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a time when other short-sellers of the security are receiving similar requests, a “short squeeze” can occur, and the Fund may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most disadvantageous time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
In September 2008, in response to spreading turmoil in the financial markets, the SEC temporarily banned short selling in the stocks of numerous financial services companies, and also promulgated new disclosure requirements with respect to short positions held by investment managers. The SEC’s temporary ban on short selling of such stocks has since expired, but should similar restrictions and/or additional disclosure requirements be promulgated, especially if market turmoil occurs, the Fund may be forced to cover short positions more quickly than otherwise intended and may suffer losses as a result. Such restrictions may also adversely affect the ability of the Fund to execute its investment strategies generally. Similar emergency orders were also instituted in non-U.S. markets in response to increased volatility. The Fund’s ability to engage in short sales is also restricted by various regulatory requirements relating to short sales.
Significant Holdings Risk. The Fund may invest up to 25% of its total assets in securities of a single industry. Should the Fund choose to do so, the net asset value of the Fund will be more susceptible to factors affecting those particular types of companies, which, depending on the particular industry, may include, among others: governmental regulation; inflation; cost increases in raw materials, fuel and other operating expenses; technological innovations that may render existing products and equipment obsolete; and increasing interest rates resulting in high interest costs on borrowings needed for capital investment, including costs associated with compliance with environmental and other regulations. In such circumstances, the Fund’s investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of industries.
Healthcare Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by companies in the healthcare sector. The profitability of companies in the healthcare sector may be affected by legislative activities and extensive government regulations, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation,
changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of a company’s patents may adversely affect that company’s profitability. Many healthcare companies are subject to extensive civil litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly, and such efforts ultimately may be unsuccessful. Companies in the healthcare sector may be thinly capitalized and may be susceptible to product obsolescence.
Information Technology Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by information technology companies. Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect on profit margins. These companies are heavily dependent on patent protection and the expiration of or infringement on patents may adversely affect the profitability of such companies.
The securities of information technology companies tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation, product and/or service obsolescence, unpredictable changes in growth rates and competition for the services of qualified personnel. In addition, a rising interest rate environment tends to negatively affect information technology companies. These companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices. Further, those information technology companies seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings.
Financial Services Company Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by financial services companies. Financial services are generally involved in banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, financial investments, or real estate.
Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares. As of September 30, 2023, the amount of leverage represented approximately 25% of the Fund’s net assets. The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds that have a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for any preferred shares or debt outstanding. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise deleverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent the
Fund is leveraged in its investment operations, the Fund will be subject to substantial risk of loss. The Fund cannot assure that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, to the extent the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code. For more information regarding the risks of a leverage capital structure to holders of the Fund’s common shares, see “—Special Risks to Holders of Common Shares—Leverage Risk.”
Market Discount Risk. The Fund is a diversified, closed-end management investment company. Whether investors will realize gains or losses upon the sale of additional securities of the Fund will depend upon the market price of the securities at the time of sale, which may be less or more than the Fund’s net asset value per share or the liquidation value of any Fund preferred shares issued. Since the market price of any additional securities the Fund may issue will be affected by such factors as the Fund’s dividend and distribution levels (which are in turn affected by expenses), dividend and distribution stability, net asset value, market liquidity, the relative demand for and supply of such securities in the market, general market and economic conditions and other factors beyond the control of the Fund, we cannot predict whether any such securities will trade at, below or above net asset value or at, below or above their public offering price or at, below or above their liquidation value, as applicable. For example, common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their securities of the Fund soon after the completion of a public offering for such securities. The risk of a market price discount from net asset value is separate and in addition to the risk that net asset value itself may decline. The Fund’s securities are designed primarily for long term investors, and investors in the shares should not view the Fund as a vehicle for trading purposes.
Long Term Objective; Not a Complete Investment Program. The Fund is intended for investors seeking long term growth of capital. The Fund is not meant to provide a vehicle for those who wish to play short term swings in the stock market. An investment in shares of the Fund should not be considered a complete investment program. Each shareholder should take into account the Fund’s investment objectives as well as the shareholder’s other investments when considering an investment in the Fund.
Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Investment Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Fund, except as set forth in the Fund’s governing documents. The authority for all such decisions is generally delegated to the Board, who in turn, has delegated the day-to-day management of the Fund’s investment activities to the Investment Adviser, subject to oversight by the Board.
Dependence on Key Personnel. The Investment Adviser is dependent upon the expertise of Mr. James Dinsmore, who serves as the Fund’s portfolio manager, in providing advisory services with respect to the Fund’s investments. If the Investment Adviser were to lose the services of Mr. James Dinsmore, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could
be found for Mr. James Dinsmore in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as localized wars, instability, new and ongoing pandemics (such as COVID-19), epidemics or outbreaks of infectious diseases in certain parts of the world, natural/environmental disasters in certain parts of the world, terrorist attacks in the United States and around the world, trade or tariff arrangements, social and political discord, debt crises, sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, historical adversaries and the international community generally, new and continued political unrest in various countries, the exit or potential exit of one or more countries from the EU or the Economic and Monetary Union, continued changes in the balance of political power among and within the branches of the U.S. government, and government shutdowns, among others, may result in market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide.
The consequences of the conflict between Russia and Ukraine, including international sanctions, the potential impact on inflation and increased disruption to supply chains may impact our portfolio companies, result in an economic downturn or recession either globally or locally in the U.S. or other economics, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited “cold” wars or in the form a virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on the Fund’s returns and net asset value. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, may in the future result in additional government shutdowns, which could have a material adverse effect on the Funds’ investments and operations. In addition, the Funds’ ability to raise additional capital in the future through the sale of securities could be materially affected by a government shutdown. Additional and/or prolonged U.S. government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree.
Periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
While the extreme volatility and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007 and 2008 had, until the recent coronavirus (COVID-19) outbreak, generally subsided, uncertainty and periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
The occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. It is not known how long the securities markets may be affected by similar events, and the effects of similar events in the future on the U.S. economy and securities markets cannot be predicted. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
As previously discussed, Brexit has led to volatility in the financial markets of the UK and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The decision made in the British referendum may also lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund and its investments to execute its respective strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these changes on the value of our assets or the Fund’s common shares or market conditions generally, is uncertain.
Economic Events and Market Risk. Periods of market volatility remain, and may continue to occur in the future, in response to various political, social and economic events both within and outside of the United States. These conditions have resulted in, and in many cases continue to result in, greater price volatility, less liquidity, widening credit spreads and a lack of price transparency, with many securities remaining illiquid and of uncertain value. Such market conditions may adversely affect the Fund, including by making valuation of some of the Fund’s securities uncertain and/or result in sudden and significant valuation increases or declines in the Fund’s holdings. If there is a significant decline in the value of the Fund’s portfolio, this may impact the asset coverage levels for the Fund’s outstanding leverage.
Risks resulting from any future debt or other economic crisis could also have a detrimental impact on the global economic recovery, the financial condition of financial institutions and our business, financial condition and results of operation. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. To the extent uncertainty regarding the U.S. or global economy negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected. Downgrades to the credit ratings of major banks could result in increased borrowing costs for such banks and negatively affect the broader economy. Moreover, Federal Reserve policy, including with respect to certain interest rates, may also adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. Market volatility, rising interest rates and/or a return to unfavorable economic conditions could impair the Fund’s ability to achieve its investment objectives.
Regulation and Government Intervention Risk. Changes enacted by the current presidential administration could significantly impact the regulation of financial markets in the U.S. Areas subject to potential change, amendment or repeal include trade and foreign policy, corporate tax rates, energy and infrastructure policies, the environment and sustainability, criminal and social justice initiatives, immigration, healthcare and the oversight of certain federal financial regulatory agencies and the Federal Reserve. Certain of these changes can, and have, been effectuated through executive order. For example, the current administration has taken steps to rejoin the Paris climate accord of 2015 and incentivize certain clean energy technologies, cancel the Keystone XL pipeline, provide military support to Ukraine and change immigration enforcement priorities. Other potential changes that could be pursued by the current presidential administration could include an increase in the corporate income tax rate; changes to regulatory enforcement priorities; and spending on clean energy and infrastructure. It is not possible to predict which, if any, of these actions will be taken or, if taken, their effect on the economy, securities markets or the financial stability of the U.S. The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and the Fund’s ability to achieve its investment objectives.
Additional risks arising from the differences in expressed policy preferences among the various constituencies in the branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have a material adverse effect on the Fund’s net asset value.
In addition, the rules dealing with the U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain
dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these and other changes is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund’s shares and their indirect effect on the value of the Fund’s assets, Fund shares or market conditions generally.
In addition, the U.S. government has proposed and adopted multiple regulations that could have a long-lasting impact on the Fund and on the closed-end fund industry in general. The SEC’s final rules and amendments that modernize reporting and disclosure, along with other potential upcoming regulations, could, among other things, restrict the Fund’s ability to engage in transactions, and/or increase overall expenses of the Fund.
The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and its ability to achieve its investment objective(s).
Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
Loans of Portfolio Securities Risk. Consistent with applicable regulatory requirements and the Fund’s investment restrictions, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times collateralized by cash or cash equivalents which are maintained at all times in an amount equal to at least 100% of the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short term highly liquid obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale. The Fund’s loans of portfolio securities will be collateralized in accordance with applicable regulatory requirements, which means that “cash equivalents” accepted as collateral will be limited to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or irrevocable letters of credit issued by a bank (other than a borrower of the Fund’s portfolio securities or any affiliate of such borrower) which qualifies as a custodian bank for an investment company under the 1940 Act. The Fund’s ability to lend portfolio securities may be limited by rating agency guidelines (if any).
A loan may generally be terminated by the borrower on one business days’ notice, or by the Fund at any time thereby requiring the borrower to redeliver the borrowed securities within the normal and customary settlement time for securities transactions. If the borrower fails to deliver the loaned securities within the normal and customary settlement time for securities transactions, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral pledged by the borrower. As with any extensions of credit, there are risks of delay in recovery and in some cases even
loss of rights in the collateral should the borrower of the securities violate the terms of the loan or fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Investment Adviser to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund.
The risks associated with loans of portfolio securities are substantially similar to those associated with repurchase agreements. Thus, if the counterparty to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund’s ability to sell the collateral and the Fund would suffer a loss. Moreover, because the Fund will reinvest any cash collateral it receives, as described above, the Fund is subject to the risk that the value of the investments it makes will decline and result in losses to the Fund. These losses, in extreme circumstances such as the 2007-2009 financial crisis, could be substantial and have a significant adverse impact on the Fund and its shareholders. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund’s investment in such loaned securities. The Fund will pay reasonable finder’s, administrative and custodial fees in connection with a loan of its securities, and may also pay fees to one or more securities lending agents and/or pay other fees or rebates to borrowers.
Investment Dilution Risk. The Fund’s investors do not have preemptive rights to any shares the Fund may issue in the future. The Fund’s Declaration of Trust authorizes it to issue an unlimited number of shares. The Board may make certain amendments to the Declaration of Trust. After an investor purchases shares, the Fund may sell additional shares or other classes of shares in the future or issue equity interests in private offerings. To the extent the Fund issues additional equity interests after an investor purchases its shares, such investor’s percentage ownership interest in the Fund will be diluted.
Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund or its shareholders. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability of the Fund to pursue its investment strategies. Similarly, the Biden administration has indicated that it intends to modify key aspects of the Code, including by increasing corporate and individual tax rates. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in the Fund.
We cannot assure you what percentage of the distributions paid on the Fund’s shares, if any, will consist of tax-advantaged qualified dividend income or long term capital gains or what the tax rates on various types of income will be in future years.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, meet certain asset diversification tests, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its “investment company
taxable income.” Statutory limitations on distributions on the common shares if the Fund fails to satisfy the 1940 Act’s asset coverage requirements could jeopardize the Fund’s ability to meet such distribution requirements. While the Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary in order to maintain compliance with such asset coverage requirements, there can be no assurance that such actions can be effected in time to meet the Code requirements. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The resulting corporate taxes would materially reduce the Fund’s net assets and the amount of cash available for distribution to shareholders. For a more complete discussion of these and other U.S. federal income tax considerations.
1940 Act Regulation. The Fund is a registered closed-end investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
Legislation Risk. At any time after the date of this Annual Report, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation may change the way in which the Fund itself is regulated. The Investment Adviser cannot predict the effects of any new governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Fund’s ability to achieve its investment objectives.
Reliance on Service Providers Risk. The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Fund’s operations and financial performance. Failure by any service provider to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Fund’s performance and returns to shareholders. The termination of the Fund’s relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect on the Fund’s performance and returns to shareholders.
Cyber Security Risk. 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 are becoming increasingly common and more sophisticated, and may be perpetrated by computer hackers, cyber-terrorists or others engaged in corporate espionage. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders 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 have been a number of recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well as cyberattacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments. Although service providers typically have policies and procedures, business continuity plans and/or risk management systems intended to identify and mitigate cyber incidents, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber security policies, plans and systems put in place by its service providers or any other third parties whose operations may affect the Fund or its shareholders. 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.
Because technology is consistently changing, new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks have not been identified or prepared for, or that an attack may not be detected, which puts limitations on the Fund’s ability to plan for or respond to a cyber attack. In addition to deliberate cyber attacks, unintentional cyber incidents can occur, such as the inadvertent release of confidential information by the Fund or its service providers. Like other funds and business enterprises, the Fund and its service providers are subject to the risk of cyber incidents occurring from time to time.
Misconduct of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Adviser or the Fund’s service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Fund’s service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting he Fund’s business prospects or future marketing activities. Despite the Investment Adviser’s due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Adviser’s due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Investment Adviser will identify or prevent any such misconduct.
Anti-Takeover Provisions. The Agreement and Declaration of Trust and By-Laws of the Fund include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to an open-end fund.
Special Risks to Holders of Common Shares
Dilution Risk. If the Fund determines to conduct a rights offering to subscribe for common shares, holders of common shares may experience dilution or accretion of the aggregate net asset value of their common shares. Such dilution or accretion will depend upon whether (i) such shareholders participate in the rights offering and (ii) the Fund’s net asset value per common share is above or below the subscription price on the expiration date of the rights offering.
Shareholders who do not exercise their subscription rights may, at the completion of such an offering, own a smaller proportional interest in the Fund than if they exercised their subscription rights. As a result of such an offering, a shareholder may experience dilution in net asset value per share if the subscription price per share is below the net asset value per share on the expiration date. If the subscription price per share is below the net asset value per share of the Fund’s shares on the expiration date, a shareholder will experience an immediate dilution of the aggregate net asset value of such shareholder’s shares if the shareholder does not participate in such an offering and the shareholder will experience a reduction in the net asset value per share of such shareholder’s shares whether or not the shareholder participates in such an offering. The Fund cannot state precisely the extent of this dilution (if any) if the shareholder does not exercise such shareholder’s subscription rights because the Fund does not know what the net asset value per share will be when the offer expires or what proportion of the subscription rights will be exercised.
Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares and is also permitted to use other types of financial leverage, such as through the issuance of debt securities or additional preferred shares and borrowing from financial institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding. As of September 30, 2023 the amount of leverage represented approximately 25% of the Fund’s net assets.
The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for the preferred shares. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in its investment operations, the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code.
Any decline in the net asset value of the Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of the Fund’s portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. The Fund might be in danger of failing to maintain the required asset coverage of the borrowings, notes or preferred shares, or of losing its ratings on its notes or preferred shares or, in an extreme case, the Fund’s
current investment income might not be sufficient to meet the distribution or interest requirements on the preferred shares, or notes. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the preferred shares or notes.
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Preferred Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common shares to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net rate of return on the Fund’s investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate on the preferred shares or the interest rate on the notes plus the management fee annual rate of 0.80% of the first $100,000,000 of average weekly net assets and 0.55% of average weekly net assets in excess of $100,000,000 exceeds the net rate of return on the Fund’s portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares or notes. (The Fund’s “net” assets for this purpose includes the liquidation of any preferred shares out-standing.) If the Fund has insufficient investment income and gains, all or a portion of the distributions to preferred shareholders or interest payments to note holders would come from the common shareholders’ capital. Such distributions and interest payments reduce the net assets attributable to common share-holders and do not reduce the principal due to noteholders on maturity or the liquidation preference to which preferred shareholders are entitled. The Prospectus Supplement relating to any sale of preferred shares will set forth dividend rate on such preferred shares. |
In addition, the Fund would pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred shares or notes, including the advisory fees on the incremental assets attributable to the preferred shares or notes.
Holders of preferred shares and notes may have different interests than holders of common shares and may at times have disproportionate influence over the Fund’s affairs. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt, such as notes) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding, which is referred to as the “asset coverage” required by the 1940 Act. In the event the Fund fails to maintain an asset coverage of 100% for any notes outstanding for certain periods of time, the 1940 Act requires that either an event of default be declared or that the holders of such notes have the right to elect a majority of the Fund’s Trustees until asset coverage recovers to 110%. In addition, holders of preferred shares, voting separately as a single class, have the right (subject to the rights of noteholders) to elect two members of the Board at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the Trustees until such arrearage is completely eliminated. In addition, preferred shareholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion of the Fund to open-end status, and accordingly can veto any such changes. Further, interest on notes will be payable when due as described in a Prospectus Supplement and if the Fund does not pay interest when due, it will trigger an event of default and the Fund expects to be restricted from declaring dividends and making other distributions with respect to common shares and preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority in principal amount of a series of outstanding notes or the trustee
will be able to declare the principal amount of that series of notes immediately due and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring distributions on, or repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of declaring distributions on preferred shares). The Fund’s common shares are structurally subordinated as to income and residual value to any preferred shares or notes in the Fund’s capital structure, in terms of priority to income and payment in liquidation.
Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of the Fund’s common shares and preferred shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund’s ability to maintain its qualification as a RIC for U.S. federal income tax purposes. While the Fund intends to redeem its preferred shares or notes to the extent necessary to enable the Fund to distribute its income as required to maintain its qualification as a RIC under the Code, there can be no assurance that such actions can be effected in time to meet the Code requirements.
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Portfolio Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain attractive credit quality ratings for preferred shares or notes, the Fund must comply with investment quality, diversification and other guidelines established by the relevant rating agencies. These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. In the event that a rating on the Fund’s preferred shares or notes is lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred shares or notes, and the common shares of the Fund will lose the potential benefits associated with a leveraged capital structure. |
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Impact on Common Shares. Assuming that leverage will (1) be equal in amount to approximately 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), and (2) charge interest or involve dividend payments at a projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), then the annual return generated by the Fund’s portfolio (net of estimated ex-penses) must exceed approximately 1.36% of the Fund’s total net assets in order to cover such interest or dividend payments and other expenses specifically related to leverage. Of course, these numbers are merely estimates, used for illustration. Actual dividend rates, interest or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above. |
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of net investment income of the Fund, realized gains or losses of the Fund and changes in the value of the securities held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects leverage representing 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), the Fund’s current projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), a management fee at an annual rate of 0.55% of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses attributable to any
outstanding preferred shares of 0.04% of the Fund’s net assets attributable to common shares. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See “Risk Factors and Special Considerations.”
Assumed Return on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
Corresponding Return to Common Shareholder | |
| (15.53 | )% | |
| (8.82 | )% | |
| (2.12 | )% | |
| 4.58 | % | |
| 11.29 | % |
Common share total return is composed of two elements—the common share distributions paid by the Fund (the amount of which is largely determined by the taxable income of the Fund (including realized gains or losses) after paying interest on any debt and/or dividends on any preferred shares) and unrealized gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy total return. For example, to assume a total return of 0% the Fund must assume that the income it receives on its investments is entirely offset by expenses and losses in the value of those investments.
Market Discount Risk. As described above in “–General Risks—Market Discount Risk,” common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their common shares of the Fund soon after completion of a public offering. The common shares of the Fund are designed primarily for long-term investors and investors in the shares should not view the Fund as a vehicle for trading purposes.
Special Risks to Holders of Preferred Shares
Illiquidity Prior to Exchange Listing. Prior to an offering, there will be no public market for any series of fixed rate preferred shares. In the event any series of fixed rate preferred shares are issued, we expect to apply to list such shares on a national securities exchange, which will likely be the NYSE American. However, during an initial period, which is not expected to exceed 30 days after the date of its initial issuance, such shares may not be listed on any securities exchange. During such period, the underwriters may make a market in such shares, though they will have no obligation to do so. Consequently, an investment in such shares may be illiquid during such period.
Market Price Fluctuation. Fixed rate preferred shares may trade at a premium to or discount from liquidation value for various reasons, including changes in interest rates, perceived credit quality and other factors.
Special Risks to Holders of Notes
An investment in our notes is subject to special risks. Our notes are not likely to be listed on an exchange or automated quotation system. We cannot assure you that any market will exist for our notes or if a market does exist, whether it will provide holders with liquidity. Broker-dealers that maintain a secondary trading market for the notes are not required to maintain this market, and the Fund is not required to redeem notes if an attempted
secondary market sale fails because of a lack of buyers. To the extent that our notes trade, they may trade at a price either higher or lower than their principal amount depending on interest rates, the rating (if any) on such notes and other factors.
Special Risks of Notes to Holders of Preferred Shares
As provided in the 1940 Act, and subject to compliance with the Fund’s investment limitations, the Fund may issue notes. In the event the Fund were to issue such securities, the Fund’s obligations to pay dividends or make distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and interest payments due and owing with respect to its outstanding notes. Accordingly, the Fund’s issuance of notes would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
Special Risks to Holders of Notes and Preferred Shares
Common Share Repurchases. Repurchases of common shares by the Fund may reduce the net asset coverage of the notes and preferred shares, which could adversely affect their liquidity or market prices.
Common Share Distribution Policy. In the event the Fund does not generate a total return from dividends and interest received and net realized capital gains in an amount at least equal to its distributions for a given year, the Fund may return capital as part of its distribution. This would decrease the asset coverage per share with respect to the Fund’s notes or preferred shares, which could adversely affect their liquidity or market prices. For the fiscal year ended September 30, 2023, the Fund made distributions of $0.52 per common share, none of which constituted a return of capital. The composition of each distribution is estimated based on earnings as of the record date for the distribution. The actual composition of each distribution may change based on the Fund’s investment activity through the end of the calendar year.
Credit
Quality Ratings. The Fund may obtain credit quality ratings for its preferred shares or notes; however, it is not required
to do so and may issue preferred shares or notes without any rating. If rated, the Fund does not impose any minimum rating necessary
to issue such preferred shares or notes. In order to obtain and maintain attractive credit quality ratings for preferred shares or
notes, if desired, the Fund’s portfolio must satisfy over-collateralization tests established by the relevant rating agencies.
These tests are more difficult to satisfy to the extent the Fund’s portfolio securities are of lower credit quality, longer
maturity or not diversified by issuer and industry.
These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. A rating (if any) by a rating agency does not eliminate or necessarily mitigate the risks of investing in our preferred shares or notes, and a rating may not fully or accurately reflect all of the securities’ credit risks. A rating (if any) does not address liquidity or any other market risks of the securities being rated. A rating agency could downgrade the rating of our notes or preferred shares, which may make such securities less liquid in the
secondary market. If a rating agency downgrades the rating assigned to notes or preferred shares, we may alter our portfolio or redeem the preferred securities or notes under certain circumstances.
Special Risk to Holders of Subscription Rights
There is a risk that changes in market conditions may result in the underlying common or preferred shares purchasable upon exercise of the subscription rights being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the subscription rights. Investors who receive subscription rights may find that there is no market to sell rights they do not wish to exercise. If investors exercise only a portion of the rights, the number of common or preferred shares issued may be reduced, and the common or preferred shares may trade at less favorable prices than larger offerings for similar securities.
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Effects of Leverage [Text Block] |
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The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of net investment income of the Fund, realized gains or losses of the Fund and changes in the value of the securities held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects leverage representing 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), the Fund’s current projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), a management fee at an annual rate of 0.55% of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses attributable to any
outstanding preferred shares of 0.04% of the Fund’s net assets attributable to common shares. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See “Risk Factors and Special Considerations.”
Assumed Return on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
Corresponding Return to Common Shareholder | |
| (15.53 | )% | |
| (8.82 | )% | |
| (2.12 | )% | |
| 4.58 | % | |
| 11.29 | % |
Common share total return is composed of two elements—the common share distributions paid by the Fund (the amount of which is largely determined by the taxable income of the Fund (including realized gains or losses) after paying interest on any debt and/or dividends on any preferred shares) and unrealized gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy total return. For example, to assume a total return of 0% the Fund must assume that the income it receives on its investments is entirely offset by expenses and losses in the value of those investments.
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Annual Interest Rate [Percent] |
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5.23%
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Effects of Leverage [Table Text Block] |
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Assumed Return on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
Corresponding Return to Common Shareholder | |
| (15.53 | )% | |
| (8.82 | )% | |
| (2.12 | )% | |
| 4.58 | % | |
| 11.29 | % |
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Return at Minus Ten [Percent] |
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(15.53%)
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Return at Minus Five [Percent] |
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(8.82%)
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Return at Zero [Percent] |
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(2.12%)
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Return at Plus Five [Percent] |
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4.58%
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Return at Plus Ten [Percent] |
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11.29%
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Effects of Leverage, Purpose [Text Block] |
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The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of net investment income of the Fund, realized gains or losses of the Fund and changes in the value of the securities held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects leverage representing 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), the Fund’s current projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), a management fee at an annual rate of 0.55% of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses attributable to any
outstanding preferred shares of 0.04% of the Fund’s net assets attributable to common shares. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. See “Risk Factors and Special Considerations.”
Assumed Return on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
Corresponding Return to Common Shareholder | |
| (15.53 | )% | |
| (8.82 | )% | |
| (2.12 | )% | |
| 4.58 | % | |
| 11.29 | % |
|
|
|
|
|
Share Price [Table Text Block] |
|
|
|
|
|
|
|
|
|
The following table sets forth for the quarters indicated, the high and low sale prices
on the NYSE American per share of our common shares and the net asset value and the
premium or discount from net asset value per share at which the common shares were
trading, expressed as a percentage of net asset value, at each of the high and low
sale prices provided.
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common Share Market Price | | |
Corresponding Net Asset Value
(“NAV”) Per Share | | |
Corresponding Premium or Discount as a % of NAV | |
Quarter Ended | |
High | | |
Low | | |
High | | |
Low | | |
High | | |
Low | |
September 30, 2021 | |
$ | 15.37 | | |
$ | 13.22 | | |
$ | 14.99 | | |
$ | 14.64 | | |
| (2.53 | )% | |
| (9.69 | )% |
December 31, 2021 | |
$ | 14.72 | | |
$ | 11.82 | | |
$ | 15.36 | | |
$ | 13.05 | | |
| (4.17 | )% | |
| (9.43 | )% |
March 31, 2022 | |
$ | 12.31 | | |
$ | 9.09 | | |
$ | 13.44 | | |
$ | 11.32 | | |
| (8.41 | )% | |
| (12.54 | )% |
June 30, 2022 | |
$ | 10.78 | | |
$ | 8.32 | | |
$ | 12.30 | | |
$ | 9.51 | | |
| (12.36 | )% | |
| (12.51 | )% |
September 30, 2022 | |
$ | 10.01 | | |
$ | 8.08 | | |
$ | 11.06 | | |
$ | 9.31 | | |
| (9.49 | )% | |
| (13.21 | )% |
March 31, 2023 | |
$ | 9.09 | | |
$ | 7.90 | | |
$ | 10.34 | | |
$ | 9.33 | | |
| (11.94 | )% | |
| (15.33 | )% |
June 30, 2023 | |
$ | 8.60 | | |
$ | 7.76 | | |
$ | 9.77 | | |
$ | 9.36 | | |
| (11.98 | )% | |
| (17.09 | )% |
September 30, 2023 | |
$ | 8.85 | | |
$ | 8.04 | | |
$ | 9.94 | | |
$ | 8.97 | | |
| (10.97 | )% | |
| (10.37 | )% |
|
|
|
|
|
Lowest Price or Bid |
|
$ 8.04
|
$ 7.76
|
$ 8.08
|
$ 8.32
|
$ 9.09
|
$ 11.82
|
$ 13.22
|
$ 7.90
|
|
|
|
|
|
Highest Price or Bid |
|
8.85
|
8.60
|
10.01
|
10.78
|
12.31
|
14.72
|
15.37
|
9.09
|
|
|
|
|
|
Lowest Price or Bid, NAV |
|
8.97
|
9.36
|
9.31
|
9.51
|
11.32
|
13.05
|
14.64
|
9.33
|
|
|
|
|
|
Highest Price or Bid, NAV |
|
$ 9.94
|
$ 9.77
|
$ 11.06
|
$ 12.30
|
$ 13.44
|
$ 15.36
|
$ 14.99
|
$ 10.34
|
|
|
|
|
|
Highest Price or Bid, Premium (Discount) to NAV [Percent] |
|
(10.97%)
|
(11.98%)
|
(9.49%)
|
(12.36%)
|
(8.41%)
|
(4.17%)
|
(2.53%)
|
(11.94%)
|
|
|
|
|
|
Lowest Price or Bid, Premium (Discount) to NAV [Percent] |
|
(10.37%)
|
(17.09%)
|
(13.21%)
|
(12.51%)
|
(12.54%)
|
(9.43%)
|
(9.69%)
|
(15.33%)
|
|
|
|
|
|
Latest Premium (Discount) to NAV [Percent] |
|
|
|
|
|
|
|
|
|
(10.56%)
|
|
|
|
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock [Table Text Block] |
|
|
|
|
|
|
|
|
|
6. Capital. The Fund is authorized to issue an unlimited number of common shares of beneficial
interest (par value $0.01). The Board has authorized the repurchase of the Fund’s common shares on the open market when the shares are trading at a discount of 10%
or more (or such other percentage as the Board may determine from time to time) from
the NAV of the shares. During the fiscal years ended September 30, 2023 and 2022, the Fund repurchased and retired 32,934 and 222,248 of its common
shares at investments of $261,930 and $2,068,339, respectively, at average discounts
of approximately 16.01% and 13.42% from NAV.
Transactions in shares of common shares of beneficial interest for the fiscal years
ended September 30, 2023 and 2022 were as follows:
| |
Year
Ended | | |
Year
Ended | |
| |
September 30,
2023 | | |
September 30,
2022 | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | |
Increase
in net assets from common shares issued upon reinvestment of distributions | |
| 75,976 | | |
$ | 635,918 | | |
| 428,456 | | |
$ | 5,154,319 | |
Decrease
in net assets from repurchase of common shares | |
| (32,934 | ) | |
| (261,930 | ) | |
| (222,248 | ) | |
| (2,068,339 | ) |
Net
increase | |
| 43,042 | | |
$ | 373,988 | | |
| 206,208 | | |
$ | 3,085,980 | |
The Fund’s Declaration of Trust, as amended, authorizes the issuance of an unlimited number
of preferred shares, par value $0.01. The Preferred Shares are senior to the common shares and result in the financial
leveraging of the common shares. Such leveraging tends to magnify both the risks and
opportunities to common shareholders. Dividends on Preferred Shares are cumulative.
The Fund is required by the 1940 Act and by the Fund’s Statement of Preferences to meet certain asset coverage tests with respect to the
Preferred Shares. If the Fund fails to meet these requirements and does not correct
such failure, the Fund may be required to redeem, in part or in full, the Preferred
Shares at their respective liquidation values plus an amount equal to the accumulated
and unpaid dividends whether or not declared on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset coverage requirements
could restrict the Fund’s ability to pay dividends to common shareholders and could lead to sales of portfolio
securities at inopportune times. The income received on the Fund’s assets may vary in a manner unrelated to the fixed rates, which could have either
a beneficial or detrimental impact on net investment income and gains available to
common shareholders.
The liquidation value of the Series A Preferred is $25 per share. The Series A Preferred
has an annual dividend rate of 5.25% and is callable at the Fund’s option. The Board has authorized the repurchase of the Series A Preferred in the
open market at prices less than the $25 liquidation value per share. During the fiscal
years ended September 30, 2023 and 2022, the Fund repurchased and retired 31,113 and 1,572 Series A Preferred,
at investments of $699,557 and $36,725 at average discounts of approximately 10.10%
and 6.59%, from its liquidation value.
On July 1, 2022, the Fund issued 2,503,000 shares of Series B Cumulative Preferred Shares (Series
B Preferred) receiving $24,887,500 million after the deduction of offering expenses
of $124,517, and issued 120,000 shares of Series B Preferred on May 4, 2023, receiving $1,190,000 after deducting offering expenses. The Series B Preferred
shares have a liquidation value of $10 per share, and were issued with an annual dividend
rate of 4.40%. On April 17, 2023, the Board approved an increase in the Series B annual dividend rate to 5.20%.
On June 26, 2023, 1,320,000 shares of Series B Preferred were put back to the Fund at their
liquidation preference of $10 per share. The Series B Preferred are puttable on June 26, 2024 and are callable after June 26, 2024. Distributions are paid semiannually at an annual rate of 5.20%. At September 30, 2023, 1,303,000 shares of Series B Preferred were outstanding and accrued dividends
amounted to $178,801.
The following table summarizes Cumulative Preferred Shares information:
Series | |
Issue
Date | |
|
Authorized | | |
Number
of Shares Outstanding at 9/30/2023 | | |
Net
Proceeds | | |
2023
Dividend Rate Range | |
|
Dividend
Rate at 9/30/2023 | | |
Accrued
Dividends at 9/30/2023 | |
A
5.250% | |
September 18, 2017 | |
|
unlimited | | |
| 1,167,315 | | |
$ | 28,855,381 | | |
Fixed
Rate | |
|
| 5.250 | % | |
$ | 21,279 | |
B
5.200% | |
July 1, 2022 | |
|
unlimited | | |
| 1,303,000 | | |
$ | 24,887,500 | | |
Fixed Rate | |
|
| 5.200 | % | |
$ | 178,801 | |
The holders of Preferred Shares generally are entitled to one vote per share held
on each matter submitted to a vote of shareholders of the Fund and will vote together
with holders of common shares as a single class. The holders of Preferred Shares voting together as a single class also have the right currently to
elect two Trustees and, under certain circumstances, are entitled to elect a majority
of the Board of Trustees. In addition, the affirmative vote of a majority of the votes
entitled to be cast by holders of all outstanding shares of the preferred shares,
voting as a single class, will be required to approve any plan of reorganization adversely
affecting the preferred shares, and the approval of two-thirds of each class, voting separately, of the Fund’s outstanding voting stock must approve the conversion of the Fund from a closed-end
to an open-end investment company. The approval of a majority (as defined in the 1940
Act) of the outstanding preferred shares and a majority (as defined in the 1940 Act)
of the Fund’s outstanding voting securities are required to approve certain other actions, including
changes in the Fund’s investment objectives or fundamental investment policies.
|
|
|
|
|
Common Stocks [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Description of Registrant [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk [Text Block] |
|
|
|
|
|
|
|
|
|
Market Discount Risk. As described above in “–General Risks—Market Discount Risk,” common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their common shares of the Fund soon after completion of a public offering. The common shares of the Fund are designed primarily for long-term investors and investors in the shares should not view the Fund as a vehicle for trading purposes.
|
|
|
|
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Security, Held [Shares] |
|
|
|
|
|
|
|
|
|
13,748,708
|
|
|
|
|
Series A Cumulative Preferred Stock [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual Expenses [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[custom:SeniorSecuritieInvoluntaryLiquidatingPreferencePerUnit] |
|
|
|
|
|
|
|
|
|
$ 25.00
|
$ 25.00
|
$ 25.00
|
$ 25.00
|
$ 25.00
|
[custom:SeniorSecuritiesAmounts] |
|
|
|
|
|
|
|
|
|
$ 29,183,000
|
$ 29,961,000
|
$ 30,000,000
|
$ 30,000,000
|
$ 30,000,000
|
Financial Highlights [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Securities Average Market Value per Unit |
|
|
|
|
|
|
|
|
|
$ 23.04
|
$ 24.82
|
$ 26.10
|
$ 25.59
|
$ 24.64
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Security, Held [Shares] |
|
|
|
|
|
|
|
|
|
1,167,000
|
1,198,000
|
1,200,000
|
1,200,000
|
1,200,000
|
[custom:SeniorSecuritieCoveragePerUnit] |
[5] |
|
|
|
|
|
|
|
|
$ 98.32
|
$ 82.61
|
$ 188.94
|
$ 169.66
|
$ 148.91
|
Series B Cumulative Preferred Stock [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual Expenses [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[custom:SeniorSecuritieInvoluntaryLiquidatingPreferencePerUnit] |
|
|
|
|
|
|
|
|
|
$ 10.00
|
$ 10.00
|
|
|
|
[custom:SeniorSecuritiesAmounts] |
|
|
|
|
|
|
|
|
|
$ 13,030,000
|
$ 25,030,000
|
|
|
|
Financial Highlights [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Securities Average Market Value per Unit |
[6] |
|
|
|
|
|
|
|
|
$ 10.00
|
|
|
|
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Security, Title [Text Block] |
|
|
|
|
|
|
|
|
|
B
5.200%
|
|
|
|
|
Outstanding Security, Held [Shares] |
|
|
|
|
|
|
|
|
|
1,303,000
|
2,503,000
|
|
|
|
[custom:SeniorSecuritieCoveragePerUnit] |
[5] |
|
|
|
|
|
|
|
|
$ 39.33
|
$ 33.04
|
|
|
|
Cumulative Preferred Stocks [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Voting Rights [Text Block] |
|
|
|
|
|
|
|
|
|
The holders of Preferred Shares generally are entitled to one vote per share held
on each matter submitted to a vote of shareholders of the Fund and will vote together
with holders of common shares as a single class. The holders of Preferred Shares voting together as a single class also have the right currently to
elect two Trustees and, under certain circumstances, are entitled to elect a majority
of the Board of Trustees. In addition, the affirmative vote of a majority of the votes
entitled to be cast by holders of all outstanding shares of the preferred shares,
voting as a single class, will be required to approve any plan of reorganization adversely
affecting the preferred shares, and the approval of two-thirds of each class, voting separately, of the Fund’s outstanding voting stock must approve the conversion of the Fund from a closed-end
to an open-end investment company. The approval of a majority (as defined in the 1940
Act) of the outstanding preferred shares and a majority (as defined in the 1940 Act)
of the Fund’s outstanding voting securities are required to approve certain other actions, including
changes in the Fund’s investment objectives or fundamental investment policies.
|
|
|
|
|
Preferred Stock Restrictions, Other [Text Block] |
|
|
|
|
|
|
|
|
|
The Fund’s Declaration of Trust, as amended, authorizes the issuance of an unlimited number
of preferred shares, par value $0.01. The Preferred Shares are senior to the common shares and result in the financial
leveraging of the common shares. Such leveraging tends to magnify both the risks and
opportunities to common shareholders. Dividends on Preferred Shares are cumulative.
The Fund is required by the 1940 Act and by the Fund’s Statement of Preferences to meet certain asset coverage tests with respect to the
Preferred Shares. If the Fund fails to meet these requirements and does not correct
such failure, the Fund may be required to redeem, in part or in full, the Preferred
Shares at their respective liquidation values plus an amount equal to the accumulated
and unpaid dividends whether or not declared on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset coverage requirements
could restrict the Fund’s ability to pay dividends to common shareholders and could lead to sales of portfolio
securities at inopportune times. The income received on the Fund’s assets may vary in a manner unrelated to the fixed rates, which could have either
a beneficial or detrimental impact on net investment income and gains available to
common shareholders.
The liquidation value of the Series A Preferred is $25 per share. The Series A Preferred
has an annual dividend rate of 5.25% and is callable at the Fund’s option. The Board has authorized the repurchase of the Series A Preferred in the
open market at prices less than the $25 liquidation value per share. During the fiscal
years ended September 30, 2023 and 2022, the Fund repurchased and retired 31,113 and 1,572 Series A Preferred,
at investments of $699,557 and $36,725 at average discounts of approximately 10.10%
and 6.59%, from its liquidation value.
On July 1, 2022, the Fund issued 2,503,000 shares of Series B Cumulative Preferred Shares (Series
B Preferred) receiving $24,887,500 million after the deduction of offering expenses
of $124,517, and issued 120,000 shares of Series B Preferred on May 4, 2023, receiving $1,190,000 after deducting offering expenses. The Series B Preferred
shares have a liquidation value of $10 per share, and were issued with an annual dividend
rate of 4.40%. On April 17, 2023, the Board approved an increase in the Series B annual dividend rate to 5.20%.
On June 26, 2023, 1,320,000 shares of Series B Preferred were put back to the Fund at their
liquidation preference of $10 per share. The Series B Preferred are puttable on June 26, 2024 and are callable after June 26, 2024. Distributions are paid semiannually at an annual rate of 5.20%. At September 30, 2023, 1,303,000 shares of Series B Preferred were outstanding and accrued dividends
amounted to $178,801.
|
|
|
|
|
Outstanding Securities [Table Text Block] |
|
|
|
|
|
|
|
|
|
The following table summarizes Cumulative Preferred Shares information:
Series | |
Issue
Date | |
|
Authorized | | |
Number
of Shares Outstanding at 9/30/2023 | | |
Net
Proceeds | | |
2023
Dividend Rate Range | |
|
Dividend
Rate at 9/30/2023 | | |
Accrued
Dividends at 9/30/2023 | |
A
5.250% | |
September 18, 2017 | |
|
unlimited | | |
| 1,167,315 | | |
$ | 28,855,381 | | |
Fixed
Rate | |
|
| 5.250 | % | |
$ | 21,279 | |
B
5.200% | |
July 1, 2022 | |
|
unlimited | | |
| 1,303,000 | | |
$ | 24,887,500 | | |
Fixed Rate | |
|
| 5.200 | % | |
$ | 178,801 | |
|
|
|
|
|
Series A Cumulative Preferred Stocks [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Security, Title [Text Block] |
|
|
|
|
|
|
|
|
|
A
5.250%
|
|
|
|
|
Outstanding Security, Held [Shares] |
|
|
|
|
|
|
|
|
|
1,167,315
|
|
|
|
|
Purchase Transaction [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Table [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Reinvestment and Cash Purchase Fees |
[7] |
|
|
|
|
|
|
|
|
$ 1.25
|
|
|
|
|
One Time Fee For Deposit Of Share Certificates [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Table [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Reinvestment and Cash Purchase Fees |
[7] |
|
|
|
|
|
|
|
|
$ 7.50
|
|
|
|
|
Market Risk [Member] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Description of Registrant [Abstract] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk [Text Block] |
|
|
|
|
|
|
|
|
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Market Risk. The market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. The value of a security may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Equity securities generally have greater price volatility than fixed income securities. Credit ratings downgrades may also negatively affect securities held by the Fund. Even when markets perform well, there is no assurance that the investments held by the Fund will increase in value along with the broader market.
In addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a national or global level. For instance, war, terrorism, market manipulation, government defaults, government shutdowns, political changes or diplomatic developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental disasters can all negatively impact the securities markets, which could cause the Fund to lose value. These events could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and significantly adversely impact the economy. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, has in the past resulted, and may in the future result, in a government shutdown, which could have an adverse impact on the Fund’s investments and operations. Additional and/or prolonged U.S. federal government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Governmental and quasi-governmental authorities and regulators throughout the world have previously responded to serious economic disruptions with a variety of significant fiscal and monetary policy changes, including, but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund’s investments. Any market disruptions could also prevent the Fund from executing advantageous investment decisions in a timely manner. To the extent that the Fund focuses its investments in a region enduring geopolitical market disruption, it will face higher risks of loss, although the increasing interconnectivity between global economies and financial markets can lead to events or conditions in one country, region or financial market adversely impacting a different country, region or financial
market. Thus, investors should closely monitor current market conditions to determine whether the Fund meets their individual financial needs and tolerance for risk.
Current market conditions may pose heightened risks with respect to the Fund’s investment in fixed income securities. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. Any interest rate increases in the future could cause the value of the Fund to decrease. Recently, inflation levels have been at their highest point in nearly 40 years and the Federal Reserve has been engaged in a campaign to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases, the real value of the Fund’s common stock and distributions therefore may decline.
Exchanges and securities markets may close early, close late or issue trading halts on specific securities or generally, which may result in, among other things, the Fund being unable to buy or sell certain securities or financial instruments at an advantageous time or accurately price its portfolio investments.
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Convertible Securities Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.
The value of a convertible security is influenced by the value of the underlying equity security. Convertible debt securities and preferred stocks may depreciate in value if the market value of the underlying equity security declines or if rates of interest increase. In addition, although debt securities are liabilities of a corporation which the corporation is generally obligated to repay at a specified time, debt securities, particularly convertible debt securities, are often subordinated to the claims of some or all of the other creditors of the corporation.
Mandatory conversion securities (securities that automatically convert into equity securities at a future date) may limit the potential for capital appreciation and, in some instances, are subject to complete loss of invested capital. Other innovative convertibles include “equity-linked” securities, which are securities or derivatives that may have fixed, variable, or no interest payments prior to maturity, may convert (at the option of the holder or on a mandatory basis) into cash or a combination of cash and common stock, and may be structured to limit the potential for capital appreciation. Equity-linked securities may be illiquid and difficult to value and may be subject to greater credit risk than that of other convertibles. Moreover, mandatory conversion securities and equity-linked securities have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.
Preferred stocks are equity securities in the sense that they do not represent a liability of the corporation. In the event of liquidation of the corporation, and after its creditors have been paid or provided for, holders of preferred stock are generally entitled to a preference as to the assets of the corporation before any distribution may be made to the holders of common stock. Debt securities normally do not have voting rights. Preferred stocks may have no voting rights or may have voting rights only under certain circumstances.
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Credit Risk. Credit risk is the risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies that issue convertible securities may be small to medium-size, and they often |
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have low credit ratings. In addition, the credit rating of a company’s convertible securities is generally lower than that of its conventional debt securities. Convertible securities are normally considered “junior” securities—that is, the company usually must pay interest on its conventional debt before it can make payments on its convertible securities. Credit risk could be high for the Fund, because it could invest in securities with low credit quality. The lower a debt security is rated, the greater its default risk. As a result, the Fund may incur cost and delays in enforcing its rights against the issuer. |
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Market Risk. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convert-ible securities, but generally less than that of the underlying common stock. |
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Interest Rate Risk for Convertible Securities. The Fund may be subject to a greater risk of rising inter-est rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of convertible securities held by the Fund. Convertible securities are particularly sensitive to interest rate changes when their predetermined conversion price is much higher than the issuing company’s common stock. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.” |
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Sector Risk. Sector risk is the risk that returns from the economic sectors in which convertible securities are concentrated will trail returns from other economic sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible securities market in general. These periods have, in the past, lasted for as long as several years. Moreover, the sectors that dominate this market change over time. |
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Equity Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Equity Risk. Investing in the Fund involves equity risk, which is the risk that the securities held by the Fund will fall in market value due to adverse market and economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate and the particular circumstances and performance of particular companies whose securities the Fund holds. An investment in the Fund represents an indirect economic stake in the securities owned by the Fund, which are for the most part traded on securities exchanges or in the OTC markets. The market value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The net asset value of the Fund may at any point in time be worth less than the amount at the time the shareholder invested in the Fund, even after taking into account any reinvestment of distributions.
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Common Stock Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Common Stock Risk. Common stock of an issuer in the Fund’s portfolio may decline in price for a variety of reasons, including if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Common stock in which the Fund invests is structurally subordinated as to income and residual value to preferred stock, bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stock or debt instruments of such issuers. In addition, while common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in those returns.
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Preferred Stock Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Preferred Stock Risk. There are special risks associated with the Fund’s investing in preferred securities, including:
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Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer div-idends or distributions for a stated period without any adverse consequences to the issuer. If the Fund owns a preferred security that is deferring its dividends or distributions, the Fund may be required to report income for tax purposes although it has not yet received such income. |
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Non-Cumulative Dividends. Some preferred securities are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred security held by the Fund determine not to pay dividends or distributions on such security, the Fund’s return from that security may be adversely affected. There is no assurance that dividends or distributions on non-cumulative preferred securities in which the Fund invests will be declared or otherwise made payable. |
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Subordination. Preferred securities are subordinated to bonds and other debt instruments in an issuer’s capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security instruments. |
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Liquidity. Preferred securities may be substantially less liquid than many other securities, such as com-mon stocks or U.S. government securities. |
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Limited Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may be entitled to elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. |
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Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. A redemption by the issuer may negatively impact the return of the security held by the Fund. |
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Warrants And Rights [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Warrants and Rights. The Fund may invest in warrants and rights (including those acquired in units or attached to other securities) which entitle the holder to buy equity securities at a specific price for or at the end of a specific period of time. The Fund will do so only if the underlying equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund’s portfolio.
Investing in rights and warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and thus can be a riskier investment. The value of a right or warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the Fund whose equity underlies the warrant, a change in the perception as to the future price of the underlying security, or any combination thereof. Rights and warrants generally pay no dividends and confer no voting or other rights other than the right to purchase the underlying security.
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Fixed Income Securities Risks [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Fixed Income Securities Risks. Fixed income securities in which the Fund may invest are generally subject to the following risks:
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Interest Rate Risk. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. See “—General Risks—Interest Rate Risks Generally.” |
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Issuer Risk. Issuer risk is the risk that the value of an income- or dividend-paying security may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuer’s goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer. |
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Credit Risk. Credit risk is the risk that one or more income- or dividend-paying securities in the Fund’s portfolio will decline in price or fail to pay interest/distributions or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio se-curity is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. See “—Non-Investment Grade Securities.” The degree of credit risk depends on the issuer’s financial condition and on the terms of the securities. |
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Prepayment Risk. Prepayment risk is the risk that during periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For income- or dividend-paying securities, such payments often occur during periods of declining interest rates, forcing the Fund to re-invest in lower yielding securities, resulting in a possible decline in the Fund’s income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“call protection”). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced. |
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Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Fund portfolio’s current earnings rate. |
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Duration and Maturity Risk. The Fund has no set policy regarding portfolio maturity or duration of the fixed-income securities it may hold. The Investment Adviser may seek to adjust the duration or maturity of the Fund’s fixed-income holdings based on its assessment of current and projected market conditions and all other factors that the Investment Adviser deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instrument’s expected principal and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. |
Duration can be a useful tool to estimate anticipated price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates), the magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Fund’s shares and that actual price movements in the Fund’s portfolio may differ significantly from duration-based estimates.
Duration differs from maturity in that it takes into account a security’s yield, coupon payments and its principal payments in addition to the amount of time until the security matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Investment Adviser’s assessment of current and projected market conditions will be correct or that any strategy to adjust duration or maturity will be successful at any given time.
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L I B O R Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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LIBOR Risk. The Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (“LIBOR”) to determine payment obligations, financing terms, hedging strategies or investment value. The Fund’s investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Fund may also reference LIBOR.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. LIBOR can no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling, euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published or are no longer representative. Overnight and 12-month US dollar LIBOR settings permanently ceased as of June 30, 2023. 1-, 3-, and 6-month U.S. dollar LIBOR settings will continue to be published using a synthetic methodology until September 2024. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions
to a new reference rate. Neither the effect of the LIBOR transition process nor its ultimate success can yet be known.
As an alternative to LIBOR, the Financial Reporting Council, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, recommended replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by reference to short-term repurchase agreements, backed by Treasury securities. Abandonment of, or modifications to, LIBOR could have adverse impacts on newly issued financial instruments and any of our existing financial instruments which reference LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including, but not limited to, the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect the return on, value of and market for securities linked to such rates.
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Moreover, these alternative rate-setting provisions may not be designed for regular use in an environment where LIBOR ceases to be published, and may be an ineffective fallback following the discontinuation of LIBOR.
On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022, which among other things, provides for the use of interest rates based on SOFR in certain contracts currently based on LIBOR and a safe harbor from liability for utilizing SOFR-based interest rates as a replacement for LIBOR. The elimination of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
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Interest Rate Risk Generally [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Interest Rate Risk Generally. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income- or dividend-paying securities will increase as interest rates fall and decrease as interest rates rise. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced.
The magnitude of these fluctuations in the market price of bonds and other income- or dividend-paying securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Fund’s investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management. To the extent the Fund invests in debt securities that
may be prepaid at the option of the obligor, the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. government securities. A security backed by the “full faith and credit” of the U.S. government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other income- or dividend-paying securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Fund’s use of leverage will tend to increase the Fund’s interest rate risk. The Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Fund also may invest in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Fund holds variable or floating rate instruments, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the net asset value of the Fund’s common shares.
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Corporate Bonds Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Corporate Bonds Risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The market value of intermediate and longer-term corporate bonds is generally more sensitive to changes in interest rates than is the market value of shorter term corporate bonds. The market value of a corporate bond also may be affected by factors directly related to the issuer, such as investors’ perceptions of the creditworthiness of the issuer, the issuer’s financial performance, perceptions of the issuer in the market place, performance of management of the issuer, the issuer’s capital structure and use of financial leverage and demand for the issuer’s goods and services. Certain risks associated with investments in corporate bonds are described elsewhere in this Annual Report in further detail, including under “—Fixed Income Securities Risks—Credit Risk,” “—Fixed Income Securities Risks—Interest Rate Risk,” “—Fixed Income Securities Risks— Prepayment Risk,” and “—General Risks—Inflation Risk.” There is a risk that the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument. Corporate bonds of below investment grade quality are often high risk and have speculative characteristics and may be particularly susceptible to adverse issuer-specific developments. Corporate bonds of below investment grade quality are subject to the risks described herein under”—Non-Investment Grade Securities.”
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Non Investment Grade Securities Principal [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Non-Investment Grade Securities (Principal). The Fund may invest in below investment-grade securities, also known as “junk bonds” or “high-yield securities.” These securities, which may be preferred stock or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s (or unrated securities of comparable quality) are referred to in the financial press as “junk bonds” or “high yield” securities and generally pay a premium above the yields of
U.S. government securities or securities of investment grade issuers because they are subject to greater risks than these securities. These risks, which reflect their speculative character, include the following:
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potentially greater sensitivity to general economic or industry conditions; |
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potential lack of attractive resale opportunities (illiquidity); and |
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additional expenses to seek recovery from issuers who default. |
In addition, the prices of these non-investment grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Non-investment grade securities tend to be less liquid than investment grade securities. The market value of non-investment grade securities may be more volatile than the market value of investment grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short term market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition and the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer’s current financial condition. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issuer, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.
Non-investment grade rated securities also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed income securities), the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of bonds and dividend-paying securities moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently. The Fund may be subject to a greater risk of rising interest rates due to the current period of rising interest rates and recent inflationary price movements. The Federal Reserve has aggressively been raising interest rates which is likely to drive down the prices of below investment grade securities. See “—Fixed Income Securities Risks—Duration and Maturity Risk” and “— General Risks—Interest Rate Risks Generally.”
The Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio
investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments in non-investment grade securities, the Fund may invest in the securities of issuers in default. The Fund invests in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations and emerge from bankruptcy protection and that the value of such issuers’ securities will appreciate. By investing in the securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of these securities will not otherwise appreciate.
In addition to using statistical rating agencies and other sources, the Investment Adviser will also perform its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
Fixed income securities, including non-investment grade securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return for the Fund.
The market for non-investment grade and comparable unrated securities has at various times, particularly during times of economic recession, experienced substantial reductions in market value and liquidity. Past recessions have adversely affected the ability of certain issuers of such securities to repay principal and pay interest thereon. The market for those securities could react in a similar fashion in the event of any future economic recession.
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Inflation Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. This risk may be elevated compared to historical market conditions because of recent monetary policy measures and the current interest rate environment. Inflation rates may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund shareholders. As inflation increases, the real value of the Fund’s shares and dividends may decline. In addition, during any periods of rising inflation, interest rates of any debt securities held by the Fund would likely increase, which would tend to further reduce returns to shareholders. This risk is greater for fixed-income instruments with longer maturities.
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U S Government Securities And Credit Rating Downgrade Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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U.S. Government Securities and Credit Rating Downgrade Risk. The Fund may invest in direct obligations of the government of the United States or its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders of the securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations may fluctuate. In addition, not all U.S. government securities are backed by the full faith and credit of the United States; some are the obligation solely of the entity through which they are issued. There is no guarantee that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so by law.
In 2011, S&P lowered its long term sovereign credit rating on the U.S. to “AA+” from “AAA.” The downgrade by S&P increased volatility in both stock and bond markets, resulting in higher interest rates and higher Treasury yields, and increased the costs of all kinds of debt. On August 1, 2023, Fitch Ratings lowered its long-term sovereign credit rating on the U.S. to “AA+” from “AAA.” This and any further downgrades of U.S. credit ratings could have significant adverse effects on the U.S. economy generally and could result in significant adverse impacts on issuers of securities held by the Fund itself. The Investment Adviser cannot predict the effects of similar events in the future on the U.S. economy and securities markets or on the Fund’s portfolio. The Investment Adviser monitors developments and seeks to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objectives, but there can be no assurance that it will be successful in doing so and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments.
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Smaller Companies Investment Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Smaller Companies Investment Risk. The Fund may invest in the securities of smaller, less seasoned companies. Smaller companies offer investment opportunities and additional risks. They may not be well known to the investing public, may not be significantly owned by institutional investors and may not have steady earnings growth. These companies may have limited product lines and markets, as well as shorter operating histories, less experienced management and more limited financial resources than larger companies. In addition, the securities of such companies may be more vulnerable to adverse general market or economic developments, more volatile in price, have wider spreads between their bid and ask prices and have significantly lower trading volumes than the securities of larger capitalization companies. As such, securities of these smaller companies may be less liquid than those of larger companies, and may experience greater price fluctuations than larger companies. In addition, small-cap or mid-cap company securities may not be widely followed by investors, which may result in reduced demand.
As a result, the purchase or sale of more than a limited number of shares of the securities of a smaller company may affect its market price. The Investment Adviser may need a considerable amount of time to purchase or sell its positions in these securities, particularly when other Investment Adviser-managed accounts or other investors are also seeking to purchase or sell them.
The securities of smaller capitalization companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger capitalization securities or the market as a whole. In addition, smaller capitalization securities may be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in smaller capitalization securities requires a longer-term view.
Securities of emerging companies may lack an active secondary market and may be subject to more abrupt or erratic price movements than securities of larger, more established companies or stock market averages in general. Competitors of certain companies, which may or may not be in the same industry, may have substantially greater financial resources than the companies in which the Fund may invest.
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Foreign Securities Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Foreign Securities Risk. Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers and such securities may be more volatile than those of issuers located in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes, which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not be eligible for the special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign issuers classified as passive foreign investment companies may be subject to additional taxation risk.
There may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures that could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities.
The Fund also may purchase ADRs or U.S. dollar denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust companies in respect of securities of foreign issuers held on deposit for use in the U.S. securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
The following provides more detail on certain pronounced risks with foreign investing:
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Foreign Currency Risk. The Fund may invest in companies whose securities are denominated or quot-ed in currencies other than U.S. dollars or have significant operations or markets outside of the United States. In such instances, the Fund will be exposed to currency risk, including the risk of fluctuations in the exchange rate between U.S. dollars (in which the Fund’s shares are denominated) and such foreign currencies, the risk of currency devaluations and the risks of non-exchangeability and blockage. As non- |
U.S. securities may be purchased with and payable in currencies of countries other than the U.S. dollar, the value of these assets measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Fluctuations in currency rates may adversely affect the ability of the Investment Adviser to acquire such securities at advantageous prices and may also adversely affect the performance of such assets.
Certain non-U.S. currencies, primarily in developing countries, have been devalued in the past and might face devaluation in the future. Currency devaluations generally have a significant and adverse impact on the devaluing country’s economy in the short and intermediate term and on the financial condition and results of companies’ operations in that country. Currency devaluations may also be accompanied by significant declines in the values and liquidity of equity and debt securities of affected governmental and private sector entities generally. To the extent that affected companies have obligations denominated in currencies other than the devalued currency, those companies may also have difficulty in meeting those obligations under such circumstances, which in turn could have an adverse effect upon the value of the Fund’s investments in such companies. There can be no assurance that current or future developments with respect to foreign currency devaluations will not impair the Fund’s investment flexibility, its ability to achieve its investment objectives or the value of certain of its foreign currency-denominated investments.
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Tax Consequences of Foreign Investing. The Fund’s transactions in foreign currencies, foreign curren-cy-denominated debt obligations and certain foreign currency options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could increase or decrease the Fund’s ordinary income distributions to you, and may cause some or all of the Fund’s previously distributed income to be classified as a return of capital. In certain cases, the Fund may make an election to treat gain or loss attributable to certain investments as capital gain or loss. |
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EMU and Redenomination Risk. As the European debt crisis progressed, the possibility of one or more Eurozone countries exiting the European Monetary Union (“EMU”), or even the collapse of the Euro as a common currency, arose, creating significant volatility at times in currency and financial markets gen-erally. The effects of the collapse of the Euro, or of the exit of one or more countries from the EMU, on the U.S. and global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. Any partial or com-plete dissolution of the EMU could have significant adverse effects on currency and financial markets, and on the values of the Fund’s portfolio investments. If one or more EMU countries were to stop using the Euro as its primary currency, the Fund’s investments in such countries may be redenominated into a different or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition, securities or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and valuation risk to a greater extent than similar investments currently denominated in Euros. To the extent a currency used for redenomination purposes is not specified in respect of certain EMU-related investments, or should the Euro cease to be used entirely, the currency in which such investments are denominated may be unclear, making such investments particularly difficult |
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to value or dispose of. The Fund may incur additional expenses to the extent it is required to seek judicial or other clarification of the denomination or value of such securities. |
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Emerging Markets Risk. The considerations noted above in “Foreign Securities Risk” are generally inten-sified for investments in emerging market countries. Emerging market countries typically have economic and political systems that are less fully developed, and can be expected to be less stable than those of more developed countries. Investing in securities of companies in emerging markets may entail special risks relating to potential political and economic instability and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment, the lack of hedging instruments and restrictions on repatriation of capital invested. Economies of such countries can be subject to rapid and unpredictable rates of inflation or deflation. Emerging securities markets are substantially smaller, less developed, less liquid and more volatile than the major securities markets. The limited size of emerging securities markets and limited trading volume compared to the volume of trading in U.S. securities could cause prices to be erratic for reasons apart from factors that affect the quality of the securities. For ex-ample, limited market size may cause prices to be unduly influenced by traders who control large posi-tions. Adverse publicity and investors’ perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. Other risks include high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; overdependence on exports, including gold and natural resources exports, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal systems; and less reliable securities custodial services and settlement practices. Certain emerging markets may also face other significant internal or external risks, including the risk of war and civil unrest. For all of these reasons, investments in emerging markets may be considered speculative. |
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Eurozone Risk. A number of countries in the EU have experienced, and may continue to experience, severe economic and financial difficulties. In particular, many EU nations are susceptible to economic risks associated with high levels of debt, notably due to investments in sovereign debt of countries such as Greece, Italy, Spain, Portugal, and Ireland. As a result, financial markets in the EU have been subject to increased volatility and declines in asset values and liquidity. Responses to these financial problems by European governments, central banks, and others, including austerity measures and reforms, may not work, may result in social unrest, and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets, and asset valuations around the world. Greece, Ireland, and Portugal have already received one or more “bailouts” from other Eurozone member states, and it is unclear how much additional funding they will require or if additional Eurozone member states will require bailouts in the future. One or more other countries may also abandon the euro and/or withdraw from the EU, placing its currency and banking system in jeopardy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching. |
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Brexit Risk. Pursuant to an agreement setting out the terms on which the United Kingdom may leave the European Union (the “EU”)(“Brexit”), the United Kingdom formally withdrew from the EU, effective |
January 31, 2020, and the United Kingdom remained in the EU’s customs union and single market until December 31, 2020. The United Kingdom and the EU have entered into a Trade and Cooperation Agree-ment (the “TCA”), which came into full force on May 1, 2021, and set out the foundation of the economic and legal framework for trade between the United Kingdom and the EU. As the TCA is a new legal frame-work, its implementation may result in uncertainty in its application and periods of volatility in both the United Kingdom and wider European markets. Moreover, while the TCA regulates a number of important areas, significant parts of the United Kingdom economy are not addressed in detail by the TCA, including in particular the services sector, which represents the largest component of the United Kingdom’s econ-omy. Due to political uncertainty, it is not possible to anticipate the form or nature of the future trading relationship between the United Kingdom and the EU. While certain measures have been proposed and/ or implemented within the United Kingdom and at the EU level or at the member state level, which are designed to minimize disruption in the financial markets, it is not currently possible to de-termine whether such measures would achieve their intended effects. Notwithstanding the foregoing, the extent of the impact of the withdrawal and the resulting economic arrangements in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear and may lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. For example, during this period of uncertainty, the negative impact on not only the United Kingdom and European economies, but the broader global economy, could be significant, potentially resulting in increased market and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and other currencies and volatility in global currency markets generally), and illiquidity and lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Additional risks associated with Brexit include macroeconomic risk to the United Kingdom and European economies, impetus for further dis-integration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like us), prejudice to financial services businesses that are conducting business in the EU and which are based in the United Kingdom, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations, and the unavailability of timely information as to expected legal, tax and other regimes. Any further exits from the EU, or the possibility of such exits, would likely cause additional market disruption globally and introduce new legal and regulatory uncertainties.
In addition, certain European countries have recently experienced negative interest rates on certain fixed-income instruments. A negative interest rate policy is an unconventional central bank monetary policy tool where nominal target interest rates are set with a negative value (i.e., below zero percent) intended to help create self-sustaining growth in the local economy. Negative interest rates may result in heightened market volatility and may detract from the Fund’s performance to the extent the Fund is exposed to such interest rates. Among other things, these developments have adversely affected the value and exchange rate of the euro and pound sterling, and any similar developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
To the extent the Fund has exposure to European markets or to transactions tied to the value of the euro, these events could negatively affect the value and liquidity of the Fund’s investments. All of these developments may continue to significantly affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
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Restricted And Illiquid Securities Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Restricted and Illiquid Securities Risk. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act. An illiquid investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment. Unregistered securities often can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund’s inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. The Fund may be unable to sell illiquid investments when it desires to do so, resulting in the Fund obtaining a lower price or being required to retain the investment. Illiquid investments generally must be valued at fair value, which is inherently less precise than utilizing market values for liquid investments, and may lead to differences between the price a security is valued for determining the Fund’s net asset value and the price the Fund actually receives upon sale.
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Special Risks Related To Investment In Derivatives [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Special Risks Related to Investment in Derivatives. The Fund may participate in certain derivative transactions, as described herein. Such transactions entail certain execution, market, liquidity, hedging and tax risks. Participation in derivatives transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Investment Adviser’s prediction of movements in the direction of the securities or other referenced instruments or markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Risks inherent in the use of derivative transactions include:
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dependence on the Investment Adviser’s ability to predict correctly movements in the direction of the relevant measure; |
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imperfect correlation between the price of the derivative instrument and movements in the prices of the referenced assets; |
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the fact that skills needed to use these strategies are different from those needed to select portfolio securities; |
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the possible absence of a liquid secondary market for any particular instrument at any time; |
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the possible need to defer closing out certain positions to avoid adverse tax consequences; |
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the possible inability of the Fund to purchase or sell a security or instrument at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security or instrument at a disadvantageous time due to a need for the Fund to remain in compliance with the 1840 Act restrictions regarding derivatives transactions; and |
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the creditworthiness of counterparties. |
Certain derivatives may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the ability of the Fund to act upon economic events occurring in the foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) less trading volume. Exchanges on which derivatives are traded may impose limits on the positions that the Fund may take in certain circumstances.
Many over-the-counter (“OTC”) derivatives are valued on the basis of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative and the price which the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Fund’s net asset value and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments.
Furthermore, the Fund’s ability to engage in hedging transactions may also be adversely affected by rules adopted by the U.S. Commodity Futures Trading Commission, or the “CFTC.” The Dodd-Frank Act has made broad changes to the OTC derivatives market, granted significant new authority to the CFTC and the SEC to regulate OTC derivatives (swaps and security-based swaps) and participants in these markets. The Dodd-Frank Act is intended to regulate the OTC derivatives market by requiring many derivative transactions to be cleared and traded on an exchange, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether. The CFTC has implemented mandatory clearing and exchange-trading of certain OTC derivatives contracts including many standardized interest rate swaps and credit default index swaps. The CFTC continues to approve contracts for central clearing. Exchange-trading and central clearing are expected to reduce counterparty credit risk by substituting the clearinghouse as the counterparty to a swap and increase liquidity, but exchange-trading and central clearing do not make swap transactions risk-free. Uncleared swaps, such as non-deliverable foreign currency forwards, are subject to certain margin requirements that mandate the posting and collection of minimum margin amounts. This requirement may result in the Fund and its counterparties posting higher margin amounts for uncleared swaps than would otherwise be the case. Certain rules require centralized reporting of detailed information about many types of cleared and uncleared swaps. Reporting of swap data may result in greater market transparency, but may subject the Fund to additional administrative burdens, and the safeguards established to protect trader anonymity may not function as expected.
In addition, on October 28, 2020, the SEC adopted new regulations governing the use of derivatives by closed-end funds (“Rule 18f-4”), which the Fund was required to comply with as of August 19, 2022. As a result, the Fund is required to implement and comply with the Rule 18f-4 limits on the amount of derivatives the Fund can enter into, eliminate the asset segregation framework previously used to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the limits would result in a statutory violation and require the Fund, if the Fund’s use of derivatives is more than a limited specified exposure amount (10% of net assets), to establish and maintain a comprehensive derivatives risk management program and appoint a
derivatives risk manager. These requirements may limit the ability of the Fund to invest in derivatives, engage in securities lending activities, short sales, reverse repurchase agreements and similar financing transactions. Additionally, Rule 18f-4 and the SEC’s corresponding recission and withdrawal of prior guidance and relief related to asset segregation and asset coverage requirements under section 18 of the 1940 Act may affect the Fund’s ability to implement its investment strategy, pursue its investment objectives and may increase the cost of the Fund’s investments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Fund’s hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. Future CFTC or SEC rulemakings could potentially further limit or completely restrict the Fund’s ability to use these instruments as a part of the Fund’s investment strategy, increase the costs of using these instruments or make them less effective. Limits or restrictions applicable to the counterparties with which we engage in derivative transactions could also prevent us from using these instruments or affect the pricing or other factors relating to these instruments, or may change the availability of certain investments. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
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Counterparty Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Counterparty Risk. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Fund’s clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties.
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Short Sales Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Short Sales Risk. Short-selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash and liquid securities) and the maintenance of collateral with its Custodian. Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Short selling necessarily involves certain additional risks. However, if the short seller does not own the securities sold short (an uncovered short sale), the borrowed securities must be replaced by securities purchased at market prices in order to close out the short position, and any appreciation in the price of the borrowed securities would result in a loss. Uncovered short sales expose the Fund to the risk of uncapped losses until a position can be closed out due to the lack of an upper limit on the price to which a security may rise. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. There is the risk that the securities borrowed by the Fund in connection with a short-sale must be returned to the securities lender on short notice. If a request for return of borrowed securities occurs at a time when other short-sellers of the security are receiving similar requests, a “short squeeze” can occur, and the Fund may be compelled to replace borrowed securities previously sold short with purchases on the open market at the most disadvantageous time, possibly at prices significantly in excess of the proceeds received at the time the securities were originally sold short.
In September 2008, in response to spreading turmoil in the financial markets, the SEC temporarily banned short selling in the stocks of numerous financial services companies, and also promulgated new disclosure requirements with respect to short positions held by investment managers. The SEC’s temporary ban on short selling of such stocks has since expired, but should similar restrictions and/or additional disclosure requirements be promulgated, especially if market turmoil occurs, the Fund may be forced to cover short positions more quickly than otherwise intended and may suffer losses as a result. Such restrictions may also adversely affect the ability of the Fund to execute its investment strategies generally. Similar emergency orders were also instituted in non-U.S. markets in response to increased volatility. The Fund’s ability to engage in short sales is also restricted by various regulatory requirements relating to short sales.
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Significant Holdings Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Significant Holdings Risk. The Fund may invest up to 25% of its total assets in securities of a single industry. Should the Fund choose to do so, the net asset value of the Fund will be more susceptible to factors affecting those particular types of companies, which, depending on the particular industry, may include, among others: governmental regulation; inflation; cost increases in raw materials, fuel and other operating expenses; technological innovations that may render existing products and equipment obsolete; and increasing interest rates resulting in high interest costs on borrowings needed for capital investment, including costs associated with compliance with environmental and other regulations. In such circumstances, the Fund’s investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader range of industries.
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Healthcare Sector Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Healthcare Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by companies in the healthcare sector. The profitability of companies in the healthcare sector may be affected by legislative activities and extensive government regulations, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation,
changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of a company’s patents may adversely affect that company’s profitability. Many healthcare companies are subject to extensive civil litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly, and such efforts ultimately may be unsuccessful. Companies in the healthcare sector may be thinly capitalized and may be susceptible to product obsolescence.
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Information Technology Sector Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Information Technology Sector Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by information technology companies. Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect on profit margins. These companies are heavily dependent on patent protection and the expiration of or infringement on patents may adversely affect the profitability of such companies.
The securities of information technology companies tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation, product and/or service obsolescence, unpredictable changes in growth rates and competition for the services of qualified personnel. In addition, a rising interest rate environment tends to negatively affect information technology companies. These companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices. Further, those information technology companies seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings.
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Financial Services Company Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Financial Services Company Risk. The Fund has in the past invested, and may in the future invest, a significant portion of its total assets in securities issued by financial services companies. Financial services are generally involved in banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, financial investments, or real estate.
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Leverages Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares. As of September 30, 2023, the amount of leverage represented approximately 25% of the Fund’s net assets. The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds that have a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for any preferred shares or debt outstanding. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise deleverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent the
Fund is leveraged in its investment operations, the Fund will be subject to substantial risk of loss. The Fund cannot assure that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, to the extent the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code. For more information regarding the risks of a leverage capital structure to holders of the Fund’s common shares, see “—Special Risks to Holders of Common Shares—Leverage Risk.”
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Leverage Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Leverage Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares and is also permitted to use other types of financial leverage, such as through the issuance of debt securities or additional preferred shares and borrowing from financial institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding. As of September 30, 2023 the amount of leverage represented approximately 25% of the Fund’s net assets.
The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for the preferred shares. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in its investment operations, the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code.
Any decline in the net asset value of the Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of the Fund’s portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. The Fund might be in danger of failing to maintain the required asset coverage of the borrowings, notes or preferred shares, or of losing its ratings on its notes or preferred shares or, in an extreme case, the Fund’s
current investment income might not be sufficient to meet the distribution or interest requirements on the preferred shares, or notes. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the preferred shares or notes.
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Preferred Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common shares to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net rate of return on the Fund’s investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate on the preferred shares or the interest rate on the notes plus the management fee annual rate of 0.80% of the first $100,000,000 of average weekly net assets and 0.55% of average weekly net assets in excess of $100,000,000 exceeds the net rate of return on the Fund’s portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares or notes. (The Fund’s “net” assets for this purpose includes the liquidation of any preferred shares out-standing.) If the Fund has insufficient investment income and gains, all or a portion of the distributions to preferred shareholders or interest payments to note holders would come from the common shareholders’ capital. Such distributions and interest payments reduce the net assets attributable to common share-holders and do not reduce the principal due to noteholders on maturity or the liquidation preference to which preferred shareholders are entitled. The Prospectus Supplement relating to any sale of preferred shares will set forth dividend rate on such preferred shares. |
In addition, the Fund would pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred shares or notes, including the advisory fees on the incremental assets attributable to the preferred shares or notes.
Holders of preferred shares and notes may have different interests than holders of common shares and may at times have disproportionate influence over the Fund’s affairs. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt, such as notes) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding, which is referred to as the “asset coverage” required by the 1940 Act. In the event the Fund fails to maintain an asset coverage of 100% for any notes outstanding for certain periods of time, the 1940 Act requires that either an event of default be declared or that the holders of such notes have the right to elect a majority of the Fund’s Trustees until asset coverage recovers to 110%. In addition, holders of preferred shares, voting separately as a single class, have the right (subject to the rights of noteholders) to elect two members of the Board at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the Trustees until such arrearage is completely eliminated. In addition, preferred shareholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion of the Fund to open-end status, and accordingly can veto any such changes. Further, interest on notes will be payable when due as described in a Prospectus Supplement and if the Fund does not pay interest when due, it will trigger an event of default and the Fund expects to be restricted from declaring dividends and making other distributions with respect to common shares and preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority in principal amount of a series of outstanding notes or the trustee
will be able to declare the principal amount of that series of notes immediately due and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring distributions on, or repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of declaring distributions on preferred shares). The Fund’s common shares are structurally subordinated as to income and residual value to any preferred shares or notes in the Fund’s capital structure, in terms of priority to income and payment in liquidation.
Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of the Fund’s common shares and preferred shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund’s ability to maintain its qualification as a RIC for U.S. federal income tax purposes. While the Fund intends to redeem its preferred shares or notes to the extent necessary to enable the Fund to distribute its income as required to maintain its qualification as a RIC under the Code, there can be no assurance that such actions can be effected in time to meet the Code requirements.
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Portfolio Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain attractive credit quality ratings for preferred shares or notes, the Fund must comply with investment quality, diversification and other guidelines established by the relevant rating agencies. These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. In the event that a rating on the Fund’s preferred shares or notes is lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred shares or notes, and the common shares of the Fund will lose the potential benefits associated with a leveraged capital structure. |
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Impact on Common Shares. Assuming that leverage will (1) be equal in amount to approximately 25% of the Fund’s total net assets (the Fund’s amount of outstanding financial leverage at September 30, 2023), and (2) charge interest or involve dividend payments at a projected blended annual average leverage dividend or interest rate of 5.23% (the average interest rate on the Fund’s outstanding financial leverage at September 30, 2023), then the annual return generated by the Fund’s portfolio (net of estimated ex-penses) must exceed approximately 1.36% of the Fund’s total net assets in order to cover such interest or dividend payments and other expenses specifically related to leverage. Of course, these numbers are merely estimates, used for illustration. Actual dividend rates, interest or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above. |
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Market Discount Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Market Discount Risk. The Fund is a diversified, closed-end management investment company. Whether investors will realize gains or losses upon the sale of additional securities of the Fund will depend upon the market price of the securities at the time of sale, which may be less or more than the Fund’s net asset value per share or the liquidation value of any Fund preferred shares issued. Since the market price of any additional securities the Fund may issue will be affected by such factors as the Fund’s dividend and distribution levels (which are in turn affected by expenses), dividend and distribution stability, net asset value, market liquidity, the relative demand for and supply of such securities in the market, general market and economic conditions and other factors beyond the control of the Fund, we cannot predict whether any such securities will trade at, below or above net asset value or at, below or above their public offering price or at, below or above their liquidation value, as applicable. For example, common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a discount. This risk may be greater for investors expecting to sell their securities of the Fund soon after the completion of a public offering for such securities. The risk of a market price discount from net asset value is separate and in addition to the risk that net asset value itself may decline. The Fund’s securities are designed primarily for long term investors, and investors in the shares should not view the Fund as a vehicle for trading purposes.
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Long Term Objective Not A Complete Investment Program [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Long Term Objective; Not a Complete Investment Program. The Fund is intended for investors seeking long term growth of capital. The Fund is not meant to provide a vehicle for those who wish to play short term swings in the stock market. An investment in shares of the Fund should not be considered a complete investment program. Each shareholder should take into account the Fund’s investment objectives as well as the shareholder’s other investments when considering an investment in the Fund.
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Management Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Investment Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
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Decision Making Authority Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Fund, except as set forth in the Fund’s governing documents. The authority for all such decisions is generally delegated to the Board, who in turn, has delegated the day-to-day management of the Fund’s investment activities to the Investment Adviser, subject to oversight by the Board.
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Dependence On Key Personnel [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Dependence on Key Personnel. The Investment Adviser is dependent upon the expertise of Mr. James Dinsmore, who serves as the Fund’s portfolio manager, in providing advisory services with respect to the Fund’s investments. If the Investment Adviser were to lose the services of Mr. James Dinsmore, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could
be found for Mr. James Dinsmore in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
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Market Disruption And Geopolitical Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as localized wars, instability, new and ongoing pandemics (such as COVID-19), epidemics or outbreaks of infectious diseases in certain parts of the world, natural/environmental disasters in certain parts of the world, terrorist attacks in the United States and around the world, trade or tariff arrangements, social and political discord, debt crises, sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, historical adversaries and the international community generally, new and continued political unrest in various countries, the exit or potential exit of one or more countries from the EU or the Economic and Monetary Union, continued changes in the balance of political power among and within the branches of the U.S. government, and government shutdowns, among others, may result in market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide.
The consequences of the conflict between Russia and Ukraine, including international sanctions, the potential impact on inflation and increased disruption to supply chains may impact our portfolio companies, result in an economic downturn or recession either globally or locally in the U.S. or other economics, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited “cold” wars or in the form a virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on the Fund’s returns and net asset value. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, may in the future result in additional government shutdowns, which could have a material adverse effect on the Funds’ investments and operations. In addition, the Funds’ ability to raise additional capital in the future through the sale of securities could be materially affected by a government shutdown. Additional and/or prolonged U.S. government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree.
Periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
While the extreme volatility and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007 and 2008 had, until the recent coronavirus (COVID-19) outbreak, generally subsided, uncertainty and periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s performance or impair the Fund’s ability to achieve its investment objective.
The occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. It is not known how long the securities markets may be affected by similar events, and the effects of similar events in the future on the U.S. economy and securities markets cannot be predicted. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
As previously discussed, Brexit has led to volatility in the financial markets of the UK and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The decision made in the British referendum may also lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the ability of the Fund and its investments to execute its respective strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these changes on the value of our assets or the Fund’s common shares or market conditions generally, is uncertain.
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Economic Events And Market Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Economic Events and Market Risk. Periods of market volatility remain, and may continue to occur in the future, in response to various political, social and economic events both within and outside of the United States. These conditions have resulted in, and in many cases continue to result in, greater price volatility, less liquidity, widening credit spreads and a lack of price transparency, with many securities remaining illiquid and of uncertain value. Such market conditions may adversely affect the Fund, including by making valuation of some of the Fund’s securities uncertain and/or result in sudden and significant valuation increases or declines in the Fund’s holdings. If there is a significant decline in the value of the Fund’s portfolio, this may impact the asset coverage levels for the Fund’s outstanding leverage.
Risks resulting from any future debt or other economic crisis could also have a detrimental impact on the global economic recovery, the financial condition of financial institutions and our business, financial condition and results of operation. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. To the extent uncertainty regarding the U.S. or global economy negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected. Downgrades to the credit ratings of major banks could result in increased borrowing costs for such banks and negatively affect the broader economy. Moreover, Federal Reserve policy, including with respect to certain interest rates, may also adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. Market volatility, rising interest rates and/or a return to unfavorable economic conditions could impair the Fund’s ability to achieve its investment objectives.
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Regulation And Government Intervention Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Regulation and Government Intervention Risk. Changes enacted by the current presidential administration could significantly impact the regulation of financial markets in the U.S. Areas subject to potential change, amendment or repeal include trade and foreign policy, corporate tax rates, energy and infrastructure policies, the environment and sustainability, criminal and social justice initiatives, immigration, healthcare and the oversight of certain federal financial regulatory agencies and the Federal Reserve. Certain of these changes can, and have, been effectuated through executive order. For example, the current administration has taken steps to rejoin the Paris climate accord of 2015 and incentivize certain clean energy technologies, cancel the Keystone XL pipeline, provide military support to Ukraine and change immigration enforcement priorities. Other potential changes that could be pursued by the current presidential administration could include an increase in the corporate income tax rate; changes to regulatory enforcement priorities; and spending on clean energy and infrastructure. It is not possible to predict which, if any, of these actions will be taken or, if taken, their effect on the economy, securities markets or the financial stability of the U.S. The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and the Fund’s ability to achieve its investment objectives.
Additional risks arising from the differences in expressed policy preferences among the various constituencies in the branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have a material adverse effect on the Fund’s net asset value.
In addition, the rules dealing with the U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain
dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, on August 16, 2022, the Biden administration signed into law the Inflation Reduction Act, which modifies key aspects of the Code, including by creating an alternative minimum tax on certain corporations and an excise tax on stock repurchases by certain corporations. The effect of these and other changes is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund’s shares and their indirect effect on the value of the Fund’s assets, Fund shares or market conditions generally.
In addition, the U.S. government has proposed and adopted multiple regulations that could have a long-lasting impact on the Fund and on the closed-end fund industry in general. The SEC’s final rules and amendments that modernize reporting and disclosure, along with other potential upcoming regulations, could, among other things, restrict the Fund’s ability to engage in transactions, and/or increase overall expenses of the Fund.
The Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Fund and its ability to achieve its investment objective(s).
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Deflation Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
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Loans Of Portfolio Securities Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Loans of Portfolio Securities Risk. Consistent with applicable regulatory requirements and the Fund’s investment restrictions, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times collateralized by cash or cash equivalents which are maintained at all times in an amount equal to at least 100% of the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short term highly liquid obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale. The Fund’s loans of portfolio securities will be collateralized in accordance with applicable regulatory requirements, which means that “cash equivalents” accepted as collateral will be limited to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or irrevocable letters of credit issued by a bank (other than a borrower of the Fund’s portfolio securities or any affiliate of such borrower) which qualifies as a custodian bank for an investment company under the 1940 Act. The Fund’s ability to lend portfolio securities may be limited by rating agency guidelines (if any).
A loan may generally be terminated by the borrower on one business days’ notice, or by the Fund at any time thereby requiring the borrower to redeliver the borrowed securities within the normal and customary settlement time for securities transactions. If the borrower fails to deliver the loaned securities within the normal and customary settlement time for securities transactions, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral pledged by the borrower. As with any extensions of credit, there are risks of delay in recovery and in some cases even
loss of rights in the collateral should the borrower of the securities violate the terms of the loan or fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Investment Adviser to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund.
The risks associated with loans of portfolio securities are substantially similar to those associated with repurchase agreements. Thus, if the counterparty to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund’s ability to sell the collateral and the Fund would suffer a loss. Moreover, because the Fund will reinvest any cash collateral it receives, as described above, the Fund is subject to the risk that the value of the investments it makes will decline and result in losses to the Fund. These losses, in extreme circumstances such as the 2007-2009 financial crisis, could be substantial and have a significant adverse impact on the Fund and its shareholders. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund’s investment in such loaned securities. The Fund will pay reasonable finder’s, administrative and custodial fees in connection with a loan of its securities, and may also pay fees to one or more securities lending agents and/or pay other fees or rebates to borrowers.
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Investment Dilution Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Investment Dilution Risk. The Fund’s investors do not have preemptive rights to any shares the Fund may issue in the future. The Fund’s Declaration of Trust authorizes it to issue an unlimited number of shares. The Board may make certain amendments to the Declaration of Trust. After an investor purchases shares, the Fund may sell additional shares or other classes of shares in the future or issue equity interests in private offerings. To the extent the Fund issues additional equity interests after an investor purchases its shares, such investor’s percentage ownership interest in the Fund will be diluted.
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Legal Tax And Regulatory Risks [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Fund or its shareholders. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability of the Fund to pursue its investment strategies. Similarly, the Biden administration has indicated that it intends to modify key aspects of the Code, including by increasing corporate and individual tax rates. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in the Fund.
We cannot assure you what percentage of the distributions paid on the Fund’s shares, if any, will consist of tax-advantaged qualified dividend income or long term capital gains or what the tax rates on various types of income will be in future years.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, meet certain asset diversification tests, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its “investment company
taxable income.” Statutory limitations on distributions on the common shares if the Fund fails to satisfy the 1940 Act’s asset coverage requirements could jeopardize the Fund’s ability to meet such distribution requirements. While the Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary in order to maintain compliance with such asset coverage requirements, there can be no assurance that such actions can be effected in time to meet the Code requirements. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The resulting corporate taxes would materially reduce the Fund’s net assets and the amount of cash available for distribution to shareholders. For a more complete discussion of these and other U.S. federal income tax considerations.
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Nineteen Forty Act Regulation [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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1940 Act Regulation. The Fund is a registered closed-end investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
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Legislation Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Legislation Risk. At any time after the date of this Annual Report, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation may change the way in which the Fund itself is regulated. The Investment Adviser cannot predict the effects of any new governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Fund’s ability to achieve its investment objectives.
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Reliance On Service Providers Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Reliance on Service Providers Risk. The Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Fund’s operations and financial performance. Failure by any service provider to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Fund’s performance and returns to shareholders. The termination of the Fund’s relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material adverse effect on the Fund’s performance and returns to shareholders.
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Cyber Security Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Cyber Security Risk. 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 are becoming increasingly common and more sophisticated, and may be perpetrated by computer hackers, cyber-terrorists or others engaged in corporate espionage. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact the Fund and its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders 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 have been a number of recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well as cyberattacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments. Although service providers typically have policies and procedures, business continuity plans and/or risk management systems intended to identify and mitigate cyber incidents, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber security policies, plans and systems put in place by its service providers or any other third parties whose operations may affect the Fund or its shareholders. 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.
Because technology is consistently changing, new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks have not been identified or prepared for, or that an attack may not be detected, which puts limitations on the Fund’s ability to plan for or respond to a cyber attack. In addition to deliberate cyber attacks, unintentional cyber incidents can occur, such as the inadvertent release of confidential information by the Fund or its service providers. Like other funds and business enterprises, the Fund and its service providers are subject to the risk of cyber incidents occurring from time to time.
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Misconduct Of Employees And Of Service Providers Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Misconduct of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Adviser or the Fund’s service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Fund’s service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting he Fund’s business prospects or future marketing activities. Despite the Investment Adviser’s due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Adviser’s due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Investment Adviser will identify or prevent any such misconduct.
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Anti Takeover Provisions [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Anti-Takeover Provisions. The Agreement and Declaration of Trust and By-Laws of the Fund include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to an open-end fund.
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Dilution Risk [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Dilution Risk. If the Fund determines to conduct a rights offering to subscribe for common shares, holders of common shares may experience dilution or accretion of the aggregate net asset value of their common shares. Such dilution or accretion will depend upon whether (i) such shareholders participate in the rights offering and (ii) the Fund’s net asset value per common share is above or below the subscription price on the expiration date of the rights offering.
Shareholders who do not exercise their subscription rights may, at the completion of such an offering, own a smaller proportional interest in the Fund than if they exercised their subscription rights. As a result of such an offering, a shareholder may experience dilution in net asset value per share if the subscription price per share is below the net asset value per share on the expiration date. If the subscription price per share is below the net asset value per share of the Fund’s shares on the expiration date, a shareholder will experience an immediate dilution of the aggregate net asset value of such shareholder’s shares if the shareholder does not participate in such an offering and the shareholder will experience a reduction in the net asset value per share of such shareholder’s shares whether or not the shareholder participates in such an offering. The Fund cannot state precisely the extent of this dilution (if any) if the shareholder does not exercise such shareholder’s subscription rights because the Fund does not know what the net asset value per share will be when the offer expires or what proportion of the subscription rights will be exercised.
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Illiquidity Prior To Exchange Listing [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Illiquidity Prior to Exchange Listing. Prior to an offering, there will be no public market for any series of fixed rate preferred shares. In the event any series of fixed rate preferred shares are issued, we expect to apply to list such shares on a national securities exchange, which will likely be the NYSE American. However, during an initial period, which is not expected to exceed 30 days after the date of its initial issuance, such shares may not be listed on any securities exchange. During such period, the underwriters may make a market in such shares, though they will have no obligation to do so. Consequently, an investment in such shares may be illiquid during such period.
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Market Price Fluctuation [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Market Price Fluctuation. Fixed rate preferred shares may trade at a premium to or discount from liquidation value for various reasons, including changes in interest rates, perceived credit quality and other factors.
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Notes [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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An investment in our notes is subject to special risks. Our notes are not likely to be listed on an exchange or automated quotation system. We cannot assure you that any market will exist for our notes or if a market does exist, whether it will provide holders with liquidity. Broker-dealers that maintain a secondary trading market for the notes are not required to maintain this market, and the Fund is not required to redeem notes if an attempted
secondary market sale fails because of a lack of buyers. To the extent that our notes trade, they may trade at a price either higher or lower than their principal amount depending on interest rates, the rating (if any) on such notes and other factors.
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Special Risks Notes Holders Preferred Shares [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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As provided in the 1940 Act, and subject to compliance with the Fund’s investment limitations, the Fund may issue notes. In the event the Fund were to issue such securities, the Fund’s obligations to pay dividends or make distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and interest payments due and owing with respect to its outstanding notes. Accordingly, the Fund’s issuance of notes would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.
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Common Share Repurchases [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Common Share Repurchases. Repurchases of common shares by the Fund may reduce the net asset coverage of the notes and preferred shares, which could adversely affect their liquidity or market prices.
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Common Share Distribution Policy [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Common Share Distribution Policy. In the event the Fund does not generate a total return from dividends and interest received and net realized capital gains in an amount at least equal to its distributions for a given year, the Fund may return capital as part of its distribution. This would decrease the asset coverage per share with respect to the Fund’s notes or preferred shares, which could adversely affect their liquidity or market prices. For the fiscal year ended September 30, 2023, the Fund made distributions of $0.52 per common share, none of which constituted a return of capital. The composition of each distribution is estimated based on earnings as of the record date for the distribution. The actual composition of each distribution may change based on the Fund’s investment activity through the end of the calendar year.
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Credit Quality Ratings [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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Credit
Quality Ratings. The Fund may obtain credit quality ratings for its preferred shares or notes; however, it is not required
to do so and may issue preferred shares or notes without any rating. If rated, the Fund does not impose any minimum rating necessary
to issue such preferred shares or notes. In order to obtain and maintain attractive credit quality ratings for preferred shares or
notes, if desired, the Fund’s portfolio must satisfy over-collateralization tests established by the relevant rating agencies.
These tests are more difficult to satisfy to the extent the Fund’s portfolio securities are of lower credit quality, longer
maturity or not diversified by issuer and industry.
These guidelines could affect portfolio decisions and may be more stringent than those imposed by the 1940 Act. A rating (if any) by a rating agency does not eliminate or necessarily mitigate the risks of investing in our preferred shares or notes, and a rating may not fully or accurately reflect all of the securities’ credit risks. A rating (if any) does not address liquidity or any other market risks of the securities being rated. A rating agency could downgrade the rating of our notes or preferred shares, which may make such securities less liquid in the
secondary market. If a rating agency downgrades the rating assigned to notes or preferred shares, we may alter our portfolio or redeem the preferred securities or notes under certain circumstances.
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Subscription Rights [Member] |
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General Description of Registrant [Abstract] |
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Risk [Text Block] |
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There is a risk that changes in market conditions may result in the underlying common or preferred shares purchasable upon exercise of the subscription rights being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the subscription rights. Investors who receive subscription rights may find that there is no market to sell rights they do not wish to exercise. If investors exercise only a portion of the rights, the number of common or preferred shares issued may be reduced, and the common or preferred shares may trade at less favorable prices than larger offerings for similar securities.
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Ellsworth Growth and Inc... (AMEX:ECF-A)
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