nv2za
As filed
with the Securities and Exchange Commission on August 13, 2012
1933 Act File No. 333-181550
1940 Act File No. 811-04173
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
|
|
þ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
|
|
|
þ Pre-Effective Amendment No. 1 |
|
|
|
o Post-Effective Amendment No. |
and/or
|
|
þ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
|
|
|
þ Amendment No. 18 |
JOHN HANCOCK INVESTORS TRUST
(Exact Name of Registrant as Specified in Charter)
601 Congress Street, Boston, Massachusetts 02210-2805
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, including Area Code: 1-800-225-6020
Thomas M. Kinzler, Esq.
601 Congress Street, Boston, Massachusetts 02210-2805
Name and Address (of Agent for Service)
Copies of Communications to:
Mark P. Goshko, Esq.
K&L Gates LLP
One Lincoln Street
Boston, Massachusetts 02111-2950
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous
basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following box. þ
It is proposed that this filing will become effective (check appropriate box):
|
|
þ when declared effective pursuant to Section 8(c) |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum |
|
|
Proposed Maximum |
|
|
|
|
|
|
|
|
|
|
|
Offering Price Per |
|
|
Aggregate Offering |
|
|
Amount of |
|
|
|
|
|
Amount Being |
|
|
Common Share |
|
|
Price |
|
|
Registration Fee |
|
|
Title of Securities Being Registered |
|
|
Registered |
|
|
(1) |
|
|
(1) |
|
|
(1)(2) |
|
|
Common Shares of Beneficial
Interest, no par value per share |
|
|
1,000,000 |
|
|
$24.13 |
|
|
$24,130,000 |
|
|
$2,765.30 |
|
|
|
|
|
(1) |
|
Estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) under the
Securities Act of 1933 based on the average of the high and low
sales prices of the Common Shares of beneficial interest on August 10, 2012 as reported on the NYSE. |
|
(2) |
|
Transmitted prior to filing. |
The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the Registration Statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not soliciting an offer
to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 13, 2012
Base Prospectus
1,000,000 Shares
John Hancock Investors Trust
Common Shares
John Hancock Investors Trust (the Fund) is a diversified, closed-end management investment
company. The Fund commenced operations in January 1971 following an initial public offering.
Investment Objectives. The Funds primary investment objective is to generate income for
distribution to its shareholders, with capital appreciation as a secondary objective. There can be
no assurance that the Fund will achieve its investment objectives.
The Offering. The Fund may offer, from time to time, in one or more offerings, the Funds common
shares of beneficial interest, no par value (Common Shares). Common Shares may be offered at
prices and on terms to be set forth in one or more supplements to this Prospectus (each, a
Prospectus Supplement). You should read this Prospectus and the applicable Prospectus Supplement
carefully before you invest in Common Shares.
Common Shares may be offered directly to one or more purchasers, through agents designated from
time to time by us, or to or through underwriters or dealers. The Prospectus Supplement relating
to the offering will identify any agents, underwriters or dealers involved in the offer or sale of
Common Shares, and will set forth any applicable offering price, sales, load, fee, commission or
discount arrangement between the Fund and its agents or underwriters, or among its underwriters, or
the basis upon which such amount may be calculated, net proceeds and use of proceeds, and the terms
of any sale. The Fund may not sell any Common Shares through agents, underwriters or dealers
without delivery of a Prospectus Supplement describing the method and terms of the particular
offering of the Common Shares.
Investment Strategy. The preponderance of the Funds assets are invested in a diversified
portfolio of debt securities issued by U.S. and non-U.S. corporations and governments, some of
which may carry equity features. The Fund emphasizes corporate debt securities which pay interest
on a fixed or contingent basis and which may possess certain equity features, such as conversion or
exchange rights, warrants for the acquisition of the stock of the same or different issuers, or
participations based on revenues, sales or profits. The Fund may invest up to 70% of its total
assets in debt securities rated below investment grade, commonly known as junk bonds. The Fund
also may purchase preferred securities and may acquire common stock through the exercise of
conversion or exchange rights acquired in connection with other securities owned by the Fund. The
Fund will not acquire any additional preferred securities or common stock if as a result of that
acquisition the value of all preferred securities and common stocks in the Funds portfolio would
exceed 20% of its total assets. Up to 50% of the value of the Funds assets may be invested in
restricted securities acquired through private placements. The fund may purchase mortgage-backed
securities. The Fund also may invest in repurchase agreements.
Investment Adviser and Subadviser. The Funds investment adviser is John Hancock Advisers, LLC
(the Adviser or JHA) and its subadviser is John Hancock Asset Management a division of Manulife
Asset Management (US) LLC (the Subadviser), formerly MFC Global Investment Management (U.S.), LLC
and Sovereign Asset Management LLC.
Exchange listing. The Common Shares are listed on the New York Stock Exchange (NYSE) under the
symbol JHI. Any new Common Shares offered and sold also will be listed on the NYSE and trade
under this symbol. As of May 15, 2012 the last reported sale price for the Common Shares was
$23.48.
Leverage. The Fund may use leverage to the extent permitted by the Investment Company Act of 1940,
as amended (the 1940 Act). The Fund currently utilizes leverage by borrowing pursuant to a
Committed Facilities Agreement. See Other Investment PoliciesBorrowing. In addition, the Fund
may use leverage by borrowing from other financial institutions or through the issuance of
preferred shares, reverse repurchase agreements or other leverage financing which, together with
borrowings, may be in an amount equal to 33⅓% of the Funds managed assets immediately after giving
effect to the borrowing, issuance or transaction. The Fund also may borrow for temporary,
emergency or other purposes as permitted under the 1940 Act. Any such indebtedness would be in
addition to the combined effective leverage ratio of 33⅓% of the Funds managed assets immediately
after giving effect to the borrowing. The Funds leverage strategy may not be successful.
The Common Shares have traded both at a premium and a discount to net asset value (NAV). The
Fund cannot predict whether Common Shares will trade in the future at a premium or discount to NAV.
The provisions of the 1940 Act generally require that the
public offering price of common shares (less any underwriting commissions and discounts) must equal
or exceed the NAV per share of a companys common stock (calculated within 48 hours of pricing).
The Funds issuance of Common Shares may have an adverse effect on prices in the secondary market
for the Funds Common Shares by increasing the number of Common Shares available, which may put
downward pressure on the market price for the Funds Common Shares. Shares of common stock of closed-end
investment companies frequently trade at a discount from NAV, which may increase investors risk of
loss.
Investing in the Funds Common Shares involves certain risks. See Risk Factors beginning on
page 28.
Neither the Securities and Exchange Commission (the SEC) nor any state securities commission has
approved or disapproved of these securities or determined whether this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
This Prospectus, together with any other applicable Prospectus Supplement, sets forth concisely the
information about the Fund that a prospective investor should know before investing. You should
read this Prospectus and the applicable Prospectus Supplement, which contain important information,
before deciding whether to invest in the Common Shares. You should retain the Prospectus and
Prospectus Supplement for future reference. A Statement of Additional Information (SAI), dated
[ ], 2012 containing additional information about the Fund, has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus. The Table of Contents for the SAI
is on page 55 of the Prospectus. A copy of the SAI may be obtained without charge by visiting the
Funds website (www.jhfunds.com) or by calling 1-800-225-6020 (toll-free) or from the SECs website
at www.sec.gov. Copies of the Funds annual report and semi-annual report and other information
about the Fund may be obtained upon request by writing to the Fund, by calling 1-800-225-6020, or
by visiting the Funds website at www.jhfunds.com. You also may obtain a copy of any information
regarding the Fund filed with the SEC from the SECs website (www.sec.gov).
The Funds Common Shares do not represent a deposit or obligation of, and are not guaranteed or
endorsed by, any bank or other insured depository institution, and are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Prospectus dated [ ], 2012
ii
You should rely only on the information contained in, or incorporated by reference into, this
Prospectus and any related Prospectus Supplement in making your investment decisions. The Fund has
not authorized any person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. The Fund is not making an offer
to sell the Common Shares in any jurisdiction where the offer or sale is not permitted. You should
assume that the information in this Prospectus and any Prospectus Supplement is accurate only as of
the dates on their covers. The Funds business, financial condition and prospects may have changed
since the date of its description in this Prospectus or the date of its description in any
Prospectus Supplement.
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
1 |
|
|
|
|
13 |
|
|
|
|
15 |
|
|
|
|
17 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
28 |
|
|
|
|
39 |
|
|
|
|
41 |
|
|
|
|
42 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
48 |
|
|
|
|
49 |
|
|
|
|
53 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
Until [DATE+25] (25 days after the date of this Prospectus), all dealers that buy, sell or trade
the Common Shares, whether or not participating in this offering, may be required to deliver a
Prospectus and the applicable Prospectus Supplement. This requirement is in addition to the
dealers obligation to deliver a Prospectus and the applicable Prospectus Supplement when acting as
underwriters and with respect to their unsold allotments or subscriptions.
iii
Prospectus Summary
This is only a summary. You should review the more detailed information elsewhere in this
prospectus (Prospectus), in any related supplement to this Prospectus (each, a Prospectus
Supplement), and in the Statement of Additional Information (the SAI) prior to making an
investment in the Fund. See Risk Factors.
|
|
|
The Fund
|
|
John Hancock Investors Trust (the Fund) is a diversified,
closed-end management investment company. The Fund commenced
operations in January 1971 following an initial public offering. |
|
|
|
Investment Objectives
|
|
The Funds primary investment objective is to
generate income for distribution to its
shareholders, with capital appreciation as a
secondary objective. There can be no assurance that
the Fund will achieve its investment objectives.
The Funds investment objectives are not fundamental
and may be changed without shareholder approval. |
|
|
|
The Offering
|
|
The Fund may offer, from time to time, in one or more
offerings, up to 1,000,000 of common shares of the Fund
(Common Shares) on terms to be determined at the time of
the offering. The Common Shares may be offered at prices and
on terms to be set forth in one or more Prospectus
Supplements. You should read this Prospectus and the
applicable Prospectus Supplement carefully before you invest
in Common Shares. Common Shares may be offered directly to
one or more purchasers, through agents designated from time
to time by the Fund, or to or through underwriters or
dealers. The Prospectus Supplement relating to the offering
will identify any agents, underwriters or dealers involved in
the offer or sale of Common Shares, and will set forth any
applicable offering price, sales load, fee, commission or
discount arrangement between the Fund and its agents or
underwriters, or among its underwriters, or the basis upon
which such amount may be calculated, net proceeds and use of
proceeds, and the terms of any sale. See Plan of
Distribution. The Fund may not sell any of Common Shares
through agents, underwriters or dealers without delivery of a
Prospectus Supplement describing the method and terms of the
particular offering of Common Shares. |
|
|
|
Listing and Symbol
|
|
The Common Shares are listed on the New York Stock
Exchange (NYSE) under the symbol JHI. Any new
Common Shares offered and sold also will be listed on
the NYSE and trade under this symbol. As of August 9,
2012, the last reported sale price for the Common
Shares was $24.10. |
|
|
|
Investment Strategy
|
|
The preponderance of the Funds assets are invested in
a diversified portfolio of debt securities issued by
U.S. and non-U.S. corporations and governments, some
of which may carry equity features. The Fund
emphasizes corporate debt securities which pay
interest on a fixed or contingent basis and which may
possess certain equity features, such as conversion or
exchange rights, warrants for the acquisition of the
stock of the same or different issuers, or
participations based on revenues, sales or profits.
The Fund also may purchase preferred securities and
may acquire common stock through the exercise of
conversion or exchange rights acquired in connection
with other securities owned by the Fund. The Fund
will not acquire any additional preferred securities
or common stock if as a result of that acquisition the
value of all preferred securities and common stocks in
the Funds portfolio would exceed 20% of its total
assets. Up to 50% of the value of the Funds assets
may be invested in restricted securities acquired
through private placements. The Fund may purchase mortgage-backed
securities. The Fund also may invest
in repurchase agreements. |
|
|
|
At least 30% of Funds total assets will be
represented by (a) debt securities which are rated, at
the time of acquisition, investment grade (i.e., at
least Baa by Moodys Investors Service, Inc. |
1
|
|
|
|
|
(Moodys) or BBB by Standard & Poors Rating Group
(S&P)) or in unrated securities determined by the
Subadviser to be of comparable credit quality,
(b) securities issued or guaranteed by the U.S.
government or its agencies and instrumentalities, and
(c) cash or cash equivalents. The remaining 70% of
the Funds total assets may be invested in debt
securities of any credit quality, including securities
rated below investment grade (i.e., rated Ba or
lower by Moodys or BB or lower by S&P). Debt
securities of below investment grade quality are
regarded as having predominantly speculative
characteristics with respect to the issuers ability
to pay interest and repay principal and are commonly
referred to as junk bonds or high yield
securities. While the Fund focuses on intermediate
and longer-term debt securities, the Fund may acquire
securities of any maturity and is not subject to any
limits as to the average maturity of its overall
portfolio. |
|
|
|
|
|
Securities rated BBB by S&P are regarded by S&P as
having an adequate capacity to pay interest or
dividends and repay capital or principal, as the case
may be; whereas such securities normally exhibit
adequate protection parameters, adverse economic
conditions or changing circumstances are more likely,
in the opinion of S&P, to lead to a weakened capacity
to pay interest or dividends and repay capital or
principal for securities in this category than in
higher rating categories. Securities rated Baa by
Moodys are considered by Moodys as medium to lower
medium grade securities; they are neither highly
protected nor poorly secured; interest or dividend
payments and capital or principal security, as the
case may be, appear to Moodys to be adequate for the
present but certain protective elements may be lacking
or may be characteristically unreliable over time;
and, in the opinion of Moodys, securities in this
rating category lack outstanding investment
characteristics and in fact have speculative
characteristics as well. Below investment grade
securities and comparable unrated securities involve
substantial risk of loss, are considered highly
speculative with respect to the issuers ability to
pay interest and any required redemption or principal
payments and are susceptible to default or decline in
market value due to adverse economic and business
developments. Securities rated Ba or BB may face
significant ongoing uncertainties or exposure to
adverse business, financial or economic conditions
that could lead to the issuer being unable to meet its
financial commitments. The protection of interest and
principal may be moderate and not well safeguarded
during both good and bad times. Securities rated B
generally lack the characteristics of a desirable
investment. Assurance of interest and principal
payments over the long term may be low, and such
securities are more vulnerable to nonpayment than
obligations rated BB or Ba. Adverse business,
financial or economic conditions will likely impair
the issuers capacity or willingness to meet its
financial commitments. The descriptions of the
investment grade rating categories by Moodys and S&P,
including a description of their speculative
characteristics, are set forth in the SAI. All
references to securities ratings by Moodys and S&P in
this Prospectus shall, unless otherwise indicated,
include all securities within each such rating
category (e.g., Baa1, Baa2 and Baa3 in the case
of Moodys and BBB+, BBB and BBB- in the case of
S&P). All percentage and ratings limitations on
securities in which the Fund may invest apply at the
time of making an investment and shall not be
considered violated if an investment rating is
subsequently downgraded to a rating that would have
precluded the Funds initial investment in such
security. In the event of such security downgrade,
the Fund will sell the portfolio security as soon as
the Subadviser believes it to be prudent to do so in
order to again cause the Fund to be within the
percentage and ratings limitations set forth in this
Prospectus. In the event that the Fund disposes of a
portfolio security subsequent to its being downgraded,
the Fund may experience a greater risk of loss than if
such security had been sold prior to such downgrading. |
|
|
|
|
|
In managing the Funds portfolio, the Subadviser
concentrates first on sector selection by deciding
which types of bonds and industries to emphasize at a
given time, and then which individual bonds to buy.
When making sector and industry allocations, the
Subadviser tries to anticipate shifts in the business
cycle, using top-down analysis to determine which
sectors and industries may benefit over the next 12
months. In choosing individual securities, the
Subadviser uses bottom-up research to find securities
that appear comparatively undervalued. The Subadviser
looks at bonds of all quality levels and maturities
from many different issuers, |
2
|
|
|
|
|
potentially including
U.S. dollar-denominated securities of foreign
corporations and governments. There can be no
assurance that the Fund will achieve its investment
objectives.
|
|
Investment Adviser
and Subadviser
|
|
The Funds investment adviser is John Hancock Advisers, LLC (the
Adviser or JHA) and its subadviser is John Hancock Asset
Management a division of Manulife Asset Management (US) LLC (the
Subadviser), formerly MFC Global Investment Management (U.S.),
LLC and Sovereign Asset Management LLC.
JHA, the Funds investment adviser, is an indirect
wholly-owned subsidiary of Manulife Financial Corporation.
The Adviser is responsible for overseeing the management of
the Fund, including its day-to-day business operations and
monitoring the Subadviser. As of June 30, 2012, the Adviser
had total assets under management of approximately
$20.7 billion. |
|
|
|
|
|
The Subadviser is responsible for the day-to-day management of
the Funds portfolio investments. The Subadviser, organized
in 1968, is a wholly owned subsidiary of John Hancock Life
Insurance Company (U.S.A.) (a subsidiary of Manulife
Financial, a publicly held, Canadian-based company). As of
June 30, 2012, the Subadviser had total assets under
management of approximately $132.7 billion. |
|
|
|
|
|
See Management of the FundThe Adviser and The Subadviser. |
|
|
|
Distributions
|
|
The Fund makes regular quarterly distributions to holders of
Common Shares (the Common Shareholders) sourced from the
Funds cash available for distribution. Cash available for
distribution consists of the Funds (i) investment company
taxable income, which includes among other things, dividend
and ordinary income after payment of Fund expenses, the
excess of net short-term capital gain over net long-term
capital loss, and income from certain hedging and interest
rate transactions, and (ii) net long-term capital gain (gain
from the sale of capital assets held longer than one year).
The Board of Trustees of the Fund (the Board) may modify
this distribution policy at any time without obtaining the
approval of Common Shareholders. |
|
|
|
|
|
Pursuant to the requirements of the Investment
Company Act of 1940, as amended (the 1940 Act), in the
event the Fund makes distributions from sources other than
income, a notice will accompany each quarterly distribution
with respect to the estimated source of the distribution
made. Such notices will describe the portion, if any, of
the quarterly dividend which, in the Funds good faith
judgment, constitutes long-term capital gain, short-term
capital gain, net investment income or a return of capital.
The actual character of such dividend distributions for U.S.
federal income tax purposes, however, will only be
determined finally by the Fund at the close of its fiscal
year, based on the Funds full year performance and its
actual net investment company taxable income and net capital
gain for the year, which may result in a recharacterization
of amounts distributed during such fiscal year from the
characterization in the quarterly estimates. |
|
|
|
|
|
If, for any calendar year, as discussed above, the total
distributions made exceed the Funds net investment taxable
income and net capital gain, the excess generally will be
treated as a return of capital to each Common Shareholder
(up to the amount of the Common Shareholders basis in his
or her Common Shares) and thereafter as gain from the sale
of Common Shares. The amount treated as a return of capital
reduces the Common Shareholders adjusted basis in his or
her Common Shares, thereby increasing his or her potential
gain or reducing his or her potential loss on the subsequent
sale of his or her Common Shares. Distributions in any year
may include a substantial return of capital component. |
|
|
|
|
|
Distribution rates are based on projected quarterly cash
available for distribution, which may result in fluctuations
in quarterly rates. As a result, the distributions paid by
the Fund for any particular quarter may be more or less than
the amount of cash available for distribution from that
quarterly period. In certain circumstances, the Fund may be
required to sell a portion of its investment portfolio to
fund distributions. Distributions will reduce the Common
Shares net asset value (NAV). |
|
|
|
|
|
The 1940 Act currently limits the number of times the Fund
may distribute long-term capital gain in any tax year, which
may increase the variability of the Funds distributions and
result in certain distributions being comprised more heavily
of long-term capital gain eligible for |
3
|
|
|
|
|
favorable income tax
rates. In the future, the Adviser may seek Board approval
to implement a managed distribution plan for the Fund. The
managed distribution plan would be implemented pursuant to
an exemptive order already granted by the Securities and
Exchange Commission (the SEC), which provides an exemption
from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder
to permit the Fund to include long-term capital gain as a
part of its regular distributions to Common Shareholders
more frequently than would otherwise be permitted by the
1940 Act (generally once or twice per year). If the Fund
implements a managed distribution plan, it would do so
without a vote of the Common Shareholders. |
|
|
|
Dividend Reinvestment
Plan
|
|
The Fund has established an automatic dividend
reinvestment plan (the Plan). Under the Plan,
distributions of dividends and capital gain are
automatically reinvested in Common Shares of the
Fund by Computershare Trust Company, N. A. Every
shareholder holding at least one full share of the
Fund will be automatically enrolled in the Plan.
Shareholders who do not participate in the Plan will
receive all distributions in cash. Common
Shareholders who intend to hold their Common Shares
through a broker or nominee should contact such
broker or nominee regarding the Plan. See Dividend
Reinvestment Plan. |
|
|
|
Closed-End Fund Structure
|
|
Closed-end funds differ from traditional,
open-end management investment companies (which
generally are referred to as mutual funds) in
that closed-end funds generally list their
shares for trading on a securities exchange and
do not redeem their shares at the option of the
shareholder. Mutual funds do not trade on
securities exchanges and issue securities
redeemable at the option of the shareholder.
The continuous outflows of assets in a mutual
fund can make it difficult to manage the funds
investments. Closed-end funds generally are
able to stay more fully invested in securities
that are consistent with their investment
objectives and also have greater flexibility to
make certain types of investments and to use
certain investment strategies, such as financial
leverage and investments in illiquid securities.
The Funds Common Shares are designed primarily
for long-term investors; you should not purchase
Common Shares if you intend to sell them shortly
after purchase. |
|
|
|
|
|
Common shares of closed-end funds frequently
trade at prices lower than their NAV. Since
inception, the market price of the Common Shares
has fluctuated and at times has traded below the
Funds NAV and at times has traded above the
Funds NAV. The Fund cannot predict whether in
the future the Common Shares will trade at,
above or below NAV. In addition to NAV, the
market price of the Funds Common Shares may be
affected by such factors as the Funds dividend
stability, dividend levels, which are in turn
affected by expenses, and market supply and
demand. |
|
|
|
|
|
In recognition of the possibility that the
Common Shares may trade at a discount from their
NAV, and that any such discount may not be in
the best interest of Common Shareholders, the
Board, in consultation with the Adviser, from
time to time may review possible actions to
reduce any such discount. There can be no
assurance that the Board will decide to
undertake any of these actions or that, if
undertaken, such actions would result in the
Common Shares trading at a price equal to or
close to NAV per Common Share. In the event
that the Fund conducts an offering of new Common
Shares and such offering constitutes a
distribution under Regulation M, the Fund and
certain of its affiliates may be subject to an
applicable restricted period that could limit
the timing of any repurchases by the Fund. |
|
|
|
Summary of Risks
|
|
The Funds main risk factors are listed below by general
risks and strategy risks. Before investing, be sure to
read the additional descriptions of these risks beginning
on page [28] of this Prospectus. |
|
|
|
General Risks
|
|
Investment and Market Risk. An investment in Common
Shares is subject to investment risk, including the
possible loss of the entire principal amount invested.
An investment in Common Shares represents an indirect
investment in the securities owned by the Fund, which
generally are traded on a securities exchange or in the
over-the-counter markets. The value of these securities,
like other market investments, may move up or down,
sometimes rapidly and |
4
|
|
|
|
|
unpredictably. Common Shares at
any point in time may be worth less than the original
investment, even after taking into account any
reinvestment of dividends and distributions. |
|
|
|
Tax Risk. To qualify for the special tax treatment available to regulated
investment companies, the Fund must: (i) derive at least 90% of its annual
gross income from certain kinds of investment income; (ii) meet certain asset
diversification requirements at the end of each quarter, and (iii) distribute
in each taxable year at least 90% of its net investment income (including net
interest income and net short term capital gain). If the Fund failed to meet
any of these requirements, subject to the opportunity to cure such failures
under applicable provisions of the Internal Revenue Code of 1986, as amended
(the Code), the Fund would be subject to U.S. federal income tax at regular
corporate rates on its taxable income, including its net capital gain, even if
such income were distributed to its shareholders. All distributions by the
Fund from earnings and profits, including distributions of net capital gain (if
any), would be taxable to the shareholders as ordinary income. In addition, in
order to requalify for taxation as a regulated investment company, the Fund
might be required to recognize unrealized gain, pay substantial taxes and
interest, and make certain distributions. See U.S. Federal Income Tax
Matters.
The tax treatment and characterization of the Funds distributions may vary
significantly from time to time due to the nature of the Funds investments.
The ultimate tax characterization of the Funds distributions in a calendar
year may not finally be determined until after the end of that calendar year.
The Fund may make distributions during a calendar year that exceed the Funds
net investment income and net realized capital gain for that year. In such a
situation, the amount by which the Funds total distributions exceed net
investment income and net realized capital gain generally would be treated as a
return of capital up to the amount of the Common Shareholders tax basis in his
or her Common Shares, with any amounts exceeding such basis treated as gain
from the sale of his or her Common Shares. The Funds income distributions
that qualify for favorable tax treatment may be affected by the Internal
Revenue Services (IRS) interpretations of the Code and future changes in tax
laws and regulations. For instance, Congress is considering numerous proposals
to decrease the federal budget deficit, some of which include increasing U.S.
federal income taxes or decreasing certain favorable tax treatments currently
included in the Code. See U.S. Federal Income Tax Matters.
No assurance can be given as to what percentage of the distributions paid on
the Common Shares, if any, will consist of long-term capital gain or what the
tax rates on various types of income will be in future years. The long-term
capital gain tax rate is currently 15%, and it is currently scheduled to
increase to 20% for tax years beginning after December 31, 2012. See U.S.
Federal Income Tax Matters. |
|
|
|
Distribution Risk. There can be no assurance that quarterly distributions
paid by the Fund to shareholders will be maintained at current levels or
increase over time. The quarterly distributions shareholders receive from the
Fund are derived from the Funds dividends and interest income after payment of
Fund expenses. The Funds cash available for distribution may vary widely over
the short- and long-term. If, for any calendar year, the total distributions
made exceed the Funds net investment taxable income and net capital gain, the
excess generally will be treated as a return of capital to each Common
Shareholder (up to the amount of the Common Shareholders basis in his or her
Common Shares) and thereafter as gain from the sale of Common Shares. The
amount treated as a return of capital reduces the Common Shareholders adjusted
basis in his or her Common Shares, thereby increasing his or her potential gain
or reducing his or her potential loss on the subsequent sale of his or her
Common Shares. Distributions in any year may include a substantial return of
capital component. |
|
|
|
Portfolio Turnover Risk. The Fund may engage in short-term trading
strategies, and securities may be sold without regard to the length of time
held when, in the opinion of the Subadviser, investment considerations warrant
such action. Higher rates of portfolio turnover likely would result in higher
brokerage commissions and may generate short-term capital gain taxable as |
5
|
|
|
|
|
ordinary income, which may have a negative impact on the Funds performance
over time. The portfolio turnover rate of the Fund may vary from year to year,
as well as within a year. |
|
|
|
|
|
Defensive Positions Risk. During periods of adverse market or economic
conditions, the Fund may temporarily invest all or a substantial portion of its
total assets in short-term money market instruments, securities with remaining
maturities of less than one year, cash or cash equivalents. The Fund will not
be pursuing its investment objectives in these circumstances and could miss
favorable market developments. |
|
|
|
|
|
Interest Rate Risk. Interest rate risk is the risk that fixed-income
securities such as debt securities and preferred securities will decline in
value because of changes in market interest rates. When market interest rates
rise, the market value of such securities generally will fall. The Funds
investments in debt securities and preferred securities means that the NAV and
market price of the Common Shares will tend to decline if market interest rates
rise. Given the historically low level of interest rates in recent years and
the likelihood that interest rates will increase when the national economy
strengthens, the risk of the potentially negative impact of rising interest
rates on the value of the Funds portfolio may be significant. In addition,
the longer the average maturity of the Funds portfolio of debt securities, the
greater the potential impact of rising interest rates on the value of the
Funds portfolio and the less flexibility the Fund may have to respond to the
decreasing spread between the yield on its portfolio securities. |
|
|
|
|
|
During periods of declining interest rates, an issuer may exercise its option
to prepay principal of debt securities or to redeem preferred securities
earlier than scheduled, forcing the Fund to reinvest in lower yielding
securities. This is known as call or prepayment risk. During periods of
rising interest rates, the average life of certain types of securities may be
extended because of slower than expected principal payments. This may lock in
a below market interest rate, increase the securitys duration and reduce the
value of the security. This is known as extension risk. |
|
|
|
|
|
Inflation Risk. Inflation risk is the risk that the purchasing power of
assets or income from investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of the
Common Shares and distributions thereon can decline. |
|
|
|
Market Discount Risk. The Funds Common Shares will be offered only when
Common Shares of the Fund are trading at a price equal to or above the Funds
NAV per Common Share plus the per Common Share amount of commissions. As with
any security, the market value of the Common Shares may increase or decrease
from the amount initially paid for the Common Shares. The Funds Common Shares
have traded at both a premium and at a discount to NAV. The shares of
closed-end management investment companies frequently trade at a discount from
their NAV. This characteristic is a risk separate and distinct from the risk
that the Funds NAV could decrease as a result of investment activities.
Investors bear a risk of loss to the extent that the price at which they sell
their shares is lower in relation to the Funds NAV than at the time of
purchase, assuming a stable NAV. |
|
|
|
|
|
Leverage Risk. The Fund is authorized to utilize leverage through borrowings
and/or the issuance of preferred shares, including the issuance of debt
securities. The Fund currently utilizes leverage by borrowing pursuant to a
Committed Facility Agreement (CFA). See Other Investment
PoliciesBorrowing. The Fund reserves the flexibility to utilize leverage by
borrowing from other financial institutions or through the issuance of preferred
shares. There can be no assurance that such a leveraging strategy will be
successful during any period in which it is employed. |
|
|
|
|
|
The Fund utilizes the CFA to increase its assets available for investment. When
the Fund leverages its assets, Common Shareholders bear the fees associated with
the credit facility and have the potential to benefit or be disadvantaged from
the use of leverage. In addition, the fee paid to the Adviser is calculated on
the basis of the Funds average daily managed assets, |
6
|
|
|
|
|
including proceeds from
borrowings and/or the issuance of preferred shares, so the fee will be higher
when leverage is utilized, which may create an incentive for the Adviser to
employ financial leverage. Consequently, the Fund and the Adviser may have
differing interests in determining whether to leverage the Funds assets.
Leverage creates risks that may adversely affect the return for the Common
Shareholders, including: |
|
|
|
|
|
the likelihood of greater volatility of NAV and market price of Common Shares; |
|
|
fluctuations in the interest rate paid for the use of the credit facility; |
|
|
increased operating costs, which may reduce the Funds total return; |
|
|
the potential for a decline in the value of an investment acquired through
leverage, while the Funds obligations under such leverage remains fixed; and |
|
|
the Fund is more likely to have to sell securities in a volatile market in
order to meet asset coverage or other debt compliance requirements. |
|
|
|
|
|
To the extent the returns derived from securities purchased with proceeds
received from leverage exceeds the cost of leverage, the Funds distributions may
be greater than if leverage had not been used. Conversely, if the returns from
the securities purchased with such proceeds are not sufficient to cover the cost
of leverage, the amount available for distribution to Common Shareholders will be
less than if leverage had not been used. In the latter case, the Adviser, in its
best judgment, may nevertheless determine to maintain the Funds leveraged
position if it deems such action to be appropriate. The costs of a borrowing
program and/or an offering of preferred shares would be borne by Common
Shareholders and consequently would result in a reduction of the NAV of Common
Shares. |
|
|
|
|
|
In addition to the risks created by the Funds use of leverage, the Fund is
subject to the risk that it would be unable to timely, or at all, obtain
replacement financing if the CFA is terminated. Were this to happen, the Fund
would be required to de-leverage, selling securities at a potentially inopportune
time and incurring tax consequences. Further, the Funds ability to generate
income from the use of leverage would be adversely affected. |
|
|
|
|
|
Secondary Market for the Common Shares. The issuance of new Common Shares
may have an adverse effect on the secondary market for the Common Shares. When
the Common Shares are trading at a premium, the Fund may issue Common Shares of
the Fund that are sold through transactions effected on the NYSE. The increase
in the amount of the Funds outstanding Common Shares resulting from the
offering of new Common Shares may put downward pressure on the market price for
the Common Shares of the Fund. Common Shares will not be issued at any time
when Common Shares are trading at a price lower than a price equal to the
Funds NAV per Common Share plus the per Common Share amount of commissions. |
|
|
|
|
|
The Fund also issues Common Shares of the Fund through its dividend
reinvestment plan. Common Shares may be issued under the plan at a discount to
the market price for such Common Shares, which may put downward pressure on the
market price for Common Shares of the Fund. |
|
|
|
|
|
The voting power of current Common Shareholders will be diluted to the extent
that such shareholders do not purchase shares in any future Common Share
offerings or do not purchase sufficient shares to maintain their percentage
interest. In addition, if the proceeds of such offering are unable to be
invested as intended, the Funds per Common Share distribution may decrease (or
may consist of return of capital) and the Fund may not participate in market
advances to the same extent as if such proceeds were fully invested as planned. |
|
|
|
Management Risk. The Fund is subject to management risk because it relies on
the Subadvisers ability to pursue the Funds investment objectives. The
Subadviser applies investment techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee that it will produce the
desired results. |
7
|
|
|
|
|
Market Disruption Risk. Instability in the Middle East, the wars in
Afghanistan, Iraq and Libya, geopolitical tensions elsewhere and terrorist
attacks in the U.S. and around the world have resulted in market volatility and
may have long-term effects on the U.S. and worldwide financial markets and may
cause further economic uncertainties in the U.S. and worldwide. The Fund does
not know how long the securities markets will continue to be affected by these
events and cannot predict the effects of these or similar events in the future
on the economy or the securities markets. |
|
|
|
|
|
Natural Disasters and Adverse Weather Conditions. Certain areas of the world
historically have been prone to major natural disasters, such as hurricanes,
earthquakes, typhoons, flooding, tidal waves, tsunamis, erupting volcanoes,
wildfires or droughts, and have been economically sensitive to environmental
events. Such disasters, and the resulting damage, could have a severe and
negative impact on the Funds investment portfolio and, in the longer term,
could impair the ability of issuers in which the Fund invests to conduct their
businesses in the manner normally conducted. Adverse weather conditions also
may have a particularly significant negative affect on issuers in the
agricultural sector and on insurance companies that insure against the impact
of natural disasters. |
|
|
|
|
|
Recent Events Risk. The debt and equity capital markets in the U.S. have
been negatively impacted by significant write-offs in the financial services
sector relating to sub-prime mortgages and the re-pricing of credit risk in the
broadly syndicated market, among other things. These events, along with the
deterioration of the housing market, the failure of major financial
institutions and the resulting U.S. federal government actions have led to a
decline in general economic conditions, which have materially and adversely
impacted the broader financial and credit markets and have reduced the
availability of debt and equity capital for the market as a whole and financial
firms in particular. These events have been adversely affecting the
willingness of some lenders to extend credit, in general, which may make it
more difficult for issuers of debt securities to obtain financings or
refinancings for their investment or lending activities or operations. There
is a risk that such issuers will be unable to successfully complete such
financings or refinancings. In particular, because of the current conditions
in the credit markets, issuers of debt securities may be subject to increased
cost for debt, tightening underwriting standards and reduced liquidity for
loans they make, securities they purchase and securities they issue. |
|
|
|
|
|
These events may increase the volatility of the value of securities owned by
the Fund and/or result in sudden and significant valuation increases or
declines in its portfolio. These events also may make it more difficult for
the Fund to accurately value its securities or to sell its securities on a
timely basis. A significant decline in the value of the Funds portfolio
likely would result in a significant decline in the value of your investment in
the Fund. Prolonged continuation or further deterioration of current market
conditions could adversely impact the Funds portfolio. |
|
|
|
|
|
Changes in U.S. Law. Changes in the state and U.S. federal laws applicable
to the Fund, including changes to state and U.S. federal tax laws, or
applicable to the Adviser, the Subadviser and other securities or instruments
in which the Fund may invest, may negatively affect the Funds returns to
Common Shareholders. The Fund may need to modify its investment strategy in
the future in order to satisfy new regulatory requirements or to compete in a
changed business environment. |
|
|
|
|
|
Anti-takeover Provisions. The Funds Agreement and Declaration of Trust
includes provisions that could limit the ability of other persons or entities
to acquire control of the Fund or to change the composition of its Board.
These provisions may deprive shareholders of opportunities to sell their Common
Shares at a premium over the then current market price of the Common Shares.
See Certain Provisions in the Declaration of Trust and By-LawsAnti-takeover
provisions. |
8
|
|
|
Strategy Risks
|
|
Issuer Risk. An issuer of a security may perform
poorly and, therefore, the value of its stocks and bonds
may decline. An issuer of securities held by the Fund
could default or have its credit rating downgraded. |
|
|
|
|
|
Credit and Counterparty Risk. The issuer or guarantor of a fixed-income
security, the counterparty to an over-the-counter derivatives contract or a
borrower of the Funds securities may be unable or unwilling to make timely
principal, interest or settlement payments, or otherwise honor its obligations.
Funds that invest in fixed-income securities are subject to varying degrees of
risk that the issuers of the securities will have their credit rating
downgraded or will default, potentially reducing the Funds share price and
income level. |
|
|
|
|
|
Corporate Debt Securities Risk. Corporate debt obligations are subject to
the risk of an issuers inability to meet principal and interest payments on
the obligations and also may be subject to price volatility due to such factors
as market interest rates, market perception of the creditworthiness of the
issuer and general market liquidity. |
|
|
|
|
|
U.S. Government Securities Risk. 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 U.S. 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. |
|
|
|
|
|
Fixed-income Securities Risk. Fixed-income securities are affected by
changes in interest rates and credit quality. A rise in interest rates
typically causes bond prices to fall. The longer the average maturity of the
bonds held by the Fund, the more sensitive the Fund is likely to be to
interest-rate changes. There is the possibility that the issuer of the
security will not repay all or a portion of the principal borrowed and will not
make all interest payments. |
|
|
|
|
|
Lower-rated Fixed-income Securities Risk and High-yield Securities Risk.
Lower-rated fixed-income securities and high-yield fixed-income securities
(commonly known as junk bonds) are subject to greater credit quality risk and
risk of default than higher-rated fixed-income securities. These securities
may be considered speculative and the value of these securities can be more
volatile due to increased sensitivity to adverse issuer, political, regulatory,
market or economic developments and can be difficult to resell. |
|
|
|
|
|
Mortgage-backed and Asset-backed Securities Risk. Different types of
mortgage-backed securities and asset-backed securities are subject to different
combinations of prepayment, extension, interest-rate and/or other market risks. |
|
|
|
|
|
Inverse interest-only securities. Inverse interest-only securities that
are mortgage-backed securities are subject to the same risks as other
mortgage-backed securities. In addition, the coupon on an inverse
interest-only security can be extremely sensitive to changes in prevailing
interest rates. |
|
|
|
|
|
Stripped mortgage securities. Stripped mortgage securities are subject to
the same risks as other mortgage-backed securities, i.e., different
combinations of prepayment, extension, interest rate and/or other market risks. |
|
|
|
|
|
TBA mortgage contracts. TBA mortgage contracts involve a risk of loss if
the value of the underlying security to be purchased declines prior to delivery
date. The yield obtained for such securities may be higher or lower than
yields available in the market on delivery date. |
9
|
|
|
|
|
Equity Securities Risk. The value of a companys equity securities is
subject to changes in the companys financial condition, and overall market and
economic conditions. The securities of growth companies are subject to greater
price fluctuations than other types of stocks because their market prices tend
to place greater emphasis on future earnings expectations. The securities of
value companies are subject to the risk that the companies may not overcome the
adverse business developments or other factors causing their securities to be
underpriced or that the market may never come to recognize their fundamental
value. |
|
|
|
|
|
Liquidity Risk. Exposure exists when trading volume, lack of a market maker
or legal restrictions impair the ability to sell particular securities or close
derivative positions at an advantageous price. |
|
|
|
|
|
Non-U.S. Investment Risk. As compared to U.S. companies, there may be less
publicly available information relating to foreign companies. Non-U.S.
securities may be subject to foreign taxes. The value of non-U.S. securities
is subject to currency fluctuations and adverse political and economic
developments. Investments in emerging-market countries are subject to greater
levels of non-U.S. investment risk. |
|
|
|
|
|
Sovereign Debt Obligations Risk. An investment in debt obligations of
non-U.S. governments and their political subdivisions (sovereign debt), whether
denominated in U.S. dollars for a foreign currency, involves special risks that
are not present in corporate debt obligations. The non-U.S. issuer of the
sovereign debt or the non-U.S. governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due, and the Fund may have limited recourse in the event of a
default. During periods of economic uncertainty, the market prices of
sovereign debt may be more volatile than prices of debt obligations of U.S.
issuers. In the past, certain non-U.S. countries have encountered difficulties
in servicing their debt obligations, withheld payments of principal and
interest and declared moratoria on the payment of principal and interest on
their sovereign debt. A sovereign debtors willingness or ability to repay
principal and pay interest in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign currency reserves,
the availability of sufficient foreign exchange, the relative size of the debt
service burden, the sovereign debtors policy toward its principal
international lenders and local political constraints. Sovereign debtors also
may be dependent on expected disbursements from non-U.S. governments,
multilateral agencies and other entities to reduce principal and interest
arrearages on their debt. The failure of a sovereign debtor to implement
economic reforms, achieve specified levels of economic performance or repay
principal or interest when due may result in the cancellation of third-party
commitments to lend funds to the sovereign debtor, which may further impair
such debtors ability or willingness to service its debts. |
|
|
|
|
|
Brady Bonds Risk. Brady Bonds may involve a high degree of risk, may be in
default or present the risk of default. Agreements implemented under the Brady
Plan to date are designed to achieve debt and debt-service reduction through
specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, bonds issued at a discount of
face value of such debt, bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds, although the collateral is not available to
investors until the final maturity of the Brady Bonds. Collateral purchases
are financed by the IMF, the World Bank and the debtor nations reserves. In
addition, the first two or three interest payments on certain types of Brady
Bonds may be collateralized by cash or securities agreed upon by creditors.
Although Brady Bonds may be collateralized by U.S. government securities,
repayment of principal and interest is not guaranteed by the U.S. government. |
|
|
|
|
|
Reverse Repurchase Agreement Risk. Reverse repurchase agreement transactions
involve the |
10
|
|
|
|
|
risk that the market value of the securities that the Fund is
obligated to repurchase under such agreements may decline below the repurchase
price. Any fluctuations in the market value of either the securities
transferred to the other party or the securities in which the proceeds may be
invested would affect the market value of the Funds assets, thereby
potentially increasing fluctuations in the market value of the Funds assets.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Funds use of proceeds received under
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Funds obligation to repurchase
the securities. |
|
|
|
|
|
Hedging, Derivatives and Other Strategic Transactions Risk. Hedging and
other strategic transactions may increase the volatility of the Fund and, if
the transaction is not successful, could result in a significant loss to the
Fund. The use of derivative instruments could produce disproportionate gain or
loss, more than the principal amount invested. Investing in derivative
instruments involves risks different from, or possibly greater than, the risks
associated with investing directly in securities and other traditional
investments and, in a down market, could become harder to value or sell at a
fair price. The following is a list of certain derivatives and other strategic
transactions in which the Fund may invest and the main risks associated with
each of them: |
|
|
|
|
|
Currency options. Counterparty risk, liquidity risk (i.e., the inability to
enter into closing transactions) and risk of disproportionate loss are the
principal risks of engaging in transactions involving options. |
|
|
|
|
|
Credit default swaps. Counterparty risk, liquidity risk (i.e., the inability
to enter into closing transactions), interest-rate risk, risk of default of the
underlying reference obligation and risk of disproportionate loss are the
principal risks of engaging in transactions involving credit default swaps. |
|
|
|
|
|
Equity-linked notes are subject to risks similar to those related to
investing in the underlying securities. An equity-linked note is dependent on
the individual credit of the notes issuer. Equity-linked notes often are
privately placed and may not be rated. The secondary market for equity-linked
notes may be limited. |
|
|
|
|
|
Foreign currency forward contracts. Counterparty risk, liquidity risk (i.e.,
the inability to enter into closing transactions), foreign currency risk and
risk of disproportionate loss are the principal risks of engaging in
transactions involving foreign currency forward contracts. |
|
|
|
|
|
Foreign currency swaps. Counterparty risk, liquidity risk (i.e., the
inability to enter into closing transactions), foreign currency risk and risk
of disproportionate loss are the principal risks of engaging in transactions
involving foreign currency swaps. |
|
|
|
|
|
Futures contracts. Counterparty risk, liquidity risk (i.e., the inability to
enter into closing transactions) and risk of disproportionate loss are the
principal risks of engaging in transactions involving futures contracts. |
|
|
|
|
|
Interest-rate swaps. Counterparty risk, liquidity risk (i.e., the inability
to enter into closing transactions), interest-rate risk and risk of
disproportionate loss are the principal risks of engaging in transactions
involving interest-rate swaps. |
|
|
|
|
|
Options. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions) and risk of disproportionate loss are the principal
risks of engaging in transactions involving options. Counterparty risk does
not apply to exchange-traded options. |
|
|
|
|
|
Swaps. Counterparty risk, liquidity risk (i.e., the inability to enter into
closing transactions), interest-rate risk, settlement risk, risk of default of
the underlying reference obligation and |
11
|
|
|
|
|
risk of disproportionate loss are the
principal risks of engaging in transactions involving swaps, including credit
default swaps and total return swaps.
|
|
|
|
Given the risks described above, an investment in Common Shares may not be
appropriate for all investors. You should carefully consider your ability to
assume these risks before making an investment in the Fund. |
12
Summary of Fund Expenses
The purpose of the table below is to help you understand all fees and expenses that you, as a
Common Shareholder, would bear directly or indirectly. In accordance with SEC requirements, the
table below shows the Funds expenses as a percentage of its average net assets as of April 30,
2012, and not as a percentage of total assets. By showing expenses as a percentage of average net
assets, expenses are not expressed as a percentage of all of the assets the Fund invests. The
offering costs to be paid or reimbursed by the Fund are not included in the Annual Expenses table
below. However, these expenses will be borne by Common Shareholders and may result in a reduction
in the NAV of the Common Shares. See Management of the Fund and Dividend Reinvestment Plan.
The table and example are based on the Funds capital structure as of April 30, 2012.
|
|
|
|
|
Shareholder Transaction Expenses |
|
|
|
|
Sales load paid by you (as a percentage of offering price) (1) |
|
|
|
% |
Offering expenses (as a percentage of offering price) (1) |
|
|
|
% |
Dividend Reinvestment Plan fees (2) |
|
None |
|
|
|
|
|
Annual Expenses (Percentage of Net Assets Attributable to Common Shares) |
|
|
|
|
Management fees (3) |
|
|
0.82 |
% |
Interest payments on borrowed funds (4) |
|
|
0.53 |
% |
Other expenses (5) |
|
|
0.26 |
% |
Total Annual Expenses |
|
|
1.61 |
% |
|
|
|
(1) |
|
If Common Shares are sold to or through underwriters, the Prospectus Supplement will
set forth any applicable sales load and the estimated offering expenses. |
|
(2) |
|
Participants in the Funds dividend reinvestment plan do not pay brokerage
charges with respect to Common Shares issued directly by the Fund. However, whenever
Common Shares are purchased or sold on the NYSE or otherwise on the open market, each
participant will pay a pro rata portion of brokerage trading fees, currently $0.05 per
share purchased or sold. Brokerage trading fees will be deducted from amounts to be
invested. Shareholders participating in the Plan may buy additional Common Shares of
the Fund through the Plan at any time and will be charged a $5 transaction fee plus
$0.05 per share brokerage trading fee for each order. See Distribution Policy and
Dividend Reinvestment Plan. |
|
(3) |
|
See Management of the FundThe Adviser. |
|
(4) |
|
The Fund may use leverage through borrowings. The Fund currently borrows under
a credit facility. |
|
(5) |
|
Other expenses have been estimated for the current fiscal year. |
EXAMPLE
The following example illustrates the expenses that Common Shareholders would pay on a $1,000
investment in Common Shares, assuming (i) total annual expenses of 1.61% of net assets attributable
to Common Shares in years 1 through 10; (ii) a 5% annual return; and (iii) all distributions are
reinvested at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Year |
|
|
5 Year |
|
|
10 Year |
|
Total Expenses |
|
$ |
164 |
|
|
$ |
508 |
|
|
$ |
876 |
|
|
$ |
1,911 |
|
The above table and example and the assumption in the example of a 5% annual return are required by
regulations of the SEC that are applicable to all investment companies; the assumed 5% annual
return is not a prediction of, and does not represent, the projected or actual performance of the
Funds Common Shares. For more complete descriptions of certain of the Funds costs and expenses,
see Management of the Fund. In addition, while the example assumes reinvestment of all dividends
and distributions at NAV, participants in the Funds dividend reinvestment plan may receive Common
Shares purchased or issued at a price or value different from NAV. See Distribution Policy and
Dividend Reinvestment Plan. The example does not include sales load or estimated offering costs,
which would cause the expenses shown in the example to increase.
13
The example should not be considered a representation of past or future expenses, and the Funds
actual expenses may be greater or less than those shown. Moreover, the Funds actual rate of
return may be greater or less than the hypothetical 5% return shown in the example.
14
Financial Highlights
This table details the financial performance of the Common Shares, including total return
information showing how much an investment in the Fund has increased or decreased each period.
The financial statements of the Fund as of October 31, 2011 have been audited by
PricewaterhouseCoopers LLP, the Funds independent registered public accounting firm. The report
of PricewaterhouseCoopers LLP is included, along with the Funds financial statements, in the
Funds annual report, which has been incorporated by reference into the SAI and is available upon
request.
The financial highlights for the periods ending 12-31-02 through
12-31-05 are incorporated by reference into the chart below from the
financial statements of the Funds annual reports filed in
accordance with Section 30(e) of the 1940 Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON SHARES Period ended |
|
|
4-30-12 |
1 |
|
|
10-31-11 |
|
|
|
10-31-10 |
|
|
|
10-31-09 |
|
|
|
10-31-08 |
2 |
|
|
12-31-07 |
|
|
|
12-31-06 |
|
Per share operating performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period |
|
$ |
19.19 |
|
|
$ |
20.11 |
|
|
$ |
18.03 |
|
|
$ |
14.51 |
|
|
$ |
19.21 |
|
|
$ |
19.90 |
|
|
$ |
20.04 |
|
Net investment income3 |
|
|
0.95 |
|
|
|
1.93 |
|
|
|
2.15 |
|
|
|
1.70 |
|
|
|
1.49 |
|
|
|
1.89 |
|
|
|
1.74 |
|
Net realized
and unrealized gain (loss) on investments |
|
|
0.46 |
|
|
|
(0.88 |
) |
|
|
2.00 |
|
|
|
3.51 |
|
|
|
(4.80 |
) |
|
|
(0.72 |
) |
|
|
(0.07 |
) |
Distributions to Auction Preferred Shares (APS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.19 |
) |
|
|
(0.55 |
) |
|
|
(0.50 |
) |
Total from investment operations |
|
|
1.41 |
|
|
|
1.05 |
|
|
|
4.15 |
|
|
|
5.21 |
|
|
|
(3.50 |
) |
|
|
0.62 |
|
|
|
1.17 |
|
Less distributions to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income |
|
|
(1.00 |
) |
|
|
(1.97 |
) |
|
|
(2.07 |
) |
|
|
(1.69 |
) |
|
|
(1.20 |
) |
|
|
(1.31 |
) |
|
|
(1.31 |
) |
Net asset value, end of period |
|
$ |
19.60 |
|
|
$ |
19.19 |
|
|
$ |
20.11 |
|
|
$ |
18.03 |
|
|
$ |
14.51 |
|
|
$ |
19.21 |
|
|
$ |
19.90 |
|
Per share market value, end of period |
|
$ |
23.33 |
|
|
$ |
21.82 |
|
|
$ |
21.13 |
|
|
$ |
17.73 |
|
|
$ |
13.46 |
|
|
$ |
17.01 |
|
|
$ |
19.04 |
|
Total return at net asset value (%)4 |
|
|
6.95 |
5 |
|
|
4.90 |
|
|
|
23.81 |
|
|
|
39.26 |
|
|
|
(18.78) |
5 |
|
|
3.73 |
|
|
|
6.54 |
|
Total return at market value (%)4 |
|
|
11.96 |
5 |
|
|
13.52 |
|
|
|
32.29 |
|
|
|
47.62 |
|
|
|
(14.91) |
5 |
|
|
(4.00 |
) |
|
|
15.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
applicable to common shares, end of period (in millions) |
|
$ |
168 |
|
|
$ |
164 |
|
|
$ |
171 |
|
|
$ |
152 |
|
|
$ |
121 |
|
|
$ |
160 |
|
|
$ |
164 |
|
Ratios (as a percentage of average net assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses (excluding interest expense) |
|
|
1.08 |
6 |
|
|
1.04 |
|
|
|
1.12 |
|
|
|
1.43 |
|
|
|
1.42 |
6 |
|
|
1.16 |
7 |
|
|
1.17 |
7 |
Interest expense |
|
|
0.53 |
6 |
|
|
0.58 |
|
|
|
0.81 |
|
|
|
1.00 |
|
|
|
0.83 |
6 |
|
|
|
|
|
|
|
|
Expenses (including interest expense) |
|
|
1.61 |
6 |
|
|
1.62 |
|
|
|
1.93 |
|
|
|
2.43 |
|
|
|
2.25 |
6 |
|
|
1.16 |
7 |
|
|
1.17 |
7 |
Net investment income |
|
|
9.97 |
6 |
|
|
9.63 |
|
|
|
11.33 |
|
|
|
11.34 |
|
|
|
9.93 |
6 |
|
|
9.55 |
8 |
|
|
8.80 |
8 |
Portfolio turnover (%) |
|
|
31 |
|
|
|
45 |
|
|
|
71 |
|
|
|
72 |
|
|
|
37 |
|
|
|
46 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of APS outstanding (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86 |
|
|
$ |
86 |
|
Involuntary
liquidation preference per unit (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
25 |
|
Average market value per unit (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
25 |
|
Asset coverage per unit9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
$ |
71,364 |
|
|
$ |
72,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt outstanding end of period (in
millions) |
|
$ |
88 |
|
|
$ |
88 |
|
|
$ |
80 |
|
|
$ |
67 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
Asset coverage per $1,000 of APS11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,856 |
|
|
$ |
2,910 |
|
Asset coverage per $1,000 of debt12 |
|
$ |
2,917 |
|
|
$ |
2,871 |
|
|
$ |
3,136 |
|
|
$ |
3,268 |
|
|
$ |
3,090 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Six months ended 4-30-12. Unaudited. |
15
|
|
|
|
(2) |
|
For the ten-month period ended 10-31-08. The Fund changed its fiscal year end from
December 31 to October 31. |
|
(3) |
|
Based on the average daily shares outstanding. |
|
(4) |
|
Total return based on net asset value reflects changes in the Funds net asset value
during each period. Total return based on market value reflects changes in market value.
Each figure assumes that dividend and capital gain distributions, if any, were reinvested.
These figures will differ depending upon the level of any discount from or premium to net
asset value at which the Funds shares traded during the period. |
|
(5) |
|
Not annualized. |
|
(6) |
|
Annualized. |
|
(7) |
|
Ratios calculated on the basis of expenses relative to the average net assets of common
shares. Without the exclusion of preferred shares, the ratios of expenses would have been
0.76% and 0.77% for the years ended 12-31-07 and 12-31-06, respectively. |
|
(8) |
|
Ratios calculated on the basis of net investment income relative to the average net
assets of common shares. Without the exclusion of preferred shares, the ratios of net
investment income would have been 6.26% and 5.77% for the years ended 12-31-07 and
12-31-06, respectively. |
|
(9) |
|
Calculated by subtracting the Funds total liabilities from the Funds total assets and
dividing that amount by the number of APS outstanding, as of the applicable 1940 Act
Evaluation Date, which may differ from the financial reporting date. |
|
(10) |
|
In May 2008, the Fund entered into a Committed Facility Agreement with a third-party
commercial bank in order to redeem the APS. The redemption of all APS was completed on
6-12-08. |
|
(11) |
|
Asset coverage equals the total net assets plus APS divided by the APS of the Fund
outstanding at period end. |
|
(12) |
|
Asset coverage equals the total net assets plus borrowings divided by the borrowings of
the Fund outstanding at period end. As debt outstanding changes, level of invested assets
may change accordingly. Asset coverage ratio provides a consistent measure of leverage. |
16
Market and Net Asset Value Information
The Funds Common Shares are listed on the New York Stock Exchange (NYSE) under the symbol
JHI. The Funds Common Shares commenced trading on the NYSE in 1971.
The Funds Common Shares have traded both at a premium and a discount to its net asset value
(NAV). The Fund cannot predict whether its shares will trade in the future at a premium or
discount to NAV. The provisions of the 1940 Act generally require that the public offering price
of common shares (less any underwriting commissions and discounts) must equal or exceed the NAV per
share of a companys common stock (calculated within 48 hours of pricing). The Funds issuance of
Common Shares may have an adverse effect on prices in the secondary market for Common Shares by
increasing the number of Common Shares available, which may put downward pressure on the market
price for Common Shares. Shares of common stock of closed-end investment companies frequently
trade at a discount from NAV. See Risk FactorsGeneral RisksMarket Discount Risk.
The following table sets forth for each of the periods indicated the high and low closing market
prices for Common Shares on the NYSE, and the corresponding NAV per share and the premium or
discount to NAV per share at which the Funds Common Shares were trading as of such date. NAV is
determined once daily as of the close of regular trading of the NYSE (typically 4:00 P.M., Eastern
Time). See Determination of Net Asset Value for information as to the determination of the
Funds NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share on |
|
|
Premium/(Discount) on |
|
|
|
|
|
|
|
|
|
|
|
Date of Market Price |
|
|
Date of Market Price |
|
|
|
Market Price |
|
|
High and Low |
|
|
High and Low |
|
Fiscal Quarter Ended |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
January 31, 2010 |
|
$ |
18.89 |
|
|
$ |
17.22 |
|
|
$ |
18.79 |
|
|
$ |
18.13 |
|
|
|
0.53% |
|
|
|
(5.02)% |
|
April 30, 2010 |
|
$ |
20.70 |
|
|
$ |
18.20 |
|
|
$ |
19.30 |
|
|
$ |
18.39 |
|
|
|
7.25% |
|
|
|
(1.03)% |
|
July 31, 2010 |
|
$ |
21.94 |
|
|
$ |
19.35 |
|
|
$ |
18.58 |
|
|
$ |
18.72 |
|
|
|
18.08% |
|
|
|
3.37% |
|
October 31, 2010 |
|
$ |
22.35 |
|
|
$ |
20.35 |
|
|
$ |
19.63 |
|
|
$ |
19.95 |
|
|
|
13.86% |
|
|
|
2.01% |
|
January 31, 2011 |
|
$ |
21.53 |
|
|
$ |
18.75 |
|
|
$ |
20.29 |
|
|
$ |
19.45 |
|
|
|
6.11% |
|
|
|
(3.60)% |
|
April 30, 2011 |
|
$ |
22.42 |
|
|
$ |
20.55 |
|
|
$ |
20.20 |
|
|
$ |
20.40 |
|
|
|
10.99% |
|
|
|
0.74% |
|
July 31, 2011 |
|
$ |
22.50 |
|
|
$ |
20.65 |
|
|
$ |
20.83 |
|
|
$ |
20.45 |
|
|
|
8.02% |
|
|
|
0.98% |
|
October 31, 2011 |
|
$ |
22.04 |
|
|
$ |
19.12 |
|
|
$ |
19.61 |
|
|
$ |
19.87 |
|
|
|
12.39% |
|
|
|
(3.77)% |
|
January 31, 2012 |
|
$ |
23.35 |
|
|
$ |
20.80 |
|
|
$ |
19.17 |
|
|
$ |
18.64 |
|
|
|
21.80% |
|
|
|
11.59% |
|
April 30, 2012 |
|
$ |
23.45 |
|
|
$ |
22.37 |
|
|
$ |
19.77 |
|
|
$ |
19.60 |
|
|
|
18.61% |
|
|
|
14.13% |
|
July 31, 2012 |
|
$ |
24.63 |
|
|
$ |
22.75 |
|
|
$ |
19.43 |
|
|
$ |
18.91 |
|
|
|
26.76% |
|
|
|
20.31% |
|
The last reported sale price, NAV per share and percentage premium to NAV per share of the Common
Shares as of July 31, 2012 were $24.13, $19.68 and 22.61%, respectively. As of July 31, 2012, the
Fund had 8,599,803 Common Shares outstanding and net assets of the Fund were $169,283,618.
17
The Fund
The Fund is a diversified, closed-end management investment company registered under the 1940
Act. The Fund was organized on October 26, 1970 as a Delaware corporation and was reorganized on
October 5, 1984 as a Massachusetts business trust pursuant to an Agreement and Declaration of
Trust, which was amended and restated on August 26, 2003, as amended (the Declaration of Trust).
The Fund commenced operations following an initial public offering on January 29, 1971, pursuant to
which the Fund issued an aggregate of 5,500,000 Common Shares of beneficial interest, $1.00 par
value. The Funds principal office is located at 601 Congress Street, Boston, Massachusetts 02210
and its phone number is 800-225-6020.
The following provides information about the Funds outstanding securities as of July 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Held by the |
|
|
|
|
|
|
Amount |
|
|
Fund or for its |
|
|
Amount |
|
Title of Class |
|
Authorized |
|
|
Account |
|
|
Outstanding |
|
Common Shares, no par value |
|
unlimited |
|
|
0 |
|
|
|
8,599,803 |
|
Use of Proceeds
Subject to the remainder of this section, and unless otherwise specified in a Prospectus
Supplement, the Fund currently intends to invest substantially all of the net proceeds of any sales
of Common Shares pursuant to this Prospectus in accordance with its investment objectives and
policies as described under Investment Objectives and Investment Strategies within three months
of receipt of such proceeds. Such investments may be delayed up to three months if suitable
investments are unavailable at the time or for other reasons, such as market volatility and lack of
liquidity in the markets of suitable investments. Pending such investment, the Fund anticipates
that it will invest the proceeds in short-term money market instruments, securities with remaining
maturities of less than one year, cash or cash equivalents. A delay in the anticipated use of
proceeds could lower returns and reduce the Funds distribution to Common Shareholders or result in
a distribution consisting principally of a return of capital.
Investment Objectives
The Funds primary investment objective is to generate income for distribution to its
shareholders, with capital appreciation as a secondary objective. There can be no assurance that
the Fund will achieve its investment objectives. The Funds investment objectives are not
fundamental policies and may be changed without the approval of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund.
Investment Strategies
The preponderance of the Funds assets are invested in a diversified portfolio of debt
securities issued by U.S. and non-U.S. corporations and governments, some of which may carry equity
features. The Fund emphasizes corporate debt securities which pay interest on a fixed or
contingent basis and which may possess certain equity features, such as conversion or exchange
rights, warrants for the acquisition of the stock of the same or different issuers, or
participations based on revenues, sales or profits. The Fund also may purchase preferred
securities and may acquire common stock through the exercise of conversion or exchange rights
acquired in connection with other securities owned by the Fund. The Fund will not acquire any
additional preferred securities or common stock if as a result of that acquisition the value of all
preferred securities and common stocks in the Funds portfolio would exceed 20% of its total
assets. Up to 50% of the value of the Funds assets may be invested in restricted securities
acquired through private placements. The fund may purchase mortgage-backed securities. The Fund
also may invest in repurchase agreements.
18
At least 30% of Funds total assets will be represented by (a) debt securities which are rated, at
the time of acquisition, investment grade (i.e., at least Baa by Moodys Investors Service, Inc.
(Moodys) or BBB by Standard & Poors Rating Group (S&P)) or in unrated securities determined
by the Subadviser to be of comparable credit quality, (b) securities issued or guaranteed by the
U.S. government or its agencies and instrumentalities, and (c) cash or cash equivalents. The
remaining 70% of the Funds total assets may be invested in debt securities of any credit quality,
including securities rated below investment grade (i.e., rated Ba or lower by Moodys or BB or
lower by S&P). Debt securities of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuers ability to pay interest and
repay principal and are commonly referred to as junk bonds or high yield securities. While the
Fund focuses on intermediate and longer-term debt securities, the Fund may acquire securities of
any maturity and is not subject to any limits as to the average maturity of its overall portfolio.
Securities rated BBB by S&P are regarded by S&P as having an adequate capacity to pay interest or
dividends and repay capital or principal, as the case may be; whereas such securities normally
exhibit adequate protection parameters, adverse economic conditions or changing circumstances are
more likely, in the opinion of S&P, to lead to a weakened capacity to pay interest or dividends and
repay capital or principal for securities in this category than in higher rating categories.
Securities rated Baa by Moodys are considered by Moodys as medium to lower medium grade
securities; they are neither highly protected nor poorly secured; interest or dividend payments and
capital or principal security, as the case may be, appear to Moodys to be adequate for the present
but certain protective elements may be lacking or may be characteristically unreliable over time;
and, in the opinion of Moodys, securities in this rating category lack outstanding investment
characteristics and in fact have speculative characteristics as well. Below investment grade
securities and comparable unrated securities involve substantial risk of loss, are considered
highly speculative with respect to the issuers ability to pay interest and any required redemption
or principal payments and are susceptible to default or decline in market value due to adverse
economic and business developments. Securities rated Ba or BB may face significant ongoing
uncertainties or exposure to adverse business, financial or economic conditions that could lead to
the issuer being unable to meet its financial commitments. The protection of interest and
principal may be moderate and not well safeguarded during both good and bad times. Securities
rated B generally lack the characteristics of a desirable investment. Assurance of interest and
principal payments over the long term may be low, and such securities are more vulnerable to
nonpayment than obligations rated BB or Ba. Adverse business, financial or economic conditions
will likely impair the issuers capacity or willingness to meet its financial commitments. The
descriptions of the investment grade rating categories by Moodys and S&P, including a description
of their speculative characteristics, are set forth in the SAI. All references to securities
ratings by Moodys and S&P in this Prospectus shall, unless otherwise indicated, include all
securities within each such rating category (e.g., Baa1, Baa2 and Baa3 in the case of Moodys
and BBB+, BBB and BBB- in the case of S&P). All percentage and ratings limitations on
securities in which the Fund may invest apply at the time of making an investment and shall not be
considered violated if an investment rating is subsequently downgraded to a rating that would have
precluded the Funds initial investment in such security. In the event of such security downgrade,
the Fund will sell the portfolio security as soon as the Subadviser believes it to be prudent to do
so in order to again cause the Fund to be within the percentage and ratings limitations set forth
in this Prospectus. In the event that the Fund disposes of a portfolio security subsequent to its
being downgraded, the Fund may experience a greater risk of loss than if such security had been
sold prior to such downgrading.
In managing the Funds portfolio, the Subadviser concentrates first on sector selection by deciding
which types of bonds and industries to emphasize at a given time, and then which individual bonds
to buy. When making sector and industry allocations, the Subadviser tries to anticipate shifts in
the business cycle, using top-down analysis to determine which sectors and industries may benefit
over the next 12 months. In choosing individual securities, the Subadviser uses bottom-up research
to find securities that appear comparatively undervalued. The Subadviser looks at bonds of all
quality levels and maturities from many different issuers, potentially including U.S.
dollar-denominated securities of foreign corporations and governments. There can be no assurance
that the Fund will achieve its investment objectives.
19
PORTFOLIO INVESTMENTS
Corporate debt securities
The Fund invests in corporate debt obligations. Corporate debt obligations are subject to the risk
of an issuers inability to meet principal and interest payments on the obligations and also may be
subject to price volatility due to such factors as market interest rates, market perception of the
creditworthiness of the issuer and general market liquidity.
U.S. government and foreign government securities
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. U.S. government securities include securities issued or guaranteed by the U.S.
government or its authorities, agencies, or instrumentalities. Foreign government securities
include securities issued or guaranteed by foreign governments (including political subdivisions)
or their authorities, agencies, or instrumentalities or by supra-national agencies. Different
kinds of U.S. government securities and foreign government securities have different kinds of
government support. For example, some U.S. government securities (e.g., 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 U.S. Other U.S. government
securities are issued or guaranteed by federal agencies or government-chartered or -sponsored
enterprises, but are neither guaranteed nor insured by the U.S. government (e.g., debt securities
issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage
Association Bonds (Fannie Mae), and Federal Home Loan Banks (FHLBs)). Others may be supported
by: (i) the right of the issuer to borrow from the U.S. Treasury; (ii) the discretionary authority
of the U.S. government to purchase the agencys obligations; or (iii) only the credit of the
issuer. Similarly, some foreign government securities are supported by the full faith and credit
of a foreign national government or political subdivision and some are not. Foreign government
securities of some countries may involve varying degrees of credit risk as a result of financial or
political instability in those countries and the possible inability of a Fund to enforce its rights
against the foreign government issuer. As with other fixed-income securities, sovereign issuers
may be unable or unwilling to make timely principal or interest payments.
Supra-national agencies are agencies whose member nations make capital contributions to support the
agencies activities, and include the International Bank for Reconstruction and Development (the
World Bank), the Asian Development Bank, the European Coal and Steel Community, and the
Inter-American Development Bank.
Like other fixed-income securities, U.S. government securities are subject to market risk and their
market values typically will change as interest rates fluctuate. For example, the value of a
Funds investment in U.S. government securities may fall during times of rising interest rates.
Yields on U.S. government securities tend to be lower than those of corporate securities of
comparable maturities.
In addition to investing directly in U.S. government securities and foreign government securities,
a Fund may purchase certificates of accrual or similar instruments evidencing undivided ownership
interests in interest payments and/or principal payments of U.S. government securities and foreign
government securities. Certificates of accrual and similar instruments may be more volatile than
other government securities.
Mortgage-backed securities
The Fund may invest in mortgage-backed securities which represent participation interests in pools
of adjustable and fixed rate mortgage loans which are guaranteed by agencies or instrumentalities
of the U.S. government. Unlike conventional debt obligations, mortgage-backed securities provide
monthly payments derived from the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans. The mortgage loans
underlying mortgage-backed securities are generally subject to a greater rate of principal
prepayments in a declining interest rate environment and to a lesser rate of principal prepayments
in an increasing interest rate environment. Under certain interest and prepayment scenarios, the
Fund may fail to recover the full amount of its investment in mortgage-backed securities
notwithstanding any direct or indirect governmental or agency guarantee. Since faster than
expected prepayments must usually be invested in lower yielding securities, mortgage-backed
securities are less effective than conventional bonds in locking in a specified interest rate.
In a rising interest rate environment, a declining prepayment rate may extend the average life of
many mortgage-backed securities. Extending the average life of a mortgage-backed security
increases the risk of depreciation due to future
20
increases in market interest rates. Government
sponsored entities such as the FHLMC, FNMA and FHLB, although chartered or sponsored by Congress,
are not funded by congressional appropriations and the debt and mortgage-backed securities issued
by them are neither guaranteed nor issued by the U.S. government.
The Funds investments in mortgage-backed securities may include conventional mortgage pass through
securities and certain classes of multiple class collateralized mortgage obligations (CMOs). In
order to reduce the risk of prepayment for investors, CMOs are issued in multiple classes, each
having different maturities, interest rates, payment schedules and allocations of principal and
interest on the underlying mortgages. Senior CMO classes will typically have priority over
residual CMO classes as to the receipt of principal and/or interest payments on the underlying
mortgages. The CMO classes in which the Fund may invest include but are not limited to sequential
and parallel pay CMOs, including planned amortization class (PAC) and target amortization class
(TAC) securities.
Different types of mortgage-backed securities are subject to different combinations of prepayment,
extension, interest rate and/or other market risks. Conventional mortgage pass through securities
and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. PACs,
TACs and other senior classes of sequential and parallel pay CMOs involve less exposure to
prepayment, extension and interest rate risk than other mortgage-backed securities, provided that
prepayment rates remain within expected prepayment ranges or collars.
Illiquid securities
The Fund may invest up to 20% of its total assets in illiquid securities (i.e., securities that are
not readily marketable). For this purpose, illiquid securities may include certain securities
that are not registered (restricted securities) under the Securities Act of 1933, as amended (the
1933 Act), including commercial paper issued in reliance on Section 4(2) of the 1933 Act and
securities offered and sold to qualified institutional buyers under Rule 144A under the 1933 Act.
If the Board of Trustees (the Board) determines, based upon a continuing review of the trading
markets for specific Section 4(2) commercial paper or Rule 144A securities, that these instruments
are liquid, they will not be subject to the 20% limit on illiquid investments. The Board has
adopted guidelines and delegated to the Adviser the daily function of determining the monitoring
and liquidity of restricted securities. The Board will, however, retain sufficient oversight and
be ultimately responsible for these determinations. The Board will carefully monitor the Funds
investments in these securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
Repurchase agreements maturing in more than seven days are considered illiquid, unless an agreement
can be terminated after a notice period of seven days or less.
As long as the SEC maintains the position that most swap contracts, caps, floors, and collars are
illiquid, the Fund will continue to designate these instruments as illiquid for purposes of its 20%
illiquid limitation unless the instrument includes a termination clause or has been determined to
be liquid based on a case-by-case analysis pursuant to procedures approved by the Board.
Equity securities
The Fund may invest up to 20% of its assets in preferred securities and common stocks. The Fund
may purchase preferred securities and may acquire common stock through the exercise of conversion
or exchange rights acquired in connection with other securities owned by the Fund. The Fund
normally will invest in such securities when the Subadviser believes that they will provide a
sufficiently high yield to attain the Funds investment objectives. The Fund also may purchase
income producing securities which are convertible into or come with rights to purchase preferred
securities and common stocks.
Fixed rate preferred securities have fixed dividend rates. They can be perpetual, with no
mandatory redemption date, or issued with a fixed mandatory redemption date. Certain issues of
preferred securities are convertible into other equity securities. Perpetual preferred securities
provide a fixed dividend throughout the life of the issue, with no mandatory retirement provisions,
but may be callable. Sinking fund preferred securities provide for the redemption of a portion of
the issue on a regularly scheduled basis with, in most cases, the entire issue being retired as of
a future date. The value of fixed rate preferred securities can be expected to vary inversely with
interest rates.
21
Adjustable rate preferred securities have a variable dividend rate which is determined
periodically, typically quarterly, according to a formula based on a specified premium or discount
to the yield on particular U.S. Treasury securities, typically the highest base-rate yield of one
of three U.S. Treasury securities: the 90-day Treasury bill; the 10-year Treasury note; and either
the 20-year or 30-year Treasury bond or other index. The premium or discount to be added to or
subtracted from this base-rate yield is fixed at the time of issuance and cannot be changed without
the approval of the holders of the adjustable rate preferred securities. Some adjustable rate
preferred securities have a maximum and a minimum rate and in some cases are convertible into
common stock.
Auction rate preferred securities pay dividends that adjust based upon periodic auctions. Such
preferred securities are similar to short-term corporate money market instruments in that an
auction rate preferred stockholder has the opportunity to sell the preferred securities at its
liquidation value in an auction, normally conducted at least every 49 days, through which buyers
set the dividend rate in a bidding process for the next period. The dividend rate set in the
auction depends upon market conditions and the credit quality of the particular issuer. Typically,
the auction rate preferred securities dividend rate is limited to a specified maximum percentage
of an external commercial paper index as of the auction date. Further, the terms of auction rate
preferred securities generally provide that they are redeemable by the issuer at certain times or
under certain conditions.
Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits, if any, of the corporation without preference over any other shareholder or
class of shareholders, including holders of such entitys preferred securities and other senior
equity securities. Common stock usually carries with it the right to vote and frequently an
exclusive right to do so. In selecting common stocks for investment, the Fund expects generally to
focus more on the securitys dividend paying capacity than on its potential for capital
appreciation.
Non-U.S. securities
While the Fund primarily invests in the securities of U.S. issuers, the Fund may invest in
securities of corporate and governmental issuers located outside the U.S., including emerging
market issuers. The Fund may invest up to 30% of its total assets in securities that are
denominated in foreign currencies.
Sovereign debt obligations
The Fund may invest in sovereign debt obligations, which involve special risks that are not present
in corporate debt obligations. The foreign issuer of the sovereign debt or the foreign
governmental authorities that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and a fund may have limited recourse in the event of a default.
During periods of economic uncertainty, the market prices of sovereign debt, and the Funds NAV, to
the extent it invests in such securities, may be more volatile than prices of debt obligations of
U.S. issuers. In the past, certain foreign countries have encountered difficulties in servicing
their debt obligations, withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debt.
Money market instruments
Money market instruments include short-term U.S. government securities, U.S. dollar-denominated,
high quality commercial paper (unsecured promissory notes issued by corporations to finance their
short-term credit needs), certificates of deposit, bankers acceptances and repurchase agreements
relating to any of the foregoing. U.S. government securities include Treasury notes, bonds and
bills, which are direct obligations of the U.S. government backed by the full faith and credit of
the U.S., and securities issued by agencies and instrumentalities of the U.S. government, which may
be guaranteed by the U.S. Treasury, may be supported by the issuers right to borrow from the U.S.
Treasury or may be backed only by the credit of the U.S. federal agency or instrumentality itself.
Hedging and interest rate transactions
The Fund may, but is not required to, use various hedging and interest rate transactions described
below to mitigate risks or facilitate portfolio management. Such transactions are generally
accepted under modern portfolio management and are regularly used by many mutual funds and other
institutional investors. Although the Subadviser seeks to use these practices to further the
Funds investment objectives, no assurance can be given that these practices will achieve this
result.
The Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter
put and call options on securities, financial futures, fixed-income, interest rate and equity
indices, and other financial
22
instruments, purchase and sell financial futures contracts and options
thereon, and enter into various interest rate transactions such as swaps, caps, floors or collars
or credit transactions and credit default swaps. The Fund also may purchase derivative instruments
that combine features of these instruments. Collectively, all of the above are referred to as
Strategic Transactions. The Fund generally seeks to use Strategic Transactions as a portfolio
management or hedging technique to seek to protect against possible adverse changes in the market
value of securities held in or to be purchased for the Funds portfolio, protect the value of the
Funds portfolio, facilitate the sale of certain securities for investment purposes, manage the
effective interest rate exposure of the Fund, including the effective yield paid on any preferred
shares issued by the Fund, manage the effective maturity or duration of the Funds portfolio or
establish positions in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. The Fund does not engage in these transactions for speculative purposes.
Strategic Transactions have risks, including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of the other party to the transaction
or illiquidity of the derivative instruments. Furthermore, the ability to use successfully
Strategic Transactions depends on the Subadvisers ability to predict pertinent market movements,
which cannot be assured. Thus, the use of Strategic Transactions may result in a loss greater than
if they had not been used, may require the Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the amount of
appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it
might otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or other assets
held in margin accounts with respect to Strategic Transactions are not otherwise available to the
Fund for investment purposes.
A more complete discussion of Strategic Transactions and their risks is contained in the SAI.
TEMPORARY DEFENSIVE STRATEGIES
There may be times when, in the Subadvisers judgment, conditions in the securities market would
make pursuit of the Funds investment strategy inconsistent with achievement of the Funds
investment objectives. At such times, the Subadviser may employ alternative strategies primarily
to seek to reduce fluctuations in the value of the Funds assets. In implementing these temporary
defensive strategies, depending on the circumstances, the Fund may invest an unlimited portion of
its portfolio in short-term money market instruments, securities with remaining maturities of less
than one year, cash or cash equivalents. It is impossible to predict when, or for how long, the
Fund may use these alternative strategies.
ADDITIONAL PORTFOLIO INVESTMENTS
Structured securities
The Fund may invest in structured securities including notes, bonds or debentures, the value of the
principal of and/or interest on which is to be determined by reference to changes in the value of
specific currencies, interest rates, commodities, indices or other financial indicators (the
Reference) or the relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased depending upon changes in
the applicable Reference. The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, may result in the loss of the Funds
investment. Structured securities may be positively or negatively indexed, so that appreciation of
the Reference may produce an increase or decrease in the interest rate or value of the security at
maturity. In addition, the change in interest rate or the value of the security at maturity may be
a multiple of the change in the value of the Reference. Consequently, structured securities entail
a greater degree of market risk than other types of debt obligations. Structured securities also
may be more volatile, less liquid and more difficult to price accurately than less complex
fixed-income investments.
When-Issued and Forward Commitment Securities
The Fund may purchase securities on a when-issued or forward commitment basis. When-issued
refers to securities whose terms are available and for which a market exists, but which have not
been issued. The Fund will engage in when-issued transactions with respect to securities purchased
for its portfolio in order to obtain what is considered to be an advantageous price and yield at
the time of the transaction. For when-issued transactions, no payment is made until delivery is
due, often a month or more after the purchase. In a forward commitment
23
transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond customary settlement
time.
When the Fund engages in a forward commitment or when-issued transaction, the Fund relies on the
issuer or seller to consummate the transaction. The failure of the issuer or seller to consummate
the transaction may result in the Funds losing the opportunity to obtain a price and yield
considered to be advantageous. The purchase of securities on a when-issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased declines prior to
the settlement date.
On the date that the Fund enters into an agreement to purchase securities on a when-issued or
forward commitment basis, the Fund will segregate in a separate account cash or liquid securities,
of any type or maturity, equal in value to the Funds commitment. These assets will be valued
daily at market, and additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the amount of the
when-issued commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase agreements
The Fund may enter into repurchase agreements. In a repurchase agreement the Fund would buy a
security for a relatively short period (usually not more than 7 days) subject to the obligation to
sell it back to the seller at a fixed time and price plus accrued interest. The Fund will enter
into repurchase agreements only with member banks of the Federal Reserve System and with primary
dealers in U.S. government securities. When the Fund enters into a repurchase agreement, it
receives collateral which is held in a segregated account by the Funds custodian. The collateral
amount is marked-to-market and monitored on a daily basis to ensure that the collateral held is in
an amount not less than the principal amount of the repurchase agreement plus any accrued interest.
In the event of a default by the counterparty, realization of the collateral proceeds could be
delayed, during which time the collateral value may decline.
Reverse repurchase agreements
The Fund may engage in reverse repurchase agreement transactions to the extent permitted under the
1940 Act, and related guidance of the SEC and its staff. Reverse repurchase agreements involve the
sale of U.S. government securities held in its portfolio to a bank with an agreement that the Fund
will buy back the securities at a fixed future date at a fixed price plus an agreed amount of
interest which may be reflected in the repurchase price. Reverse repurchase agreements are
considered to be borrowings by the Fund.
The Fund intends to use reverse repurchase agreements to obtain investment leverage either alone
and/or in combination with other forms of investment leverage. The Fund also may use reverse
repurchase agreement transactions for temporary or emergency purposes. In a reverse repurchase
agreement transaction, the Fund temporarily transfers possession of a portfolio instrument to
another party in return for cash. At the same time, the Fund agrees to repurchase the instrument
at an agreed upon time and price, which reflects an interest payment. The value of the portfolio
securities transferred may substantially exceed the purchase price received by the Fund under the
reverse repurchase agreement transaction and, during the life of the reverse repurchase agreement
transaction, the Fund may be required to transfer additional securities if the market value of
those securities initially transferred declines. In engaging in a reverse repurchase transaction,
the Fund may transfer (sell) any of its portfolio securities to a broker-dealer, bank or another
financial institution counterparty as determined by the Subadviser to be appropriate. In
accordance with guidance from the SEC and its staff from time to time in effect, the Fund will
earmark or segregate liquid assets equal to repayment obligations under the reverse repurchase
agreements.
Reverse repurchase agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of the securities sold
by the Fund which it is obligated to repurchase. The Fund also will continue to be subject to the
risk of a decline in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Fund will establish and maintain a separate account
consisting of liquid securities, of any type or maturity, in an amount at least equal to the
repurchase prices of the securities (plus any accrued interest thereon) under such agreements. In
addition, the Fund will not enter into reverse repurchase agreements, except from banks as a
temporary measure for extraordinary emergency purposes in amounts not to exceed 33⅓% of the Funds
total assets (including the amount borrowed) taken at market
24
value immediately after giving effect
to the reverse repurchase agreement. The Fund will enter into reverse repurchase agreements only
with federally insured banks which are approved in advance as being creditworthy by the Trustees.
Under the procedures established by the Trustees, the Adviser will monitor the creditworthiness of
the banks involved.
Mortgage dollar roll transactions
The Fund may enter into mortgage dollar roll transactions with selected banks and broker-dealers
pursuant to which the Fund sells mortgage-backed securities and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on a specified future
date. The Fund will only enter into covered rolls. A covered roll is a specific type of dollar
roll for which there is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction. Covered rolls are
not treated as a borrowing or other senior security and will be excluded from the calculation of
the Funds borrowings and other senior securities. For financial reporting and tax purposes, the
Fund treats mortgage dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale.
Asset-backed securities
The Fund may invest in asset-backed securities. Asset-backed securities are often subject to more
rapid repayment than their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining interest rates,
prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly,
the Funds ability to maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability to reinvest the
returns of principal at comparable yields is subject to generally prevailing interest rates at that
time.
Brady bonds
The Fund may invest in Brady Bonds and other sovereign debt securities of countries that have
restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan.
Brady Bonds are debt securities described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the World Bank and the International Monetary Fund (the
IMF). The Brady Plan facilitates the exchange of commercial bank debt for newly issued bonds
(known as Brady Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to
repurchase outstanding bank debt at a discount. Under these arrangements the IMF debtor nations
are required to implement domestic monetary and fiscal reforms. These reforms have included the
liberalization of trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and programs seek to
promote the debtor countrys ability to service its external obligations and promote its economic
growth and development. The Brady Plan only sets forth general guiding principles for economic
reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis
between debtor nations and their creditors.
REITs
The Fund may invest in common and preferred interests in real estate investment trusts (REITs).
REITs primarily invest in income producing real estate or real estate related loans or interests.
REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs also can realize capital gain
by selling properties that have appreciated in value. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive income from the collection of interest payments. REITs
are not taxed on income distributed to shareholders provided they comply with the applicable
requirements of the Code. The Fund will in some cases indirectly bear its proportionate share of
any management and other expenses paid by REITs in which it invests in addition to the expenses
paid by the Fund. Debt securities issued by REITs are, for the most part, general and unsecured
obligations and are subject to risks associated with REITs.
Other investment companies
The Fund may invest in the securities of other investment companies to the extent that such
investments are consistent with the Funds investment objectives and policies and permissible under
the 1940 Act. As a stockholder
25
in an investment company, the Fund will bear its ratable share of
that investment companys expenses, and would remain subject to payment of the Funds investment
management fees and other expenses with respect to the assets so invested. Common Shareholders
would therefore be subject to duplicative expenses to the extent the Fund invests in other
investment companies. In addition, these other investment companies may utilize leverage, in which
case an investment would subject the Fund to additional risks associated with leverage. See Risk
FactorsLeverage Risk. The Fund, as a holder of the securities of other investment companies,
will bear its pro rata portion of the other investment companies expenses, including advisory
fees. These expenses are in addition to the direct expenses of the Funds own operations.
OTHER INVESTMENT POLICIES
Borrowing
The Fund has entered into a Committed Facility Agreement (CFA) that allows it to borrow up to $91
million and to invest the borrowings in accordance with its investment practices.
Borrowings under the CFA are secured by certain assets of the Fund as disclosed in the Funds
investments. Interest charged is at the rate of one-month LIBOR plus 0.70%. Prior to April 29,
2011, the interest rate was one-month LIBOR plus 0.95%. See Use of Leverage by the Fund.
The Fund may terminate the agreement with 30 days notice. In addition, if certain asset coverage
and collateral requirements, minimum net assets or other covenants are not met, the CFA could be
deemed in default and result in termination. Absent a default or a facility termination event, the
lender is required to provide the Fund with 360 days notice prior to terminating or amending the
CFA.
Portfolio turnover
The Fund may engage in short-term trading strategies, and securities may be sold without regard to
the length of time held when, in the opinion of the Subadviser, investment considerations warrant
such action. Short term trading may have the effect of increasing portfolio turnover rate. A high
turnover rate (100% or more) necessarily involves greater trading costs to the Fund and may result
in the realization of net short term capital gain. The portfolio turnover rate for the Fund for
the fiscal years ended October 31, 2011 and October 31, 2010 was 45% and 71%, respectively. The
success of short-term trading will depend upon the ability of the Subadviser to evaluate particular
securities, to anticipate relevant market factors, including trends of interest rates and earnings
and variations from such trends, to obtain relevant information, to evaluate it promptly, and to
take advantage of its evaluations by completing transactions on a favorable basis. There can be no
assurance that the Subadviser will be successful in that evaluation. If securities are not held
for the applicable holding periods, dividends paid on them will not qualify for the advantageous
U.S. federal tax rates. See Investment Strategies and U.S. Federal Income Tax Matters.
Lending of securities
The Fund may lend portfolio securities to brokers, dealers and financial institutions if the loan
is collateralized by cash or U.S. government securities according to applicable regulatory
requirements. The Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the borrower may fail to
return the securities involved in the transaction. As a result, the Fund may incur a loss or, in
the event of the borrowers bankruptcy, the Fund may be delayed in or prevented from liquidating
the collateral. The Fund may not lend portfolio securities having a total value exceeding 33⅓% of
its total assets.
Foreign currency transactions
The value of non-U.S. assets as measured in U.S. dollars may be affected favorably or unfavorably
by changes in foreign currency rates and exchange control regulations. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments in the U.S. or
abroad. The Fund may (but is not required to) engage in transactions to hedge against changes in
foreign currencies, and will use such hedging techniques when the Adviser or the Subadviser deems
appropriate. Foreign currency exchange transactions may be conducted on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market or through entering into
derivative currency transactions. Currency futures contracts are exchange-traded and change in
value to reflect movements of a currency or a basket of currencies. Settlement must be made in a
designated currency.
26
Forward foreign currency exchange contracts are individually negotiated and privately traded so
they are dependent upon the creditworthiness of the counterparty. Such contracts may be used when
a security denominated in a foreign currency is purchased or sold, or when the receipt in a foreign
currency of dividend or interest payments on such a security is anticipated. A forward contract
can then lock in the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be.
Additionally, when the Adviser or the Subadviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the securities held that are denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities involved generally
will not be possible. In addition, it may not be possible to hedge against long-term currency
changes. Cross-hedging may be performed by using forward contracts in one currency (or basket of
currencies) to hedge against fluctuations in the value of securities denominated in a different
currency if the Adviser or the Subadviser determines that there is an established historical
pattern of correlation between the two currencies (or the basket of currencies and the underlying
currency). Use of a different foreign currency magnifies exposure to foreign currency exchange
rate fluctuations. Forward contracts also may be used to shift exposure to foreign currency
exchange rate changes from one currency to another. Short-term hedging provides a means of fixing
the dollar value of only a portion of portfolio assets. Income or gain earned on any of the Funds
foreign currency transactions generally will be treated as fully taxable income (i.e., income other
than tax-advantaged dividends).
Currency transactions are subject to the risk of a number of complex political and economic factors
applicable to the countries issuing the underlying currencies. Furthermore, unlike trading in most
other types of instruments, there is no systematic reporting of last sale information with respect
to the foreign currencies underlying the derivative currency transactions. As a result, available
information may not be complete. In an over-the-counter trading environment, there are no daily
price fluctuation limits. There may be no liquid secondary market to close out options purchased
or written, or forward contracts entered into, until their exercise, expiration or maturity. There
also is the risk of default by, or the bankruptcy of, the financial institution serving as
counterparty.
USE OF LEVERAGE BY THE FUND
The Fund may use leverage to the extent permitted by the 1940 Act. The Fund currently utilizes
leverage by borrowing pursuant the CFA as described above in Other Investment
PoliciesBorrowing. In addition, the Fund may use leverage by borrowing from other financial
institutions or through the issuance of preferred shares, reverse repurchase agreements or other
leverage financing which, together with borrowings, may be in an amount equal to 33⅓% of the Funds
managed assets immediately after giving effect to the borrowing, issuance or transaction. The Fund
also may borrow for temporary, emergency or other purposes as permitted under the 1940 Act. Any
such indebtedness would be in addition to the combined effective leverage ratio of 33⅓% of the
Funds managed assets immediately after giving effect to the borrowing. The Funds leverage
strategy may not be successful. By leveraging its investment portfolio, the Fund creates an
opportunity for increased net income or capital appreciation. However, the use of leverage also
involves risks, which can be significant. These risks include the possibility that the value of
the assets acquired with such borrowing decreases although the Funds liability is fixed, greater
volatility in the Funds NAV and the market price of the Funds Common Shares and higher expenses.
Because the Advisers fee is based upon a percentage of the Funds managed assets, the Advisers
fee will be higher if the Fund is leveraged and the Adviser will have an incentive to leverage the
Fund. The Adviser intends only to leverage the Fund when it believes that the potential return on
the additional investments acquired through the use of leverage is likely to exceed the costs
incurred in connection with the offering.
At April 30, 2012, the Fund had loans outstanding
under the Funds CFA of $87,700,000. At April 30, 2012, the Fund had borrowings under the CFA as follows:
|
|
|
|
|
Average Daily Loan Balance |
|
Weighted Average Interest Rate% |
|
Maximum Daily Loan Outstanding |
$87,700,000
|
|
1.00%
|
|
$87,700,000 |
27
The Funds borrowings under its credit facility at
April 30, 2012 equaled approximately 33.65% of
the Funds total assets (including the proceeds of such leverage). The Funds asset coverage ratio
as of April 30, 2012 was 291.7%. See Other Investment PoliciesBorrowing for a brief
description of the Funds CFA.
Assuming
the utilization of leverage in the amount of 33.65% of the
Funds total assets and an
annual interest rate of 0.94% payable on such leverage based on market rates as of April 30, 2012, the additional income that the Fund must earn (net of expenses) in order to cover
such leverage is approximately $824,380. Actual costs of leverage may be higher or lower than that
assumed in the previous example.
Following an offering of additional Common Shares from time to time, the Fund may increase the
amount of leverage outstanding. The Fund may engage in additional borrowings in order to maintain
the Funds desired leverage ratio. Leverage creates a greater risk of loss, as well as a potential
for more gain, for the Common Shares than if leverage were not used. Interest on borrowings may be
at a fixed or floating rate and generally will be based on short-term rates. The costs associated
with the Funds use of leverage, including the issuance of such leverage and the payment of
dividends or interest on such leverage, will be borne entirely by the Common Shareholders. As long
as the rate of return, net of applicable Fund expenses, on the Funds investment portfolio
investments purchased with leverage exceeds the costs associated with such leverage, the Fund will
generate more return or income than will be needed to pay such costs. In this event, the excess
will be available to pay higher dividends to Common Shareholders. Conversely, if the Funds return
on such assets is less than the cost of leverage and other Fund expenses, the return to the Common
Shareholders will diminish. To the extent that the Fund uses leverage, the NAV and market price of
the Common Shares and the yield to Common Shareholders will be more volatile. The Funds
leveraging strategy may not be successful. See Risk FactorsLeverage Risk.
The following table is designed to illustrate the effect on the return to a holder of the Funds
Common Shares of leverage in the amount of approximately 33.65% of the Funds total assets,
assuming hypothetical annual returns of the Funds investment portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to Common Shareholders when portfolio
return is positive and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures appearing in the table
are hypothetical. Actual returns may be greater or less than those appearing in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Return |
|
(10.00)% |
|
|
(5.00)% |
|
|
0.00% |
|
|
5.00% |
|
|
10.00% |
|
Corresponding Common Shares Total Return |
|
|
(13.85)% |
|
|
|
(7.17)% |
|
|
|
(0.49)% |
|
|
|
6.19% |
|
|
|
12.88% |
|
Risk Factors
Below are descriptions of the main factors that may play a role in shaping the Funds overall
risk profile. The descriptions of are grouped by general risks and strategy risks. For further
details about Fund risks, including additional risk factors that are not discussed in this
Prospectus because they are not considered primary factors, see the Funds SAI.
General Risks
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the possible loss of the
entire principal amount invested. An investment in Common Shares represents an indirect investment
in the securities owned by the Fund, which generally are traded on a securities exchange or in the
over-the-counter markets. The value of these securities, like other market investments, may move
up or down, sometimes rapidly and unpredictably. Common Shares at any point in time may be worth
less than the original investment, even after taking into account any reinvestment of dividends and
distributions.
28
TAX RISK
To qualify for the special tax treatment available to regulated investment companies, the Fund
must: (i) derive at least 90% of its annual gross income from certain kinds of investment income;
(ii) meet certain asset diversification requirements at the end of each quarter, and
(iii) distribute in each taxable year at least 90% of its net investment income (including net
interest income and net short term capital gain). If the Fund failed to meet any of these
requirements, subject to the opportunity to cure such failures under applicable provisions of the
Code, the Fund would be subject to U.S. federal income tax at regular corporate rates on its
taxable income, including its net capital gain, even if such income were distributed to its
shareholders. All distributions by the Fund from earnings and profits, including distributions of
net capital gain (if any), would be taxable to the shareholders as ordinary income. In addition,
in order to requalify for taxation as a regulated investment company, the Fund might be required to
recognize unrealized gain, pay substantial taxes and interest, and make certain distributions. See
U.S. Federal Income Tax Matters.
The tax treatment and characterization of the Funds distributions may vary significantly from time
to time due to the nature of the Funds investments. The ultimate tax characterization of the
Funds distributions in a calendar year may not finally be determined until after the end of that
calendar year. The Fund may make distributions during a calendar year that exceed the Funds net
investment income and net realized capital gain for that year. In such a situation, the amount by
which the Funds total distributions exceed net investment income and net realized capital gain
generally would be treated as a return of capital up to the amount of the Common Shareholders tax
basis in his or her Common Shares, with any amounts exceeding such basis treated as gain from the
sale of his or her Common Shares. See U.S. Federal Income Tax Matters.
No assurance can be given as to what percentage of the distributions paid on Common Shares, if any,
will consist of long-term capital gain or what the tax rates on various types of income will be in
future years. See U.S. Federal Income Tax Matters.
DISTRIBUTION RISK
There can be no assurance that quarterly distributions paid by the Fund to shareholders will be
maintained at current levels or increase over time. The quarterly distributions shareholders
receive from the Fund are derived from the Funds dividends and interest income after payment of
Fund expenses, net option premiums and net realized gain on equity securities investments. If
stock market volatility and/or stock prices decline, the premiums available from writing call
options and writing put options on individual stocks likely will decrease as well. Payments to
purchase put options and to close written call and put options will reduce amounts available for
distribution. Net realized gain on the Funds stock investments will be determined primarily by
the direction and movement of the stock market and the equity securities held. The Funds cash
available for distribution may vary widely over the short- and long-term. If, for any calendar
year, the total distributions made exceed the Funds net investment taxable income and net capital
gain, the excess generally will be treated as a return of capital to each Common Shareholder (up to
the amount of the Common Shareholders basis in his or her Common Shares) and thereafter as gain
from the sale of Common Shares. The amount treated as a return of capital reduces the Common
Shareholders adjusted basis in his or her Common Shares, thereby increasing his or her potential
gain or reducing his or her potential loss on the subsequent sale of his or her Common Shares.
Distributions in any year may include a substantial return of capital component. Dividends on
common stocks are not fixed but are declared at the discretion of the issuers board of directors.
PORTFOLIO TURNOVER RISK
The Fund may engage in short-term trading strategies, and securities may be sold without regard to
the length of time held when, in the opinion of the Subadviser, investment considerations warrant
such action. Higher rates of portfolio turnover likely would result in higher brokerage
commissions and may generate short-term capital gain taxable as ordinary income, which may have a
negative impact on the Funds performance over time. The portfolio turnover rate of the Fund may
vary from year to year, as well as within a year.
29
DEFENSIVE POSITIONS RISK
During periods of adverse market or economic conditions, the Fund may temporarily invest all or a
substantial portion of its total assets in short-term money market instruments, securities with
remaining maturities of less than one year, cash or cash equivalents. The Fund will not be
pursuing its investment objectives in these circumstances and could miss favorable market
developments.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income securities such as debt securities and preferred
securities will decline in value because of changes in market interest rates. When market interest
rates rise, the market value of such securities generally will fall. The Funds investments in
debt securities and preferred securities means that the NAV and market price of the Common Shares
will tend to decline if market interest rates rise. Given the historically low level of interest
rates in recent years and the likelihood that interest rates will increase when the national
economy strengthens, the risk of the potentially negative impact of rising interest rates on the
value of the Funds portfolio may be significant. In addition, the longer the average maturity of
the Funds portfolio of debt securities, the greater the potential impact of rising interest rates
on the value of the Funds portfolio and the less flexibility the Fund may have to respond to the
decreasing spread between the yield on its portfolio securities.
During periods of declining interest rates, an issuer may exercise its option to prepay principal
of debt securities or to redeem preferred securities earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. This is known as call or prepayment risk. During periods
of rising interest rates, the average life of certain types of securities may be extended because
of slower than expected principal payments. This may lock in a below market interest rate,
increase the securitys duration and reduce the value of the security. This is known as extension
risk.
INFLATION RISK
Inflation risk is the risk that the purchasing power of assets or income from investments will be
worth less in the future as inflation decreases the value of money. As inflation increases, the
real value of Common Shares and distributions thereon can decline.
LEVERAGE RISK
The Fund is authorized to utilize leverage through borrowings and/or the issuance of preferred
shares, including the issuance of debt securities. The Fund currently utilizes leverage through
borrowings under a credit facility. The Fund reserves the flexibility to utilize leverage by
borrowing from other financial institutions or through the issuance of preferred shares. There can
be no assurance that such a leveraging strategy will be successful during any period in which it is
employed.
The Fund utilizes a CFA to increase its assets available for investment. When the Fund leverages
its assets, Common Shareholders bear the fees associated with the credit facility and have the
potential to benefit or be disadvantaged from the use of leverage. In addition, the fee paid to
the Adviser is calculated on the basis of the Funds average daily managed assets, including
proceeds from borrowings and/or the issuance of preferred shares, so the fee will be higher when
leverage is utilized, which may create an incentive for the Adviser to employ financial leverage.
Consequently, the Fund and the Adviser may have differing interests in determining whether to
leverage the Funds assets. Leverage creates risks that may adversely affect the return for the
Common Shareholders, including:
|
|
|
the likelihood of greater volatility of NAV and market price of Common Shares; |
|
|
|
|
fluctuations in the interest rate paid for the use of the credit facility; |
|
|
|
|
increased operating costs, which may reduce the Funds total return; |
|
|
|
|
the potential for a decline in the value of an investment acquired through leverage,
while the Funds obligations under such leverage remains fixed; and |
|
|
|
|
the Fund is more likely to have to sell securities in a volatile market in order to meet
asset coverage or other debt compliance requirements. |
30
To the extent the returns derived from securities purchased with proceeds received from leverage
exceeds the cost of leverage, the Funds distributions may be greater than if leverage had not been
used. Conversely, if the returns from the securities purchased with such proceeds are not
sufficient to cover the cost of leverage, the amount available for distribution to Common
Shareholders will be less than if leverage had not been used. In the latter case, the Adviser, in
its best judgment, may nevertheless determine to maintain the Funds leveraged position if it deems
such action to be appropriate. The costs of a borrowing program and/or an offering of preferred
shares would be borne by Common Shareholders and consequently would result in a reduction of the
NAV of Common Shares.
In addition to the risks created by the Funds use of leverage, the Fund is subject to the risk
that it would be unable to timely, or at all, obtain replacement financing if the CFA is
terminated. Were this to happen, the Fund would be required to de-leverage, selling securities at
a potentially inopportune time and incurring tax consequences. Further, the Funds ability to
generate income from the use of leverage would be adversely affected.
MARKET DISCOUNT RISK
The Funds Common Shares will be offered only when Common Shares of the Fund are trading at a price
equal to or above the Funds NAV per Common Share plus the per Common Share amount of commissions.
As with any security, the market value of the Common Shares may increase or decrease from the
amount initially paid for the Common Shares. The Funds Common Shares have traded at both a
premium and at a discount to NAV. The shares of closed-end management investment companies
frequently trade at a discount from their NAV. This characteristic is a risk separate and distinct
from the risk that the Funds NAV could decrease as a result of investment activities. Investors
bear a risk of loss to the extent that the price at which they sell their shares is lower in
relation to the Funds NAV than at the time of purchase, assuming a stable NAV.
SECONDARY MARKET FOR THE COMMON SHARES
The issuance of new Common Shares may have an adverse effect on the secondary market for the Common
Shares. When the Common Shares are trading at a premium, the Fund may issue Common Shares of the
Fund that are sold through transactions effected on the NYSE. The increase in the amount of the
Funds outstanding Common Shares resulting from the offering of new Common Shares may put downward
pressure on the market price for the Common Shares of the Fund. Common Shares will not be issued
at any time when Common Shares are trading at a price lower than a price equal to the Funds NAV
per Common Share plus the per Common Share amount of commissions.
The Fund also issues Common Shares of the Fund through its dividend reinvestment plan. Common
Shares may be issued under the plan at a discount to the market price for such Common Shares, which
may put downward pressure on the market price for Common Shares of the Fund.
The voting power of current Common Shareholders will be diluted to the extent that such
shareholders do not purchase shares in any future Common Share offerings or do not purchase
sufficient shares to maintain their percentage interest. In addition, if the proceeds of such
offering are unable to be invested as intended, the Funds per Common Share distribution may
decrease (or may consist of return of capital) and the Fund may not participate in market advances
to the same extent as if such proceeds were fully invested as planned.
MANAGEMENT RISK
The Fund is subject to management risk because it relies on the Subadvisers ability to pursue the
Funds investment objectives. The Subadviser applies investment techniques and risk analyses in
making investment decisions for the Fund, but there can be no guarantee that it will produce the
desired results. The Subadvisers securities selections and other investment decisions might
produce a loss or cause the Fund to underperform when compared to other funds with similar
investment goals. If one or more key individuals leave the employ of the Subadviser, then the
Subadviser may not be able to hire qualified replacements, or may require an extended time to do
so. This could prevent the Fund from achieving its investment objectives.
31
MARKET DISRUPTION RISK
Instability in the Middle East, the wars in Afghanistan, Iraq and Libya, geopolitical tensions
elsewhere and terrorist attacks in the U.S. and around the world have resulted in market volatility
and may have long-term effects on the U.S. and worldwide financial markets and may cause further
economic uncertainties in the U.S. and worldwide. The Fund does not know how long the securities
markets will continue to be affected by these events and cannot predict the effects of these or
similar events in the future on the economy or the securities markets.
NATURAL DISASTERS AND ADVERSE WEATHER CONDITIONS
Certain areas of the world historically have been prone to major natural disasters, such as
hurricanes, earthquakes, typhoons, flooding, tidal waves, tsunamis, erupting volcanoes, wildfires
or droughts, and have been economically sensitive to environmental events. Such disasters, and the
resulting damage, could have a severe and negative impact on the Funds investment portfolio and,
in the longer term, could impair the ability of issuers in which the Fund invests to conduct their
businesses in the manner normally conducted. Adverse weather conditions also may have a
particularly significant negative affect on issuers in the agricultural sector and on insurance
companies that insure against the impact of natural disasters.
RECENT EVENTS RISK
The debt and equity capital markets in the U.S. have been negatively impacted by significant
write-offs in the financial services sector relating to sub-prime mortgages and the re-pricing of
credit risk in the broadly syndicated market, among other things. These events, along with the
deterioration of the housing market, the failure of major financial institutions and the resulting
U.S. federal government actions have led to a decline in general economic conditions, which have
materially and adversely impacted the broader financial and credit markets and have reduced the
availability of debt and equity capital for the market as a whole and financial firms in
particular. These events have been adversely affecting the willingness of some lenders to extend
credit, in general, which may make it more difficult for issuers of debt securities to obtain
financings or refinancings for their investment or lending activities or operations. There is a
risk that such issuers will be unable to successfully complete such financings or refinancings. In
particular, because of the current conditions in the credit markets, issuers of debt securities may
be subject to increased cost for debt, tightening underwriting standards and reduced liquidity for
loans they make, securities they purchase and securities they issue.
These events may increase the volatility of the value of securities owned by the Fund and/or result
in sudden and significant valuation increases or declines in its portfolio. These events also may
make it more difficult for the Fund to accurately value its securities or to sell its securities on
a timely basis. A significant decline in the value of the Funds portfolio likely would result in
a significant decline in the value of your investment in the Fund. Prolonged continuation or
further deterioration of current market conditions could adversely impact the Funds portfolio.
CHANGES IN U.S. LAW
Changes in the state and U.S. federal laws applicable to the Fund, including changes to state and
U.S. federal tax laws, or applicable to the Adviser, the Subadviser and other securities or
instruments in which the Fund may invest, may negatively affect the Funds returns to Common
Shareholders. The Fund may need to modify its investment strategy in the future in order to
satisfy new regulatory requirements or to compete in a changed business environment.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust includes provisions that could limit the ability of other persons or
entities to acquire control of the Fund or to change the composition of its Board. These
provisions may deprive shareholders of opportunities to sell their Common Shares at a premium over
the then current market price of the Common Shares. See Certain Provisions in the Declaration of
Trust and By-LawsAnti-takeover provisions.
32
Strategy Risks
ISSUER RISK
An issuer of a security purchased by the Fund may perform poorly and, therefore, the value of its
stocks and bonds may decline and the issuer may default on its obligations. Poor performance may
be caused by poor management decisions, competitive pressures, breakthroughs in technology,
reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent
disclosures or other factors.
CREDIT AND COUNTERPARTY RISK
The issuer or guarantor of a fixed-income security, the counterparty to an over-the-counter
derivatives contract or a borrower of the Funds securities may be unable or unwilling to make
timely principal, interest or settlement payments, or otherwise honor its obligations. Funds that
invest in fixed-income securities are subject to varying degrees of risk that the issuers of the
securities will have their credit rating downgraded or will default, potentially reducing the
Funds share price and income level.
CORPORATE DEBT SECURITIES RISK
Corporate debt obligations are subject to the risk of an issuers inability to meet principal and
interest payments on the obligations and also may be subject to price volatility due to such
factors as market interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
U.S. GOVERNMENT SECURITIES RISK
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 U.S. 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.
FIXED-INCOME SECURITIES RISK
Fixed-income securities are generally subject to two principal types of risks: (i) interest-rate
risk and (ii) credit quality risk.
Interest-rate Risk. Fixed-income securities are affected by changes in interest rates. When
interest rates decline, the market value of fixed-income securities generally can be expected to
rise. Conversely, when interest rates rise, the market value of fixed-income securities generally
can be expected to decline. The longer the duration or maturity of a fixed-income security, the
more susceptible it is to interest-rate risk.
Credit Quality Risk. Fixed-income securities are subject to the risk that the issuer of the
security will not repay all or a portion of the principal borrowed and will not make all interest
payments. If the credit quality of a fixed-income security deteriorates after the Fund has
purchased the security, the market value of the security may decrease and lead to a decrease in the
value of the Funds investments. Funds that may invest in lower-rated fixed-income securities,
commonly referred to as junk securities, are riskier than funds that may invest in higher-rated
fixed-income securities. Additional information on the risks of investing in investment-grade
fixed-income securities in the lowest rating category and lower-rated fixed-income securities is
set forth below.
Investment-grade Fixed-income Securities in the Lowest Rating Category Risk. Investment-grade
fixed-income securities in the lowest rating category (rated Baa by Moodys or BBB by S&P and
comparable unrated securities) involve a higher degree of risk than fixed-income securities in the
higher rating categories. While such securities are considered investment-grade quality and are
deemed to have adequate capacity for payment of principal and interest, such securities lack
outstanding investment characteristics and have speculative
33
characteristics as well. For example,
changes in economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher-grade securities.
Prepayment of Principal. Many types of debt securities, including floating-rate loans, are subject
to prepayment risk. Prepayment risk occurs when the issuer of a security can repay principal prior
to the securitys maturity. Securities subject to prepayment risk can offer less potential for
gain when the credit quality of the issuer improves.
LOWER-RATED FIXED-INCOME SECURITIES RISK AND HIGH-YIELD SECURITIES RISK
Lower-rated fixed-income securities are defined as securities rated below investment grade (rated
Ba and below by Moodys, and BB and below by S&P) (also called junk bonds). The general
risks of investing in these securities are as follows:
|
|
|
Risk to principal and income. Investing in lower-rated fixed-income securities is
considered speculative. While these securities generally provide greater income potential
than investments in higher-rated securities, there is a greater risk that principal and
interest payments will not be made. Issuers of these securities may even go into default
or become bankrupt. |
|
|
|
|
Price volatility. The price of lower-rated fixed-income securities may be more
volatile than securities in the higher-rating categories. This volatility may increase
during periods of economic uncertainty or change. The price of these securities is
affected more than higher-rated fixed-income securities by the markets perception of their
credit quality, especially during times of adverse publicity. In the past, economic
downturns or increases in interest rates have, at times, caused more defaults by issuers of
these securities and may do so in the future. Economic downturns and increases in interest
rates have an even greater effect on highly leveraged issuers of these securities. |
|
|
|
|
Liquidity. The market for lower-rated fixed-income securities may have more limited
trading than the market for investment-grade fixed-income securities. Therefore, it may be
more difficult to sell these securities, and these securities may have to be sold at prices
below their market value in order to meet redemption requests or to respond to changes in
market conditions. |
|
|
|
|
Dependence on Subadvisers own credit analysis. While the Subadviser may rely on
ratings by established credit-rating agencies, it also will supplement such ratings with
its own independent review of the credit quality of the issuer. Therefore, the assessment
of the credit risk of lower-rated fixed-income securities is more dependent on the
Subadvisers evaluation than the assessment of the credit risk of higher-rated securities. |
Additional Risks Regarding Lower-rated Corporate Fixed-income Securities. Lower-rated corporate
fixed-income securities (and comparable unrated securities) tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-rated corporate fixed-income
securities. Issuers of lower-rated corporate fixed-income securities also may be highly leveraged,
increasing the risk that principal and income will not be repaid.
Additional Risks Regarding Lower-rated Foreign Government Fixed-income Securities. Lower-rated
non-U.S. government fixed-income securities are subject to the risks of investing in foreign
countries described under Non-U.S. Investment Risk. In addition, the ability and willingness of
a non-U.S. government to make payments on debt when due may be affected by the prevailing economic
and political conditions within the country. Emerging-market countries may experience high
inflation, interest rates and unemployment, as well as exchange-rate trade difficulties and
political uncertainty or instability. These factors increase the risk that a non-U.S. government
will not make payments when due.
MORTGAGE-BACKED AND ASSET BACKED SECURITIES RISK
Mortgage-backed Securities. Mortgage-backed securities represent participating interests in pools
of residential mortgage loans, which are guaranteed by the U.S. government, its agencies or
instrumentalities. However, the guarantee of these types of securities relates to the principal
and interest payments, and not to the market value of
34
such securities. In addition, the guarantee
only relates to the mortgage-backed securities held by the Fund and not the purchase of shares of
the Fund.
Mortgage-backed securities are issued by lenders, such as mortgage bankers, commercial banks and
savings and loan associations. Such securities differ from conventional debt securities, which
provide for the periodic payment of interest in fixed amounts (usually semiannually) with principal
payments at maturity or on specified dates. Mortgage-backed securities provide periodic payments
which are, in effect, a pass-through of the interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans. A mortgage-backed
security will mature when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity and their expected maturities may vary when
interest rates rise or fall.
When interest rates fall, homeowners are more likely to prepay their mortgage loans. An increased
rate of prepayments on the Funds mortgage-backed securities will result in an unforeseen loss of
interest income to the Fund as the Fund may be required to reinvest assets at a lower interest
rate. Because prepayments increase when interest rates fall, the prices of mortgage-backed
securities do not increase as much as other fixed-income securities when interest rates fall.
When interest rates rise, homeowners are less likely to prepay their mortgage loans. A decreased
rate of prepayments lengthens the expected maturity of a mortgage-backed security. Therefore, the
prices of mortgage-backed securities may decrease more than prices of other fixed-income securities
when interest rates rise.
The yield of mortgage-backed securities is based on the average life of the underlying pool of
mortgage loans. The actual life of any particular pool may be shortened by unscheduled or early
payments of principal and interest. Principal prepayments may result from the sale of the
underlying property, or the refinancing or foreclosure of underlying mortgages. The occurrence of
prepayments is affected by a wide range of economic, demographic and social factors and,
accordingly, it is not possible to accurately predict the average life of a particular pool. The
actual prepayment experience of a pool of mortgage loans may cause the yield realized by the Fund
to differ from the yield calculated on the basis of the average life of the pool. In addition, if
the Fund purchases mortgage-backed securities at a premium, the premium may be lost in the event of
early prepayment, which may result in a loss to the Fund.
Prepayments tend to increase during periods of falling interest rates, while during periods of
rising interest rates, prepayments are likely to decline. Monthly interest payments received by
the Fund have a compounding effect, which will increase the yield to shareholders as compared to
debt obligations that pay interest semiannually. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest rates. Also, although
the value of debt securities may increase as interest rates decline, the value of these
pass-through type of securities may not increase as much, due to their prepayment feature.
Collateralized Mortgage Obligations. The Fund may invest in mortgage-backed securities called
collateralized mortgage obligations (CMOs). CMOs are issued in separate classes with different
stated maturities. As the mortgage pool experiences prepayments, the pool pays off investors in
classes with shorter maturities first. By investing in CMOs, the Fund may manage the prepayment
risk of mortgage-backed securities. However, prepayments may cause the actual maturity of a CMO to
be substantially shorter than its stated maturity.
Asset-backed Securities. Asset-backed securities include interests in pools of debt securities,
commercial or consumer loans, or other receivables. The value of these securities depends on many
factors, including changes in interest rates, the availability of information concerning the pool
and its structure, the credit quality of the underlying assets, the markets perception of the
servicer of the pool and any credit enhancement provided. In addition, asset-backed securities
have prepayment risks similar to mortgage-backed securities.
EQUITY SECURITIES RISK
Common and preferred stocks represent equity ownership in a company. Stock markets are
volatile. The price of equity securities will fluctuate, and can decline and reduce the value of
the Fund investing in equities. The price of
35
equity securities fluctuates based on changes in a companys financial condition, and overall
market and economic conditions. The value of equity securities purchased by the Fund could decline
if the financial condition of the companies in which the Fund is invested declines, or if overall
market and economic conditions deteriorate. Even a fund that invests in high-quality or blue
chip equity securities, or securities of established companies with large market capitalizations
(which generally have strong financial characteristics), can be negatively impacted by poor overall
market and economic conditions. Companies with large market capitalizations also may have less
growth potential than smaller companies and may be less able to react quickly to changes in the
marketplace.
The Fund may maintain substantial exposure to equities and generally does not attempt to time the
market. Because of this exposure, the possibility that stock market prices in general will decline
over short or extended periods subjects the Fund to unpredictable declines in the value of its
investments, as well as periods of poor performance.
Preferred and Convertible Securities Risk. Unlike interest on debt securities, preferred
securities dividends are payable only if declared by the issuers board. Also, preferred
securities may be subject to optional or mandatory redemption provisions. The value of convertible
preferred securities can depend heavily upon the value of the security into which such convertible
preferred securities is converted, depending on whether the market price of the underlying security
exceeds the conversion price.
LIQUIDITY RISK
The Fund is exposed to liquidity risk when trading volume, lack of a market maker or legal
restrictions impair the Funds ability to sell particular securities or close derivative positions
at an advantageous market price. Funds with principal investment strategies that involve
investments in securities of companies with smaller market capitalizations, foreign securities,
derivatives or securities with substantial market and/or credit risk tend to have the greatest
exposure to liquidity risk. Exposure to liquidity risk may be heightened for funds that invest in
emerging markets and related derivatives that are not widely traded, and that may be subject to
purchase and sale restrictions.
NON-U.S. INVESTMENT RISK
Funds that invest in securities traded principally in securities markets outside the U.S. are
subject to additional and more varied risks, as the value of non-U.S. securities may change more
rapidly and extremely than the value of U.S. securities. The securities markets of many foreign
countries are relatively small, with a limited number of companies representing a small number of
industries. Additionally, issuers of non-U.S. securities may not be subject to the same degree of
regulation as U.S. issuers. Reporting, accounting and auditing standards of foreign countries
differ, in some cases significantly, from U.S. standards. There generally are higher commission
rates on non-U.S. portfolio transactions, transfer taxes, higher custodial costs and the
possibility that non-U.S. taxes will be charged on dividends and interest payable on non-U.S.
securities, some or all of which may not be reclaimable. Also, for lesser-developed countries,
nationalization, expropriation or confiscatory taxation, adverse changes in investment or exchange
control regulations (which may include suspension of the ability to transfer currency or assets
from a country), political changes or diplomatic developments could adversely affect the Funds
investments. In the event of nationalization, expropriation or other confiscation, the Fund could
lose its entire investment in a non-U.S. security. All funds that invest in non-U.S. securities
are subject to these risks. Some of the non-U.S. investment risks also are applicable to funds
that invest a material portion of their assets in securities of non-U.S. issuers traded in the U.S.
Currency Risk. Currency risk is the risk that fluctuations in exchange rates may adversely affect
the U.S. dollar value of the Funds investments. Currency risk includes both the risk that
currencies in which the Funds investments are traded, or currencies in which the Fund has taken an
active investment position, will decline in value relative to the U.S. dollar and, in the case of
hedging positions, that the U.S. dollar will decline in value relative to the currency being
hedged. Currency rates in foreign countries may fluctuate significantly for a number of reasons,
including the forces of supply and demand in the foreign exchange markets, actual or perceived
changes in interest rates and intervention (or the failure to intervene) by U.S. or foreign
governments or central banks or by currency controls or political developments in the U.S. or
abroad. All funds with foreign currency holdings and/or that invest or trade in securities
denominated in foreign currencies or related derivative instruments may be adversely affected by
changes in foreign currency exchange rates. Derivative foreign currency transactions (such as
futures, forwards and swaps) also may involve leveraging risk, in addition to currency risk.
Leverage may disproportionately increase
36
the Funds portfolio loss and reduce opportunities for
gain when interest rates, stock prices or currency rates are changing.
SOVEREIGN DEBT OBLIGATIONS RISK
An investment in debt obligations of non-U.S. governments and their political subdivisions
(sovereign debt), whether denominated in U.S. dollars for a foreign currency, involves special
risks that are not present in corporate debt obligations. The non-U.S. issuer of the sovereign
debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable
or unwilling to repay principal or pay interest when due, and the Fund may have limited recourse in
the event of a default. During periods of economic uncertainty, the market prices of sovereign
debt may be more volatile than prices of debt obligations of U.S. issuers. In the past, certain
non-U.S. countries have encountered difficulties in servicing their debt obligations, withheld
payments of principal and interest and declared moratoria on the payment of principal and interest
on their sovereign debt. A sovereign debtors willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign currency reserves, the availability of sufficient foreign exchange, the
relative size of the debt service burden, the sovereign debtors policy toward its principal
international lenders and local political constraints. Sovereign debtors also may be dependent on
expected disbursements from non-U.S. governments, multilateral agencies and other entities to
reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to
implement economic reforms, achieve specified levels of economic performance or repay principal or
interest when due may result in the cancellation of third-party commitments to lend funds to the
sovereign debtor, which may further impair such debtors ability or willingness to service its
debts.
BRADY BONDS RISK
Brady Bonds may involve a high degree of risk, may be in default or present the risk of default.
Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service
reduction through specific options negotiated by a debtor nation with its creditors. As a result,
the financial packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt,
bonds issued at a discount of face value of such debt, bonds bearing an interest rate which
increases over time and bonds issued in exchange for the advancement of new money by existing
lenders. Certain Brady Bonds have been collateralized as to principal due at maturity by U.S.
Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity of the Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the debtor nations reserves. In
addition, the first two or three interest payments on certain types of Brady Bonds may be
collateralized by cash or securities agreed upon by creditors. Although Brady Bonds may be
collateralized by U.S. government securities, repayment of principal and interest is not guaranteed
by the U.S. government.
REVERSE REPURCHASE AGREEMENT RISK
Reverse repurchase agreement transactions involve the risk that the market value of the securities
that the Fund is obligated to repurchase under such agreements may decline below the repurchase
price. Any fluctuations in the market value of either the securities transferred to the other
party or the securities in which the proceeds may be invested would affect the market value of the
Funds assets, thereby potentially increasing fluctuations in the market value of the Funds
assets. In the event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Funds use of proceeds received under the agreement may be
restricted pending a determination by the other party, or its trustee or receiver, whether to
enforce the Funds obligation to repurchase the securities.
HEDGING, DERIVATIVES AND OTHER STRATEGIC TRANSACTIONS RISK
The ability of the Fund to utilize hedging, derivatives and other strategic transactions
successfully will depend in part on the Subadvisers ability to predict pertinent market movements
and market risk, counterparty risk, credit risk, interest-rate risk and other risk factors, none of
which can be assured. The skills required to successfully utilize hedging and other strategic
transactions are different from those needed to select the Funds securities. Even if the
Subadviser only uses hedging and other strategic transactions in the Fund primarily for hedging
purposes or to gain exposure to a particular securities market, if the transaction is not
successful, it could result in a significant loss to
37
the Fund. The amount of loss could be more
than the principal amount invested. These transactions also may increase the volatility of the
Fund and may involve a small investment of cash relative to the magnitude of the risks assumed,
thereby magnifying the impact of any resulting gain or loss. For example, the potential loss from
the use of futures can exceed the Funds initial investment in such contracts. In addition, these
transactions could result in a loss to the Fund if the counterparty to the transaction does not
perform as promised.
The Fund may invest in derivatives, which are financial contracts with a value that depends on, or
is derived from, the value of underlying assets, reference rates or indexes. Examples of
derivative instruments include options, futures contracts, options on futures contracts, foreign
currency forward contracts and swap agreements (including, but not limited to, interest-rate swaps,
credit default swaps and swaps on exchange-traded funds). Examples of derivative instruments
include currency forwards, currency futures, credit default swaps and options. Examples of
derivative instruments include options, futures, currency forwards and market access products
including zero strike options and zero strike warrants. Examples of derivative instruments include
currency forwards and currency options. Derivatives may relate to stocks, bonds, interest rates,
currencies or currency exchange rates and related indexes. The Fund may use derivatives for many
purposes, including for hedging, and as a substitute for direct investment in securities or other
assets. Derivatives may be used in a way to efficiently adjust the exposure of the Fund to various
securities, markets and currencies without the Fund actually having to sell existing investments
and make new investments. This generally will be done when the adjustment is expected to be
relatively temporary or in anticipation of effecting the sale of fund assets and making new
investments over time. Further, since many derivatives have a leverage component, adverse changes
in the value or level of the underlying asset, reference rate or index can result in a loss
substantially greater than the amount invested in the derivative itself. Certain derivatives have
the potential for unlimited loss, regardless of the size of the initial investment. When the Fund
uses derivatives for leverage, investments in the Fund will tend to be more volatile, resulting in
larger gain or loss in response to market changes. To limit leverage risk, the Fund may segregate
assets determined to be liquid or, as permitted by applicable regulation, enter into certain
offsetting positions to cover its obligations under derivative instruments. For a description of
the various derivative instruments the Fund may utilize, refer to the SAI.
The use of derivative instruments may involve risks different from, or potentially greater than,
the risks associated with investing directly in securities and other more traditional assets. In
particular, the use of derivative instruments exposes the Fund to the risk that the counterparty to
an over-the-counter (OTC) derivatives contract will be unable or unwilling to make timely
settlement payments or otherwise to honor its obligations. OTC derivatives transactions typically
can only be closed out with the other party to the transaction, although either party may engage in
an offsetting transaction that puts that party in the same economic position as if it had closed
out the transaction with the counterparty or may obtain the other partys consent to assign the
transaction to a third party. If the counterparty defaults, the Fund will have contractual
remedies, but there is no assurance that the counterparty will meet its contractual obligations or
that, in the event of default, the Fund will succeed in enforcing them. For example, because the
contract for each OTC derivatives transaction is individually negotiated with a specific
counterparty, the Fund is subject to the risk that a counterparty may interpret contractual terms
(e.g., the definition of default) differently than the Fund when the Fund seeks to enforce its
contractual rights. If that occurs, the cost and unpredictability of the legal proceedings
required for the Fund to enforce its contractual rights may lead it to decide not to pursue its
claims against the counterparty. The Fund, therefore, assumes the risk that it may be unable to
obtain payments owed to it under OTC derivatives contracts or that those payments may be delayed or
made only after the Fund has incurred the costs of litigation. While the Subadviser intends to
monitor the creditworthiness of counterparties, there can be no assurance that a counterparty will
meet its obligations, especially during unusually adverse market conditions. To the extent the
Fund contracts with a limited number of counterparties, the Funds risk will be concentrated and
events that affect the creditworthiness of any of those counterparties may have a pronounced effect
on the Fund. Derivatives also are subject to a number of other risks, including market risk and
liquidity risk. Since the value of derivatives is calculated and derived from the value of other
assets, instruments or references, there is a risk that they will be improperly valued.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the
assets, rates or indexes they are designed to hedge or closely track. Suitable derivatives
transactions may not be available in all circumstances. The Fund also is subject to the risk that
the counterparty closes out the derivatives transactions upon the occurrence of certain triggering
events. In addition, the Subadviser may determine not to use derivatives to hedge or otherwise
reduce risk exposure. A detailed discussion of various hedging and other strategic transactions
appears in the SAI. To the extent the Fund utilizes hedging and other strategic transactions, it
will be subject to the same risks. The following is a list of certain
38
derivatives and other
strategic transactions in which the Fund may invest and the main risks associated with each of
them:
|
|
|
Credit default swaps. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions), interest-rate risk, risk of default of the underlying reference
obligation and risk of disproportionate loss are the principal risks of engaging in
transactions involving credit default swaps. |
|
|
|
|
Currency options. Counterparty risk, liquidity risk (i.e., the inability to enter into
closing transactions) and risk of disproportionate loss are the principal risks of engaging
in transactions involving options. |
|
|
|
|
Foreign currency forward contracts. Counterparty risk, liquidity risk (i.e., the
inability to enter into closing transactions), foreign currency risk and risk of
disproportionate loss are the principal risks of engaging in transactions involving foreign
currency forward contracts. |
|
|
|
|
Foreign currency swaps. Counterparty risk, liquidity risk (i.e., the inability to
enter into closing transactions), foreign currency risk and risk of disproportionate loss
are the principal risks of engaging in transactions involving foreign currency swaps. |
|
|
|
|
Futures contracts. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions) and risk of disproportionate loss are the principal risks of
engaging in transactions involving futures contracts. |
|
|
|
|
Interest-rate swaps. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions), interest-rate risk and risk of disproportionate loss are the
principal risks of engaging in transactions involving interest-rate swaps. |
|
|
|
|
Options. Counterparty risk, liquidity risk (i.e., the inability to enter into closing
transactions) and risk of disproportionate loss are the principal risks of engaging in
transactions involving options. Counterparty risk does not apply to exchange-traded
options. |
|
|
|
|
Swaps. Counterparty risk, liquidity risk (i.e., the inability to enter into closing
transactions), interest-rate risk, settlement risk, risk of default of the underlying
reference obligation and risk of disproportionate loss are the principal risks of engaging
in transactions involving swaps, including credit default swaps and total return swaps. |
Given the risks described above, an investment in Common Shares may not be appropriate for all
investors. You should carefully consider your ability to assume these risks before making an
investment in the Fund.
Management of the Fund
TRUSTEES
The overall management of the Fund, including supervision of the duties performed by the Adviser
and the Subadviser, is the responsibility of the Board, under the laws of The Commonwealth of
Massachusetts and the 1940 Act. The Trustees are responsible for the Funds overall management,
including adopting the investment and other policies of the Fund, electing and replacing officers
and selecting and supervising the Funds Adviser and Subadviser. The names and business addresses
of the Trustees and officers of the Fund and their principal occupations and other affiliations
during the past five years, as well as a description of committees of the Board, are set forth
under Those Responsible for Management in the SAI.
A discussion regarding the basis for the Trustees approval of the Advisory Agreement and the
Subadvisory Agreements (each, as defined below) is available in the Funds October 31, 2011 annual
shareholder report.
39
THE ADVISER
The Adviser is a Delaware limited liability company whose principal offices are located at 601
Congress Street, Boston, Massachusetts 02210 and serves as the Funds investment adviser. The
Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of
1940, as amended (the Advisers Act).
Founded in 1968, the Adviser is a wholly owned subsidiary of John Hancock Life Insurance Company
(U.S.A.), a subsidiary of Manulife Financial Corporation (Manulife Financial or the Company).
Manulife Financial is the holding company of The Manufacturers Life Insurance Company (the Life
Company) and its subsidiaries. John Hancock Life Insurance Company (U.S.A.) and its subsidiaries
(John Hancock) today offer a broad range of financial products and services, including whole,
term, variable, and universal life insurance, as well as college savings products, mutual funds,
fixed and variable annuities, long-term care insurance and various forms of business insurance.
The Advisers parent company has been helping individuals and institutions work toward their
financial goals since 1862. The Adviser offers investment solutions managed by institutional money
managers, taking a disciplined team approach to portfolio management and research, leveraging the
expertise of seasoned investment professionals. The Adviser has been managing closed-end funds
since 1971. As of June 30, 2012, the Adviser had total assets under management of approximately
$20.7 billion.
Established in 1887, Manulife Financial is a Canada-based financial services group with principal
operations in Asia, Canada and the U.S. Its international network of employees, agents and
distribution partners offers financial protection and wealth management products and services to
millions of clients. It also provides asset management services to institutional customers. Funds
under management by Manulife Financial and its subsidiaries were C$512 billion (US$512 billion) as
of March 31, 2012. The Company operates as Manulife Financial in Canada and Asia and primarily as
John Hancock in the U.S.
Advisory Agreement. The Fund entered into an investment management contract dated July 1, 2009
(the Advisory Agreement) with the Adviser. As compensation for its advisory services under the
Advisory Agreement, the Adviser receives a fee from the Fund, calculated and paid daily, at an
annual rate of the Funds average daily managed assets. Managed assets means the total assets of
the Fund (including any assets attributable to any leverage that may be outstanding) minus the sum
of accrued liabilities (other than liabilities representing financial leverage). The liquidation
preference of any preferred shares is not a liability.
Pursuant to the Advisory Agreement and subject to the general supervision of the Trustees, the
Adviser selects, contracts with, and compensates the Subadviser to manage the investments and
determine the composition of the assets of the Fund. The Adviser does not itself manage any of the
Funds portfolio assets but has ultimate responsibility to oversee the Subadviser and recommend
their hiring, termination and replacement. In this connection, the Adviser monitors the
Subadvisers management of the Funds investment operations in accordance with the investment
objectives and related investment policies of the Fund, reviews the performance of the Subadviser
and reports periodically on such performance to the Board.
Service Agreement. The Fund entered into a management-related service contract dated July 1,
2009 (the Service Agreement) with JHA, under which the Fund receives Non-Advisory Services.
These Non-Advisory Services include, but are not limited to, legal, tax, accounting, valuation,
financial reporting and performance, compliance, service provider oversight, portfolio and cash
management, project management office, EDGAR conversion and filing, graphic design, and other
services that are not investment advisory in nature. JHA is reimbursed for its costs in providing
Non-Advisory Services to the Fund under the Service Agreement.
THE SUBADVISER
Subadvisory Agreement. The Adviser entered into a Subadvisory Agreement dated December 31, 2005
with the Subadviser (the Subadvisory Agreement). The Subadviser is responsible for the
day-to-day management of the Funds portfolio investments. The Subadviser, organized in 1968, is a
wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife
Financial, a publicly held, Canadian-based company).
40
As of June 30, 2012, the Subadviser had total
assets under management of approximately $132.7 billion. The Subadviser is located at 101
Huntington Avenue, Boston, Massachusetts 02199.
Under the terms of the Subadvisory Agreement, the Subadviser is responsible for managing the
investment and reinvestment of the assets of the Fund, subject to the supervision and control of
the Board and the Adviser. For services rendered by the Subadviser under the Subadvisory
Agreement, the Adviser (and not the Fund) pays the Subadviser a fee.
PORTFOLIO MANAGERS
Below is a list of the Funds investment management team at the Subadviser, listed in alphabetical
order, which includes a brief summary of their business careers during the past five years. These
managers share portfolio management responsibilities. For more details about these individuals,
including information about their compensation, other accounts they manage and any investments they
may have in the Fund, see the SAI.
Barry H. Evans, CFA
President, Chief Fixed Income Officer and Chief Operating Officer, John Hancock Asset
Management since 2005
Senior Vice President, Chief Fixed Income Officer and Chief Operating Officer, John Hancock
Advisers LLC (19862005)
Began business career in 1986
Joined Fund team in 2002
Jeffrey N. Given, CFA
Vice President, John Hancock Asset Management since 2005
Second Vice President, John Hancock Advisers LLC (19932005)
Began business career in 1993
Joined Fund team in 1999
John F. Iles
Vice President, John Hancock Asset Management since 2005
Vice President, John Hancock Advisers LLC (19992005)
Began business career in 1984
Joined Fund team in 2005
CUSTODIAN AND TRANSFER AGENT
The Funds portfolio securities are held pursuant to a custodian agreement between the Fund and
State Street Bank and Trust Company (State Street), Lafayette Corporate Center, Two Avenue de
Lafayette, Boston, Massachusetts 02111. Under the custodian agreement, State Street performs
custody, foreign custody manager and fund accounting services.
Computershare Shareowner Services LLC, 480 Washington Boulevard, Jersey City, New Jersey,
07310-1900, is the transfer agent and dividend disbursing agent of the Fund.
Determination of Net Asset Value
The NAV of the Common Shares is determined once daily as of the close of regular trading of
the NYSE (typically 4:00 P.M., Eastern Time) on each business day that the NYSE is open. On
holidays or other days when the NYSE is closed, the NAV is not calculated.
The NAV is computed by dividing the total assets, minus liabilities by the number of Fund shares
outstanding.
41
Distribution Policy
The Fund makes regular quarterly distributions to Common Shareholders sourced from the Funds
cash available for distribution. Cash available for distribution consists of the Funds
(i) investment company taxable income, which includes among other things, dividend and ordinary
income after payment of Fund expenses, the excess of net short-term capital gain over net long-term
capital loss, and income from certain hedging and interest rate transactions and (ii) net long-term
capital gain (gain from the sale of capital assets held longer than one year). The Board may
modify this distribution policy at any time without obtaining the approval of Common Shareholders.
Expenses of the Fund are accrued each day. To the extent that the Funds net investment income for
any year exceeds the total quarterly distributions paid during the year, the Fund may make a
special distribution at or near year-end of such excess amount as may be required. If it does,
over time, all of the Funds investment company taxable income will be distributed.
If, for any calendar year, as discussed above, the total distributions made exceed the Funds net
investment taxable income and net capital gain, the excess generally will be treated as a return of
capital to each Common Shareholder (up to the amount of the Common Shareholders basis in his or
her Common Shares) and thereafter as gain from the sale of Common Shares. The amount treated as a
return of capital reduces the Common Shareholders adjusted basis in his or her Common Shares,
thereby increasing his or her potential gain or reducing his or her potential loss on the
subsequent sale of his or her Common Shares. Distributions in any year may include a substantial
return of capital component.
Pursuant to the requirements of the 1940 Act, in the event the Fund makes distributions from
sources other than income, a notice will accompany each quarterly distribution with respect to the
estimated source of the distribution made. Such notices will describe the portion, if any, of the
quarterly dividend which, in the Funds good faith judgment, constitutes long-term capital gain,
short-term capital gain, net investment income or a return of capital. The actual character of
such dividend distributions for U.S. federal income tax purposes, however, will only be determined
finally by the Fund at the close of its fiscal year, based on the Funds full year performance and
its actual net investment company taxable income and net capital gain for the year, which may
result in a recharacterization of amounts distributed during such fiscal year from the
characterization in the quarterly estimates.
At least annually, the Fund intends to distribute any net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss) or, alternatively, to retain all or a
portion of the years net capital gain and pay U.S. federal income tax on the retained gain. As
provided under U.S. federal tax law, Common Shareholders of record as of the end of the Funds
taxable year will include their attributable share of the retained gain in their income for the
year as a long-term capital gain, and will be entitled to a tax credit or refund for the tax deemed
paid on their behalf by the Fund. The Fund may treat the cash value of tax credit and refund
amounts in connection with retained capital gain as a substitute for equivalent cash distributions.
The tax treatment and characterization of the Funds distributions may vary substantially from time
to time because of the varied nature of the Funds investments. If the Funds total quarterly
distributions in any year exceed the amount of its net investment taxable income for the year, any
such excess would be characterized as a return of capital for U.S. federal income tax purposes to
the extent not designated as a capital gain dividend. Distributions in any year may include a
substantial return of capital component. Under the 1940 Act, for any distribution that includes
amounts from sources other than net income (calculated on a book basis), the Fund is required to
provide Common Shareholders a written statement regarding the components of such distribution.
Such a statement will be provided at the time of any distribution believed to include any such
amounts. A return of capital is a distribution to Common Shareholders that is not attributable to
the Funds earnings but, represents a return of part of the Common Shareholders investment. If
the Funds distributions exceed the Funds current and accumulated earnings and profits, such
excess will be treated first as a return of capital to the extent of the shareholders tax basis in
Common Shares (thus reducing a shareholders adjusted tax basis in his or her Common Shares), and
thereafter as capital gain assuming Common Shares are held as a capital asset. Upon the sale of
Common Shares, a shareholder generally will recognize capital gain or loss equal to the difference
between the amount realized on the sale and the shareholders adjusted tax basis in Common Shares
sold. For example, in year one, a Common Shareholder purchased 100 shares of the Fund at $10 per
Share. In year two, the Common Shareholder received a $1-per-share
42
return of capital distribution,
which reduced the basis in each share by $1, to give the Common Shareholder an adjusted basis of $9
per share. In year three, the Common Shareholder sells the 100 shares for $15 per Share. Assuming
no other transactions during this period, a Common Shareholder would have a capital gain in year
three of $6 per share ($15 minus $9) for a total capital gain of $600.
The 1940 Act currently limits the number of times the Fund may distribute long-term capital gain in
any tax year, which may increase the variability of the Funds distributions and result in certain
distributions being comprised more heavily of long-term capital gain eligible for favorable income
tax rates. In the future, the Adviser may seek Board approval to implement a managed distribution
plan for the Fund. The managed distribution plan would be implemented pursuant to an exemptive
order already granted by the SEC, which provides an exemption from Section 19(b) of the 1940 Act
and Rule 19b-1 thereunder to permit the Fund to include long-term capital gain as a part of its
regular distributions to Common Shareholders more frequently than would otherwise be permitted by
the 1940 Act (generally once or twice per year). If the Fund implements a managed distribution
plan, it would do so without a vote of the Common Shareholders.
Distribution rates are based on projected quarterly cash available for distribution, which may
result in fluctuations in quarterly rates. As a result, the distributions paid by the Fund for any
particular quarter may be more or less than the amount of cash available for distribution from that
quarterly period. In certain circumstances, the Fund may be required to sell a portion of its
investment portfolio to fund distributions. Distributions will reduce the Common Shares NAV.
Common Shareholders may automatically reinvest some or all of their distributions in additional
Common Shares under the Funds dividend reinvestment plan. See Dividend Reinvestment Plan.
Dividend Reinvestment Plan
Pursuant to the Funds Dividend Reinvestment Plan (the Plan), distributions of dividends and
capital gain are automatically reinvested in Common Shares by Computershare Trust Company, N.A.
(the Plan Agent). Every shareholder holding at least one full share of the Fund is automatically
enrolled in the Plan. Shareholders who do not participate in the Plan will receive all
distributions in cash.
If the Fund declares a dividend or distribution payable either in cash or in Common Shares and the
market price of shares on the payment date for the distribution or dividend equals or exceeds the
Funds NAV per share, the Fund will issue Common Shares to participants at a value equal to the
higher of NAV or 95% of the market price. The number of additional Common Shares to be credited to
each participants account will be determined by dividing the dollar amount of the distribution or
dividend by the higher of NAV or 95% of the market price. If the market price is lower than NAV,
or if dividends or distributions are payable only in cash, then participants will receive Common
Shares purchased by the Plan Agent on participants behalf on the NYSE or otherwise on the open
market. If the market price exceeds NAV before the Plan Agent has completed its purchases, the
average per share purchase price may exceed NAV, resulting in fewer Common Shares being acquired
than if the Fund had issued new Common Shares.
There are no brokerage charges with respect to Common Shares issued directly by the Fund. However,
whenever shares are purchased or sold on the NYSE or otherwise on the open market, each participant
will pay a pro rata portion of brokerage trading fees, currently $0.05 per share purchased or sold.
Brokerage trading fees will be deducted from amounts to be invested.
The reinvestment of dividends and net capital gain distributions does not relieve participants of
any income tax that may be payable on such dividends or distributions even though cash is not
received by the participant.
Shareholders participating in the Plan may buy additional Common Shares of the Fund through the
Plan at any time in amounts of at least $50 per investment, up to a maximum of $10,000, with a
total calendar year limit of $100,000. Shareholders will be charged a $5 transaction fee plus
$0.05 per share brokerage trading fee for each order. Purchases of additional shares of the Fund
will be made on the open market. Shareholders who elect to utilize monthly electronic fund
transfers to buy additional shares of the Fund will be charged a $2 transaction fee plus
43
$0.05 per
share brokerage trading fee for each automatic purchase. Shareholders also can sell Fund shares
held in the Plan account at any time by contacting the Plan Agent by telephone, in writing or by
visiting the Plan Agents website at www.computershare.com and clicking EquityAccess & More. The
Plan Agent will mail a check to you (less applicable brokerage trading fees) on settlement date,
which is three business days after your shares have been sold. If you choose to sell your shares
through your stockbroker, you will need to request that the Plan Agent electronically transfer your
shares to your stockbroker through the Direct Registration System.
Shareholders participating in the Plan may withdraw from the Plan at any time by contacting the
Plan Agent by telephone, in writing or by visiting the Plan Agents website at
www.computershare.com and clicking EquityAccess & More. Such termination will be effective
immediately if the notice is received by the Plan Agent prior to any dividend or distribution
record date; otherwise, such termination will be effective on the first trading day after the
payment date for such dividend or distribution, with respect to any subsequent dividend or
distribution. If you withdraw, your shares will be credited to your account; or, if you wish, the
Plan Agent will sell your full and fractional shares and send you the proceeds, less a transaction
fee of $5.00 and less brokerage trading fees of $0.05 per share. If a shareholder does not
maintain at least one whole share of common stock in the Plan account, the Plan Agent may terminate
such shareholders participation in the Plan after written notice. Upon termination, shareholders
will be sent a check for the cash value of any fractional share in the Plan account, less any
applicable broker commissions and taxes.
Shareholders who hold at least one full share of the Fund may join the Plan by notifying the Plan
Agent by telephone, in writing or by visiting the Plan Agents website at www.computershare.com and
clicking EquityAccess & More. If received in proper form by the Plan Agent before the record
date of a dividend, the election will be effective with respect to all dividends paid after such
record date. If you wish to participate in the Plan and your shares are held in the name of a
brokerage firm, bank or other nominee, please contact your nominee to see if it will participate in
the Plan for you. If you wish to participate in the Plan, but your brokerage firm, bank or other
nominee is unable to participate on your behalf, you will need to request that your shares be
re-registered in your own name, or you will not be able to participate. The Plan Agent will
administer the Plan on the basis of the number of shares certified from time to time by you as
representing the total amount registered in your name and held for your account by your nominee.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund and the
Plan Agent reserve the right to amend or terminate the Plan. Participants generally will receive
written notice at least 90 days before the effective date of any amendment. In the case of
termination, participants will receive written notice at least 90 days before the record date for
the payment of any dividend or distribution by the Fund.
All correspondence or additional information about the Plan should be directed to Computershare
Trust Company, N.A., (Telephone: 1-800-852-0218 (within the U.S. and Canada), 1-201-680-6578
(International Telephone Inquiries), and 1-201-680-6610 (For the Hearing Impaired (TDD)).
Closed-End Fund Structure
Closed-end funds differ from traditional, open-end management investment companies (which
generally are referred to as mutual funds) in that closed-end funds generally list their shares
for trading on a securities exchange and do not redeem their shares at the option of the
shareholder. Mutual funds do not trade on securities exchanges and issue securities redeemable at
the option of the shareholder. The continuous outflows of assets in a mutual fund can make it
difficult to manage the funds investments. Closed-end funds generally are able to stay more fully
invested in securities that are consistent with their investment objectives and also have greater
flexibility to make certain types of investments and to use certain investment strategies, such as
financial leverage and investments in illiquid securities. The Funds Common Shares are designed
primarily for long-term investors; you should not purchase Common Shares if you intend to sell them
shortly after purchase.
Common shares of closed-end funds frequently trade at prices lower than their NAV. Since
inception, the market price of the Common Shares has fluctuated and at times has traded below the
Funds NAV and at times has traded above the Funds NAV. The Fund cannot predict whether in the
future the Common Shares will trade at, above or
44
below NAV. In addition to NAV, the market price
of the Funds Common Shares may be affected by such factors as the Funds dividend stability,
dividend levels, which are in turn affected by expenses, and market supply and demand.
In recognition of the possibility that Common Shares may trade at a discount from their NAV, and
that any such discount may not be in the best interest of Common Shareholders, the Board, in
consultation with the Adviser, from time to time may review possible actions to reduce any such
discount. There can be no assurance that the Board will decide to undertake any of these actions
or that, if undertaken, such actions would result in Common Shares trading at a price equal to or
close to NAV per Common Share. In the event that the Fund conducts an offering of new Common
Shares and such offering constitutes a distribution under Regulation M, the Fund and certain of
its affiliates may be subject to an applicable restricted period that could limit the timing of any
repurchases by the Fund.
U.S. Federal Income Tax Matters
The following discussion of U.S. federal income tax matters is based on the advice of K&L
Gates LLP. The Fund has elected to be treated and to qualify each year as a regulated investment
company (a RIC) under the Code. Accordingly, the Fund intends to satisfy certain requirements
relating to sources of its income and diversification of its total assets and to distribute
substantially all of its net income and net short-term capital gain (after reduction by net
long-term capital loss and any available capital loss carryforwards) in accordance with the timing
requirements imposed by the Code, so as to maintain its RIC status and to avoid paying U.S. federal
income or excise tax thereon. To the extent it qualifies for treatment as a RIC and satisfies the
above-mentioned distribution requirements, the Fund will not be subject to U.S. federal income tax
on income paid to its shareholders in the form of dividends or capital gain distributions.
At least annually, the Fund intends to distribute any net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss) or, alternatively, to retain all or a
portion of the years net capital gain and pay U.S. federal income tax on the retained gain. As
provided under U.S. federal tax law, Common Shareholders of record as of the end of the Funds
taxable year will include their attributable share of the retained gain in their income for the
year as long-term capital gain (regardless of holding period in Common Shares), and will be
entitled to a tax credit or refund for the tax paid on their behalf by the Fund. Common
Shareholders of record for the retained capital gain also will be entitled to increase their tax
basis in their Common Shares by an amount equal to the deemed distribution less the tax credit.
Distributions of the Funds net capital gain (capital gain distributions), if any, are taxable to
Common Shareholders as long-term capital gain, regardless of their holding period in Common Shares.
Distributions of the Funds net realized short-term capital gain will be taxable as ordinary
income.
If, for any calendar year, the Funds total distributions exceed the Funds current and accumulated
earnings and profits, the excess will be treated as a return of capital to each Common Shareholder
(up to the amount of the Common Shareholders basis in his or her Common Shares) and thereafter as
gain from the sale of Common Shares (assuming Common Shares are held as a capital asset). The
amount treated as a return of capital reduces the Common Shareholders adjusted basis in his or her
Common Shares, thereby increasing his or her potential gain or reducing his or her potential loss
on the subsequent sale or other disposition of his or her Common Shares. See below for a summary
of the current maximum tax rates applicable to long-term capital gain (including capital gain
distributions).
To qualify as a RIC for income tax purposes, the Fund must derive at least 90% of its annual gross
income from dividends, interest, payments with respect to securities loans, gain from the sale or
other disposition of stock, securities or foreign currencies, or other income (including, but not
limited to, gain from options, futures or forward contracts) derived with respect to its business
of investing in stock, securities and currencies, and net income derived from an interest in a
qualified publicly traded partnership. A qualified publicly traded partnership is a publicly
traded partnership that meets certain requirements with respect to the nature of its income. To
qualify as a RIC, the Fund must also satisfy certain requirements with respect to the
diversification of its assets. The Fund must have, at the close of each quarter of the taxable
year, at least 50% of the value of its total assets represented by cash, cash items, U.S.
government securities, securities of other regulated investment companies, and other securities
that, in
45
respect of any one issuer, do not represent more than 5% of the value of the assets of the
Fund nor more than 10% of the voting securities of that issuer. In addition, at those times not
more than 25% of the value of the Funds assets can be invested in securities (other than U.S.
government securities or the securities of other regulated investment companies) of any one issuer,
or of two or more issuers, which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses, or of one or more qualified publicly traded
partnerships. If the Fund fails to meet the annual gross income test described above, the Fund
will nevertheless be considered to have satisfied the test if (i) (a) such failure is due to
reasonable cause and not due to willful neglect and (b) the Fund reports the failure pursuant to
Treasury Regulations to be adopted, and (ii) the Fund pays an excise tax equal to the excess
non-qualifying income. If the Fund fails to meet the asset diversification test described above
with respect to any quarter, the Fund will nevertheless be considered to have satisfied the
requirements for such quarter if the Fund cures such failure within 6 months and either (i) such
failure is de minimis or (ii) (a) such failure is due to reasonable cause and not due to willful
neglect and (b) the Fund reports the failure under Treasury Regulations to be adopted and pays an
excise tax.
As a RIC, the Fund generally will not be subject to federal income tax on its investment company
taxable income (as that term is defined in the Code, but without regard to the deductions for
dividend paid) and net capital gain (the excess of net long-term capital gain over net short-term
capital loss), if any, that it distributes in each taxable year to its shareholders, provided that
it distributes at least 90% of its investment company taxable income and 90% of its net tax-exempt
interest income for such taxable year. The Fund intends to distribute to its shareholders, at
least annually, substantially all of its investment company taxable income, net tax-exempt income
and net capital gain. In order to avoid incurring a nondeductible 4% federal excise tax
obligation, the Code requires that the Fund distribute (or be deemed to have distributed) by
December 31 of each calendar year an amount at least equal to the sum of (i) 98% of its ordinary
income for such year, (ii) 98.2% of its capital gain net income (which is the excess of its
realized net long-term capital gain over its realized net short-term capital loss), generally
computed on the basis of the one-year period ending on October 31 of such year, after reduction by
any available capital loss carryforwards and (iii) 100% of any ordinary income and capital gain net
income from the prior year (as previously computed) that were not paid out during such year and on
which the Fund paid no U.S. federal income tax.
If the Fund does not qualify as a RIC for any taxable year, the Funds taxable income will be
subject to corporate income taxes, and all distributions from earnings and profits, including
distributions of net capital gain (if any), will be taxable to the shareholder as ordinary income.
Such distributions generally would be eligible (i) to be treated as qualified dividend income in
the case of individual and other non-corporate shareholders and (ii) for the dividends received
deduction (DRD) in the case of corporate shareholders. In addition, in order to requalify for
taxation as a RIC, the Fund may be required to recognize unrealized gain, pay substantial taxes and
interest, and make certain distributions.
Certain of the Funds investment practices are subject to special and complex U.S. federal income
tax provisions that may, among other things, (i) convert dividends that would otherwise constitute
qualified dividend income into ordinary income, (ii) treat dividends that would otherwise be
eligible for the corporate DRD as ineligible for such treatment, (iii) disallow, suspend or
otherwise limit the allowance of certain loss or deductions, (iv) convert long-term capital gain
into short-term capital gain or ordinary income, (v) convert an ordinary loss or deduction into a
capital loss (the deductibility of which is more limited), (vi) cause the Fund to recognize income
or gain without a corresponding receipt of cash, (vii) adversely affect when a purchase or sale of
stock or securities is deemed to occur, (viii) adversely alter the characterization of certain
complex financial transactions, and (ix) produce income that will not qualify as good income for
purposes of the income requirement that applies to RICs. While it may not always be successful in
doing so, the Fund will seek to avoid or minimize the adverse tax consequences of its investment
practices.
The Fund may recognize gain (but not loss) from a constructive sale of certain appreciated
financial positions if the Fund enters into a short sale, offsetting notional principal contract,
or forward contract transaction with respect to the appreciated position or substantially identical
property. Appreciated financial positions subject to this constructive sale treatment include
interests (including options and forward contracts and short sales) in stock and certain other
instruments. Constructive sale treatment does not apply if the transaction is closed out not later
than thirty days after the end of the taxable year in which the transaction was initiated, and the
underlying appreciated securities position is held unhedged for at least the next sixty days after
the hedging transaction is closed.
46
Gain or loss from a short sale of property generally is considered as capital gain or loss to the
extent the property used to close the short sale constitutes a capital asset in the Funds hands.
Except with respect to certain situations where the property used to close a short sale has a
long-term holding period on the date the short sale is entered into, gain on short sales generally
are short-term capital gain. A loss on a short sale will be treated as a long-term capital loss
if, on the date of the short sale, substantially identical property has been held by the Fund for
more than one year. In addition, entering into a short sale may result in suspension of the
holding period of substantially identical property held by the Fund.
Gain or loss on a short sale generally will not be realized until such time as the short sale is
closed. However, as described above in the discussion of constructive sales, if the Fund holds a
short sale position with respect to securities that have appreciated in value, and it then acquires
property that is the same as or substantially identical to the property sold short, the Fund
generally will recognize gain on the date it acquires such property as if the short sale were
closed on such date with such property. Similarly, if the Fund holds an appreciated financial
position with respect to securities and then enters into a short sale with respect to the same or
substantially identical property, the Fund generally will recognize gain as if the appreciated
financial position were sold at its fair market value on the date it enters into the short sale.
The subsequent holding period for any appreciated financial position that is subject to these
constructive sale rules will be determined as if such position were acquired on the date of the
constructive sale.
The Fund will inform Common Shareholders of the source and tax status of all distributions promptly
after the close of each calendar year.
Selling Common Shareholders generally will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Common Shareholders adjusted tax basis
in the Common Shares sold. If Common Shares are held as a capital asset, the gain or loss will be
a capital gain or loss. The maximum tax rate applicable to net capital gain recognized by
individuals and other non-corporate taxpayers is (i) the same as the maximum ordinary income tax
rate for gain recognized on the sale of capital assets held for one year or less (in 2012, 35%), or
(ii) 15% for gain recognized on the sale of capital assets held for more than one year (as well as
any capital gain distributions) (currently 0% for individuals in the 10% or 15% tax brackets). The
maximum individual tax rate for long-term capital gain is scheduled to increase to 20% for taxable
years beginning after December 31, 2012. Any loss on a disposition of Common Shares held for six
months or less will be treated as a long-term capital loss to the extent of any capital gain
distributions received with respect to those Common Shares. For purposes of determining whether
Common Shares have been held for six months or less, the holding period is suspended for any
periods during which the Common Shareholders risk of loss is diminished as a result of holding one
or more other positions in substantially similar or related property, or through certain options or
short sales. Any loss realized on a sale or exchange of Common Shares will be disallowed to the
extent those Common Shares are replaced by other Common Shares within a period of 61 days beginning
30 days before and ending 30 days after the date of disposition of Common Shares (whether through
the reinvestment of distributions or otherwise). In that event, the basis of the replacement
Common Shares will be adjusted to reflect the disallowed loss.
An investor should be aware that, if Common Shares are purchased shortly before the record date for
any taxable distribution (including a capital gain distribution), the purchase price likely will
reflect the value of the distribution and the investor then would receive a taxable distribution
that is likely to reduce the trading value of such Common Shares, in effect resulting in a taxable
return of some of the purchase price.
Taxable distributions to certain individuals and certain other non-corporate Common Shareholders,
including those who have not provided their correct taxpayer identification number and other
required certifications, may be subject to backup U.S. federal income tax withholding at the
fourth lowest rate of tax applicable to a single individual (in 2012, 28%, but scheduled to
increase to 31% in 2013). Backup withholding is not an additional tax. Any amounts withheld may
be refunded or credited against such shareholders U.S. federal income tax liability, if any,
provided that the required information is furnished to the Internal Revenue Service.
An investor also should be aware that the benefits of the reduced tax rate applicable to long-term
capital gain and qualified dividend income may be impacted by the application of the alternative
minimum tax to individual shareholders.
47
The Funds investments in non-U.S. securities may be subject to foreign withholding taxes on
dividends, interest, or capital gain, which will decrease the Funds yield. Foreign withholding
taxes may be reduced under income tax treaties between the U.S. and certain foreign jurisdictions.
Depending on the number of non-U.S. shareholders in the Fund, however, such reduced foreign
withholding tax rates may not be available for investments in certain jurisdictions.
The foregoing briefly summarizes some of the important U.S. federal income tax consequences to
Common Shareholders of investing in Common Shares, reflects the U.S. federal tax law as of the date
of this Prospectus, and does not address special tax rules applicable to certain types of
investors, such as corporate and non-U.S. investors. A more complete discussion of the tax rules
applicable to the Fund and the Common Shareholders can be found in the SAI that is incorporated by
reference into this Prospectus. Unless otherwise noted, this discussion assumes that an investor
is a U.S. person and holds Common Shares as a capital asset. This discussion is based upon current
provisions of the Code, the regulations promulgated thereunder, and judicial and administrative
ruling authorities, all of which are subject to change or differing interpretations by the courts
or the IRS retroactively or prospectively. Investors should consult their tax advisors regarding
other U.S. federal, state or local tax considerations that may be applicable in their particular
circumstances, as well as any proposed tax law changes.
Plan of Distribution
The Fund may sell the Common Shares being offered under this Prospectus in any one or more of
the following ways: (i) directly to purchasers; (ii) through agents; (iii) to or through
underwriters; or (iv) through dealers. The Prospectus Supplement relating to the offering will
identify any agents, underwriters or dealers involved in the offer or sale of Common Shares, and
will set forth any applicable offering price, sales load, fee, commission or discount arrangement
between the Fund and its agents or underwriters, or among its underwriters, or the basis upon which
such amount may be calculated, net proceeds and use of proceeds, and the terms of any sale.
The Fund may distribute Common Shares from time to time in one or more transactions at: (i) a
fixed price or prices, which may be changed; (ii) market prices prevailing at the time of sale;
(iii) prices related to prevailing market prices; or (iv) negotiated prices; provided, however,
that in each case the offering price per Common Share (less any underwriting commission or
discount) must equal or exceed the NAV per Common Share.
The Fund from time to time may offer its Common Shares through or to certain broker-dealers,
including UBS Securities LLC, that have entered into selected dealer agreements relating to
at-the-market offerings.
The Fund may directly solicit offers to purchase Common Shares, or the Fund may designate agents to
solicit such offers. The Fund will, in a Prospectus Supplement relating to such offering, name any
agent that could be viewed as an underwriter under the Securities Act of 1933, as amended (the
Securities Act), and describe any commissions the Fund must pay. Any such agent will be acting
on a best efforts basis for the period of its appointment or, if indicated in the applicable
Prospectus Supplement or other offering materials, on a firm commitment basis. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform services for the Fund in
the ordinary course of business.
If any underwriters or agents are used in the sale of Common Shares in respect of which this
Prospectus is delivered, the Fund will enter into an underwriting agreement or other agreement with
them at the time of sale to them, and the Fund will set forth in the Prospectus Supplement relating
to such offering their names and the terms of the Funds agreement with them.
If a dealer is utilized in the sale of Common Shares in respect of which this Prospectus is
delivered, the Fund will sell such Common Shares to the dealer, as principal. The dealer may then
resell such Common Shares to the public at varying prices to be determined by such dealer at the
time of resale.
48
The Fund may engage in at-the-market offerings to or through a market maker or into an existing
trading market, on an exchange or otherwise, in accordance with Rule 415(a)(4) under the Securities
Act. An at-the-market offering may be through an underwriter or underwriters acting as principal
or agent for the Fund.
Agents, underwriters and dealers may be entitled under agreements which they may enter into with
the Fund to indemnification by the Fund against certain civil liabilities, including liabilities
under the Securities Act, and may be customers of, engage in transactions with or perform services
for the Fund in the ordinary course of business.
In order to facilitate the offering of Common Shares, any underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of Common Shares or any other Common Shares
the prices of which may be used to determine payments on the Common Shares. Specifically, any
underwriters may over-allot in connection with the offering, creating a short position for their
own accounts. In addition, to cover over-allotments or to stabilize the price of Common Shares or
of any such other Common Shares, the underwriters may bid for, and purchase, Common Shares or any
such other Common Shares in the open market. Finally, in any offering of Common Shares through a
syndicate of underwriters, the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Shares in the offering if the syndicate repurchases
previously distributed Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize or maintain the
market price of Common Shares above independent market levels. Any such underwriters are not
required to engage in these activities and may end any of these activities at any time.
The Fund may enter into derivative transactions with third parties, or sell Common Shares not
covered by this Prospectus to third parties in privately negotiated transactions. If the
applicable Prospectus Supplement indicates, in connection with those derivatives, the third parties
may sell Common Shares covered by this Prospectus and the applicable Prospectus Supplement or other
offering materials, including in short sale transactions. If so, the third parties may use Common
Shares pledged by the Fund or borrowed from the Fund or others to settle those sales or to close
out any related open borrowings of securities, and may use Common Shares received from the Fund in
settlement of those derivatives to close out any related open borrowings of securities. The third
parties in such sale transactions will be underwriters and, if not identified in this Prospectus,
will be identified in the applicable Prospectus Supplement or other offering materials (or a
post-effective amendment).
The Fund or one of the Funds affiliates may loan or pledge Common Shares to a financial
institution or other third party that in turn may sell Common Shares using this Prospectus. Such
financial institution or third party may transfer its short position to investors in Common Shares
or in connection with a simultaneous offering of other Common Shares offered by this Prospectus or
otherwise.
The maximum amount of compensation to be received by any member of the Financial Industry
Regulatory Authority, Inc. will not exceed 8% of the initial gross proceeds from the sale of any
security being sold with respect to each particular offering of Common Shares made under a single
Prospectus Supplement.
Any underwriter, agent or dealer utilized in the initial offering of Common Shares will not confirm
sales to accounts over which it exercises discretionary authority without the prior specific
written approval of its customer.
Description of Capital Structure
The Fund was reorganized as a business trust established under the laws of The Commonwealth of
Massachusetts by the Declaration of Trust. The Declaration of Trust provides that the Board may
authorize separate classes of shares of beneficial interest. The Board has authorized an unlimited
number of Common Shares. The Fund holds annual meetings of Common Shareholders in compliance with
the requirements of the NYSE.
COMMON SHARES
The Declaration of Trust permits the Fund to issue an unlimited number of full and fractional
Common Shares of beneficial interest, with or without par value. Each Common Share represents an
equal proportionate interest in the
49
assets of the Fund with each other Common Share in the Fund.
Common Shareholders will be entitled to the payment of distributions when, and if declared by the
Board. The 1940 Act or the terms of any future borrowings or issuance of preferred shares may
limit the payment of distributions to the Common Shareholders. Each whole Common Share is entitled
to one vote and each fractional Common Share is entitled to a proportionate fractional vote as to
matters on which it is entitled to vote pursuant to the terms of the Declaration of Trust. Upon
liquidation of the Fund, after paying or adequately providing for the payment of all liabilities of
the Fund and the liquidation preference with respect to any outstanding preferred shares, and upon
receipt of such releases, indemnities and refunding agreements as they deem necessary for their
protection, the Board may distribute the remaining assets of the Fund among the Common
Shareholders. The Declaration of Trust provides that Common Shareholders are not liable for any
liabilities of the Fund, and requires inclusion of a clause to that effect in agreements entered
into by the Fund and indemnifies shareholders against any such liability. Although shareholders of
a business trust established under Massachusetts law, in certain limited circumstances, may be held
personally liable for the obligations of the business trust as though they were general partners,
the provisions of the Declaration of Trust and By-laws described in the foregoing sentence make the
likelihood of such personal liability remote. The Fund will not issue Common Share certificates.
The Fund has no current intention to issue preferred shares. However, if at some future time there
are any preferred shares outstanding, subject to certain exceptions, the Fund might not be
permitted to declare any cash distribution on its Common Shares, unless at the time of such
declaration, (i) all accrued distributions on preferred shares or accrued interest on borrowings
have been paid and (ii) the value of the Funds total assets (determined after deducting the amount
of such distribution), less all liabilities and indebtedness of the Fund not represented by senior
securities, is at least 300% of the aggregate amount of such securities representing indebtedness
and at least 200% of the aggregate amount of securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares. In addition to the requirements
of the 1940 Act, the Fund may be required to comply with other asset coverage requirements under a
credit facility as a condition of the Fund obtaining a rating of preferred shares from a nationally
recognized statistical rating organization (a Rating Agency). These requirements may include an
asset coverage test more stringent than under the 1940 Act. This limitation on the Funds ability
to make distributions on its Common Shares could in certain circumstances impair the ability of the
Fund to maintain its qualification for taxation as a RIC for U.S. federal income tax purposes. If
the Fund were in the future to issue preferred shares, it would intend, however, to the extent
possible, to purchase or redeem preferred shares from time to time to maintain compliance with such
asset coverage requirements and may pay special distributions to the holders of the preferred
shares in certain circumstances in connection with any potential impairment of the Funds status as
a RIC. Depending on the timing of any such redemption or repayment, the Fund may be required to
pay a premium in addition to the liquidation preference of the preferred shares to the holders
thereof.
The Fund has no present intention of offering additional Common Shares, except as described herein.
Other offerings of its Common Shares, if made, will require approval of the Board. Any additional
offering will not be sold at a price per Common Share below the then current NAV (exclusive of
underwriting discounts and commissions) except in connection with an offering to existing Common
Shareholders or with the consent of a majority of the Funds outstanding Common Shares. Common
Shares have no preemptive rights.
CREDIT FACILITY
The Fund currently utilizes leverage by borrowing pursuant to the CFA as described in Other
Investment PoliciesBorrowing. In addition, the Fund may use leverage by borrowing from other
financial institutions or through the issuance of preferred shares, reverse repurchase agreements
or other leverage financing. The Fund intends to limit its combined effective leverage ratio
(measured by the aggregate dollar amount of all leverage facilities to managed assets) to 33⅓% of
the Funds managed assets at the time of borrowing. In addition, the Fund may borrow for
temporary, emergency or other purposes as permitted under the 1940 Act. Any such indebtedness
would be in addition to the combined effective leverage ratio of 33⅓% of managed assets immediately
after giving effect to the borrowing.
The Funds leverage strategy may not be successful. By leveraging its investment portfolio, the
Fund creates an opportunity for increased net income or capital appreciation. However, the use of
leverage also involves risks, which can be significant. These risks include the possibility that
the value of the assets acquired with such borrowing decreases although the Funds liability is
fixed, greater volatility in the Funds NAV and the market price
50
of the Funds Common Shares and
higher expenses. Since the Advisers fee is based upon a percentage of the Funds managed assets,
the Advisers fee will be higher if the Fund is leveraged and the Adviser will have an incentive to
leverage the Fund. The Board will monitor this potential conflict. The Adviser intends to
leverage the Fund only when it believes that the potential return on the additional investments
acquired through the use of leverage is likely to exceed the costs incurred in connection with the
offering.
Leverage creates risks which may adversely affect the return for the Common Shareholders,
including:
|
|
|
the likelihood of greater volatility of NAV and market price of Common Shares; |
|
|
|
|
fluctuations in the dividend rates on any preferred shares or in interest rates on
borrowings and short-term debt; |
|
|
|
|
increased operating costs, which may reduce the Funds total return to the Common
Shareholders. The fees and expenses attributed to leverage, including all offering and
operating expenses relating to any preferred shares, will be borne by Common Shareholders;
and |
|
|
|
|
the potential for a decline in the value of an investment acquired through leverage,
while the Funds obligations under such leverage remains fixed. |
To the extent the income or capital appreciation derived from securities purchased with funds
received from leverage exceeds the cost of leverage, the Funds return will be greater than if
leverage had not been used. Conversely, if the income or capital appreciation from the securities
purchased with such funds is not sufficient to cover the cost of leverage or if the Fund incurs
capital loss, the return of the Fund will be less than if leverage had not been used, and therefore
the amount available for distribution to shareholders as dividends and other distributions will be
reduced or potentially eliminated. The Adviser may determine to maintain the Funds leveraged
position if it expects that the long-term benefits to the Funds shareholders of maintaining the
leveraged position will outweigh the current reduced return. The Fund may be required to maintain
minimum average balances in connection with borrowings or to pay a commitment or other fee to
maintain a line of credit; either of these requirements will increase the cost of borrowing over
the stated interest rate. To the extent that the Fund borrows through the use of reverse
repurchase agreements, it would be subject to a risk that the value of the portfolio securities
transferred may substantially exceed the purchase price received by the Fund under the reverse
repurchase agreement transaction. Alternatively, during the life of any reverse repurchase
agreement transaction, the Fund may be required to transfer additional securities if the market
value of those securities initially transferred declines. In addition, capital raised through
borrowing or the issuance of preferred shares will be subject to interest costs or dividend
payments that may or may not exceed the income and appreciation on the assets purchased. The
issuance of additional classes of preferred shares involves offering expenses and other costs,
which will be borne by the Common Shareholders, and may limit the Funds freedom to pay dividends
on Common Shares or to engage in other activities.
The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more
nationally recognized statistical rating organizations which may issue ratings for the preferred
shares or short-term debt instruments issued by the Fund. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than those imposed by the
1940 Act. Certain types of borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage, borrowing base and portfolio composition
requirements and additional covenants that may affect the Funds ability to pay dividends and
distributions on Common Shares in certain instances. The Fund also may be required to pledge its
assets to the lenders in connection with certain types of borrowing. The Adviser does not
anticipate that these covenants or restrictions will adversely affect its ability to manage the
Funds portfolio in accordance with the Funds investment objectives and principal investment
strategies. Due to these covenants or restrictions, the Fund may be forced to liquidate
investments at times and at prices that are not favorable to the Fund, or the Fund may be forced to
forego investments that the Adviser otherwise views as favorable.
The extent that the Fund employs leverage, if any, will depend on many factors, the most important
of which are investment outlook, market conditions and interest rates. Successful use of a
leveraging strategy depends on the
51
Advisers ability to predict correctly interest rates and market
movements. There is no assurance that a leveraging strategy will be successful during any period
in which it is employed.
REPURCHASE OF SHARES AND OTHER DISCOUNT MEASURES
Because shares of closed-end management investment companies frequently trade at a discount to
their NAVs, the Board has determined that from time to time it may be in the interest of the Common
Shareholders to take certain actions intended to reduce such discount. The Board, in consultation
with the Adviser, review at least annually the possibility of open market repurchases and/or tender
offers for the Common Shares and consider such factors as the market price of the Common Shares,
the NAV of the Common Shares, the liquidity of the assets of the Fund, effect on the Funds
expenses, whether such transactions would impair the Funds status as a RIC or result in a failure
to comply with applicable asset coverage requirements, general economic conditions and such other
events or conditions, which may have a material effect on the Funds ability to consummate such
transactions. There are no assurances that the Board will, in fact, decide to undertake either of
these actions or, if undertaken, that such actions will result in the Funds Common Shares trading
at a price which is equal to or approximates their NAV.
In recognition of the possibility that Common Shares might trade at a discount to NAV and that any
such discount may not be in the interest of the Funds shareholders, the Board, in consultation
with the Adviser, from time to time may review possible actions to reduce any such discount. In
the event that the Fund conducts an offering of new Common Shares and such offering constitutes a
distribution under Regulation M, the Fund and certain of its affiliates may be subject to an
applicable restricted period that could limit the timing of any repurchases by the Fund.
PREFERRED SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial
interest with preference rights, including preferred shares (Preferred Shares), having no par
value per share or such other amount as the Board may establish, in one or more series, with rights
as determined by the Board, by action of the Board without the approval of the Common Shareholders.
The Board has no current intention to issue Preferred Shares.
Under the requirements of the 1940 Act, the Fund must, immediately after the issuance of any
Preferred Shares, have an asset coverage of at least 200%. Asset coverage means the ratio which
the value of the total assets of the Fund, less all liability and indebtedness not represented by
senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Fund, if any, plus the aggregate liquidation preference of the
Preferred Shares. If the Fund seeks a rating of the Preferred Shares, asset coverage requirements,
in addition to those set forth in the 1940 Act, may be imposed. The liquidation value of the
Preferred Shares is expected to equal their aggregate original purchase price plus redemption
premium, if any, together with any accrued and unpaid dividends thereon (on a cumulative basis),
whether or not earned or declared. The terms of the Preferred Shares, including their dividend
rate, voting rights, liquidation preference and redemption provisions, will be determined by the
Board (subject to applicable law and the Declaration of Trust) if and when it authorizes the
Preferred Shares. The Fund may issue Preferred Shares that provide for the periodic
redetermination of the dividend rate at relatively short intervals through an auction or
remarketing procedure, although the terms of the Preferred Shares also may enable the Fund to
lengthen such intervals. At times, the dividend rate as redetermined on the Funds Preferred
Shares may approach or exceed the Funds return after expenses on the investment of proceeds from
the Preferred Shares and the Funds leveraged capital structure would result in a lower rate of
return to Common Shareholders than if the Fund were not so structured.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund,
the terms of any Preferred Shares may entitle the holders of Preferred Shares to receive a
preferential liquidating distribution (expected to equal the original purchase price per share plus
redemption premium, if any, together with accrued and unpaid dividends, whether or not earned or
declared and on a cumulative basis) before any distribution of assets is made to Common
Shareholders. After payment of the full amount of the liquidating distribution to which they are
entitled, the holders of Preferred Shares would not be entitled to any further participation in any
distribution of assets by the Fund.
52
Under the 1940 Act, if at any time dividends on the Preferred Shares are unpaid in an amount equal
to two full years dividends thereon, the holders of all outstanding Preferred Shares, voting as a
class, will be allowed to elect a majority of the Funds Trustees until all dividends in default
have been paid or declared and set apart for payment. In addition, if required by the Rating
Agency rating the Preferred Shares or if the Board determines it to be in the best interests of the
Common Shareholders, issuance of the Preferred Shares may result in more restrictive provisions
than required by the 1940 Act being imposed. In this regard, holders of the Preferred Shares may
be entitled to elect a majority of the Board in other circumstances, for example, if one payment on
the Preferred Shares is in arrears.
If the Fund were to issue Preferred Shares, it is expected that the Fund would seek a credit rating
for the Preferred Shares from a Rating Agency. In that case, as long as Preferred Shares are
outstanding, the composition of its portfolio would reflect guidelines established by such Rating
Agency. Although, as of the date hereof, no such Rating Agency has established guidelines relating
to any such Preferred Shares, based on previous guidelines established by such Rating Agencies for
the securities of other issuers, the Fund anticipates that the guidelines with respect to the
Preferred Shares would establish a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable requirements under the 1940
Act. Although, at this time, no assurance can be given as to the nature or extent of the
guidelines, which may be imposed in connection with obtaining a rating of the Preferred Shares, the
Fund currently anticipates that such guidelines will include asset coverage requirements, which are
more restrictive than those under the 1940 Act, restrictions on certain portfolio investments and
investment practices, requirements that the Fund maintain a portion of its total assets in
short-term, high-quality, fixed-income securities and certain mandatory redemption requirements
relating to the Preferred Shares. No assurance can be given that the guidelines actually imposed
with respect to the Preferred Shares by such Rating Agency will be more or less restrictive than as
described in this Prospectus.
Certain Provisions in the Declaration of Trust and By-Laws
Under Massachusetts law, shareholders, in certain circumstances, could be held personally
liable for the obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability in connection with Fund property or the acts, obligations or
affairs of the Fund and requires that notice of such limited liability be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the Fund or the Board. The
Declaration of Trust further provides for indemnification out of the assets of the Fund for all
loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus,
the risk of a shareholder incurring financial loss on account of shareholder liability is limited
to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that
the likelihood of such circumstances is remote.
The Declaration of Trust provides that the Trustees may amend the Declaration of Trust when
authorized by a vote of a majority of the outstanding voting securities (Majority Shareholder
Vote). The Declaration of Trust does not permit amendments that impair the exemption from
personal liability of the shareholders, Trustees, officers, employees and agents of the Fund or
permit assessments upon shareholders.
The Declaration of Trust and By-laws provide that the Trustees have the power, to the exclusion of
shareholders, to make, alter, amend or repeal any of the By-laws, except for any By-law that
requires a vote of the shareholders to be amended, adopted or repealed by the terms of the
Declaration of Trust, By-laws or applicable law.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust and By-laws include provisions that could have the effect of limiting the
ability of other entities or persons to acquire control of the Fund or to change the composition of
its Board and could have the effect of depriving Common Shareholders of an opportunity to sell
their Common Shares at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. These provisions may have the effect of discouraging
attempts to acquire control of the Fund, which attempts could have the effect of increasing the
expenses of the Fund and interfering with the normal operation of the Fund. They provide, however,
the advantage of potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the Funds investment
objectives and policies. The Board has considered the following anti-takeover provisions and
concluded that they are in the best interests of the Fund. The
53
following is only a summary and is
qualified in its entirety by reference to the Declaration of Trust and By-laws on file with the
SEC.
The number of Trustees is currently nine, but by action of a majority of the Trustees, the Board
may from time to time be increased or decreased. If the Fund issues Preferred Shares, the Fund may
establish a separate class for the Trustees elected by the holders of the Preferred Shares.
Subject to applicable provisions of the 1940 Act, vacancies on the Board may be filled by a
majority action of the remaining Trustees. The Declaration of Trust provides that Trustees and
officers are entitled to indemnification and that the Fund may pay or reimburse expenses of
Trustees and officers. Such provisions may work to delay a change in the majority of the Board.
Generally, the shareholders have power to vote only: (a) for the election of Trustees; (b) with
respect to any investment advisory or management contract entered into; (c) with respect to any
termination of the Fund; (d) with respect to any amendment of the Declaration of Trust; (e) with
respect to any merger, consolidation or sale of assets of the Fund; (f) with respect to
incorporation of the Fund; (g) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Fund or the shareholders;
and (h) with respect to such additional matters relating to the Fund as may be required by the
Declaration of Trust or the By-Laws or by reason of the registration of the Fund or the shares with
the SEC or any State or by any applicable law or any regulation or order of the SEC or any State or
as the Trustees may consider necessary or desirable. On any matter required or permitted to be
voted on by the shareholders, all shares then entitled to vote shall be voted in the aggregate as a
single class without regard to class, except (i) when required by the Declaration of Trust, the
By-Laws, the 1940 Act, or when the Trustees have determined that any matter to be submitted to a
vote of the shareholders affects the rights or interests of the shareholders of one or more
classes, if any, materially differently, shares shall be voted by each such affected class
individually; and (ii) when the Trustees shall have determined that the matter affects only the
interests of one or more classes, then only the shareholders of such affected class shall be
entitled to vote thereon.
Additionally, the Funds By-laws contain certain provisions that may tend to make a change of
control of the Fund more difficult. For example, the By-laws (i) require a shareholder to give
written advance notice and other information to the Fund of the shareholders nominees for Trustees
and proposals for other business to be considered at shareholders meetings; (ii) require any notice
by a shareholder be accompanied by certain information as provided in the By-laws; and
(iii) reserve to the Trustees the exclusive power to alter, amend or repeal any provision of the
By-laws or to make new By-laws.
POTENTIAL CONVERSION TO OPEN-END FUND
Conversion of the Fund to an open-end investment company would require an amendment to the Funds
Declaration of Trust. Such amendment would require approval by each of the following: (i) a
majority of the Trustees then in office, (ii) a majority of the outstanding voting securities, and
(iii) by such vote or votes of the holders of any class or classes or series of shares as may be
required by the 1940 Act. In the event of conversion, the Common Shares would cease to be listed
on the NYSE or other national securities exchange or market system. The Board believes, however,
that the closed-end structure is desirable, given the Funds investment objective and policies.
Investors should assume, therefore, that it is unlikely that the Board would vote to convert the
Fund to an open-end management investment company. Shareholders of an open-end management
investment company may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their NAV, less such redemption charge, if
any, as might be in effect at the time of a redemption. The Fund would expect to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption requests in a
combination of cash or securities. If such partial payment in securities were made, investors may
incur brokerage costs in converting such securities to cash. If the Fund were converted to an
open-end fund, it is likely that new Common Shares would be sold at NAV plus a sales load.
54
Reports to Shareholders
The Fund sends to its shareholders unaudited semi-annual and audited annual reports, including
a list of investments held.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, who has offices at 125 High Street, Boston, Massachusetts, 02110
is the independent registered public accounting firm for the Fund and audits the Funds financial
statements.
Additional Information
This Prospectus and the SAI do not contain all of the information set forth in the
Registration Statement that the Fund has filed with the SEC (file No. 333-181550). The complete
Registration Statement may be obtained from the SEC at www.sec.gov. See the cover page of this
Prospectus for information about how to obtain a paper copy of the Registration Statement or SAI
without charge.
Table of Contents of the Statement of Additional Information
|
|
|
|
|
Page |
|
|
2 |
|
|
2 |
|
|
12 |
|
|
14 |
|
|
14 |
|
|
23 |
|
|
24 |
|
|
30 |
|
|
30 |
|
|
34 |
|
|
41 |
|
|
41 |
|
|
41 |
|
|
41 |
|
|
42 |
|
|
42 |
|
|
42 |
|
|
A-1 |
|
|
B-1 |
The Funds Privacy Policy
The Fund is committed to maintaining the privacy of its shareholders and to safeguarding their
non-public personal information. The following information is provided to help you understand what
personal information the Fund collects, how the Fund protects that information and why, in certain
cases, the Fund may share information with select other parties.
55
Generally, the Fund does not receive any non-public personal information relating to its
shareholders, although certain non-public personal information of its shareholders may become
available to the Fund. The Fund does not disclose any non-public personal information about its
shareholders or former shareholders to anyone, except as permitted by law (which includes
disclosure to employees necessary to service your account). The Fund may share information with
unaffiliated third parties that perform various required services, such as transfer agents,
custodians and broker/dealers.
The Fund restricts access to non-public personal information about its shareholders to employees of
the Funds investment adviser and its affiliates with a legitimate business need for the
information. The Fund maintains physical, electronic and procedural safeguards designed to protect
the non-public personal information of its shareholders.
56
1,000,000 Shares
John Hancock Investors Trust
Common Shares
PROSPECTUS
[_____________], 2012
Until
[ ], 2012 (25 days after the date of this Prospectus), all dealers that buy, sell or
trade the Common Shares, whether or not participating in this offering, may be required to deliver
a prospectus and the applicable prospectus supplement. This delivery requirement is in addition to
the dealers obligation to deliver a prospectus and the applicable prospectus supplement when
acting as underwriters and with respect to their unsold allotments or subscriptions.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the Registration Statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not soliciting an offer
to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 13, 2012
Prospectus Supplement
(To Prospectus dated [___], 2012)
[______________] Shares
John Hancock Investors Trust
Common Shares
John Hancock Investors Trust (the Fund) is a diversified, closed-end management investment
company. The Fund commenced operations in January 1971 following an initial public offering.
Investment Objectives. The Funds primary investment objective is to generate income for
distribution to its shareholders, with capital appreciation as a secondary objective. There can be
no assurance that the Fund will achieve its investment objectives.
The Offering. John Hancock Funds, LLC (the Distributor) has entered into a dealer agreement,
dated [ ], 2012, (the Dealer Agreement) with [ ] (the Dealer) with
respect to the Fund relating to the common shares of beneficial interest (Common Shares) offered
by this prospectus supplement (Prospectus Supplement) and the accompanying prospectus dated [ ],
2012 (the Prospectus). In accordance with the terms of the Dealer Agreement, the Fund may
offer and sell up to [ ] of
its Common Shares, no par value, from time to time
through the Dealer as sub-placement agent for the offer and sale of the Common Shares. Under the Investment
Company Act of 1940, as amended (the 1940 Act), the Fund may not sell any Common Shares at a
price below the current net asset value of such Common Shares, exclusive of any distributing
commission or discount.
Sales of Common Shares, if any, under this Prospectus Supplement and the accompanying Prospectus
may be made in negotiated transactions or transactions that are deemed to be at the market as
defined in Rule 415 under the Securities Act of 1933, as amended (the 1933 Act), including sales
made directly on the New York Stock Exchange (NYSE) or sales made to or through a market maker
other than on an exchange.
The Dealer will be entitled to compensation of [____] basis points of the gross sales price per
share for any Common Shares sold under the Dealer Agreement, with the exact amount of such
compensation to be mutually agreed upon by the Distributor and the Dealer from time to time. In
connection with the sale of the Common Shares on the Funds behalf, the Dealer may be deemed to be
an underwriter within the meaning of the 1933 Act and the compensation of the Dealer may be
deemed to be underwriting commissions or discounts.
Investment Strategy. The preponderance of the Funds assets are invested in a diversified
portfolio of debt securities issued by U.S. and non-U.S. corporations and governments, some of
which may carry equity features. The Fund emphasizes corporate debt securities which pay interest
on a fixed or contingent basis and which may possess certain equity features, such as conversion or
exchange rights, warrants for the acquisition of the stock of the same or different issuers, or
participations based on revenues, sales or profits. The Fund may invest up to 70% of its
total assets in debt securities rated below investment grade, commonly called junk bonds. The
Fund also may
purchase preferred securities and may acquire common stock through the exercise of
conversion or exchange rights acquired in connection with other securities owned by the Fund. The
Fund may purchase mortgage-backed securities. The Fund will not acquire any additional preferred
securities or common stock if as a result of that acquisition the value of all preferred securities
and common stocks in the Funds portfolio would exceed 20% of its total assets. Up to 50% of the
value of the Funds assets may be invested in restricted securities acquired through private
placements. The Fund also may invest in repurchase agreements.
Investment Adviser and Subadviser. The Funds investment adviser is John Hancock Advisers, LLC
(the Adviser or JHA) and its subadviser is John Hancock Asset Management a division of Manulife
Asset Management (US) LLC (the Subadviser), formerly MFC Global Investment Management (U.S.), LLC
and Sovereign Asset Management LLC.
Exchange listing. The Common Shares are listed on the New York Stock Exchange (NYSE) under the
symbol JHI. Any new Common Shares offered and sold also will be listed on the NYSE and trade
under this symbol. As of [ ], 2012 the last reported sale price for the Common Shares was
$[ ].
Leverage. The Fund may use leverage to the extent permitted by the 1940 Act. The Fund currently utilizes leverage by borrowing pursuant to a
Committed Facility Agreement. See Other Investment PoliciesBorrowing in the accompanying
Prospectus. In addition, the Fund may use leverage by borrowing from other financial institutions
or through the issuance of preferred shares, reverse repurchase agreements or other leverage
financing which, together with borrowings, may be in an amount equal to 33⅓% of the Funds managed
assets immediately after giving effect to the borrowing, issuance or transaction. The Fund also
may borrow for temporary, emergency or other purposes as permitted under the 1940 Act. Any such
indebtedness would be in addition to the combined effective leverage ratio of 33⅓% of the Funds
managed assets immediately after giving effect to the borrowing. The Funds leverage strategy may
not be successful.
The Common Shares have traded both at a premium and a discount to net asset value (NAV). The
Fund cannot predict whether Common Shares will trade in the future at a premium or discount to NAV.
The provisions of the 1940 Act generally require that the
public offering price of common shares (less any underwriting commissions and discounts) must equal
or exceed the NAV per share of a companys common stock (calculated within 48 hours of pricing).
The Funds issuance of Common Shares may have an adverse effect on prices in the secondary market
for the Funds Common Shares by increasing the number of Common Shares available, which may put
downward pressure on the market price for the Funds Common Shares. Shares of common stock of closed-end
investment companies frequently trade at a discount from NAV, which may increase investors risk of
loss.
Investing in the Funds Common Shares involves certain risks. You could lose all or some of your
investment. You should consider carefully these risks together with all of the other information
contained in this Prospectus Supplement and the accompanying Prospectus before making a decision to
purchase the Funds securities. See Risk Factors beginning on page [__] of the accompanying
Prospectus.
Neither the Securities and Exchange Commission (the SEC) nor any state securities commission has
approved or disapproved of these securities or determined whether this Prospectus Supplement and
the accompanying Prospectus are truthful or complete. Any representation to the contrary is a
criminal offense.
This Prospectus Supplement and the accompanying Prospectus set forth concisely the information
about the Fund that a prospective investor should know before investing. You should read this
Prospectus Supplement and the accompanying Prospectus, which contain important information, before
deciding whether to invest in the Common Shares. You should retain this Prospectus Supplement and
the accompanying Prospectus for future reference. A Statement of Additional Information (SAI),
dated [ ], containing additional information about the Fund, has been filed with the SEC
and is incorporated by reference in its entirety into the accompanying Prospectus. The Table of
Contents for the SAI is on page [ ] of the accompanying Prospectus. A copy of the SAI may be
obtained without charge by visiting the Funds website (www.jhfunds.com) or by calling
1-800-225-6020 (toll-free) or from the SECs website at www.sec.gov. Copies of the Funds annual
report and semi-annual report and other
ii
information about the Fund may be obtained upon request by writing to the Fund, by calling
1-800-225-6020, or by visiting the Funds website at www.jhfunds.com. You also may obtain a copy
of any information regarding the Fund filed with the SEC from the SECs website (www.sec.gov). You
may also e-mail requests for these documents to publicinfo@sec.gov or make a request in writing to
the SECs Public Reference Section, Washington, D.C. 20549-0102.
The Funds Common Shares do not represent a deposit or obligation of, and are not guaranteed or
endorsed by, any bank or other insured depository institution, and are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Prospectus Supplement dated [ ]
iii
You should rely only on the information contained in, or incorporated by reference into, this
Prospectus Supplement and the accompanying Prospectus in making your investment decisions. The
Fund has not authorized any person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it.
This Prospectus Supplement, which describes the specific terms of this offering including the method
of distribution, also adds to and updates information contained in the accompanying Prospectus and the
documents incorporated by reference into the accompanying Prospectus. If the description of this offering
varies between this Prospectus Supplement and the accompanying Prospectus, you should rely on the information
contained in this Prospectus Supplement.
The Fund is not making
an offer to sell the Common Shares in any jurisdiction where the offer or sale is not permitted.
You should assume that the information in this Prospectus Supplement and the accompanying
Prospectus is accurate only as of the dates on their covers. The Funds business, financial
condition and prospects may have changed since the date of its description in this Prospectus
Supplement or the date of its description in the accompanying Prospectus.
TABLE OF CONTENTS
|
|
|
|
|
Prospectus
Supplement |
|
|
|
|
|
|
|
|
|
S-1 |
|
|
|
|
S-3 |
|
|
|
|
S-4 |
|
|
|
|
S-6 |
|
|
|
|
S-6 |
|
|
|
|
S-6 |
|
|
|
|
S-7 |
|
|
|
|
|
|
Prospectus |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
13 |
|
|
|
|
15 |
|
|
|
|
17 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
18 |
|
|
|
|
28 |
|
|
|
|
39 |
|
|
|
|
41 |
|
|
|
|
42 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
48 |
|
|
|
|
49 |
|
|
|
|
53 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
|
|
|
55 |
|
Until
[ ], 2012 (25 days after the date of the Prospectus), all dealers that buy, sell or trade the Common Shares, whether or not
participating in this offering, may be required to deliver the Prospectus and this Prospectus
Supplement. This requirement is in addition to the dealers obligation to deliver the Prospectus
and this Prospectus Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
iv
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus and the statement of additional
information contain forward-looking statements. Forward-looking statements can be identified by
the words may, will, intend, expect, estimate, continue, plan, anticipate, and
similar terms and the negative of such terms. Such forward-looking statements may be contained in
this Prospectus Supplement as well as in the accompanying Prospectus. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could
materially affect the Funds actual results are the performance of the portfolio of securities the
Fund holds, the price at which the Common Shares will trade in the public markets and other factors
discussed in the Funds periodic filings with the SEC. Currently known risk factors that could
cause actual results to differ materially from the Funds expectations include, but are not limited
to, the factors described in the Risks section of the accompanying Prospectus. You are urged to
review carefully those sections for a more detailed discussion of the risks of an investment in the
Funds securities.
Although the Fund believes that the expectations expressed in the Funds forward-looking
statements are reasonable, actual results could differ materially from those projected or assumed
in the Funds forward-looking statements. The Funds future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and are subject to
inherent risks and uncertainties, such as those disclosed in the Risks section of the
accompanying Prospectus. All forward-looking statements contained or incorporated by reference in
this Prospectus Supplement or the accompanying Prospectus are made as of the date of this
Prospectus Supplement or the accompanying Prospectus, as the case may be. Except for the Funds
ongoing obligations under the federal securities laws, the Fund does not intend, and the Fund
undertakes no obligation, to update any forward-looking statement. The forward-looking statements
contained in this Prospectus Supplement, the accompanying Prospectus and the statement of
additional information are excluded from the safe harbor protection provided by section 27A of the
1933 Act.
v
Prospectus Supplement Summary
This is only a summary. You should review the more detailed information elsewhere in this
prospectus supplement (Prospectus Supplement), the accompanying prospectus (the Prospectus),
and in the Statement of Additional Information (the SAI) prior to making an investment in the
Fund. See Risk Factors in the accompanying Prospectus.
|
|
|
The Fund
|
|
John Hancock Investors Trust (the Fund) is a diversified,
closed-end management investment company. The Fund commenced
operations in January 1971 following an initial public offering.
|
|
|
|
Investment Objectives
|
|
The Funds primary investment objective is to
generate income for distribution to its
shareholders, with capital appreciation as a
secondary objective. There can be no assurance that
the Fund will achieve its investment objectives.
The Funds investment objectives are not fundamental
and may be changed without shareholder approval. |
|
|
|
The Offering
|
|
John Hancock Funds, LLC (the Distributor) has entered into
a dealer agreement (the Dealer Agreement) with [ ] (the Dealer) with respect to the Fund relating to the
Common Shares offered by this Prospectus Supplement and the
accompanying Prospectus. In accordance with the terms of the
Dealer Agreement, the Fund may offer and sell up to [ ]
Common Shares from time to time through the
Dealer as sub-placement agent for the offer and sale of the
Common Shares. |
|
|
|
|
|
Offerings of the Common Shares will be subject to the
provisions of the Investment Company Act of 1940, as amended
(the 1940 Act), which generally require that the public
offering price of common shares of a closed-end investment
company (exclusive of distribution commissions and discounts)
must equal or exceed the net asset value per share of the
companys common shares (calculated within 48 hours of
pricing), absent shareholder approval or under certain other
circumstances. |
|
|
|
|
|
Sales of the Common Shares, if any, under this Prospectus
Supplement and the accompanying Prospectus may be made in
negotiated transactions or transactions that are deemed to be
at the market as defined in Rule 415 under the Securities
Act of 1933 (the 1933 Act), including sales made directly
on the New York Stock Exchange (NYSE) or sales made to or
through a market maker other than on an exchange. The Common
Shares may not be sold through agents, underwriters or
dealers without delivery or deemed delivery of a Prospectus
and an accompanying Prospectus Supplement describing the
method and terms of the offering of Common Shares. |
|
|
|
Listing and Symbol
|
|
The Common Shares are listed on the NYSE under the
symbol JHI. Any new Common Shares offered and sold
also will be listed on the NYSE and trade under this
symbol. The net asset value of the Common Shares on [ ],
2012 was $[ ] per share. As of [ ],
the last reported sale price for the Common Shares
was $[_______]. |
|
|
|
Use of Proceeds
|
|
The Fund currently intends to invest substantially all of
the net proceeds of any sales of Common Shares pursuant to
this Prospectus Supplement in accordance with its
investment objectives and policies as described in the
accompanying Prospectus under Investment Objectives and
Investment Strategies within three months of receipt of
such proceeds. Such investments may be delayed up to
three months if suitable investments are unavailable at
the time or for other reasons, such as market volatility
and lack of liquidity in the markets of suitable
investments. Pending such investment, the Fund
anticipates that it will invest the |
S-1
|
|
|
|
|
proceeds in short-term
money market instruments, securities with remaining
maturities of less than one year, cash or cash
equivalents. A delay in the anticipated use of proceeds
could lower returns and reduce the Funds distribution to
Common Shareholders or result in a distribution consisting
principally of a return of capital. |
|
Investment Adviser and Subadviser
|
|
The Funds investment adviser is John Hancock Advisers, LLC (the
Adviser or JHA) and its subadviser is John Hancock Asset
Management a division of Manulife Asset Management (US) LLC (the
Subadviser), formerly MFC Global Investment Management (U.S.),
LLC and Sovereign Asset Management LLC.
JHA, the Funds investment adviser,
is an indirect wholly-owned
subsidiary of Manulife Financial
Corporation. The Adviser is
responsible for overseeing the
management of the Fund, including
its day-to-day business operations
and monitoring the Subadviser. As
of [ ], 2012, the Adviser had
total assets under management of
approximately $[ ] billion.
The Subadviser is responsible for
the day-to-day management of the
Funds portfolio investments. The
Subadviser, organized in 1968, is a
wholly owned subsidiary of John
Hancock Life Insurance Company
(U.S.A.) (a subsidiary of Manulife
Financial, a publicly held,
Canadian-based company). As of [ ],
2012, the Subadviser had
total assets under management of
approximately $[ ] billion.
See Management of the FundThe
Adviser and The Subadviser in
the accompanying Prospectus. |
|
Risk Factors
|
|
See Risk Factors beginning on page [ ] of the
accompanying Prospectus for a discussion of factors you
should consider carefully before deciding to invest in the
Funds Common Shares. |
S-2
Summary of Fund Expenses
The purpose of the table below is to help you understand all fees and expenses that you, as a
Common Shareholder, would bear directly or indirectly. In accordance with SEC requirements, the
table below shows the Funds expenses as a percentage of its average net assets as of [ ],
2012, and not as a percentage of total assets. By showing expenses as a percentage of average net
assets, expenses are not expressed as a percentage of all of the assets the Fund invests. See
Management of the Fund and Dividend Reinvestment Plan in the accompanying Prospectus.
The table and example are based on the Funds capital structure as of [ ], 2012.
|
|
|
|
|
Shareholder Transaction Expenses |
|
|
|
|
Sales load paid by you (as a percentage of offering price) |
|
|
[___] |
%(1) |
Offering expenses (as a percentage of offering price) |
|
|
[___] |
%(2) |
Dividend Reinvestment Plan fees |
|
None(3) |
|
|
|
|
|
Annual Expenses (Percentage of Net Assets Attributable to Common Shares) |
|
|
|
|
Management fees |
|
|
[___] |
%(4) |
Interest payments on borrowed funds |
|
|
[___] |
% (5) |
Other expenses |
|
|
[___] |
% (6) |
[Acquired fees and expenses] |
|
|
[___] |
% |
Total Annual Expenses |
|
|
[___] |
% |
|
|
|
(1) |
|
Represents the estimated commission with respect to the Funds Common
Shares being sold in this offering, which the Fund will pay to the Dealer in
connection with the sales of Common Shares effected by the Dealer in this offering.
While the Dealer is entitled to a commission of [__% to __]% of the gross sales price
for Common Shares sold, with the exact amount to be agreed upon by the parties, the
Fund has assumed, for purposes of this offering, that the Dealer will receive a
commission of [___]% of such gross sales price. This is the only sales load to be
paid in connection with this offering. There is no guarantee that there will be any
sales of the Funds Common Shares pursuant to this Prospectus Supplement and the
accompanying Prospectus. Actual sales of the Funds Common Shares under this
Prospectus Supplement and the accompanying Prospectus, if any, may be less than as set
forth under Capitalization below. In addition, the price per share of any such sale
may be greater or less than the price set forth under Capitalization below,
depending on market price of the Funds Common Shares at the time of any such sale. |
|
(2) |
|
Includes the Funds payment of the reasonable fees and expenses of counsel for
the Dealer in connection with the transactions contemplated by the Dealer Agreement, as
described under Plan of Distribution below. |
|
(3) |
|
Participants in the Funds dividend reinvestment plan do not pay brokerage
charges with respect to Common Shares issued directly by the Fund. However, whenever
Common Shares are purchased or sold on the NYSE or otherwise on the open market, each
participant will pay a pro rata portion of brokerage trading fees, currently $0.05 per
share purchased or sold. Brokerage trading fees will be deducted from amounts to be
invested. Shareholders participating in the Plan may buy additional Common Shares of
the Fund through the Plan at any time and will be charged a $5 transaction fee plus
$0.05 per share brokerage trading fee for each order. See Distribution Policy and
Dividend Reinvestment Plan in the accompanying Prospectus. |
|
(4) |
|
See Management of the FundThe Adviser in the accompanying Prospectus. |
|
(5) |
|
The Fund may use leverage through borrowings. The Fund currently borrows under
a credit facility. |
|
(6) |
|
Other Expenses have been estimated for the current fiscal year. |
EXAMPLE
The following example illustrates the expenses that Common Shareholders would pay on a $1,000
investment in Common Shares, assuming (i) total annual expenses of [___]% of net assets
attributable to Common Shares in years 1 through 10; (ii) a sales load of [___]; (iii) estimated
offering expenses of [___]; (iv) a 5% annual return; and (v) all distributions are reinvested at
NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
3 Year |
|
|
5 Year |
|
|
10 Year |
|
Total Expenses |
|
$ |
[___] |
|
|
$ |
[___] |
|
|
$ |
[___] |
|
|
$ |
[___] |
|
S-3
The above table and example and the assumption in the example of a 5% annual return are required by
regulations of the SEC that are applicable to all investment companies; the assumed 5% annual
return is not a prediction of, and does not represent, the projected or actual performance of the
Funds Common Shares. For more complete descriptions of certain of the Funds costs and expenses,
see Management of the Fund in the accompanying Prospectus. In addition, while the
example assumes reinvestment of all dividends and distributions at NAV, participants in the Funds
dividend reinvestment plan may receive Common Shares purchased or issued at a price or value
different from NAV. See Distribution Policy and Dividend Reinvestment Plan in the
accompanying Prospectus.
The example should not be considered a representation of past or future expenses, and the Funds
actual expenses may be greater or less than those shown. Moreover, the Funds actual rate of
return may be greater or less than the hypothetical 5% return shown in the example.
Capitalization
The Fund may offer and sell up to [ ]
Common Shares from time to time
through the Dealer as sub-placement agent under this Prospectus Supplement and the accompanying
Prospectus. There is no guaranty that there will be any sales of the Common Shares pursuant to
this Prospectus Supplement and the accompanying Prospectus. The table below assumes that the Fund
will sell [ ] Common Shares at a price of $[ ] per share (the last
reported sale price per share of Common Shares on the NYSE on [ ], 2012). Actual sales, if any,
of the Common Shares under this Prospectus Supplement and the accompanying Prospectus may be
greater or less than $[ ] per share, depending on the market price of the Common Shares at the
time of any such sale. To the extent that the market price per share of the Funds Common Shares
on any given day is less than the net asset value per share on such day, the Fund will instruct the
Dealer not to make any sales on such day.
The following table sets forth the Funds capitalization at [ ], 2012:
|
|
|
on a historical basis; and |
|
|
|
|
on a pro forma as adjusted basis to reflect the assumed sale of [ ]
Common Shares at $[ ] per share (the last reported sale price for the Funds Common
Shares on the NYSE [ ], 2012), in an offering under this Prospectus Supplement and the
accompanying Prospectus, after deducting the assumed commission of $[______] (representing
an estimated commission paid to the Dealer of [__]% of the gross sales price per share in
connection with sales of Common Shares effected by the Dealer in this offering) and
offering expenses payable by the Fund of $[______]. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
|
|
|
October 31, 2011 |
|
|
[ ], 2012 |
|
|
Pro Forma |
|
|
|
(audited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
Actual |
|
|
Actual |
|
|
As Adjusted |
|
|
|
|
Net assets |
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares of beneficial interest outstanding
unlimited number of shares authorized with no par value |
|
|
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Paid-in capital |
|
$ |
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Undistributed net investment income |
|
|
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Accumulated net realized loss on investments, futures
contracts and foreign currency transactions |
|
|
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Net unrealized appreciation (depreciation) on
investments, futures contracts and swap contracts |
|
|
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Net assets |
|
$ |
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
Net asset value per share |
|
$ |
[_______] |
|
|
|
[_______] |
|
|
|
[_______] |
|
S-4
Market and Net Asset Value Information
The Common Shares are listed on the NYSE under the symbol JHI. the Funds Common Shares
commenced trading on the NYSE in 1971.
The Common Shares have traded both at a premium and a discount to net asset value or net asset
value. The Fund cannot predict whether the Funds shares will trade in the future at a premium or
discount to net asset value. The provisions of the 1940 Act generally require that the public
offering price of Common Shares (less any underwriting commissions and discounts) must equal or
exceed the net asset value per share of a companys common stock (calculated within 48 hours of
pricing). The Funds issuance of Common Shares may have an adverse effect on prices in the
secondary market for the Funds Common Shares by increasing the number of Common Shares available,
which may put downward pressure on the market price for the Funds Common Shares. Shares of common
stock of closed-end investment companies frequently trade at a discount from net asset value. See
Risks Market Discount Risk on page [ ] of the accompanying Prospectus.
The following table sets forth for each of the periods indicated the high and low closing
market prices for the Funds Common Shares on the New York Stock Exchange, the net asset value per
share and the premium or discount to net asset value per share at which the Funds Common Shares
were trading. Net asset value is determined on the last business day of each month. See Net Asset
Value on page [ ] of the accompanying Prospectus for information as to the determination of the
Funds net asset value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Price(1) |
|
|
NAV(2) |
|
|
Premium/(Discount) to NAV(3) |
|
Quarter Ended |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
Reported NYSE Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: [ ].
|
|
|
(1) |
|
Based on high and low closing market price during the respective quarter. |
|
(2) |
|
Based on the net asset value calculated on the close of business on the
last business day of each calendar quarter. |
|
(3) |
|
Based on the Funds computations on the day of each of the high and low
closing market prices during the respective quarter. |
The last reported sale price, NAV per common share and percentage discount to NAV per
common share on [ ], 2012, were $[ ], $[ ] and [ ]%, respectively. As of [ ],
2012, the Fund had [ ] Common Shares outstanding and managed assets of approximately $[ ].
The following table provides information about the Funds outstanding securities as of [ ], 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Held by the |
|
|
|
|
|
|
|
|
|
|
Fund or for its |
|
|
|
|
Title of Class |
|
Amount Authorized |
|
|
Account |
|
|
Amount Outstanding |
|
Common Shares |
|
Unlimited |
|
|
[ ] |
|
|
|
[ ] |
|
S-5
The Fund
The Fund is a diversified, closed-end management investment company registered under the 1940
Act. The Fund was organized on October 26, 1970 as a Delaware corporation and was reorganized on
October 5, 1984 as a Massachusetts business trust pursuant to an Agreement and Declaration of
Trust, which was amended and restated on August 26, 2003, as amended (the Declaration of Trust).
The Fund commenced operations following an initial public offering on January 29, 1971, pursuant to
which the Fund issued an aggregate of 5,500,000 Common Shares of beneficial interest, $1.00 par
value. The Funds principal office is located at 601 Congress Street, Boston, Massachusetts 02210
and its phone number is 800-225-6020.
Use of Proceeds
Sales of the Common Shares, if any, under this Prospectus
Supplement and the accompanying Prospectus may be made in negotiated transactions or transactions that are deemed to
be at the market as defined in Rule 415 under the 1933 Act, including sales made directly on the NYSE or sales
made to or through a market maker other than on an exchange. There is no guarantee that there will be any sales of
the Common Shares pursuant to this Prospectus Supplement and the accompanying Prospectus. Actual sales, if any, of
the Common Shares under this Prospectus Supplement and the accompanying Prospectus may be less than as set forth
in this paragraph. In addition, the price per share of any such sale may be greater or less than the price set
forth in this paragraph, depending on the market price of the Common Shares at the time of any such sale. As a
result, the actual net proceeds the Fund receives may be more or less than the amount of net proceeds estimated
in this Prospectus Supplement. Assuming the sale of all of the Common Shares offered under this Prospectus
Supplement and the accompanying Prospectus, at the last reported sale price of $[__] per share for the
Common Shares on the NYSE as of [__], the Fund estimates that the net proceeds of this offering
will be approximately $[__] after deducting the estimated sales load and the estimated offering
expenses payable by the Fund.
Subject to the remainder of this section, the Fund currently intends to invest substantially
all of the net proceeds of any sales of Common Shares pursuant to this Prospectus Supplement in
accordance with its investment objectives and policies as described in the accompanying Prospectus
under Investment Objectives and Investment Strategies within three months of receipt of such
proceeds. Such investments may be delayed up to three months if suitable investments are
unavailable at the time or for other reasons, such as market volatility and lack of liquidity in
the markets of suitable investments. Pending such investment, the Fund anticipates that it will
invest the proceeds in short-term money market instruments, securities with remaining maturities of
less than one year, cash or cash equivalents. A delay in the anticipated use of proceeds could
lower returns and reduce the Funds distribution to Common Shareholders or result in a distribution
consisting principally of a return of capital.
Plan of Distribution
[Under the Dealer Agreement among the Distributor and the Dealer, upon written instructions
from the Distributor, the Dealer will use its reasonable best efforts, to sell, as sub-placement agent, the Common Shares under the terms
and subject to the conditions set forth in the Dealer Agreement. The Dealers solicitation will
continue until the Distributor instructs the Dealer to suspend the solicitations and offers. The
Distributor will instruct the Dealer as to the amount of Common Shares to be sold by the Dealer.
The Distributor may instruct the Dealer not to sell Common Shares if the sales cannot be effected
at or above the price designated by the Distributor in any instruction. To the extent that the
market price per share of the Funds Common Shares on any given day is less than the net asset
value per share on such day, the Distributor will instruct the Dealer not to make any sales on such
day. The Distributor or the Dealer may suspend the offering of Common Shares upon proper notice
and subject to other conditions.]
The Dealer will provide written confirmation to the Distributor
following the close of trading on the day on which Common Shares are sold under the Dealer
Agreement. Each confirmation will include the number of shares sold on the preceding day, the net
proceeds to the Fund and the compensation payable by the Distributor to the Dealer in connection
with the sales.
The Distributor will pay the Dealer commissions for its services
in acting as sub-placement agent in the sale of
Common Shares. The Dealer will be entitled to compensation of [_____] basis points of the gross
sales price per share of any Common Shares sold under the Dealer Agreement, with the exact amount of
such compensation to be mutually agreed upon by the Distributor and the Dealer from time to time.
There is no guaranty that there will be any sales of the Common Shares pursuant to this Prospectus
Supplement and the accompanying Prospectus. Actual sales, if any, of the Common Shares under this
Prospectus Supplement and the accompanying Prospectus may be greater or less than the price set
forth in this paragraph, depending on the market price of Common Shares at the time of any such
sale. Assuming [ ] of the Common Shares offered hereby are sold at a market
price of $[ ] per share (the last reported sale price for Common Shares on the NYSE on [ ],
2012), the Fund estimates that the total expenses for the offering, excluding compensation payable
to the Dealer under the terms of the Dealer Agreement, would be approximately $[_____].
S-6
Settlement for sales of Common Shares will occur on the third trading day following the date on
which such sales are made, in return for payment of the net proceeds to the Fund. There is no
arrangement for funds to be received in an escrow, trust or similar arrangement.
In connection with the sale of the
Common Shares, the Dealer may, and will
with respect to sales effected in an at the market offering, be deemed to be an underwriter
within the meaning of the 1933 Act, and the compensation of the Dealer may be deemed to be
underwriting commissions or discounts. The Distributor has agreed to provide indemnification and
contribution to the Dealer against certain civil liabilities, including liabilities under the 1933
Act.
The Dealer Agreement will remain in full force and effect
unless terminated by either party upon 30
days written notice to the other party.
The principal business address of the Dealer is [ ].
Additional Information
This Prospectus Supplement, the accompanying Prospectus, and the SAI do not contain all of the
information set forth in the Registration Statement that the Fund has filed with the SEC (file No.
333-181550). The complete Registration Statement may be obtained from the SEC at www.sec.gov. See
the cover page of the accompanying Prospectus for information about how to obtain a paper copy of
the Registration Statement or SAI without charge.
S-7
The information in this Statement of Additional Information is not complete and may be
changed. We may not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This preliminary Statement of Additional
Information is not an offer to sell these securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. This Statement of
Additional Information is not a prospectus.
SUBJECT TO COMPLETION, DATED AUGUST 13, 2012
JOHN HANCOCK INVESTORS TRUST
Statement of Additional Information
[ ],
2012
601 Congress Street
Boston, Massachusetts 02210
1-800-225-6020
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
2 |
|
|
|
|
2 |
|
|
|
|
12 |
|
|
|
|
14 |
|
|
|
|
14 |
|
|
|
|
23 |
|
|
|
|
24 |
|
|
|
|
30 |
|
|
|
|
30 |
|
|
|
|
34 |
|
|
|
|
41 |
|
|
|
|
41 |
|
|
|
|
41 |
|
|
|
|
41 |
|
|
|
|
42 |
|
|
|
|
42 |
|
|
|
|
42 |
|
|
|
|
A-1 |
|
|
|
|
B-1 |
|
This Statement of Additional Information (SAI) is not a prospectus and is authorized for
distribution to prospective investors only if preceded or accompanied by the prospectus of John
Hancock Investors Trust (the Fund) dated [ ],
2012 (the Prospectus) and any related
supplement thereto (Prospectus Supplements), which are incorporated herein by reference. This
SAI should be read in conjunction with such Prospectus and any related Prospectus Supplements,
copies of which may be obtained without charge by contacting your financial intermediary or calling
the Fund at 1-800-225-6020.
Capitalized terms used in this SAI and not otherwise defined have the meanings given them in the
Funds Prospectus and any related Prospectus Supplements.
Organization of the Fund
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 was organized on October 26,
1970 as a Delaware corporation and was reorganized on October 5, 1984 as a Massachusetts business
trust pursuant to an Agreement and Declaration of Trust, which was amended and restated on August
26, 2003, as amended (the Declaration of Trust).
John Hancock Advisers, LLC (the Adviser or JHA) is the Funds investment adviser and is
registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as
amended (the Advisers Act). The Adviser is responsible for overseeing the management of the
Fund, including its day-to-day business operations and monitoring the subadviser. The Adviser has
been managing closed-end funds since 1971.
Founded in 1968, the Adviser is a wholly owned subsidiary of John Hancock Life Insurance Company
(U.S.A.), a subsidiary of Manulife Financial Corporation (Manulife Financial or the Company).
John Hancock Life Insurance Company (U.S.A.) and its subsidiaries (John Hancock) today offer a
broad range of financial products and services, including whole, term, variable, and universal life
insurance, as well as college savings products, mutual funds, fixed and variable annuities,
long-term care insurance and various forms of business insurance.
The Advisers parent company has been helping individuals and institutions work toward their
financial goals since 1862. The Adviser offers investment solutions managed by institutional money
managers, taking a disciplined team approach to portfolio management and research, leveraging the
expertise of seasoned investment professionals.
Established in 1887, Manulife Financial is a Canada-based financial services group with principal
operations in Asia, Canada and the United States. Its international network of employees, agents
and distribution partners offers financial protection and wealth management products and services
to millions of clients. It also provides asset management services to institutional customers.
The Funds subadviser is John Hancock Asset Management a division of Manulife Asset Management (US)
LLC (the Subadviser), formerly MFC Global Investment Management (U.S.), LLC and Sovereign Asset
Management LLC. The Subadviser is responsible for the day-to-day management of the Funds
portfolio investments. The Subadviser, organized in 1968, is a wholly owned subsidiary of John
Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife Financial).
Additional Investment Policies and Risks
The Funds primary investment strategies are described in the Prospectus. The following is a
description of the various investment policies that may be engaged in, whether as a primary or
secondary strategy, and a summary of certain attendant risks. The Subadviser may not buy any of
the following instruments or use any of the following techniques unless they believe that doing so
will help to achieve the Funds investment objective.
Ratings as Investment Criteria. In general, the ratings of Moodys and S&P represent the opinions
of these agencies as to the quality of the securities which they rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards of quality. There
is no guarantee that these institutions will continue to provide ratings. These ratings will be
used by the Fund as initial criteria for the selection of debt securities. Among the factors which
will be considered are the long-term ability of the issuer to pay principal and interest and
general economic trends. Appendix A contains further information concerning the rating of Moodys
and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund.
Neither of these events will require the sale of the securities by the Fund.
2
Short-Term Bank and Corporate Obligations. The Fund may invest in depository-type obligations of
banks and savings and loan associations and other high quality money market instruments consisting
of short-term obligations of the U.S. government or its agencies and commercial paper. Commercial
paper represents short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. Depository-type obligations in which the
Fund may invest include certificates of deposit, bankers acceptances and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds deposited in a commercial
bank for a definite period of time and earning a specified return.
Bankers acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are accepted by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument at maturity. Fixed time
deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a beneficial interest
in a fixed time deposit to a third party, although there is no market for such deposits. Bank
notes and bankers acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not insured by the
Federal Deposit Insurance Corporation or any other insurer. Deposit notes are insured by the
Federal Deposit Insurance Corporation only to the extent of $100,000 per depositor per bank.
Preferred Securities. The Fund may invest in preferred securities. Preferred securities, like
common stock, represent an equity ownership in an issuer. Generally, preferred securities have a
priority of claim over common stock in dividend payments and upon liquidation of the issuer.
Unlike common stock, preferred securities do not usually have voting rights. Preferred securities
in some instances are convertible into common stock. Although they are equity securities,
preferred securities have characteristics of both debt and common stock. Like debt, their promised
income is contractually fixed. Like common stock, they do not have rights to precipitate
bankruptcy proceedings or collection activities in the event of missed payments. Other equity
characteristics are their subordinated position in an issuers capital structure and that 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.
Distributions on preferred securities must be declared by the board of directors and may be subject
to deferral, and thus they may not be automatically payable. Income payments on preferred
securities may be cumulative, causing dividends and distributions to accrue even if not declared by
the board or otherwise made payable, or they may be non-cumulative, so that skipped dividends and
distributions do not continue to accrue. There is no assurance that dividends on preferred
securities in which the Fund invests will be declared or otherwise made payable. The Fund may
invest in non-cumulative preferred securities.
Shares of preferred securities have a liquidation value that generally equals the original purchase
price at the date of issuance. The market values of preferred securities may be affected by
favorable and unfavorable changes impacting the issuers industries or sectors, including companies
in the utilities and financial services sectors, which are prominent issuers of preferred
securities. They may also be affected by actual and anticipated changes or ambiguities in the tax
status of the security and by actual and anticipated changes or ambiguities in tax laws, such as
changes in corporate and individual income tax rates, and in the dividends received deduction for
corporate taxpayers or the characterization of dividends as tax-advantaged as described herein.
Because the claim on an issuers earnings represented by preferred securities may become onerous
when interest rates fall below the rate payable on the stock or for other reasons, the issuer may
redeem preferred securities, generally after an initial period of call protection during which the
stock is not redeemable. Thus, in declining interest rate environments in particular, the Funds
holdings of higher dividend-paying preferred securities may be reduced and the Fund may be unable
to acquire securities paying comparable rates with the redemption proceeds.
Investments in Non-U.S. Securities. The Fund may invest directly in the securities of non-U.S.
issuers as well as securities in the form of sponsored or unsponsored American Depository Receipts
(ADRs), European Depository Receipts (EDRs) and Global Depository Receipts (GDRs) or other
securities convertible into non-U.S. securities. The Fund may invest up to 30% of its total assets
in securities denominated in non-U.S. currencies. ADRs are receipts typically issued by a U.S.
bank or trust company which evidence ownership of underlying
3
securities issued by a non-U.S. corporation. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Issuers of unsponsored ADRs are not contractually obligated to
disclose material information, including financial information, in the United States. Generally,
ADRs are designed for use in the United States securities markets and EDRs are designed for use in
European securities markets.
An investment in non-U.S. securities including ADRs may be affected by changes in currency rates
and in exchange control regulations. Issuers of unsponsored ADRs are not contractually obligated
to disclose material information, including financial information, in the United States and,
therefore, there may not be a correlation between such information and the market value of the
unsponsored ADR. Non-U.S. companies may not be subject to accounting standards or government
supervision comparable to U.S. companies, and there is often less publicly available information
about their operations. Non-U.S. companies may also be affected by political or financial
instability abroad. These risk considerations may be intensified in the case of investments in
ADRs of non-U.S. companies that are located in emerging market countries. ADRs of companies
located in these countries may have limited marketability and may be subject to more abrupt or
erratic price movements.
Risks of Non-U.S. Securities. Investments in non-U.S. securities may involve a greater degree of
risk than those in domestic securities. There is generally less publicly available information
about non-U.S. companies in the form of reports and ratings similar to those that are published
about issuers in the United States. Also, non-U.S. issuers generally are not subject to uniform
accounting, auditing and financial reporting requirements comparable to those applicable to United
States issuers.
Because non-U.S. securities may be denominated in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the Funds net asset value (NAV), the value of
dividends and interest earned, gains and losses realized on the sale of securities, and any net
investment income and gains that the Fund distributes to shareholders. Securities transactions
undertaken in some non-U.S. markets may not be settled promptly so that the Funds investments on
non-U.S. exchanges may be less liquid and subject to the risk of fluctuating currency exchange
rates pending settlement.
Non-U.S. securities will be purchased in the best available market, whether through OTC markets or
exchanges located in the countries where principal offices of the issuers are located. Non-U.S.
securities markets generally are not as developed or efficient as those in the United States.
While growing in volume, they usually have substantially less volume than the NYSE, and securities
of some non-U.S. issuers are less liquid and more volatile than securities of comparable United
States issuers. Fixed commissions on non-U.S. exchanges generally are higher than negotiated
commissions on United States exchanges; nevertheless, the Fund will endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers than in the United
States.
With respect to certain non-U.S. countries, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation, nationalization or confiscatory taxation
limitations on the removal of funds or other assets of the Fund, political or social instability,
or diplomatic developments, which could affect United States investments in those countries.
Moreover, individual non-U.S. economies may differ favorably or unfavorably from the United States
economy in terms of growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
The dividends, in some cases capital gains and interest payable on certain of the Funds non-U.S.
portfolio securities, may be subject to non-U.S. withholding or other non-U.S. taxes, thus reducing
the net amount of income or gains available for distribution to the Funds shareholders.
These risks may be intensified in the case of investments in emerging markets or countries with
limited or developing capital markets. See Securities of Emerging Market Issuers or Countries
below.
The Funds ability and decision to purchase or sell portfolio securities may be affected by laws or
regulations relating to the convertibility and repatriation of assets. Under present conditions,
it is not believed that this consideration will have any significant effect on the Funds portfolio
strategies.
4
European Markets Risk. Countries in Europe may be significantly affected by fiscal and monetary
controls implemented by the European Union (EU) and European Economic and Monetary Union (EMU),
which require member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls. Decreasing imports or exports, changes in
governmental or other regulations on trade, changes in the exchange rate of the Euro, the default
or threat of default by one or more EU member countries on its sovereign debt, and/or an economic
recession in one or more EU member countries may have a significant adverse effect on the economies
of these and other EU member countries and major trading partners outside Europe.
The European financial markets have recently experienced volatility and adverse trends due to
concerns about economic downturns, rising government debt levels and the possible default of
government debt in several European countries, including Greece, Ireland, Italy, Portugal and
Spain. Several countries, including Greece and Italy, have agreed to multi-year bailout loans from
the European Central Bank, International Monetary Fund, and other institutions. A default or debt
restructuring by any European country, such as the recent restructuring of Greeces outstanding
sovereign debt, can adversely impact holders of that countrys debt and sellers of credit default
swaps linked to that countrys creditworthiness, which may be located in countries other than those
listed above, and can affect exposures to other EU countries and their financial companies as well.
The manner in which the EU and EMU responded to the global recession and sovereign debt issues
raised questions about their ability to react quickly to rising borrowing costs and the potential
default by Greece and other countries of their sovereign debt and revealed a lack of cohesion in
dealing with the fiscal problems of member states. To address budget deficits and public debt
concerns, a number of European countries have imposed strict austerity measures and comprehensive
financial and labor market reforms, which could increase political or social instability. Many
European countries continue to suffer from high unemployment rates and are projected to experience
similar, double-digit unemployment rates in 2012.
Investing in the securities of Eastern European issuers is highly speculative and involves risks
not usually associated with investing in the more developed markets of Western Europe. Securities
markets of Eastern European countries typically are less efficient and have lower trading volume,
lower liquidity, and higher volatility than more developed markets. Eastern European economies
also may be particularly susceptible to the international credit market due to their reliance on
bank related inflows of capital.
The Fund may be exposed to these risks through its direct investments in European securities,
including sovereign debt, or indirectly through investments in money market funds and financial
institutions with significant investments in such securities.
Emerging Markets Risk. In addition, the Fund may invest in the securities of issuers based in
countries with emerging market economies. Funds that invest a significant portion of their
assets in the securities of issuers based in countries with emerging market economies are subject
to greater levels of foreign investment risk than funds investing primarily in more-developed
foreign markets, since emerging market securities may present market, credit, currency, liquidity,
legal, political and other risks greater than, or in addition to, the risks of investing in
developed foreign countries. These risks include: high currency exchange-rate fluctuations;
increased risk of default (including both government and private issuers); greater social, economic
and political uncertainty and instability (including the risk of war); more substantial
governmental involvement in the economy; less governmental supervision and regulation of the
securities markets and participants in those markets; controls on foreign investment and
limitations on repatriation of invested capital and on the Funds ability to exchange local
currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging
market countries; the fact that companies in emerging market countries may be newly organized,
smaller and less seasoned; the difference in, or lack of, auditing and financial reporting
standards, which may result in the unavailability of material information about issuers; different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities
transactions or otherwise make it difficult to engage in such transactions; difficulties in
obtaining and/or enforcing legal judgments in foreign jurisdictions; and significantly smaller
market capitalizations of emerging market issuers.
Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would
otherwise be possible the effective price or rate of return on portfolio securities or securities
that the Fund proposes to acquire or the exchange rate of currencies in which the portfolio
securities are quoted or denominated. When securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the sale of
5
futures contracts. When securities prices are rising, the Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be available in the market
when it effects anticipated purchases.
If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends
for the Funds portfolio securities and futures contracts based on other financial instruments,
securities indices or other indices, the Fund may also enter into such futures contracts as part of
its hedging strategy. Although under some circumstances prices of securities in the Funds
portfolio may be more or less volatile than prices of such futures contracts, the Adviser will
attempt to estimate the extent of this volatility difference based on historical patterns and
compensate for any differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes affecting the
Funds portfolio securities.
When a short hedging position is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures position. On the other
hand, any unanticipated appreciation in the value of the Funds portfolio securities would be
substantially offset by a decline in the value of the futures position. On other occasions, the
Fund may take a long position by purchasing futures contracts.
Options on Securities and Securities Indices. The Fund may purchase and write (sell) call and put
options on any securities and securities indices. These options may be listed on national domestic
securities exchanges or foreign securities exchanges or traded in the over-the-counter market. The
Fund may write covered put and call options and purchase put and call options as a substitute for
the purchase or sale of securities or to protect against declines in the value of portfolio
securities and against increases in the cost of securities to be acquired.
Writing Covered Options. A call option on securities written by the Fund obligates the Fund to
sell specified securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option on securities written by the Fund
obligates the Fund to purchase specified securities from the option holder at a specified price if
the option is exercised at any time before the expiration date. Options on securities indices are
similar to options on securities, except that the exercise of securities index options requires
cash settlement payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in a single security.
Writing covered call options may deprive the Fund of the opportunity to profit from an increase in
the market price of the securities in its portfolio. Writing covered put options may deprive the
Fund of the opportunity to profit from a decrease in the market price of the securities to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option or put option may
be covered by (i) maintaining cash or liquid securities in a segregated account with a value at
least equal to the Funds obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Funds net exposure on its written option position. A
written call option on securities is typically covered by maintaining the securities that are
subject to the option in a segregated account. The Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put option by purchasing an
option identical to the one it has written. Obligations under over-the-counter options may be
terminated only by entering into an offsetting transaction with the counterparty to such option.
Such purchases are referred to as closing purchase transactions.
Purchasing Options. The Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease (protective puts), in the market value of securities
of the type in which it may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase
specified securities or currency at a specified price during the option period. The Fund would
ordinarily realize a gain on the purchase of a call option if, during the option period, the value
of such securities or currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the
call option.
6
The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. The purchase of protective
puts is designed to offset or hedge against a decline in the market value of the Funds portfolio
securities. Put options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the underlying securities
decreased below the exercise price sufficiently to cover the premium and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing changes in the value of
the Funds portfolio securities.
The Funds options transactions will be subject to limitations established by each of the
exchanges, boards of trade or other trading facilities on which such options are traded. These
limitations govern the maximum number of options in each class which may be written or purchased by
a single investor or group of investors acting in concert, regardless of whether the options are
written or purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more brokers. Thus,
the number of options which the Fund may write or purchase may be affected by options written or
purchased by other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid secondary market
on a domestic or foreign options exchange will exist for any particular exchange-traded option or
at any particular time. If the Fund is unable to effect a closing purchase transaction with
respect to covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to
options it has purchased, it would have to exercise the options in order to realize any profit and
will incur transaction costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed
by an exchange on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or the Options Clearing Corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the trading of options (or
a particular class or series of options). If trading were discontinued, the secondary market on
that exchange (or in that class or series of options) would cease to exist. However, outstanding
options on that exchange that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with their terms.
The Funds ability to terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such transactions will not
fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter
option in accordance with guidelines adopted by the Board of Trustees of the Fund (the Board).
The writing and purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio securities
transactions. The successful use of options depends in part on the Advisers ability to predict
future price fluctuations and, for hedging transactions, the degree of correlation between the
options and securities or currency markets.
Futures Contracts and Options on Futures Contracts. The Fund may purchase and sell futures
contracts based on various securities (such as U.S. government securities) and securities indices,
and any other financial instruments and indices and purchase and write call and put options on
these futures contracts. The Fund may also enter into closing purchase and sale transactions with
respect to any of these contracts and options. All futures contracts entered into by a Fund are
traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated or approved by
the Commodity Futures Trading Commission (CFTC).
7
Futures Contracts. A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments or currencies for an agreed price during a
designated month (or to deliver the final cash settlement price, in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are instead liquidated
through offsetting transactions, which may result in a profit or a loss. While futures contracts
on securities will usually be liquidated in this manner, the Fund may instead make, or take,
delivery of the underlying securities or currency whenever it appears economically advantageous to
do so. A clearing corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the settlement date.
A Fund may, for example, take a short position in the futures market by selling futures contracts
in an attempt to hedge against an anticipated decline in market prices that would adversely affect
the value of the Funds portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by a Fund or securities with characteristics similar to those of
the Funds portfolio securities.
Options on Futures Contracts. The purchase of put and call options on futures contracts will give
the Fund the right (but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of the futures position
if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a
decline in the value of the Funds assets. By writing a call option, the Fund becomes obligated,
in exchange for the premium (upon exercise of the option) to sell a futures contract if the option
is exercised, which may have a value higher than the exercise price. Conversely, the writing of a
put option on a futures contract generates a premium which may partially offset an increase in the
price of securities that the Fund intends to purchase. However, a Fund becomes obligated (upon
exercise of the option) to purchase a futures contract if the option is exercised, which may have a
value lower than the exercise price. The loss incurred by each Fund in writing options on futures
is potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its position by selling or
purchasing an offsetting option of the same series. There is no guarantee that such closing
transactions can be effected. A Funds ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options transactions either for
bona fide hedging or to facilitate portfolio management. The Fund will not engage in futures or
related options for speculative purposes. To the extent that the Fund is using futures and related
options for hedging purposes, futures contracts will be sold to protect against a decline in the
price of securities that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities it intends to purchase. The Fund will determine
that the price fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. To the extent that the Fund engages in
non-hedging transactions in futures contracts and options on futures to facilitate portfolio
management, the aggregate initial margin and premiums required to establish these nonhedging
positions will not exceed 5% of the net asset value of the Funds portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the Fund to purchase securities,
require the Fund to establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce certain risks, these
transactions themselves entail certain other risks. For example, unanticipated changes in interest
rates or securities prices may
8
result in a poorer overall performance for the Fund than if it had
not entered into any futures contracts or options transactions.
Perfect correlation between the Funds futures positions and portfolio positions will be impossible
to achieve. In the event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be obtained and the Fund
may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse market conditions.
In addition, during periods of market volatility, a commodity exchange may suspend or limit trading
in a futures contract or related option, which may make the instrument temporarily illiquid and
difficult to price. Commodity exchanges may also establish daily limits on the amount that the
price of a futures contract or related option can vary from the previous days settlement price.
Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This
may prevent the Fund from closing out positions and limiting its losses.
Interest Rate Swaps, Collars, Caps and Floors. In order to hedge the value of the Funds portfolio
against interest rate fluctuations or to facilitate portfolio management, the Fund may, but is not
required to, enter into various interest rate transactions such as interest rate swaps and the
purchase or sale of interest rate caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date or to manage the Funds interest rate exposure on
any debt securities or preferred shares issued by the Fund for leverage purposes. The Fund intends
to use these transactions only as a hedge or to facilitate portfolio management. The Fund is not
required to hedge its portfolio and may choose not to do so. The Fund cannot guarantee that any
hedging strategies it uses will work.
Interest Rate Swaps. In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for
floating rate payments). For example, if the Fund holds a debt instrument with an interest rate
that is reset only once each year, it may swap the right to receive interest at this fixed rate for
the right to receive interest at a rate that is reset every week. This would enable the Fund to
offset a decline in the value of the debt instrument due to rising interest rates but would also
limit its ability to benefit from falling interest rates. Conversely, if the Fund holds a debt
instrument with an interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate that is fixed for one year. Such
a swap would protect the Fund from a reduction in yield due to falling interest rates and may
permit the Fund to enhance its income through the positive differential between one week and one
year interest rates, but would preclude it from taking full advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis (i.e., the two payment streams
are netted out with the trust receiving or paying, as the case may be, only the net amount of the
two payments). The net amount of the excess, if any, of the Funds obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Funds custodian. If the interest
rate swap transaction is entered into on other than a net basis, the full amount of the Funds
obligations will be accrued on a daily basis, and the full amount of the Funds obligations will be
maintained in a segregated account by the Funds custodian.
Interest Rate Collars, Caps and Floors. The Fund also may engage in interest rate transactions in
the form of purchasing or selling interest rate caps or floors. The Fund will not sell interest
rate caps or floors that it does not own. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest equal to the difference of the index and the predetermined rate on a notional
principal amount (i.e., the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments of interest at the
difference of the index and the predetermined rate on a notional principal amount from the party
selling such interest rate floor.
9
Typically, the parties with which the Fund will enter into interest rate transactions will be
broker-dealers and other financial institutions. The Fund will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or whose
creditworthiness is believed by the Adviser to be equivalent to such rating. If there is a default
by the other party to such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially in recent years
with a large number of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has become relatively
liquid in comparison with other similar instruments traded in the interbank market. Caps and
floors, however, are less liquid than swaps. Certain federal income tax requirements may limit the
Funds ability to engage in interest rate swaps.
Credit Default Swap Agreements. The Fund may enter into credit default swap agreements. The
buyer in a credit default contract is obligated to pay the seller a periodic stream of payments
over the term of the contract provided that no event of default on an underlying reference
obligation has occurred. If an event of default occurs, the seller must pay the buyer the par
value (full notional value) of the reference obligation in exchange for the reference obligation.
The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no event
of default occurs, the Fund loses its investment and recovers nothing. However, if an event of
default occurs, the buyer receives full notional value for a reference obligation that may have
little or no value. As a seller, the Fund receives a fixed rate of income throughout the term of
the contract, which can run between six months and ten years but are typically structured between
three and five years, provided that there is no default event. If an event of default occurs, the
seller must pay the buyer the full notional value of the reference obligation. Credit default
swaps involve greater risks than if the Fund had invested in the reference obligation directly. In
addition to general market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into swap agreements only with
counterparties who are rated investment grade by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose creditworthiness is
believed by the Adviser to be equivalent to such rating. A buyer also will lose its investment and
recover nothing should an event of default occur. If an event of default were to occur, the value
of the reference obligation received by the seller, coupled with the periodic payments previously
received, may be less than the full notional value it pays to the buyer, resulting in a loss of
value to the Fund.
If the Fund enters into a credit default swap, the Fund may be required to report the swap as a
listed transaction for tax shelter reporting purposes on the Funds federal income tax return.
If the Internal Revenue Service (the IRS) were to determine that the credit default swap is a tax
shelter, the Fund could be subject to penalties under the Internal Revenue Code of 1986, as amended
(the Code).
The Fund may in the future employ new or additional investment strategies and hedging instruments
if those strategies and instruments are consistent with the Funds investment objectives and are
permissible under applicable regulations governing the Fund.
Additional Regulatory Limitations on the Use of Futures and Related Options, Interest Rate Floors,
Caps and Collars and Interest Rate and Currency Swap Contracts. The Fund has claimed an exclusion
from the definition of commodity pool operator under the CEA and, therefore, is not subject to
registration or regulation as a pool operator under the CEA. It should be noted, however, that the
CFTC has adopted certain rules that significantly affect the exemptions available to the Fund.
These rules are not yet effective and their scope of application is still uncertain. As of the
date of this SAI, there is no certainty that the Fund, the Adviser, the Subadviser or other parties
will be able to rely on these exclusions and exemptions in the future. Additional CFTC regulation
(or a choice to no longer use strategies that trigger additional regulation) may cause the Fund to
change its investment strategies or to incur additional expenses.
Risk of Potential Government Regulation of Derivatives. It is possible that government regulation
of various types of derivative instruments, including futures and swap agreements, may limit or
prevent the Fund from using such instruments as part of its investment strategy, which could
negatively impact the Fund. For example, some legislative and regulatory proposals, such as those
in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (which was
enacted in July 2010), would, upon implementation, impose limits on the
10
maximum position that could
be held by a single trader in certain contracts and would subject some derivatives transactions to
new forms of regulation that could create barriers to some types of investment activity. Other
provisions would require many swaps to be cleared and traded on an exchange, expand entity
registration requirements, impose business conduct requirements on dealers that enter into swaps
with a pension plan, endowment, retirement plan or government entity, and require banks to move
some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank
or divest them altogether. While many provisions of the Dodd-Frank Act must be implemented through
future rulemaking, and any regulatory or legislative activity may not necessarily have a direct,
immediate effect upon the Fund, it is possible that, upon implementation of these measures or any
future measures, they could potentially limit or completely restrict the ability of the Fund to use
these instruments as a part of its investment strategy, increase the costs of using these
instruments or make them less effective. Limits or restrictions applicable to the counterparties
with which the Fund engages in derivative transactions could also prevent the Fund from using these
instruments or affect the pricing or other factors relating to these instruments, or may change
availability of certain investments.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase and subsequent
sale of a security after it has been held for a relatively brief period of time. The Fund may
engage in short-term trading in response to stock market conditions, changes in interest rates or
other economic trends and developments, or to take advantage of yield disparities between various
fixed-income securities in order to realize capital gains or improve income. Short-term trading
may have the effect of increasing portfolio turnover rate. A high rate of portfolio turnover (100%
or greater) involves correspondingly greater brokerage expenses. The portfolio turnover rate for
the Fund for the fiscal years ended October 31, 2011 and October 31, 2010 was 45% and 71%,
respectively.
Real estate securities. Investing in securities of companies in the real estate industry subjects
the Fund to the risks associated with the direct ownership of real estate. These risks include:
|
|
|
Declines in the value of real estate; |
|
|
|
|
Risks related to general and local economic conditions; |
|
|
|
|
Possible lack of availability of mortgage funds; |
|
|
|
|
Overbuilding; |
|
|
|
|
Extended vacancies of properties; |
|
|
|
|
Increased competition; |
|
|
|
|
Increases in property taxes and operating expenses; |
|
|
|
|
Changes in zoning laws; |
|
|
|
|
Losses due to costs resulting from the cleanup of environmental problems; |
|
|
|
|
Liability to third parties for damages resulting from environmental problems; |
|
|
|
|
Casualty or condemnation losses; |
|
|
|
|
Limitations on rents; |
|
|
|
|
Changes in neighborhood values and the appeal of properties to tenants; and |
|
|
|
|
Changes in interest rates. |
Therefore, for the Fund investing a substantial amount of its assets in securities of companies in
the real estate industry, the value of the Funds shares may change at different rates compared to
the value of shares of the Fund with investments in a mix of different industries.
Securities of companies in the real estate industry include equity real estate investment trusts
(REITs) and mortgage REITs. Equity REITs may be affected by changes in the value of the
underlying property owned by the REIT, while mortgage REITs may be affected by the quality of any
credit extended. Further, equity and mortgage REITs are dependent upon management skills and
generally may not be diversified. Equity and mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidations. In addition, equity and mortgage REITs
could possibly fail to qualify for tax-free pass-through of income under the Code, as amended, or
to maintain their exemptions form registration under the 1940 Act. The above factors may also
adversely affect a borrowers or a lessees ability to meet its obligations to a REIT. In the
event of a default by a borrower or lessee, a REIT may experience delays in enforcing its rights as
a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
11
In addition, even the larger REITs in the industry tend to be small- to medium-sized companies in
relation to the equity markets as a whole. Moreover, shares of REITs may trade less frequently
and, therefore, are subject to more erratic price movements, than securities of larger issuers.
Gaming-Tribal Authority Investments. The Fund may invest in securities issued by gaming companies,
including gaming facilities operated by Indian (Native American) tribal authorities. The value of
the Funds investments in gaming companies is subject to legislative or regulatory changes, adverse
market conditions, and/or increased competition affecting the gaming sector. Securities of gaming
companies may be considered speculative, and generally exhibit greater volatility than the overall
market. The market value of gaming company securities may fluctuate widely due to unpredictable
earnings, due in part to changing consumer tastes and intense competition, strong reaction to
technological developments, and the threat of increased government regulation.
Securities issued by Indian tribal authorities are subject to particular risks. Indian tribes
enjoy sovereign immunity, which is the legal privilege by which the United States federal, state,
and tribal governments cannot be sued without their consent. In order to sue an Indian tribe (or
an agency or instrumentality thereof), the tribe must have effectively waived its sovereign
immunity with respect to the matter in dispute. Certain Indian tribal authorities have agreed to
waive their sovereign immunity in connection with their outstanding debt obligations. Generally,
waivers of sovereign immunity have been held to be enforceable against Indian tribes.
Nevertheless, if a waiver of sovereign immunity is held to be ineffective, claimants, including
investors in Indian tribal authority securities (such as the Fund), could be precluded from
judicially enforcing their rights and remedies.
Further, in most commercial disputes with Indian tribes, it may be difficult or impossible to
obtain federal court jurisdiction. A commercial dispute may not present a federal question, and an
Indian tribe may not be considered a citizen of any state for purposes of establishing diversity
jurisdiction. The U.S. Supreme Court has held that jurisdiction in a tribal court must be
exhausted before any dispute can be heard in an appropriate federal court. In cases where the
jurisdiction of the tribal forum is disputed, the tribal court first must rule as to the limits of
its own jurisdiction. Such jurisdictional issues, as well as the general view that Indian tribes
are not considered to be subject to ordinary bankruptcy proceedings, may be disadvantageous to
holders of obligations issued by Indian tribal authorities, including the Fund.
Investment Restrictions
The investment policies and strategies of the Fund described in this SAI and the Prospectus,
except for the nine investment restrictions designated as fundamental policies under this caption,
are not fundamental and may be changed by the Board without shareholder approval.
Fundamental Investment Restrictions
As referred to above, the following nine investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the holders of a
majority of the Funds outstanding voting securities, which as used in this SAI means the lesser of
(a) 67% of the shares of the Fund present or represented by proxy at a meeting if the holders of
more than 50% of the outstanding shares are present or represented at the meeting or (b) more than
50% of outstanding shares of the Fund. As a matter of fundamental policy, the Fund may not:
|
(1) |
|
Issue senior securities, except as permitted by the Investment Company Act of 1940 Act,
as amended (the 1940 Act) and the rules and interpretive positions of the Securities and
Exchange Commission (the SEC) thereunder. Senior securities that the Fund may issue in
accordance with the 1940 Act include preferred shares, borrowing, futures, when-issued and
delayed delivery securities and forward foreign currency exchange transactions. |
|
|
(2) |
|
Borrow money, except as permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder. |
|
|
(3) |
|
Act as an underwriter, except to the extent that the Fund may be deemed to be an
underwriter for the purposes of the Securities Act of 1933, as amended (the 1933 Act), in
connection with the disposition of |
12
|
|
|
portfolio securities or purchase any security which is
subject to legal or contractual delays in or restrictions on resale if after such purchase
more than 50% of the Funds total assets would be invested in such securities. |
|
|
(4) |
|
Purchase real estate or any interest therein, except through the purchase of corporate
or certain government securities (including securities secured by mortgage or a leasehold
interest or other interest in real estate and securities of companies investing in real
estate) in accordance with the Funds investment objectives. |
|
|
(5) |
|
Make loans except through the lending of portfolio securities and the purchase of
securities in accordance with the Funds investment objectives. The Fund does not for this
purpose consider repurchase agreements and bank obligations to be the making of a loan. |
|
|
(6) |
|
Invest in commodities or in commodity contracts or in puts, calls or combinations of
both except options on securities and securities indices, and futures contracts on
securities and securities indices and options on such futures. |
|
|
(7) |
|
Invest more than 5% of its total assets taken at market value at the time of purchase
in securities of any one issuer, other than obligations of the United States government and
its agencies and instrumentalities and repurchase agreements collateralized by such
obligations. |
|
|
(8) |
|
Purchase securities of any issuer if such purchase would at the time result in more
than 10% of the outstanding voting securities of such issuer being held by the Fund. |
|
|
(9) |
|
Purchase securities of issuers conducting their principal business activity in the same
industry if immediately after such purchase the value of its investment in such industry
would exceed 25% of its total assets taken at market value. For purposes of construing
this fundamental restriction No. 9, tax-exempt municipal securities shall not be considered
to represent industries. |
The Fund does not have a fundamental policy with respect to short sales and purchases on margin.
In regard to restriction (2), the Fund may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of securities
transactions which otherwise might require untimely dispositions of Fund securities. The 1940 Act
currently requires that the Fund have 300% asset coverage at the time of borrowing with respect to
all borrowings other than temporary borrowings.
For purposes of construing restriction (9), securities of the U.S. government, its agencies, or
instrumentalities are not considered to represent industries. Tax-exempt municipal obligations
backed by the credit of a governmental entity also are not considered to represent industries.
Whenever an investment policy or investment restriction set forth in the Prospectus or this SAI
states a maximum percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or standard shall be
determined immediately after and as a result of the Funds acquisition of such security or asset.
Accordingly, any later increase or decrease resulting from a change in values, assets or other
circumstances or any subsequent rating change made by a rating agency (or as determined by the
Subadviser if the security is not rated by a rating agency) will not compel the Fund to dispose of
such security or other asset. Notwithstanding the foregoing, the Fund must always be in compliance
with the borrowing policies set forth above.
Non-fundamental Investment Restrictions
The Fund has adopted the following non-fundamental investment policies, which may be changed by the
Board without approval of the Funds shareholders:
|
(1) |
|
The Fund intends to purchase securities through private placements, but no purchase
will be made if as a result more than 20% of the value of the Funds total assets would be
invested in such securities.
|
13
|
(2) |
|
If a percentage restriction on investment or utilization of assets as set forth above
is adhered to at the time an investment is made, a later change in percentage resulting
from changes in the value of the Funds assets will not be considered a violation of the
restriction. |
|
|
(3) |
|
The Fund may also be subject to certain restrictions and guidelines imposed by lenders
if the Fund engages in borrowings. The Fund does not anticipate that such guidelines would
have a material adverse effect on its common shareholders or the Funds ability to achieve
its investment objectives. |
|
|
(4) |
|
The Fund will invest only in countries on the Advisers Approved Country Listing. The
Approved Country Listing is a list maintained by the Advisers investment department that
outlines all countries, including the United States, that have been approved for investment
by funds managed by the Adviser. |
|
|
(5) |
|
If allowed by the Funds other investment policies and restrictions, the Fund may
invest up to 5% of its total assets in Russian equity securities and up to 10% of its total
assets in Russian fixed-income securities. All Russian securities must be:
(a) denominated in U.S. dollars; (b) traded on a major exchange; and (c) held physically
outside of Russia. |
Portfolio Turnover
The Funds annual rate of portfolio turnover may vary from year to year as well as within a
year. A high rate of portfolio turnover (100% or more) generally involves correspondingly greater
brokerage commission expenses, which must be borne directly by the Fund. Portfolio turnover is
calculated by dividing the lesser of purchases or sales of fund securities during the fiscal year
by the monthly average of the value of the Funds securities. (Excluded from the computation are
all securities, including options, with maturities at the time of acquisition of one year or less.)
The portfolio turnover rate for the Fund for the fiscal years ended October 31, 2011 and
October 31, 2010 was 45% and 71%, respectively.
Those Responsible for Management
The business of the Fund is managed by the Board, including certain trustees of the Fund
(Trustees) who are not interested persons (as defined by the 1940 Act) of the Fund (the
Independent Trustees). The Board elects officers who are responsible for the day-to-day
operations of the Fund and who execute policies formulated by the Board. Several of the officers
and Trustees of the Fund also are officers or directors of the Adviser. Each Trustee serves in a
similar capacity for other John Hancock funds.
The Board consists of seven members. Each Trustee holds office until his or her successor is
elected and qualified, or until the Trustees death, retirement, resignation or removal.
|
|
|
|
|
|
|
Interested Trustees |
|
|
|
|
|
|
Number of
Funds in John
Hancock Fund |
|
|
|
|
|
|
Complex |
Name |
|
Position with the |
|
Principal Occupation(s) and Other |
|
Overseen by |
(Birth Year) |
|
Fund |
|
Directorships During the Past 5 Years |
|
Trustee |
Hugh
McHaffie(1)
(1959) |
|
Trustee
(since 2010) |
|
Executive Vice President, John Hancock Financial Services (since 2006, including prior positions); President of John Hancock Variable Insurance Trust and John Hancock Funds II (since 2009); Trustee, John Hancock retail funds(2) (since 2010); Chairman and Director, John Hancock Advisers, LLC, John Hancock Investment Management Services, LLC and John Hancock Funds, LLC (since 2010). |
|
49 |
14
|
|
|
|
|
|
|
Interested Trustees |
|
|
|
|
|
|
Number of
Funds in John
Hancock Fund |
|
|
|
|
|
|
Complex |
Name |
|
Position with the |
|
Principal Occupation(s) and Other |
|
Overseen by |
(Birth Year) |
|
Fund |
|
Directorships During the Past 5 Years |
|
Trustee |
John G.
Vrysen(1)
(1955)
|
|
Trustee
(since 2009)
|
|
Senior Vice President, John Hancock Financial Services (since 2006); Director, Executive Vice President and Chief Operating Officer, John Hancock Advisers, LLC, John Hancock Investment Management Services, LLC and John Hancock Funds, LLC (since 2005); Chief Operating Officer, John Hancock Funds II and John Hancock Variable Insurance Trust (since 2007); Chief Operating Officer, John Hancock retail funds(2) (until 2009); Trustee, John Hancock retail funds (since 2009). |
|
49 |
|
|
|
|
|
|
|
|
|
Independent Trustees |
|
|
|
|
|
|
Number of Funds in John
Hancock Fund |
|
|
|
|
|
|
Complex |
Name |
|
Position(s) with |
|
Principal Occupation(s) and Other |
|
Overseen by |
(Birth Year) |
|
the Fund |
|
Directorships During the Past 5 Years |
|
Trustee |
William H.
Cunningham
(1944)
|
|
Trustee
(since 2005)
|
|
Professor, University of Texas,
Austin, Texas (since 1971); former
Chancellor, University of Texas
System and former President of the
University of Texas, Austin, Texas;
Director of the following: LIN
Television (since 2009); Lincoln
National Corporation (insurance)
(Chairman since 2009 and Director
since 2006); Resolute Energy
Corporation (since 2009);
Nanomedical Systems, Inc.
(biotechnology company) (Chairman
since 2008); Yorktown Technologies,
LP (tropical fish) (Chairman since
2007); Greater Austin Crime
Commission (since 2001); Southwest
Airlines (since 2000); former
Director of the following: Introgen
(manufacturer of biopharmaceuticals)
(until 2008); Hicks Acquisition
Company I, Inc. (until 2007);
Jefferson-Pilot Corporation
(diversified life insurance company)
(until 2006); and former Advisory
Director, JP Morgan Chase Bank
(formerly Texas Commerce
BankAustin) (until 2009).
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
Deborah C. Jackson
(1952)
|
|
Trustee
(since 2008)
|
|
President, Cambridge College,
Cambridge, Massachusetts (since May
2011); Chief Executive Officer,
American Red Cross of Massachusetts
Bay (2002-May 2011); Board of
Directors of Eastern Bank
Corporation (since 2001); Board of
Directors of Eastern Bank Charitable
Foundation (since 2001); Board of
Directors of American Student
Assistance Corporation (1996-2009);
Board of Directors of Boston Stock
Exchange (20022008); Board of
Directors of Harvard Pilgrim
Healthcare (health benefits company)
(2007-2011).
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
John A.
Moore(3)
(1939)
|
|
Trustee
(since 1996)
Vice Chairman
(since 2012)
|
|
President and Chief Executive
Officer, Institute for Evaluating
Health Risks, (nonprofit
institution) (1989-2001); Senior
Scientist, Sciences International
(health research) (2000-2003);
Former Assistant Administrator &
Deputy Administrator, Environmental
Protection Agency (1983-1989);
Principal, Hollyhouse (consulting)
(since 2000); Director, CIIT Center
for Health Science Research
(nonprofit research) (until 2007).
|
|
|
49 |
|
15
|
|
|
|
|
|
|
|
|
Independent Trustees |
|
|
|
|
|
|
Number of Funds in |
|
|
|
|
|
|
John Hancock Fund |
Name |
|
Position(s) with |
|
Principal Occupation(s) and Other |
|
Complex Overseen by |
(Birth Year) |
|
the Fund |
|
Directorships During the Past 5 Years |
|
Trustee |
Steven R. Pruchansky
(1944)
|
|
Trustee
(since 2005)
Chairman
(since 2011)
|
|
Chairman and Chief Executive
Officer, Greenscapes of Southwest
Florida, Inc. (since 2000); Director
and President, Greenscapes of
Southwest Florida, Inc. (until
2000); Member, Board of Advisors,
First American Bank (until 2010);
Managing Director, Jon James, LLC
(real estate) (since 2000);
Director, First Signature Bank &
Trust Company (until 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
Gregory A. Russo
(1949)
|
|
Trustee
(since 2008)
|
|
Director and Audit Committee
Chairman (since May2012) and Member,
Audit Committee and Finance
Committee of NCH Healthcare System,
Inc. (since 2011) (holding company
for multi-entity health care
system); Director and Member of
Finance Committee, The Moorings,
Inc. (nonprofit continuing care
community) (since May 2012); Vice
Chairman, Risk & Regulatory Matters,
KPMG LLP (KPMG) (20022006); Vice
Chairman, Industrial Markets, KPMG
(19982002); Chairman and Treasurer,
Westchester County, New York,
Chamber of Commerce (1985-1995);
Director, Treasurer and Chairman of
Audit and Finance Committees, Putnam
Hospital Center (1990-2000);
Director and Chairman of Fundraising
Campaign, United Way of Westchester
and Putnam Counties, New York
(1990-1997).
|
|
|
49 |
|
|
|
|
(1) |
|
The Trustee is an Interested Trustee due to his position with the Adviser and certain of
its affiliates. |
|
(2) |
|
John Hancock retail funds is comprised of ten closed-end funds (including the Fund), as
well as the series of John Hancock Funds III and 12 other investment companies. |
|
(3) |
|
Dr. Moores term of office will end when he retires as a Trustee upon the earlier of the
election of his successor or December 31, 2012. |
Correspondence intended for any of the Trustees may be sent to the attention of the individual
Trustee or to the Board c/o the Secretary of the Fund at 601 Congress Street, Boston, Massachusetts
02210. All communications addressed to the Board or individual Trustee will be logged and sent to
the Board or individual Trustee. The Secretary may determine not to forward any letter to Trustees
that does not relate to the business of the Fund.
|
|
|
|
|
|
|
|
|
Principal Officers who are not Trustees |
Name, |
|
Position(s) with |
|
|
|
|
(Birth Year) |
|
the Fund |
|
Officer since |
|
Principal Occupation(s) During Past 5 Years |
Keith F. Hartstein
(1956)
|
|
President and Chief
Executive Officer
|
|
|
2005 |
|
|
Senior Vice President, John Hancock
Financial Services (since 2004); Director,
President and Chief Executive Officer,
John Hancock Advisers, LLC and John
Hancock Funds, LLC (since 2005); Director,
John Hancock Asset Management a division
of Manulife Asset Management (US), LLC
(since 2005); Director, John Hancock
Investment Management Services, LLC (since
2006); President and Chief Executive
Officer, John Hancock retail funds (since
2005); Member, Investment Company
Institute Sales Force Marketing Committee
(since 2003). |
|
|
|
|
|
|
|
|
|
Thomas M. Kinzler
(1955)
|
|
Secretary and Chief
Legal Officer
|
|
|
2006 |
|
|
Vice President, John Hancock Financial
Services (since 2006); Secretary and Chief
Legal Counsel, John Hancock Advisers, LLC,
John Hancock Investment Management
Services, LLC and John Hancock Funds, LLC
(since 2007); and Secretary and Chief
Legal Officer, John Hancock retail funds,
John Hancock Funds II and John Hancock
Variable Insurance Trust (since 2006). |
16
|
|
|
|
|
|
|
|
|
Principal Officers who are not Trustees |
Name, |
|
Position(s) with |
|
|
|
|
(Birth Year) |
|
the Fund |
|
Officer since |
|
Principal Occupation(s) During Past 5 Years |
Francis V. Knox, Jr.
(1947)
|
|
Chief Compliance Officer
|
|
|
2005 |
|
|
Vice President, John Hancock Financial
Services (since 2005); Chief Compliance
Officer, John Hancock retail funds, John
Hancock Funds II, John Hancock Variable
Insurance Trust, John Hancock Advisers,
LLC and John Hancock Investment Management
Services, LLC (since 2005); Vice President
and Chief Compliance Officer, John Hancock
Asset Management a division of Manulife
Asset Management (US) LLC(20052008). |
|
|
|
|
|
|
|
|
|
Andrew G. Arnott
(1971)
|
|
Senior Vice President and Chief
Operating Officer
|
|
|
2009 |
|
|
Senior Vice President, John Hancock
Financial Services (since 2009); Executive
Vice President, John Hancock Advisers, LLC
(since 2005); Executive Vice President,
John Hancock Investment Management
Services, LLC (since 2006); Executive Vice
President, John Hancock Funds, LLC (since
2004); Chief Operating Officer, John
Hancock retail funds (since 2009); Senior
Vice President, John Hancock retail funds
(since 2010); Vice President, John Hancock
Funds II and John Hancock Variable
Insurance Trust (since 2006); Senior Vice
President, Product Management and
Development, John Hancock Funds, LLC
(until 2009). |
|
|
|
|
|
|
|
|
|
Charles A. Rizzo
(1957)
|
|
Chief Financial Officer
|
|
|
2007 |
|
|
Vice President, John Hancock Financial
Services (since 2008); Senior Vice
President, John Hancock Advisers, LLC and
John Hancock Investment Management
Services, LLC (since 2008); Chief
Financial Officer, John Hancock retail
funds, John Hancock Funds II and John
Hancock Variable Insurance Trust (since
2007); Assistant Treasurer, Goldman Sachs
Mutual Fund Complex (20052007); Vice
President, Goldman Sachs (20052007). |
|
|
|
|
|
|
|
|
|
Salvatore Schiavone
(1965)
|
|
Treasurer
|
|
|
2009 |
|
|
Assistant Vice President, John Hancock
Financial Services (since 2007); Vice
President, John Hancock Advisers, LLC and
John Hancock Investment Management
Services, LLC (since 2007); Treasurer,
John Hancock retail funds (since 2010);
Treasurer, John Hancock closed-end funds
(since 2009); Assistant Treasurer, John
Hancock Funds II and John Hancock Variable
Insurance Trust (since 2010) and
(2007-2009); Assistant Treasurer, John
Hancock retail funds (2007-2009);
Assistant Treasurer, Fidelity Group of
Funds (20052007); Vice President,
Fidelity Management Research Company
(20052007). |
All of the officers listed are officers or employees of the Adviser or affiliated companies.
Some of the Trustees and officers also may be officers and/or directors and/or trustees of one or
more of the other funds for which the Adviser or an affiliate of the Adviser serves as investment
adviser.
Additional Information about the Trustees
In addition to the description of each Trustees Principal Occupation(s) and Other Directorships
set forth above, the following provides further information about each Trustees specific
experience, qualifications, attributes or skills. The information in this section should not be
understood to mean that any of the Trustees is an expert within the meaning of the U.S. federal
securities laws.
Although the Boards Nominating, Governance and Administration Committee has general criteria that
guides its choice of candidates to serve on the Board (as discussed below under Board
Committees), there are no specific required qualifications for Board membership. In considering
nominees, although this Committee does not have a
17
formal policy to consider diversity when
identifying candidates for the position of Independent Trustee, as a matter of practice, this
Committee considers the overall diversity of the Board with respect to backgrounds, professional
experience, education, skill, and viewpoint. In addition, as part of its annual self-evaluation,
the Board has an opportunity to consider the diversity of its members, including specifically
whether the Boards members have the right mix of characteristics, experiences and skills. The
results of the self-evaluation are considered by this Committee in its decision-making process with
respect to candidates for the position of Independent Trustee. The Board believes that the
different perspectives, viewpoints, professional experience, education, and individual qualities of
each Trustee represent a diversity of experiences and a variety of complementary skills. Each
Trustee has experience as a Trustee of the Fund, as well as experience as a Trustee of other John
Hancock funds. It is the Trustees belief that this allows the Board, as a whole, to oversee the
business of the Fund in a manner consistent with the best interests of the Funds shareholders.
When considering potential nominees to fill vacancies on the Board, and as part of its annual
self-evaluation, the Board reviews the mix of skills and other relevant experiences of the
Trustees.
William H. Cunningham Mr. Cunningham has management and operational oversight experience as a
former Chancellor and President of a major university. Mr. Cunningham has expertise in corporate
governance as a Professor of business ethics. He also has oversight and corporate governance
experience as a current and former director of a number of operating companies, including an
insurance company.
Deborah C. Jackson Ms. Jackson has management and operational oversight experience as the
president of a college and as the former chief executive officer of a major charitable
organization. She also has oversight and corporate governance experience as a current and former
director of various corporate organizations, including a bank, an insurance company and a regional
stock exchange, and nonprofit entities.
Hugh McHaffie Through his positions as a senior executive of Manulife Financials U.S. Wealth
Management division, his prior position as a senior executive of MetLife, and membership in the
Society of Actuaries and American Academy of Actuaries, Mr. McHaffie has experience in the
development and management of registered investment companies, variable annuities and retirement
products, enabling him to provide management input to the Board.
John A. Moore Dr. Moore has management and operational oversight experience from his current and
former positions as a senior executive of scientific research organizations and as a senior
administrator of the Environmental Protection Agency. He also has oversight and corporate
governance experience as a director of a scientific research organization. Dr. Moore, an
Independent Trustee, serves as the Boards Vice Chairman.
Steven R. Pruchansky Mr. Pruchansky has entrepreneurial, executive and financial experience as a
chief executive officer of an operating services company and a current and former director of real
estate and banking companies. Mr. Pruchansky, an Independent Trustee, serves as the Boards
Chairman.
Gregory A. Russo As a certified public accountant and former partner in a major independent
registered public accounting firm, Mr. Russo has accounting and executive experience.
John G. Vrysen Through his positions as Director, Executive Vice President and Chief Operating
Officer of the Adviser, position as a senior executive of Manulife Financial, the Advisers parent
company, positions with other affiliates of the Adviser, and current and former memberships in the
Society of Actuaries, Canadian Institute of Actuaries and American Academy of Actuaries, Mr. Vrysen
has experience in the development and management of registered investment companies, variable
annuities and retirement products, enabling him to provide management input to the Board.
Duties of Trustees
The Fund is organized as a Massachusetts business trust. Under the Declaration of Trust, the
Trustees are responsible for managing the affairs of the Fund, including the appointment of
advisers and subadvisers. Each Trustee has the experience, skills, attributes or qualifications
described above (see Principal Occupation(s) and
18
Other Directorships and Additional
Information about the Trustees above). The Board appoints officers who assist in managing the
day-to-day affairs of the Fund. The Board met six times during the latest fiscal year.
The Board has appointed an Independent Trustee as Chairman. The Chairman presides at meetings of
the Trustees and may call meetings of the Board and any Board committee whenever he deems it
necessary. The Chairman participates in the preparation of the agenda for meetings of the Board
and the identification of information to be presented to the Board with respect to matters to be
acted upon by the Board. The Chairman also acts as a liaison with the Funds management, officers,
attorneys, and other Trustees generally between meetings. The Chairman may perform such other
functions as may be requested by the Board from time to time. The Board has also designated a Vice
Chairman to serve in the absence of the Chairman. Except for any duties specified in this SAI or
pursuant to the Funds Declaration of Trust or By-laws, or as assigned by the Board, the
designation of a Trustee as Chairman or Vice Chairman does not impose on that Trustee any duties,
obligations or liability that are greater than the duties, obligations or liability imposed on any
other Trustee, generally. The Board has designated a number of standing committees as further
described below, each of which has a Chairman. The Board also designates working groups or ad hoc
committees as it deems appropriate.
The Board believes that this leadership structure is appropriate because it allows the Board to
exercise informed and independent judgment over matters under its purview, and it allocates areas
of responsibility among committees or working groups of Trustees and the full Board in a manner
that enhances effective oversight. The Board considers leadership by an Independent Trustee as
Chairman to be integral to promoting effective independent oversight of the Funds operations and
meaningful representation of the shareholders interests, given the number of funds offered by the
complex and the amount of assets that these funds represent. The Board also believes that having a
super-majority of Independent Trustees is appropriate and in the best interest of the Funds
shareholders. Nevertheless, the Board also believes that having interested persons serve on the
Board brings corporate and financial viewpoints that are, in the Boards view, helpful elements in
its decision-making process. In addition, the Board believes that Mr. McHaffie and Mr. Vrysen,
each of whom is a senior executive of the Adviser, Manulife Financial (the Advisers parent
company), and of other affiliates of the Adviser, provide the Board with the Advisers perspective
in managing and sponsoring the Fund. The leadership structure of the Board may be changed, at any
time and in the discretion of the Board, including in response to changes in circumstances or the
characteristics of the Fund.
Board Committees
The Board has five standing committees: the Audit Committee; the Compliance Committee; the
Nominating, Governance and Administration Committee; Investment Performance Committee A; and the
Contracts/Operations Committee.
The current membership of each committee is set forth below. As Chairman of the Board, Mr.
Pruchansky is considered an ex officio member of each committee and, therefore, is able to attend
and participate in any committee meeting, as appropriate.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominating, |
|
|
|
|
|
|
|
|
Governance and |
|
Investment |
|
Contracts/ |
Audit |
|
Compliance |
|
Administration |
|
Performance A |
|
Operations |
Dr. Moore
|
|
Mr. Cunningham
|
|
All Independent
|
|
Ms. Jackson
|
|
All Independent |
Mr. Pruchansky
|
|
Ms. Jackson
|
|
Trustees
|
|
Mr. Russo
|
|
Trustees |
Mr. Russo
|
|
Mr. Russo
|
|
|
|
Mr. Vrysen |
|
|
Audit Committee. Each member of this Committee is a financially literate Independent Trustee and
at least one member has accounting or related financial management expertise. The Board has
adopted a written charter for the Committee. This Committee recommends to the full Board
independent registered public accounting firms for the Fund, oversees the work of the independent
registered public accounting firm in connection with the Funds audit, communicates with the
independent registered public accounting firm on a regular basis and provides a forum for the
independent registered public accounting firm to report and discuss any matters it deems
appropriate at any time. Mr. Russo serves as Chairman of this Committee. The Audit Committee held
eight meetings during the last fiscal year.
19
Compliance Committee. The primary role of this Committee is to oversee the activities of the
Funds Chief Compliance Officer; the implementation and enforcement of the Funds compliance
policies and procedures; and compliance with the Funds and the Independent Trustees Codes of
Ethics. Mr. Russo serves as Chairman of this Committee. This Committee held four meetings during
the last fiscal year.
Nominating, Governance and Administration Committee. This Committee is comprised of all of the
Independent Trustees. The purpose of this Committee is to make determinations and recommendations
to the Board on issues related to the composition and operation of the Board, corporate governance
matters applicable to the Independent Trustees, and issues related to complex-wide matters and
practices designed to facilitate uniformity and administration of the Boards oversight of the
Fund. This Committee is solely responsible for the selection and recommendation to the Board of
Independent Trustee candidates. Mr. Pruchansky serves as Chairman of this Committee. This
Committee held three meetings during the last fiscal year.
In reviewing a potential nominee and in evaluating the renomination of current Independent
Trustees, this Committee generally will apply the following criteria: (i) the nominees reputation
for integrity, honesty and adherence to high ethical standards; (ii) the nominees business acumen,
experience and ability to exercise sound judgments; (iii) a commitment to understand the Fund and
the responsibilities of a trustee of an investment company; (iv) a commitment to regularly attend
and participate in meetings of the Board and its committees; (v) the ability to understand
potential conflicts of interest involving management of the Fund and to act in the interests of all
shareholders; and (vi) the absence of a real or apparent conflict of interest that would impair the
nominees ability to represent the interests of all the shareholders and to fulfill the
responsibilities of an Independent Trustee. This Committee does not necessarily place the same
emphasis on each criteria and each nominee may not have each of these qualities.
As long as a current Independent Trustee continues, in the opinion of this Committee, to satisfy
these criteria, the Fund anticipates that the Committee would favor the renomination of a current
Independent Trustee rather than a new candidate. Consequently, while this Committee will consider
nominees recommended by shareholders to serve as Independent Trustees, the Committee may only act
upon such recommendations if there is a vacancy on the Board or a committee determines that the
selection of a new or additional Independent Trustee is in the best interests of the Fund. In the
event that a vacancy arises or a change in Board membership is determined to be advisable, this
Committee will, in addition to any shareholder recommendations, consider candidates identified by
other means, including candidates proposed by members of this Committee. This Committee may retain
a consultant to assist it in a search for a qualified candidate. The Committee has adopted
Procedures for the Selection of Independent Trustees.
While this Committee is solely responsible for the selection and recommendation to the Board of
Independent Trustee candidates, the Committee may consider nominees recommended by any source,
including fund shareholders, management and Committee members, as it deems appropriate. Any such
recommendations from shareholders shall be directed to the Secretary of the Fund at 601 Congress
Street, Boston, Massachusetts 02210-2805. Recommendations from management may be submitted to the
Committee Chairman. All recommendations shall include all information relating to such person that
is required to be disclosed in solicitations of proxies for the election of Board members and as
specified in the Funds By-Laws, and must be accompanied by a written consent of the proposed
candidate to stand for election if nominated for the Board and to serve if elected by shareholders.
Investment Performance Committee A. This Committee monitors and analyzes the performance of the
Fund generally, consults with the Adviser as necessary if the Fund requires special attention, and
reviews peer groups and other comparative standards as necessary. Ms. Jackson serves as Chairman
of Investment Performance Committee A. This Committee held seven meetings during the last fiscal
year.
Contracts/Operations Committee. This Committee is comprised of all of the Independent Trustees.
This Committee oversees the initiation, operation, and renewal of the various contracts between the
Fund and other entities. These contracts include advisory and subadvisory agreements, custodial
and transfer agency agreements and arrangements with other service providers. Dr. Moore serves as
Chairman of this Committee. As indicated above, Dr. Moore will retire as a Trustee on December 31,
2012. This Committee held three meetings during the last fiscal year.
20
Annually, the Board evaluates its performance and that of its Committees, including the
effectiveness of the Boards Committee structure.
Risk Oversight
As a registered investment company, the Fund is subject to a variety of risks, including investment
risks, financial risks, compliance risks, and operational risks. As part of its overall
activities, the Board oversees the management of the Funds risk management structure by various
departments of the Adviser, including: Investment Management Services Group (which oversees the
Subadviser and investment management operations) (IMS), Fund Administration, Legal, the Product
Group (which oversees new product development and marketplace positioning), and Internal Audit; as
well as by the Funds Chief Compliance Officer (CCO). The responsibility to manage the Funds
risk management structure on a day-to-day basis is subsumed within the Advisers overall investment
management responsibilities. The Adviser has its own, independent interest in risk management. In
this regard, the Adviser has appointed a Risk and Investment Operations Committee, consisting of
senior personnel from each of the Advisers functional departments. The Advisers risk management
program is part of the overall risk management program of John Hancock, the Advisers parent
company. John Hancocks Chief Risk Officer supports the Advisers risk management program.
While the Adviser has responsibility for identifying and managing the Funds exposure to risk on a
daily basis, the Board plays an active role in overseeing the processes established to assess,
monitor and mitigate that exposure. The Board, acting through its Committees, has charged the
Adviser with (i) identifying events or circumstances the occurrence of which could have adverse
effects on the Funds business and/or reputation; (ii) implementing processes and controls to
lessen the possibility that such events or circumstances occur or to mitigate the effects of such
events or circumstances if they do occur; and (iii) creating and maintaining a system designed to
evaluate continuously business and market conditions in order to facilitate the identification and
implementation of processes and controls described in (i) and (ii) above. The Board, directly and
indirectly through its Committees, routinely discusses with management the significant risks facing
the Funds and reviews the processes and controls in place to address those risks. The Board
regularly receives materials and information, including in-depth and in-person presentations from
third-party experts, with respect to specific areas of risk, and the Board engages in comprehensive
analyses and dialogues regarding those risks. Because the day-to-day operations and activities of
the Funds are carried out by or through the Adviser and other service providers, the Board
recognizes that it is not possible for it to identify all of the risks that may affect a Fund or to
develop processes and controls to eliminate or mitigate their occurrence or effects.
The Board discharges risk oversight as part of its overall activities, with the assistance of its
Investment Performance, Audit, Compliance, and Contracts/Operations Committees. The Committee
system facilitates the timely and efficient consideration of matters by the Board, and facilitates
effective oversight of compliance with legal and regulatory requirements and of the Funds
activities and associated risks. In addressing issues regarding the Funds risk management between
meetings, appropriate representatives of the Adviser communicate with the Chairman of the Board,
the relevant Committee Chair or the Funds CCO, who is directly accountable to the Board. As
appropriate, the Chairman of the Board and the Committee Chairs confer among themselves, with the
Funds CCO, the Adviser, other service providers, external fund counsel, and counsel to the
Independent Trustees, to identify and review risk management issues that may be placed on the full
Boards agenda and/or that of an appropriate Committee for review and discussion with management.
The Audit Committee assists the Board in reviewing with the independent auditors, at various times
throughout the year, matters relating to financial reporting matters. In addition, this Committee
oversees the process of the Funds valuation of its portfolio securities, with day-to-day
responsibility for valuation determinations having been delegated to the Funds Pricing Committee
(comprised of officers of the Fund).
Investment Performance Committee A assists the Board in overseeing the significant investment
policies of the Fund. The Adviser monitors these policies and may recommend changes to this
Committee in response to subadviser requests or other circumstances. On a quarterly basis, this
Committee reviews reports from IMS and the Product Group regarding the Funds investment
performance, which include information about investment risks and how they are managed.
21
The Compliance Committee assists the Board in overseeing the activities of the Funds CCO with
respect to the compliance programs of the Fund, the Adviser, the Subadviser, and certain of the
Funds other service providers. This Committee and the Board receive and consider the CCOs annual
written report, which, among other things, summarizes material compliance issues that arose during
the previous year and any remedial action taken to address these issues, as well as any material
changes to the compliance programs. This Committee and the Board also receive and consider reports
from the Funds CCO throughout the year. As part of its oversight responsibilities, the Board has
approved various compliance policies and procedures.
Each of the above Board Committees meets at least quarterly. Each Committee presents reports to
the Board, which may prompt further discussion of issues concerning the oversight of the Funds
risk management. The Board also may discuss particular risks that are not addressed in the
Committee process. In addition to the Committee meetings, the Advisers Risk and Investment
Operations Committee described above, reports periodically to the full Board on risk management
matters. Finally, John Hancocks Chief Risk Officer, who as noted above supports the Advisers
risk management program, at the Boards request will from time-to-time report on risk management
matters.
The Contracts/Operations Committee assists the Board in overseeing the Advisers management of the
Funds operational risks, particularly as it regards vendor management and the quality of services
provided by various service providers. This Committee periodically reviews reports from Fund
Administration on these issues and discusses its findings with the Board. Among other things, in
its annual review of the Funds advisory and subadvisory agreements, this Committee and the Board
receive and review information provided by the Adviser and the Subadviser relating to their
operational capabilities, financial condition and resources.
The Board also has a Nominating, Governance and Administration Committee that, among other matters,
periodically reviews the Boards committee structure and the charters of the Boards committees,
and recommends to the Board such changes as it deems appropriate. This Committee also coordinates
and administers an annual self-evaluation of the Board that includes a review of its effectiveness
in overseeing the number of funds in the fund complex and the effectiveness of its committee
structure. The Board may, at any time and in its discretion, change the manner in which it
conducts its risk oversight role.
As stated above, the Adviser also has its own, independent interest in risk management. In this
regard, the Adviser has appointed a Risk and Investment Operations Committee, consisting of senior
personnel from each of the Advisers functional departments. This Committee reports periodically
to the Board on risk management matters. The Advisers risk management program is part of the
overall risk management program of John Hancock, the Advisers parent company. John Hancocks
Chief Risk Officer supports the Advisers risk management program, and at the Boards request will
report on risk management matters.
Independent Trustee Compensation
The table below sets forth the compensation paid by the Fund and certain other investment companies
in the John Hancock Fund Complex to the Independent Trustees of the Fund for their services for the
fiscal year ended October 31, 2011. These Trustees oversee 49 series in the John Hancock Fund
complex, which consists of 255 series. Each Trustee is reimbursed for travel and other out of
pocket expenses incurred in attending meetings. The Fund pays fees only to its Independent
Trustees. The Fund does not pay any remuneration to any Trustee who is an officer or employee of
the Adviser or its affiliates. Of the Funds officers, the President is furnished to the Fund
pursuant to the Advisory Agreement described below and receives no compensation from the Fund. The
other named officers receive no compensation from the Fund, and are compensated by the Adviser
and/or affiliates for their services. The officers of the Fund may spend only a portion of their
time on the affairs of the Fund.
|
|
|
|
|
|
|
|
|
Independent Trustee* |
|
Fund |
|
|
John Hancock Fund Complex |
|
William H. Cunningham |
|
$ |
5,000 |
|
|
$ |
218,071 |
|
Deborah C. Jackson |
|
$ |
5,178 |
|
|
$ |
203,000 |
|
John A. Moore |
|
$ |
6,006 |
|
|
$ |
229,000 |
|
Steven R. Pruchansky |
|
$ |
6,828 |
|
|
$ |
280,149 |
|
Gregory A. Russo |
|
$ |
5,750 |
|
|
$ |
227,000 |
|
22
|
|
|
* |
|
Mr. Charles L. Ladner retired as a Trustee effective as of December 31, 2011. Messrs. James
F. Carlin and Stanley Martin and Ms. Patti McGill Peterson each resigned as a Trustee
effective as of February 29, 2012, July 25, 2012 and July 23, 2012, respectively. For the
fiscal year ended October 31, 2011, Messrs. Carlin, Ladner and Martin and Ms. McGill Peterson
received compensation from the Fund of $5,000, $6,014, $5,948 and $5,608, respectively, and
received compensation from the John Hancock Fund Complex of $188,000, $232,500, $234,624 and
$211,314, respectively. Mr. Martins John Hancock Fund Complex compensation includes $1,000 of
fees contributed to the John Hancock Deferred Compensation Plan. |
The Fund does not have a pension or retirement plan for any of its Trustees or officers. The Fund
participates in the John Hancock Deferred Compensation Plan for Independent Trustees (the Plan).
Under the Plan, an Independent Trustee may elect to have his or her deferred fees invested in
shares of one or more funds in the John Hancock Fund Complex and the amount paid to the Independent
Trustees under the Plan will be determined based upon the performance of such investments.
Deferral of Trustees fees does not obligate the Fund to retain the services of any Trustee or
obligate the Fund to pay any particular level of compensation to the Trustee. Under these
circumstances, the Trustee is not the legal owner of the underlying shares, but does participate in
any positive or negative return on those shares to the same extent as all other shareholders. As
of October 31, 2011, the value of the aggregate accrued deferred compensation amount from all funds
in the John Hancock Fund Complex for Mr. Cunningham was $247,659; Mr. Ladner was $81,197; Mr.
Martin was $69,973; Ms. McGill Peterson was $270,374; Dr. Moore was $322,934; and Mr. Pruchansky
was $389,739 under the Plan.
Trustee Ownership of Shares of John Hancock Funds
The table below sets forth the aggregate dollar range of equity securities beneficially owned by
the Trustees in the Fund and in all John Hancock funds overseen by each Trustee as of December 31,
2011. For each Trustee, the amounts reflected include share equivalents of certain John Hancock
funds in which the Trustee is deemed to be invested pursuant to the Deferred Compensation Plan for
Independent Trustees, as more fully described under Compensation of Trustees and Officers. The
information as to beneficial ownership is based on statements furnished to the Fund by the
Trustees. Each of the Trustees has all voting and investment powers with respect to the shares
indicated.
|
|
|
|
|
|
|
|
|
Trustees |
|
Fund |
|
|
John Hancock Fund Complex |
|
Independent Trustees* |
|
|
|
|
|
|
|
|
William H. Cunningham |
|
$ |
1-$10,000 |
|
|
Over $100,000 |
Deborah C. Jackson |
|
$ |
10,001-$50,000 |
|
|
Over $100,000 |
John A. Moore |
|
$ |
1-$10,000 |
|
|
Over $100,000 |
Steven R. Pruchansky |
|
$ |
1-$10,000 |
|
|
Over $100,000 |
Gregory A. Russo |
|
$ |
10,001-$50,000 |
|
|
Over $100,000 |
Non-Independent Trustees |
|
|
|
|
|
|
|
|
Hugh McHaffie |
|
$ |
10,001-$50,000 |
|
|
Over $100,000 |
John G. Vrysen |
|
$ |
10,001-$50,000 |
|
|
Over $100,000 |
|
|
|
* |
|
Mr. Charles L. Ladner retired as a Trustee effective as of December 31, 2011. Messrs. James
F. Carlin and Stanley Martin and Ms. Patti McGill Peterson each resigned as a Trustee
effective as of February 29, 2012, July 25, 2012 and July 23, 2012, respectively. |
Shareholders of the Fund
As of July 31, 2012, the officers and Trustees of the Fund as a group owned beneficially less
than 1% of the outstanding shares of the Fund.
To the best knowledge of the Fund, no shareholder owned 5% or more of the outstanding shares of the
Fund as of the date of this SAI.
23
Investment Advisory and Other Services
A discussion regarding the basis for the Trustees approval of the Advisory Agreement and the
Subadvisory Agreements is available in the Funds October 31, 2011 annual shareholder report.
THE ADVISER
The Adviser is a Delaware limited liability company whose principal offices are located at 601
Congress Street, Boston, Massachusetts 02210 and serves as the Funds investment adviser. The
Adviser is registered with the SEC as an investment adviser under the Advisers Act.
Founded in 1968, the Adviser is a wholly owned subsidiary of John Hancock Life Insurance Company
(U.S.A.), a subsidiary of Manulife Financial Corporation (Manulife Financial or the Company).
Manulife Financial is the holding company of The Manufacturers Life Insurance Company (the Life
Company) and its subsidiaries. John Hancock Life Insurance Company (U.S.A.) and its subsidiaries
(John Hancock) today offer a broad range of financial products and services, including whole,
term, variable, and universal life insurance, as well as college savings products, mutual funds,
fixed and variable annuities, long-term care insurance and various forms of business insurance.
The Advisers parent company has been helping individuals and institutions work toward their
financial goals since 1862. The Adviser offers investment solutions managed by institutional money
managers, taking a disciplined team approach to portfolio management and research, leveraging the
expertise of seasoned investment professionals. The Adviser has been managing closed-end funds
since 1971. As of June 30, 2012, the Adviser had total assets under management of approximately
$20.7 billion.
Established in 1887, Manulife Financial is a Canada-based financial services group with principle
operations in Asia, Canada and the United States. Its international network of employees, agents
and distribution partners offers financial protection and wealth management products and services
to millions of clients. It also provides asset management services to institutional customers.
Funds under management by Manulife Financial and its subsidiaries were C$512 billion
(US$512 billion) as of March 31, 2012. The Company operates as Manulife Financial in Canada and
Asia and primarily as John Hancock in the United States.
The Adviser serves as investment adviser to the Fund and is responsible for monitoring the
Subadvisers services to the Fund.
Advisory Agreement. The Fund has entered into an investment management contract dated July 1, 2009
(the Advisory Agreement) with the Adviser. As compensation for its advisory services under the
Advisory Agreement, the Adviser receives a fee from the Fund, calculated and paid daily, at an
annual rate of the Funds average daily managed assets.
The following table shows the advisory fee that the Fund incurred and paid to the Adviser for the
last three fiscal years ended October 31, 2011, October 31, 2010, and October 31, 2009.
|
|
|
|
|
October 31, 2011
|
|
October 31, 2010
|
|
October 31, 2009 |
|
|
|
|
|
$1,352,248
|
|
$1,282,091
|
|
$1,102,458* |
|
|
|
* |
|
The amount disclosed for the October 31, 2009 fiscal year includes the
advisory fee in the amount of $703,563 paid to the Adviser under the previous advisory
agreement for the period from November 1, 2008 to June 30, 2009 and the advisory fee in
the amount of $398,895 paid to the Adviser under the current Advisory Agreement for the
period from July 1, 2009 to October 31, 2009. |
Pursuant to the Advisory Agreement and subject to the general supervision of the Trustees, the
Adviser selects, contracts with, and compensates the Subadviser to manage the investments and
determine the composition of the assets of the Fund; provided, that any contract with a Subadviser
(a Subadvisory Agreement) shall be in compliance with and approved as required by the 1940 Act,
except for such exemptions therefrom as may be granted to the Fund or the Adviser. The Adviser
monitors the Subadvisers management of the Funds investment
24
operations in accordance with the
investment objectives and related investment policies of the Fund, reviews the performance of the
Subadviser and reports periodically on such performance to the Board.
Pursuant to the Advisory Agreement, the Adviser has entered into a Subadvisory Agreement with the
Subadviser to provide day-to-day portfolio management of the Fund and to implement the Funds
portfolio management strategies and investment objective. The Advisory Agreement provides that the
Adviser may terminate the Subadvisory Agreement entered into and directly assume any functions
performed by the Subadviser, upon approval of the Board.
The Fund pays all expenses of its organization, operations and business.
The Advisory Agreement had an initial period of two years and continues from year to year so long
as such continuance is approved at least annually: (i) by the vote of a majority of the
Independent Trustees; and (ii) either by the Board or by the vote of a majority of the outstanding
shares of the Fund.
The Advisory Agreement may be terminated at any time without penalty upon sixty (60) days written
notice by the Board or the Advisor, as applicable, or by the vote of the majority of the
outstanding shares of the Fund. The Advisory Agreement will terminate automatically in the event
of its assignment. The Subadvisory Agreement terminates automatically upon the termination of the
Advisory Agreement.
The Advisory Agreement provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties to the Fund under such agreements on
the part of the Adviser, the Adviser shall not be liable to the Fund or to any shareholder for any
loss sustained in connection with the purchase, holding, redemption or sale of any security on
behalf of the Fund.
Service Agreement. The Fund has entered into a management-related service contract dated July 1,
2009 (the Service Agreement) with JHA, under which the Fund receives Non-Advisory Services.
These Non-Advisory Services include, but are not limited to, legal, tax, accounting, valuation,
financial reporting and performance, compliance, service provider oversight, portfolio and cash
management, project management office, EDGAR conversion and filing, graphic design, and other
services that are not investment advisory in nature.
JHA is reimbursed by the Fund for its costs in providing Non-Advisory Services to the Fund under
the Service Agreement. The following table shows the expenses incurred by JHA in providing
services under the Services Agreement for the last three fiscal years ended October 31, 2011,
October 31, 2010, and October 31, 2009.
|
|
|
|
|
October 31, 2011
|
|
October 31, 2010
|
|
October 31, 2009 |
|
|
|
|
|
$21,564
|
|
$26,280
|
|
$26,825* |
|
|
|
* |
|
The amount disclosed for the October 31, 2009 fiscal year includes the
service fees in the amount of $16,744 paid to JHA under the previous Accounting & Legal
Services Agreement, EDGAR Services Agreement and Graphic Design Agreement for the
period from November 1, 2008 to June 30, 2009 and the service fee in the amount of
$10,081 paid to JHA under the current Service Agreement for the period from July 1,
2009 to October 31, 2009. |
The Service Agreement had an initial period of two years and continues from year to year so
long as such continuance is specifically approved at least annually by a majority of the Board and
a majority of the Independent Trustees. The Fund or JHA may terminate the Service Agreement at any
time without penalty upon 60 days written notice to the other party. The Service Agreement may be
amended by mutual written agreement of the parties, without obtaining shareholder approval.
JHA is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which the Service Agreement relates, except losses resulting from
willful misfeasance, bad faith or negligence by JHA in the performance of its duties or from
reckless disregard by JHA of its obligations under the Service Agreement.
25
THE SUBADVISER
Subadvisory Agreement. The Adviser entered into a Subadvisory Agreement dated December 31, 2005
with the Subadviser (the Subadvisory Agreement). The Subadviser is responsible for the
day-to-day management of the Funds portfolio investments. The Subadviser, organized in 1968, is a
wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife
Financial, a publicly held, Canadian-based company). As of June 30, 2012, the Subadviser had total
assets under management of approximately $132.7 billion. The Subadviser is located at 101
Huntington Avenue, Boston, Massachusetts 02199.
Under the terms of the Subadvisory Agreement, the Subadviser is responsible for managing the
investment and reinvestment of the assets of the Fund, subject to the supervision and control of
the Board and the Adviser.
The Subadvisory Agreement had an initial period of two years and continues from year to year so
long as such continuance is approved at least annually: (i) by the Board or by the holders of a
majority of its outstanding voting securities and (ii) by a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of any party to the Subadvisory Agreement. The
Subadvisory Agreement terminates automatically in the event of its assignment or upon termination
of the Advisory Agreement and may be terminated without penalty upon 60 days written notice at the
option of the Adviser, the Subadviser, by the Board or by a vote of a majority of the Funds
outstanding shares. As discussed above, the Adviser may terminate the Subadvisory Agreement and
directly assume responsibility for the services provided by the Subadviser upon approval by the
Board without the need for approval of the shareholders of the Fund.
The Subadvisory Agreement provides that in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations and duties thereunder, the Subadviser is not
liable for any error or judgment or mistake of law or for any loss suffered by the Fund.
Both the Adviser and the Subadviser are controlled by Manulife Financial. Advisory arrangements
involving an affiliated subadviser may present certain potential conflicts of interest. Manulife
Financial benefits not only from the net advisory fee retained by the Adviser, but also from the
subadvisory fee paid by the Adviser to the Subadviser. Consequently, Manulife may be viewed as
benefiting financially from the appointment of or continued service of the Subadviser to manage the
Fund. However, both the Adviser, in recommending to the Board the appointment or continued service
of an affiliated subadviser, and the Subadviser have a fiduciary duty to act in the best interests
of the Fund and its shareholders. The Independent Trustees are aware of and monitor these
potential conflicts of interest.
PORTFOLIO MANAGERS
Day-to-day management of the Fund is the responsibility of the investment professionals associated
with the Subadviser. The individuals responsible for managing the implementation and monitoring
the overall portfolio management of the Fund are listed below.
The following charts reflect information regarding accounts other than the Fund for which each
portfolio manager has day-to-day management responsibilities. Accounts are grouped into three
categories: (i) other investment companies, (ii) other pooled investment vehicles, and (iii) other
accounts. To the extent that any of these accounts pay advisory fees based on account performance,
information on those accounts is specifically broken out. In addition, any assets denominated in
foreign currencies have been converted into U.S. dollars using the exchange rates as of the
applicable date. Also shown below the chart is each portfolio managers investment in the Fund.
26
The following table reflects approximate information as of October 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Registered |
|
|
Other Pooled Investment |
|
|
|
|
|
|
Investment Companies |
|
|
Vehicles |
|
|
Other Accounts |
|
Portfolio Manager |
|
Number of Accounts |
|
|
Assets |
|
|
Number of Accounts |
|
|
Assets |
|
|
Number of Accounts |
|
|
Assets |
|
Barry H. Evans, CFA |
|
|
8 |
|
|
$ |
12.0 billion |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
27 |
|
|
$ |
326 million |
|
Jeffrey N. Given, CFA |
|
|
14 |
|
|
$ |
11.6 billion |
|
|
|
4 |
|
|
$ |
279.7 million |
|
|
|
8 |
|
|
$ |
2.3 billion |
|
John F. Iles |
|
|
6 |
|
|
$ |
6.8 billion |
|
|
|
13 |
|
|
$ |
3.2 billion |
|
|
|
2 |
|
|
$ |
552.0 million |
|
Performance-Based Fees for Other Accounts Managed
Of the accounts listed in the table above, those for which the advisory fee is based on investment
performance are listed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Registered |
|
|
Other Pooled Investment |
|
|
|
|
|
|
Investment Companies |
|
|
Vehicles |
|
|
Other Accounts |
|
Portfolio Manager |
|
Number of Accounts |
|
|
Assets |
|
|
Number of Accounts |
|
|
Assets |
|
|
Number of Accounts |
|
|
Assets |
|
Barry H. Evans, CFA |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
Jeffrey N. Given, CFA |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
John F. Iles |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
1 |
|
|
$ |
245.1 million |
|
Portfolio Manager Ownership of Shares of the Fund
The table below sets forth the aggregate dollar range of equity securities beneficially owned by
each portfolio manager in the Fund as of October 31, 2011. The information as to beneficial
ownership is based on statements furnished to the Fund by the portfolio managers.
|
|
|
|
|
Portfolio Manager |
|
Fund |
|
Barry H. Evans, CFA |
|
$ |
10,001-$50,000 |
|
Jeffrey N. Given, CFA |
|
$ |
1-$10,0000 |
|
John F. Iles |
|
$ |
0 |
|
Conflicts of Interest
When a portfolio manager is responsible for the management of more than one account, the potential
arises for the portfolio manager to favor one account over another. The principal types of
potential conflicts of interest that may arise are discussed below. For the reasons outlined
below, the Fund does not believe that any material conflicts are likely to arise out of a portfolio
managers responsibility for the management of the Fund as well as one or more other accounts. The
Subadviser has adopted procedures that are intended to monitor compliance with the policies
referred to in the following paragraphs. Generally, the risks of such conflicts of interests are
increased to the extent that a portfolio manager has a financial incentive to favor one account
over another. The Subadviser has structured its compensation arrangements in a manner that is
intended to limit such potential for conflicts of interests. See Compensation below.
|
|
|
A portfolio manager could favor one account over another in allocating new investment
opportunities that have limited supply, such as initial public offerings (IPOs) and
private placements. If, for example, an IPO that was expected to appreciate in value
significantly shortly after the offering was allocated to a single account, that account
may be expected to have better investment performance than other accounts that did not
receive an allocation on the IPO. The Subadviser has policies that require a portfolio
manager to allocate such investment opportunities in an equitable manner and generally to
allocate such investments proportionately among all accounts with similar investment
objectives. |
|
|
|
|
A portfolio manager could favor one account over another in the order in which trades
for the accounts are placed. If a portfolio manager determines to purchase a security for
more than one account in an aggregate |
27
|
|
|
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. The less liquid the market for the
security or the greater the percentage that the proposed aggregate purchases or sales
represent of average daily trading volume, the greater the potential for accounts that
make subsequent purchases or sales to receive a less favorable price. When a portfolio
manager intends to trade the same security for more than one account, the policies of the
Subadviser generally require that such trades be bunched, which means that the trades
for the individual accounts are aggregated and each account receives the same price.
There are some types of accounts as to which bunching may not be possible for contractual
reasons (such as directed brokerage arrangements). Circumstances also may arise where the
trader believes that bunching the orders may not result in the best possible price. Where
those accounts or circumstances are involved, the Subadviser will place the order in a
manner intended to result in as favorable a price as possible for such client. |
|
|
|
A portfolio manager could favor an account if the portfolio managers compensation is
tied to the performance of that account rather than all accounts managed by the portfolio
manager. If, for example, the portfolio manager receives a bonus based upon the
performance of certain accounts relative to a benchmark while other accounts are
disregarded for this purpose, the portfolio manager will have a financial incentive to
seek to have the accounts that determine the portfolio managers bonus achieve the best
possible performance to the possible detriment of other accounts. Similarly, if the
Subadviser receives a performance-based advisory fee, the portfolio manager may favor that
account, whether or not the performance of that account directly determines the portfolio
managers compensation. The investment performance on specific accounts is not a factor
in determining the portfolio managers compensation. See Compensation of Portfolio
Managers below. The Subadviser does not receive a performance-based fee with respect to
any of the other accounts managed by the portfolio managers of the Fund described in this
SAI. |
|
|
|
A portfolio manager could favor an account if the portfolio manager has a beneficial
interest in the account, in order to benefit a large client or to compensate a client that
had poor returns. For example, if the portfolio manager held an interest in an investment
partnership that was one of the accounts managed by the portfolio manager, the portfolio
manager would have an economic incentive to favor the account in which the portfolio
manager held an interest. The Subadviser imposes certain trading restrictions and
reporting requirements for accounts in which a portfolio manager or certain family members
have a personal interest in order to confirm that such accounts are not favored over other
accounts. |
|
|
|
If the different accounts have materially and potentially conflicting investment
objectives or strategies, a conflict of interest may arise. For example, if a portfolio
manager purchases a security for one account and sells the same security short for another
account, such trading pattern could disadvantage either the account that is long or short.
In making portfolio manager assignments, the Subadviser seeks to avoid such potentially
conflicting situations. However, where a portfolio manager is responsible for accounts
with differing investment objectives and policies, it is possible that the portfolio
manager will conclude that it is in the best interest of one account to sell a portfolio
security while another account continues to hold or increase the holding in such security.
While these accounts have many similarities, the investment performance of each account
will be different due to differences in fees, expenses and cash flows. |
Compensation
The Subadviser has adopted a system of compensation for portfolio managers and others involved in
the investment process that is applied systematically among investment professionals. At the
Subadviser, investment professionals are compensated with a combination of base salary and
performance bonuses (e.g., cash and deferral awards). The following describes each component of
the compensation package for the individuals identified as a portfolio manager for the Fund.
|
|
|
Base salaries. Base salaries are market-based and fixed. Salary ranges are reviewed
and adjusted annually. Individual salary adjustments are based on individual performance
against mutually-agreed-upon objectives and development of technical and experiential
skills. |
28
|
|
|
Performance Bonuses. Performance bonuses take the form of cash and deferred
incentives. |
|
|
|
Short-Term Cash Incentives. Short-term incentives take the form of annual cash
awards. Individual targets are market-based and actual awards are tied to performance
against various objective measures and on overall personal performance ratings. These
include: |
|
|
|
Investment Performance. The majority of the bonus considered under the
plan is based on investment performance of accounts managed by the investment
professional over one, three and five year periods are considered (to the extent
applicable). The pre-tax performance of each account is measured relative to an
appropriate benchmark or universe. The benchmark for the Fund is Barclays Capital
U.S. Government/Credit Index. |
|
|
|
|
Financial Performance of the Subadviser. The financial performance of
the Subadviser and its parent corporation are also considered in determining bonus
awards. |
|
|
|
|
Non-Investment Performance. The more intangible contributions of an
investment professional to the Subadvisers business, including new strategy idea
generation, professional growth and development, and management, where applicable,
are evaluated in determining the amount of any bonus award. |
|
|
|
Long-Term Incentives. All investment professionals are eligible for participation
in a deferred incentive plan. 100% of the eligible awards are invested in the
strategies that the team manages as well as other strategies managed by other teams at
the Subadviser. The Subadviser believes that owning units in the same strategies a
team manages aligns the performance goals of both client and manager giving the team
added incentive to act in the best interest of the Subadvisers clients. |
As an added incentive, certain investment professionals (considered officers of Manulife Financial)
may receive a portion of their award in Manulife Restricted Share Units (RSUs) or stock options.
This plan is based on the value of the underlying common shares of Manulife Financial.
Other Services
Proxy voting
The Funds proxy voting policies and procedures (the Funds Procedures) delegate to the
Subadviser the responsibility to vote all proxies relating to securities held by the Fund in
accordance with the Subadvisers proxy voting policies and procedures. The Subadviser has a duty
to vote such proxies in the best interests of the Fund and its shareholders. Complete descriptions
of the Funds Procedures and the proxy voting procedures of the Subadviser are set forth in
Appendix A to this SAI.
It is possible that conflicts of interest could arise for the Subadviser when voting proxies. Such
conflicts could arise, for example, when the Subadviser or its affiliate has a client or other
business relationship with the issuer of the security being voted or with a third party that has an
interest in the vote. A conflict of interest also could arise when the Fund, its investment
adviser or principal underwriter or any of their affiliates has an interest in the vote.
In the event that the Subadviser becomes aware of a material conflict of interest, the Funds
Procedures generally require the Subadviser to follow any conflicts procedures that may be included
in the Subadvisers proxy voting procedures. The conflict procedures generally will include one or
more of the following:
|
(a) |
|
voting pursuant to the recommendation of a third party voting service; |
|
|
(b) |
|
voting pursuant to pre-determined voting guidelines; or |
|
|
(c) |
|
referring voting to a special compliance or oversight committee. |
29
The specific conflicts procedures of the Subadviser are set forth in the Subadvisers proxy voting
procedures included in Appendix A. While these conflicts procedures may reduce, they will not
necessarily eliminate, any influence on proxy voting of conflicts of interest.
Although the Subadviser has a duty to vote all proxies on behalf of the Fund, it is possible that
the Subadviser may not be able to vote proxies under certain circumstances. For example, it may be
impracticable to translate in a timely manner voting materials that are written in a foreign
language or to travel to a foreign country when voting in person rather than by proxy is required.
In addition, if the voting of proxies for shares of a security prohibits the Subadviser from
trading the shares in the marketplace for a period of time, the Subadviser may determine that it is
not in the best interests of the Fund to vote the proxies. The Subadviser also may choose not to
recall securities that have been lent in order to vote proxies for shares of the security since the
Fund would lose security lending income if the securities were recalled.
Information regarding how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30th is available (i) without charge, upon request, by calling
1-800-225-6020 and (ii) on the SECs website at http://www.sec.gov.
Determination of Net Asset Value
The Funds net asset value per Common Share (NAV) is determined each business day at the
close of regular trading on the NYSE (typically 4:00 p.m. Eastern Time) by dividing the Funds net
assets by the number of Common Shares outstanding. On any day the NYSE is closed, the NAV is not
calculated. Trading of foreign securities may take place on Saturdays and U.S. business holidays
on which the Funds NAV is not calculated. Consequently, the Funds portfolio securities may trade
and the NAV of the Funds Common Shares may be significantly affected on days when a shareholder
has no access to the Fund.
Portfolio securities are valued by various methods which are generally described below. As noted
in the Prospectus, portfolio securities also may be fair valued by the Funds Pricing Committee in
certain instances. Most equity securities that are traded on a stock exchange or in the OTC market
are valued at the last sale price as of the close of the exchange in the principal market on which
the security trades, or, lacking any sales, at the closing bid prices. Certain exceptions exist,
for example, securities traded on the London Stock Exchange and NASDAQ are valued at the official
closing price. Debt securities with remaining maturities of one year or more at the time of
acquisition are valued on the using prices provided by a pricing service, or by prices furnished by
recognized dealers in such securities. Debt securities with remaining maturities of less than one
year at the time of acquisition are generally valued at amortized cost. Shares of open-end
investment companies held by the Fund are valued based on the NAV of the underlying fund. The
value of securities denominated in foreign currencies are converted into U.S. dollars at the
prevailing exchange rate at the close of the NYSE. Exchange-traded options are valued at the mean
of the bid and ask prices. Futures contracts are valued at the most recent settlement price.
Shares of open-end investments companies held by the Fund are valued based on the NAV of the
underlying fund.
In certain instances, the Funds Pricing Committee may determine that a reported valuation does not
reflect fair value, based on additional information available or other factors, and accordingly may
determine in good faith the fair value of the assets, which may differ from the reported valuation.
Brokerage Allocation
Pursuant to the Subadvisory Agreement, the Subadviser is responsible for placing all orders
for the purchase and sale of portfolio securities of the Fund. The Subadviser has no formula for
the distribution of the Funds brokerage business; rather it places orders for the purchase and
sale of securities with the primary objective of obtaining the most favorable overall results for
the Fund and the Subadvisers other clients. The cost of securities transactions for the Fund
primarily consists of brokerage commissions or dealer or underwriter spreads. Fixed-income
securities and money market instruments generally are traded on a net basis and normally do not
involve either brokerage commissions or transfer taxes.
30
Occasionally, securities may be purchased directly from the issuer. For securities traded
primarily in the OTC market, the Subadviser will, where possible, deal directly with dealers who
make a market in the securities unless better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account.
Brokerage Commissions Paid
The following table shows the aggregate amount of brokerage commissions paid by the Fund for the
last three fiscal years ended October 31, 2011, October 31, 2010, and October 31, 2009.
|
|
|
|
|
|
|
|
|
October 31, 2011 |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
$649 |
|
$534 |
|
|
$560 |
|
No brokerage commissions paid by the Fund during the last three fiscal years were to any broker
that: (i) is an affiliated person of the Fund; (ii) is an affiliated person of an affiliated
person of the Fund; or (iii) has an affiliated person that is an affiliated person of the Fund,
Adviser, Subadviser, or principal underwriter.
Approved Trading Counterparties
The Subadviser maintains and periodically updates a list of approved trading counterparties.
Portfolio managers may execute trades only with pre-approved broker-dealer/counterparties. A
sub-group of the Subadvisers Brokerage Practices Committee, through a delegation from the
Subadvisers Senior Investment Policy Committee, reviews and approves all
broker-dealers/counterparties.
Selection of Brokers, Dealers, and Counterparties
In placing orders for purchase and sale of securities and selecting trading counterparties
(including banks or broker-dealers) to effect these transactions, the Subadviser seeks prompt
execution of orders at the most favorable prices reasonably obtainable. The Subadviser will
consider a number of factors when selecting trading counterparties, including the overall direct
net economic result to the Fund (including commissions, which may not be the lowest available, but
which ordinarily will not be higher than the generally prevailing competitive range), the financial
strength, reputation and stability of the counterparty, the efficiency with which the transaction
is effected, the ability to effect the transaction when a large block trade is involved, the
availability of the counterparty to stand ready to execute possibly difficult transactions in the
future, and other matters involved in the receipt of brokerage and research services.
The Subadviser periodically prepares and maintains a list of broker-dealer firms that have been
deemed to provide valuable research as determined periodically by the investment staff, together
with a suggested non-binding amount of brokerage commissions (non-binding target) to be allocated
to each of these research firms, subject to certain requirements. Neither the Subadviser nor any
client has an obligation to any research firm if the amount of brokerage commissions paid to the
research firms is less than the applicable non-binding target.
In seeking best execution, traders have a variety of venues available for execution. Traders may,
in their discretion, use algorithmic strategies through direct market access (DMA) tools and
electronic crossing networks (ECNs). DMA allows the trader to act in the market without a full
service or other broker. ECNs give the trader additional options when searching for liquidity and
the ability to trade block positions in a more efficient manner. In selecting a broker, dealer or
trading venue, traders consider the full range of available trading platforms in seeking best
execution.
Best Execution
The Subadviser owes a duty to its clients to seek best execution when executing trades on behalf of
clients. Best execution generally is understood to mean the most favorable cost or net proceeds
reasonably obtainable under the circumstances. The Subadviser is not obligated to choose the
broker-dealer offering the lowest available commission rate if, in the Subadvisers reasonable
judgment, there is a material risk that the total cost or proceeds from the transaction might be
less favorable than may be obtained elsewhere, or, if a higher commission is justified by the
trading provided by the broker-dealer, or if other considerations dictate using a different
broker-dealer. Negotiated commission rates generally will reflect overall execution requirements
of the transaction without regard to whether the broker may provide other services in addition to
execution.
31
The Subadviser may pay higher or lower commissions to different brokers that provide different
categories of services. Under this approach, the Subadviser periodically may classify different
brokers in different categories based on execution abilities, the quality of research, brokerage
services, block trading capability, speed and responsiveness, or other services provided by the
brokers. Some examples of these categories may include, without limitation, full service brokers,
alternative trading systems, client commission and execution-only brokers.
The reasonableness of brokerage commission is evaluated on an ongoing basis and at least annually
on a formal basis.
When more than one broker-dealer is believed to be capable of providing the best combination of
price and execution with respect to a particular portfolio transaction, the Subadviser often
selects a broker-dealer that furnishes research and other related services or products. The amount
of brokerage allotted to a particular broker-dealer is not made pursuant to any binding agreement
or commitment with any selected broker-dealer. However, the Subadviser maintain an internal
allocation procedure to identify those broker-dealers who have provided us with effective research
and the amount of research provided, and the Subadviser endeavor to direct sufficient commissions
to them to ensure the continued receipt of research that the Subadviser believe is useful.
Soft Dollar Considerations
The Subadviser may pay for research and brokerage services with the commission dollars generated by
Fund account transactions (known as soft dollar benefits), subject to certain conditions.
Further, the Subadviser may cause the Fund to pay up in return for soft dollar benefits (pay
commissions, markups or markdowns higher than those charged by other broker-dealers).
The research provided may be either proprietary (created and provided by the broker-dealer,
including tangible research products as well as access to analysts, traders and issuers) or
third-party (created by a third party, but provided by broker-dealer). Proprietary research is
generally part of a bundle of brokerage and research and the research is not separately priced.
In the case of third party research, the cost of products and services is generally more
transparent, and payment is made by the broker to the preparer in hard dollars. The Subadviser
may receive both proprietary and third party research and execution services.
The Subadviser considers three factors with respect to all third-party research and execution
services received through soft dollars:
|
|
|
Whether the product or service is eligible research or brokerage under SEC rules and
regulations; |
|
|
|
|
Whether an eligible product or service actually provides lawful and appropriate
assistance in the performance of the Subadvisers investment decision-making
responsibilities. |
|
|
|
|
Whether the amount of the commission paid is reasonable in light of the value of the
product or service provided by the broker-dealer (viewed in terms of the particular
transaction or the Subadvisers overall responsibilities with respect to the Subadvisers
client accounts). |
Research services currently purchased with soft dollars include: reports on the economy,
industries, sectors and individual companies or issuers; introduction to issuers, invitations to
trade conferences, statistical information; statistical models; political and country analyses;
reports on legal developments affecting portfolio securities; information on technical market
actions; and credit analyses.
The overriding consideration in selecting brokers to execute trade orders is the maximization of
client profits through a combination of controlling transaction and securities costs and seeking
the most effective use of brokers proprietary research and execution capabilities, while
maintaining relationships with those broker-dealers who consistently provide superior service.
When the Subadviser uses client brokerage commissions (or markups or markdowns) to obtain research
or other products or services, the Subadviser receives a soft dollar benefit because the Subadviser
does not have to produce or pay for the research, products or services. The Subadviser may have an
incentive to select a broker-dealer based on the Subadvisers interest in receiving research or
other products or services, rather than on the Subadvisers clients interest in receiving most
favorable execution.
Any research received is used to service all clients to which it is applicable, whether or not the
clients commissions were used to obtain the research. For example, commissions of equity clients
may be used to obtain research that is
32
used with respect to fixed-income clients. The Subadviser
does not attempt to allocate the relative costs or benefits of research among client accounts
because the Subadviser believe that, in the aggregate, the research the Subadviser receives
benefits clients and assists the Subadviser in fulfilling its overall duty to its clients.
The Subadviser does not enter into any agreement or understanding with any broker-dealer which
would obligate it to direct a specific amount of brokerage transactions or commissions in return
for such services. However, certain broker-dealers may state in advance the amount of brokerage
commissions they expect for certain services and the applicable cash equivalent.
The Subadviser may seek to obtain client commission benefits through client commission arrangements
in compliance with applicable laws and regulations. Under these types of arrangements, the
Subadviser can request that executing brokers allocate a portion of total commissions paid to a
pool of credits maintained by the broker that can be used to obtain client commission benefits.
After accumulating a number of credits within the pool, the Subadviser may subsequently direct that
those credits be used to pay appropriate parties in return for eligible client commission benefits
provided by the broker to the Subadviser.
In summary, as noted above, the Subadviser has three types of soft dollar arrangements through
which the Subadviser received soft dollar benefits in 2011:
|
(1) |
|
Full service brokers - In addition to receiving execution services, the Subadviser
also received a variety of research and related services from these brokers, including, for
example, proprietary research reports on companies, markets or investment related reports,
meetings with senior management teams of companies, and discussions with the brokers
analysts and market experts. |
|
|
(2) |
|
Client commission arrangements (CCA) Through CCA arrangements with eight brokers
with whom the Subadviser placed equity trades for execution, the Subadviser generated
commission credits with these CCA brokers that the Subadviser can direct and use to
compensate third party research providers, including other brokers, for research received.
The level of compensation to such research providers is determined by the equity portfolio
management teams using a quarterly voting process. The number of votes determined the
level of compensation paid to a research provider. |
|
|
(3) |
|
Soft dollar arrangements - The Subadviser had one soft dollar arrangement in 2011.
Under the arrangement, the Subadviser identified research services that it wanted to obtain
and subject to the approval of the soft dollar broker, the soft dollar broker directly
contracted with the research providers for services provided to the Subadviser. The
Subadviser has no financial or other contractual obligations with the research providers
under this arrangement. When the Subadviser executes equity trades with the soft dollar
broker, the soft dollar broker allocated and paid a portion of the commission to the
research providers. |
Trade Aggregation by the Subadviser
Because investment decisions often affect more than one client, the Subadviser frequently will
attempt to acquire or dispose of the same security for more than one client at the same time. The
Subadviser, to the extent permitted by applicable law, regulations and advisory contracts, may
aggregate purchases and sales of securities on behalf of its various clients for which it has
discretion, provided that in the Subadvisers opinion, all client accounts are treated equitably
and fairly and that block trading will result in a more favorable overall execution. Trades will
not be combined when a client has directed transactions to a particular broker-dealer or when the
Subadviser determines that combined orders would not be efficient or practical.
When appropriate, the Subadviser will allocate such block orders at the average price obtained or
according to a system that the Subadviser considers to be fair to all clients over time. Generally
speaking, such allocations are made on the basis of proportional capital under management in the
respective client accounts.
Affiliated Underwriting Transactions by the Subadviser
The Board has approved procedures in conformity with Rule 10f-3 under the 1940 Act whereby the Fund
may purchase securities that are offered in underwritings in which an affiliate of the Adviser or a
Subadviser participates. These procedures prohibit the Fund from directly or indirectly benefiting
an Adviser or Subadviser affiliate in connection with such underwritings. In addition, for
underwritings where an Adviser or Subadviser affiliate
33
participates as a principal underwriter,
certain restrictions may apply that could, among other things, limit the amount of securities that
the Fund could purchase.
Commission Recapture Program
The Board has approved the Funds participation in a commission recapture program. Commission
recapture is a form of institutional discount brokerage that returns commission dollars directly to
the Fund. It provides a way to gain control over the commission expenses incurred by the
Subadviser, which can be significant over time and thereby reduces expenses, improves cash flow and
conserves assets. The Fund can derive commission recapture dollars from both equity trading
commissions and fixed-income (commission equivalent) spreads. From time to time, the Board reviews
whether participation in the recapture program is in the best interests of the Fund.
Additional Information Concerning Taxes
The following discussion of U.S. federal income tax matters is based on the advice of K&L
Gates LLP. The Fund intends to elect to be treated and to qualify each year as a regulated
investment company (RIC) under the Code.
To qualify as a RIC for income tax purposes, the Fund must derive at least 90% of its annual gross
income from dividends, interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with respect to its business
of investing in stock, securities and currencies, and net income derived from an interest in a
qualified publicly traded partnership. A qualified publicly traded partnership is a publicly
traded partnership that meets certain requirements with respect to the nature of its income. To
qualify as a RIC, the Fund must also satisfy certain requirements with respect to the
diversification of its assets. The Fund must have, at the close of each quarter of the taxable
year, at least 50% of the value of its total assets represented by cash, cash items, U.S.
government securities, securities of other regulated investment companies, and other securities
that, in respect of any one issuer, do not represent more than 5% of the value of the assets of the
Fund nor more than 10% of the voting securities of that issuer. In addition, at those times not
more than 25% of the value of the Funds assets can be invested in securities (other than United
States government securities or the securities of other regulated investment companies) of any one
issuer, or of two or more issuers, which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses, or of one or more qualified publicly
traded partnerships. If the Fund fails to meet the annual gross income test described above, the
Fund will nevertheless be considered to have satisfied the test if (i) (a) such failure is due to
reasonable cause and not due to willful neglect and (b) the Fund reports the failure pursuant to
Treasury Regulations to be adopted, and (ii) the Fund pays an excise tax equal to the excess
non-qualifying income. If the Fund fails to meet the asset diversification test described above
with respect to any quarter, the Fund will nevertheless be considered to have satisfied the
requirements for such quarter if the Fund cures such failure within 6 months and either (i) such
failure is de minimis or (ii) (a) such failure is due to reasonable cause and not due to willful
neglect and (b) the Fund reports the failure under Treasury Regulations to be adopted and pays an
excise tax.
As a RIC, the Fund generally will not be subject to U.S. federal income tax on its investment
company taxable income (as that term is defined in the Code, but without regard to the deductions
for dividends paid) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that it distributes in each taxable year to its shareholders;
provided that it distributes at least 90% of its investment company taxable income and 90% of its
net tax-exempt interest income for such taxable year. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company taxable income, net
tax-exempt interest income and net capital gain. In order to avoid incurring a nondeductible 4%
U.S. federal excise tax obligation, the Code requires that the Fund distribute (or be deemed to
have distributed) by December 31 of each calendar year an amount at least equal to the sum of
(i) 98% of its ordinary income for such year, (ii) 98.2% of its capital gain net income (which is
the excess of its realized net long-term capital gain over its realized net short-term capital
loss), generally computed on the basis of the one-year period ending on October 31 of such year,
after reduction by any available capital loss carryforwards and (iii) 100% of any ordinary income
and capital gain net income from the prior year (as previously computed) that were not paid out
during such year and on which the Fund paid no U.S. federal income tax. Under current law,
provided that the Fund qualifies as a RIC for U.S. federal income tax
34
purposes, the Fund should not
be liable for any income, corporate excise or franchise tax in the Commonwealth of Massachusetts.
If the Fund does not qualify as a RIC or fails to satisfy the 90% distribution requirement for any
taxable year, subject to the opportunity to cure such failures under applicable provisions of the
Code as described above, the Funds taxable income will be subject to corporate income taxes, and
all distributions from earnings and profits, including distributions of net capital gain (if any),
will be taxable to the shareholder as ordinary income. Such distributions generally would be
eligible (i) to be treated as qualified dividend income in the case of individual and other
noncorporate shareholders and (ii) for the dividends received deduction (DRD) in the case of
corporate shareholders. In addition, in order to requalify for taxation as a RIC, the Fund may be
required to recognize unrealized gains, pay substantial taxes and interest, and make certain
distributions.
For U.S. federal income tax purposes, distributions paid out of the Funds current or accumulated
earnings and profits will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable as ordinary dividend income. Certain income
distributions paid by the Fund (whether paid in cash or reinvested in additional Fund shares) to
individual taxpayers are taxed at rates applicable to net long-term capital gains (15%, or 0% for
individuals in the 10% or 15% tax brackets). This tax treatment applies only if certain holding
period requirements and other requirements are satisfied by the shareholder and the dividends are
attributable to qualified dividend income received by the Fund itself. For this purpose,
qualified dividend income means dividends received by the Fund from United States corporations
and qualified foreign corporations, provided that the Fund satisfies certain holding period and
other requirements in respect of the stock of such corporations. These special rules relating to
the taxation of ordinary income dividends paid by RICs generally apply to taxable years beginning
before January 1, 2013. Thereafter, the Funds dividends, other than capital gain dividends, will
be fully taxable at ordinary income tax rates unless further Congressional action is taken. Thus,
no assurance can be given that current law applicable to qualified dividend income will continue
after December 31, 2012. There can be no assurance as to what portion of the Funds dividend
distributions will qualify for favorable treatment as qualified dividend income.
Shareholders receiving any distribution from the Fund in the form of additional shares pursuant to
the dividend reinvestment plan will be treated as receiving a taxable distribution in an amount
equal to the fair market value of the shares received, determined as of the reinvestment date.
Distributions of net capital gain, if any, reported as capital gains dividends are taxable to a
shareholder as long-term capital gains, regardless of how long the shareholder has held Fund
shares. A distribution of an amount in excess of the Funds current and accumulated earnings and
profits will be treated by a shareholder as a return of capital which is applied against and
reduces the shareholders basis in his or her shares. To the extent that the amount of any such
distribution exceeds the shareholders basis in his or her shares, the excess will be treated by
the shareholder as gain from a sale or exchange of the shares. Distributions of gains from the
sale of investments that the Fund owned for one year or less will be taxable as ordinary income.
The Fund may elect to retain its net capital gain or a portion thereof for investment and be taxed
at corporate rates on the amount retained. In such case, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who will be treated as if each received
a distribution of his pro rata share of such gain, with the result that each shareholder will
(i) be required to report his pro rata share of such gain on his tax return as long-term capital
gain, (ii) receive a refundable tax credit for his pro rata share of tax paid by the Fund on the
gain and (iii) increase the tax basis for his shares by an amount equal to the deemed distribution
less the tax credit.
Selling shareholders generally will recognize gain or loss in an amount equal to the difference
between the shareholders adjusted tax basis in the shares sold and the sale proceeds. If the
shares are held as a capital asset, the gain or loss will be a capital gain or loss. The current
maximum tax rate applicable to net capital gains recognized by individuals and other non-corporate
taxpayers is (i) the same as the maximum ordinary income tax rate for gains recognized on the sale
of capital assets held for one year or less, or (ii) 15% for gains recognized on the sale of
capital assets held for more than one year (as well as certain capital gain distributions) (0% for
individuals in the 10% or 15% tax brackets) but only for taxable years beginning on or before
December 31, 2012. Thereafter, the maximum rate will increase to 20%, unless Congress enacts
legislation providing otherwise.
35
Any loss realized upon the sale or exchange of Fund shares with a holding period of six months or
less will be treated as a long-term capital loss to the extent of any capital gain distributions
received (or amounts designated as undistributed capital gains) with respect to such shares. In
addition, all or a portion of a loss realized on a sale or other disposition of Fund shares may be
disallowed under wash sale rules to the extent the shareholder acquires other shares of the Fund
(whether through the reinvestment of distributions or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the Common Shares.
Any disallowed loss will result in an adjustment to the shareholders tax basis in some or all of
the other shares acquired.
Sales charges paid upon a purchase of shares cannot be taken into account for purposes of
determining gain or loss on a sale of the shares before the 91st day after their purchase to the
extent a sales charge is reduced or eliminated in a subsequent acquisition of shares of the Fund
(or of another fund), during the period beginning on the date of such sale and ending on January 31
of the calendar year following the calendar year in which such sale was made, pursuant to the
reinvestment or exchange privilege. Any disregarded amounts will result in an adjustment to the
shareholders tax basis in some or all of any other shares acquired.
For federal income tax purposes, the Fund is permitted to carry forward a net capital loss in any
year to offset net capital gains, if any, during years following the year of the loss. The
carryforward is limited to eight years in the case of losses recognized during taxable years
beginning on or before December 22, 2010. To the extent subsequent net capital gains are offset by
such losses, they would not result in federal income tax liability to the Fund and would not be
distributed to the shareholders.
If the Fund makes a distribution in excess of its current and accumulated earnings and profits in
any taxable year, the excess distribution will be treated as a return of capital to the extent of a
shareholders tax basis in its shares, and thereafter as capital gain. A return of capital is not
taxable, but it reduces a shareholders tax basis in its shares, thus reducing any loss or
increasing any gain on a subsequent taxable disposition by a shareholder of its shares.
Under legislation enacted in 2010, effective for tax years beginning after December 31, 2012,
certain net investment income received by an individual having adjusted gross income in excess of
$200,000 (or $250,000 for married individuals filing jointly) will be subject to a tax of 3.8%.
Undistributed net investment income of trusts and estates in excess of a specified amount will also
be subject to this tax. Dividends and capital gains distributed by the Fund, and gain realized on
redemption of Fund shares, will constitute investment income of the type subject to this tax.
Only a small portion, if any, of the distributions from the Fund may qualify for the
dividends-received deduction for corporations, subject to the limitations applicable under the
Code. The qualifying portion is limited to properly designated distributions attributed to
dividend income (if any) the Fund receives from certain stock in U.S. domestic corporations and the
deduction is subject to holding period requirements and debt-financing limitations under the Code.
If the Fund should have dividend income that qualifies for the reduced tax rate applicable to
qualified dividend income, the maximum amount allowable will be designated by the Fund. This
amount will be reflected on Form 1099-DIV for the current calendar year.
Dividends and distributions on the Funds shares generally are subject to U.S. federal income tax
as described herein to the extent they do not exceed the Funds realized income and gains, even
though such dividends and distributions may economically represent a return of a particular
shareholders investment. Such distributions are likely to occur in respect of shares purchased at
a time when the Funds net asset value reflects gains that are either unrealized, or realized but
not distributed. Such realized gains may be required to be distributed even when the Funds net
asset value also reflects unrealized losses. Certain distributions declared in October, November
or December to shareholders of record of such month and paid in the following January will be taxed
to shareholders as if received on December 31 of the year in which they were declared. In
addition, certain other distributions made after the close of a taxable year of the Fund may be
spilled back and treated as paid by the Fund (except for purposes of the non-deductible 4% U.S.
federal excise tax) during such taxable year. In such case, shareholders will be treated as having
received such dividends in the taxable year in which the distributions were actually made.
The Fund will inform shareholders of the source and tax status of all distributions promptly after
the close of each calendar year.
36
Legislation passed by Congress in 2008 requires the Fund (or its administrative agent) to report to
the IRS and furnish to shareholders the cost basis information and holding period for the Funds
shares purchased on or after January 1, 2012, and repurchased by the Fund on or after that date.
The Fund will permit shareholders to elect from among several permitted cost basis methods. In the
absence of an election, the Fund will use a default cost basis method. The cost basis method a
shareholder elects may not be changed with respect to a repurchase of shares after the settlement
date of the repurchase. Shareholders should consult with their tax advisors to determine the best
permitted cost basis method for their tax situation and to obtain more information about how the
new cost basis reporting rules apply to them.
The benefits of the reduced tax rates applicable to long-term capital gains and qualified dividend
income may be impacted by the application of the alternative minimum tax to individual
shareholders.
Special tax rules apply to investments through defined contribution plans and other tax-qualified
plans. Shareholders should consult their tax advisor to determine the suitability of shares of the
Fund as an investment through such plans.
The Fund may invest in debt obligations that are in the lowest rating categories or are unrated,
including debt obligations of issuers not currently paying interest or who are in default.
Investments in debt obligations that are at risk of or in default present special tax issues for
the Fund. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue
interest, original issue discount or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities and how payments received on obligations in default
should be allocated between principal and income, and whether exchanges of debt obligations in a
workout context are taxable. These and other issues will be addressed by the Fund if it acquires
such obligations in order to reduce the risk of distributing insufficient income to preserve its
status as a regulated investment company and to seek to avoid becoming subject to federal income or
excise tax.
The Fund is required to accrue income on any debt securities that have more than a de minimis
amount of original issue discount (or debt securities acquired at a market discount, if the Fund
elects to include market discount in income currently) prior to the receipt of the corresponding
cash payments. The mark to market or constructive sale rules applicable to certain options,
futures, forwards, short sales or other transactions also may require the Fund to recognize income
or gain without a concurrent receipt of cash. Additionally, some countries restrict repatriation,
which may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings
or assets in those countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such income or gain, to
qualify as a regulated investment company and avoid liability for any federal income or excise tax.
Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or borrow cash, to satisfy these distribution requirements.
The Fund may recognize gain (but not loss) from a constructive sale of certain appreciated
financial positions if the Fund enters into a short sale, offsetting notional principal contract,
or forward contract transaction with respect to the appreciated position or substantially identical
property. Appreciated financial positions subject to this constructive sale treatment include
interests (including options and forward contracts and short sales) in stock and certain other
instruments. Constructive sale treatment does not apply if the transaction is closed out not later
than thirty days after the end of the taxable year in which the transaction was initiated, and the
underlying appreciated securities position is held unhedged for at least the next sixty days after
the hedging transaction is closed.
Gain or loss from a short sale of property generally is considered as capital gain or loss to the
extent the property used to close the short sale constitutes a capital asset in the Funds hands.
Except with respect to certain situations where the property used to close a short sale has a
long-term holding period on the date the short sale is entered into, gains on short sales generally
are short-term capital gains. A loss on a short sale will be treated as a long-term capital loss
if, on the date of the short sale, substantially identical property has been held by the Fund for
more than one year. In addition, entering into a short sale may result in suspension of the
holding period of substantially identical property held by the Fund.
Gain or loss on a short sale generally will not be realized until such time as the short sale is
closed. However, as described above in the discussion of constructive sales, if the Fund holds a
short sale position with respect to
37
securities that have appreciated in value, and it then acquires
property that is the same as or substantially identical to the property sold short, the Fund
generally will recognize gain on the date it acquires such property as if the short sale were
closed on such date with such property. Similarly, if the Fund holds an appreciated financial
position with respect to securities and then enters into a short sale with respect to the same or
substantially identical property, the Fund generally will recognize gain as if the appreciated
financial position were sold at its fair market value on the date it enters into the short sale.
The subsequent holding period for any appreciated financial position that is subject to these
constructive sale rules will be determined as if such position were acquired on the date of the
constructive sale.
The Funds transactions in futures contracts and options will be subject to special provisions of
the Code that, among other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital, or short-term or
long-term), may accelerate recognition of income to the Fund and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions to shareholders.
These provisions also (a) will require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Fund to
recognize income without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a RIC and the distribution
requirement for avoiding excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and records when it
acquires any futures contract, option or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund from being taxed as a RIC.
For the Funds options and futures contracts that qualify as section 1256 contracts, Code Section
1256 generally will require any gain or loss arising from the lapse, closing out or exercise of
such positions to be treated as 60% long-term and 40% short-term capital gain or loss. In
addition, the Fund generally will be required to mark to market (i.e., treat as sold for fair
market value) each outstanding section 1256 contract position at the close of each taxable year
(and on October 31 of each year for excise tax purposes). If a section 1256 contract held by the
Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss
realized on such sale will be adjusted to reflect the gain or loss previously taken into account
under the mark to market rules. The Funds options that do not qualify as section 1256
contracts under the Code generally will be treated as equity options governed by Code Section
1234. Pursuant to Code Section 1234, if a written option expires unexercised, the premium received
is short-term capital gain to the Fund. If the Fund enters into a closing transaction, the
difference between the premium received for writing the option, and the amount paid to close out
its position generally is short-term capital gain or loss. If a call option written by the Fund
that is not a section 1256 contract is cash settled, any resulting gain or loss will be
short-term.
The Code contains special rules that apply to straddles, defined generally as the holding of
offsetting positions with respect to personal property. For example, the straddle rules normally
apply when a taxpayer holds stock and an offsetting option with respect to such stock or
substantially identical stock or securities. In general, investment positions will be offsetting
if there is a substantial diminution in the risk of loss from holding one position by reason of
holding one or more other positions. If two or more positions constitute a straddle, recognition
of a realized loss from one position generally must be deferred to the extent of unrecognized gain
in an offsetting position. In addition, long-term capital gain may be recharacterized as short-term
capital gain, or short-term capital loss as long-term capital loss. Interest and other carrying
charges allocable to personal property that is part of a straddle are not currently deductible but
must instead be capitalized. Similarly, wash sale rules apply to prevent the recognition of loss
by the Fund from the disposition of stock or securities at a loss in a case in which identical or
substantially identical stock or securities (or an option to acquire such property) is or has been
acquired within a prescribed period.
The Code allows a taxpayer to elect to offset gain and loss from positions that are part of a
mixed straddle. A mixed straddle is any straddle in which one or more but not all positions
are section 1256 contracts. The Fund may be eligible to elect to establish one or more mixed
straddle accounts for certain of its mixed straddle trading positions. The mixed straddle account
rules require a daily marking to market of all open positions in the account and a daily netting
of gain and loss from all positions in the account. At the end of a taxable year, the annual net
gain or loss from the mixed straddle account are recognized for tax purposes. The net capital gain
or loss is treated as 60% long-term and 40% short-term capital gain or loss if attributable to the
section 1256 contract positions, or all short-term capital gain or loss if attributable to the
non-section 1256 contract positions.
38
Further, certain of the Funds investment practices are subject to special and complex U.S. federal
income tax provisions that may, among other things, (i) convert dividends that would otherwise
constitute qualified dividend income into short-term capital gain or ordinary income taxed at the
higher rate applicable to ordinary income, (ii) treat dividends that would otherwise be eligible
for the corporate dividends received deduction as ineligible for such treatment, (iii) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term
capital gain into short-term capital gain or ordinary income, (v) convert an ordinary loss or
deduction into a capital loss (the deductibility of which is more limited), (vi) cause the Fund to
recognize income or gain without a corresponding receipt of cash, (vii) adversely affect the time
as to when a purchase or sale of stock or securities is deemed to occur, (viii) adversely alter the
characterization of certain complex financial transactions, and (ix) produce income that will not
qualify as good income for purposes of the 90% annual gross income requirement described above.
While it may not always be successful in doing so, the Fund will seek to avoid or minimize any
adverse tax consequences of its investment practices.
Dividends and interest received, and gains realized, by the Fund on non-U.S. securities may be
subject to income, withholding or other taxes imposed by foreign countries and United States
possessions (collectively foreign taxes) that would reduce the return on its securities. Tax
conventions between certain countries and the United States, however, may reduce or eliminate
foreign taxes, and many foreign countries do not impose taxes on capital gains in respect of
investments by U.S. investors. Depending on the number of non-U.S. shareholders in the Fund,
however, such reduced foreign withholding tax rates may not be available for investments in certain
jurisdictions.
The Fund may invest in the stock of passive foreign investment companies (PFICs). A PFIC is
any foreign corporation (with certain exceptions) that, in general, meets either of the following
tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain circumstances,
the Fund will be subject to U.S. federal income tax on a portion of any excess distribution
received on the stock of a PFIC or of any gain from disposition of that stock (collectively PFIC
income), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend
to its shareholders. The balance of the PFIC income will be included in the Funds investment
company taxable income and, accordingly, will not be taxable to it to the extent it distributes
that income to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a qualified electing fund (QEF),
then in lieu of the foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the QEFs annual ordinary earnings and net capital
gainwhich it may have to distribute to satisfy the distribution requirement and avoid imposition
of the excise taxeven if the QEF does not distribute those earnings and gain to the Fund. In most
instances it will be very difficult, if not impossible, to make this election because of certain of
its requirements.
The Fund may elect to mark-to-market its stock in any PFIC. Marking-to-market, in this
context, means including in ordinary income each taxable year the excess, if any, of the fair
market value of a PFICs stock over the Funds adjusted basis therein as of the end of that year.
Pursuant to the election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as
of the taxable year-end, but only to the extent of any net mark-to-market gains (reduced by any
prior deductions) with respect to that stock included by the Fund for prior taxable years under the
election. The Funds adjusted basis in each PFICs stock with respect to which it has made this
election will be adjusted to reflect the amounts of income included and deductions taken
thereunder. The reduced rates for qualified dividend income are not applicable to (i) dividends
paid by a foreign corporation that is a PFIC, (ii) income inclusions from a QEF election with
respect to a PFIC, and (iii) ordinary income from a mark-to-market election with respect to a
PFIC.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates
between the time the Fund accrues income or receivables or expenses or other liabilities
denominated in a non-U.S. currency and the time the Fund actually collects such income or
receivables or pays such liabilities generally are treated as ordinary income or loss. Similarly,
gains or losses on non-U.S. currency forward contracts and the disposition of debt securities
denominated in a non-U.S. currency, to the extent attributable to fluctuations in exchange rate
between the acquisition and disposition dates, also are treated as ordinary income or loss.
39
If a shareholder realizes a loss on disposition of the Funds shares of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder, the shareholder must
file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Future guidance may extend the current exception from this
reporting requirement to shareholders of most or all RICs.
The Funds investments in non-U.S. securities may be subject to foreign withholding taxes on
dividends, interest, or capital gains, which will decrease the Funds yield. Foreign withholding
taxes may be reduced under income tax treaties between the United States and certain foreign
jurisdictions.
Amounts paid by the Fund to individuals and certain other shareholders who have not provided the
Fund with their correct taxpayer identification number (TIN) and certain certifications required
by the IRS as well as shareholders with respect to whom the Fund has received certain information
from the IRS or a broker may be subject to backup withholding of U.S. federal income tax arising
from the Funds taxable dividends and other distributions as well as the gross proceeds of sales of
shares, at a rate of 28% during 2012. An individuals TIN generally is his or her social security
number. Backup withholding is not an additional tax. Any amounts withheld under the backup
withholding rules from payments made to a shareholder may be refunded or credited against such
shareholders U.S. federal income tax liability, if any; provided that the required information is
furnished to the IRS.
The backup withholding tax rate currently is scheduled to increase to 31% for amounts paid after
December 31, 2012. Distributions will not be subject to backup withholding to the extent they are
subject to the withholding tax on foreign persons described in the next paragraph.
Dividend distributions are in general subject to a U.S. withholding tax of 30% when paid to a
nonresident alien individual, foreign estate or trust, a foreign corporation, or a foreign
partnership (foreign shareholder). Persons who are resident in a country, such as the U.K., that
has an income tax treaty with the U.S. may be eligible for a reduced withholding rate (upon filing
of appropriate forms), and are urged to consult their tax advisors regarding the applicability and
effect of such a treaty. Distributions of capital gain dividends paid by the Fund to a foreign
shareholder, and any gain realized upon the sale of Fund shares by such a shareholder, will
ordinarily not be subject to U.S. taxation, unless the recipient or seller is a nonresident alien
individual who is present in the United States for more than 182 days during the taxable year.
Such distributions and sale proceeds may be subject, however, to backup withholding, unless the
foreign investor certifies his non-U.S. residency status. Also, foreign shareholders with respect
to whom income from the Fund is effectively connected with a U.S. trade or business carried on by
such shareholder will in general be subject to U.S. federal income tax on the income derived from
the Fund at the graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether such income is received in cash or reinvested in shares, and, in the case of a foreign
corporation, also may be subject to a branch profits tax. Again, foreign shareholders who are
residents in a country with an income tax treaty with the United States may obtain different tax
results, and are urged to consult their tax advisors.
For shareholders that are considered foreign financial institutions under recent legislation
known as the Foreign Account Tax Compliance Act (FATCA), a new 30% withholding tax will be
imposed on distributions paid after December 31, 2013, and on proceeds from sales of Common Shares
after December 31, 2014, unless such shareholder enters into an agreement with the IRS to collect
and provide substantial information regarding U.S. account holders, including certain account
holders that are foreign entities with U.S. owners. The legislation also generally imposes a 30%
withholding tax on distributions paid to, and on proceeds from sales of Common Shares by, a
non-financial foreign entity unless such entity provides the withholding agent with a certification
that it does not have any substantial U.S. owners or a certification identifying the direct or
indirect substantial U.S. owners. Under proposed regulations, a foreign financial institution
should enter into such an agreement with the IRS by June 30, 2013 to ensure that it will be
identified as compliant in sufficient time to allow withholding agents to refrain from withholding
beginning on January 1, 2014. Non-U.S. investors including investors owning Common Shares through
a foreign financial institution or non-financial foreign entity should consult their own tax
advisors regarding the impact of this recent legislation on their investment in the Fund.
The foregoing briefly summarizes some of the important U.S. federal income tax consequences to
Common Shareholders of investing in Common Shares, reflects U.S. federal tax law as of the date of
this SAI, and does not address special tax rules applicable to certain types of investors, such as
corporate and non-U.S. investors. Unless
40
otherwise noted, this discussion assumes that an investor
is a United States person and holds Common Shares as a capital asset. This discussion is based
upon present provisions of the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change or differing interpretations
by the courts or the IRS retroactively or prospectively. Investors should consult their tax
advisors regarding other U.S. federal, state or local tax considerations that may be applicable to
their particular circumstances, as well as any proposed tax law changes.
Other Information
The Fund is an organization of the type commonly known as a Massachusetts business trust.
Under Massachusetts law, shareholders of such a trust may, in certain circumstances, be held
personally liable as partners for the obligations of the trust. The Declaration of Trust contains
an express disclaimer of shareholder liability in connection with Fund property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for indemnification out
of Fund property of any shareholder held personally liable for the claims and liabilities to which
a shareholder may become subject by sole reason of being or having been a shareholder. Thus, the
risk of a shareholder incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself is unable to meet its obligations. The Fund has been
advised by its counsel that the risk of any shareholder incurring any liability for the obligations
of the Fund is remote.
The Declaration of Trust provides that the Trustees will not be liable for errors of judgment or
mistakes of fact or law; but nothing in the Declaration of Trust protects a Trustee against any
liability to the Fund or its shareholders to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved
in the conduct of his or her office. Voting rights are not cumulative with respect to the election
of Trustees, which means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees and, in such event, the holders of the remaining less than
50% of the shares voting on the matter will not be able to elect any Trustees.
Custodian and Transfer Agent
The Funds portfolio securities are held pursuant to a custodian agreement between the Fund
and State Street Bank and Trust Company (State Street), Lafayette Corporate Center, Two Avenue de
Lafayette, Boston, Massachusetts 02111. Under the custodian agreement, State Street performs
custody, foreign custody manager and fund accounting services.
Computershare Shareowner Services LLC, 480 Washington Boulevard, Jersey City, New Jersey,
07310-1900, is the transfer agent and dividend disbursing agent of the Fund.
Independent Registered Public Accounting Firm
The financial statements of the Fund for the fiscal year
ended October 31, 2011, including the related financial highlights that appear in the Prospectus have been
audited by PricewaterhouseCoopers LLP, independent registered public accounting firm, as indicated in their
report with respect thereto, and are incorporated herein by reference.
PricewaterhouseCoopers LLP, Boston, Massachusetts is the independent registered public
accounting firm for the Fund, providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
Reports to Shareholders
The financial statements of the Fund for the fiscal year ended October 31, 2011 are
incorporated herein by reference from the Funds most recent Annual Report to Shareholders filed
with the Securities and Exchange Commission (the SEC) on Form N-CSR pursuant to Rule 30b2-1 under
the 1940 Act.
41
Legal and Regulatory Matters
On June 25, 2007, the Adviser and John Hancock Funds, LLC (JH Funds) and two of their
affiliates (collectively, the John Hancock Affiliates) reached a settlement with the SEC that
resolved an investigation of certain practices relating to the John Hancock Affiliates variable
annuity and mutual fund operations involving directed brokerage and revenue sharing. Under the
terms of the settlement, each John Hancock Affiliate was censured and agreed to pay a $500,000
civil penalty to the United States Treasury. In addition, the Adviser and JH Funds agreed to pay
disgorgement of $2,087,477 and prejudgment interest of $359,460 to entities, including certain John
Hancock Funds, that participated in the Advisers directed brokerage program during the period from
2000 to October 2003. Collectively, all John Hancock Affiliates agreed to pay a total disgorgement
of $16,926,420 and prejudgment interest of $2,361,460 to the entities advised or distributed by
John Hancock Affiliates. The Adviser discontinued the use of directed brokerage in recognition of
the sale of fund shares in October 2003.
Codes of Ethics
The Fund, the Adviser, the Subadviser and John Hancock Funds, LLC each have adopted Codes of
Ethics that comply with Rule 17j-1 under the 1940 Act. Each Code of Ethics permits personnel
subject to that Code of Ethics to invest in securities, including securities that may be purchased
or held by the Fund.
These Codes of Ethics can be reviewed and copied at the SECs Public Reference Room in Washington,
D.C. Information regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090. These Codes of Ethics also are available on the EDGAR Database on the
SECs website at http://www.sec.gov. Copies of these Codes of Ethics may be obtained, after paying
a duplicating fee, by electronic request at the following e-mail address: public info@sec.gov, or
by writing the SECs Public Reference Section, Washington, D.C. 20549-1520.
Additional Information
The Funds Prospectus, any related Prospectus Supplements, and this SAI do not contain all of
the information set forth in the Registration Statement that the Fund has filed with the SEC. The
complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by
its Rules and Regulations.
42
John Hancock Investors Trust
Statement of Additional Information
[SAI DATE]
Investment Adviser
John Hancock Advisers, LLC
601 Congress Street
Boston, Massachusetts 02210
1-800-225-6020
Subadviser
John Hancock Asset Management
a division of Manulife Asset Management (US) LLC
101 Huntington Avenue
Boston, Massachusetts 02199
Custodian
State Street Bank and Trust Company
Lafayette Corporate Center
Two Avenue de Lafayette
Boston, Massachusetts 02111
Transfer Agent
Computershare Shareowner Services LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
43
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
(1) |
|
FINANCIAL STATEMENTS: |
|
|
|
Included in Part A: Financial Highlights |
|
|
|
Included in Part B: Financial Statements are incorporated in Part B by reference to the
Funds October 31, 2011 annual shareholder report (audited) on Form N-CSR as filed with the
Securities and Exchange Commission (SEC) on January 5, 2012 (Accession No.
0000928816-12-000023) and the Funds April 30, 2012 semi-annual shareholder report (unaudited)
on Form N-CSR as filed with the SEC on July 5, 2012 (Accession No. 0000928816-12-001043. |
|
(a) |
|
Amended and Restated Declaration of Trust dated October 5, 1984, as amended and
restated on August 26, 2003 (Declaration of Trust) previously filed as exhibit 99.(a)
to Pre-Effective Amendment No. 1 to the Funds Registration Statement on Form N-2/A (File
Nos. 333-108637 and 811-04173) as to the Funds preferred shares of beneficial interest
(Preferred Shares) filed with the SEC on October 27, 2003 (Accession
No. 0000950135-03-005304) (Preferred Shares Registration Statement). |
|
|
|
|
(1)Amendment dated July 1, 2005 to the Declaration of Trust previously filed as exhibit
99.(a)(1) to the Funds Shelf registration statement on Form N-2 filed with the SEC on May
21, 2012 (Accession No. 0000950123-12-008305) (Shelf Registration Statement). |
|
|
|
|
(2)Amendment dated June 16, 2008 to the Declaration of Trust previously filed as exhibit
99.(a)(2) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on May
21, 2012 (Accession No. 0000950123-12-008305). |
|
(b) |
|
Amended and Restated By-Laws dated September 14, 2004 (By-Laws) previously filed
as exhibit 99.(b) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC
on May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(1) |
|
Amendment dated March 8, 2005 to the By-Laws previously filed as exhibit
99.(b)(1) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on
May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(2) |
|
Amendment dated March 11, 2008 to the By-Laws previously filed as exhibit
99.(b)(2) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on
May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(3) |
|
Amendment dated October 15, 2008 to the By-Laws previously filed as exhibit
99.(b)(3) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on
May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(4) |
|
Amendment dated August 1, 2009 to the By-Laws previously filed as exhibit
99.(b)(4) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on
May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(5) |
|
Amendment dated August 31, 2010 to the By-Laws previously filed as exhibit
99.(b)(5) to the Funds Shelf Registration Statement on Form N-2 filed with the SEC on
May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(c) |
|
Voting Trust Agreements. Not applicable. |
C-1
|
(d) |
|
Instruments Defining Rights of Security Holders. See exhibits 99.(2)(a) and 99.(2)(b). |
|
(e) |
|
Dividend Reinvestment Plan. Dividend Reinvestment Plan dated July 1, 2011 previously
filed as exhibit 99.(e) to the Funds Shelf Registration Statement on Form N-2 filed with
the SEC on May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(f) |
|
Instruments Defining Rights of Long-term Debt Holders. Not applicable. |
|
(g) |
|
Investment Advisory Contracts. |
|
(1) |
|
Investment Advisory Agreement dated July 1, 2009 with John Hancock Advisers,
LLC previously filed as exhibit 99.(g)(1) to the Funds Shelf Registration Statement
on Form N-2 filed with the SEC on May 21, 2012 (Accession No. 0000950123-12-008305). |
|
(2) |
|
Sub-Advisory Agreement dated December 31, 2005 with John Hancock Advisers, LLC
and John Hancock Asset Management a division of Manulife Asset Management (US) LLC
(formerly, MFC Global Investment Management (U.S.), LLC, formerly Sovereign Asset
Management, LLC) previously filed as exhibit 99.(g)(2) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession No.
0000950123-12-008305). |
|
(h) |
|
Underwriting or Distribution Contracts. |
|
(1) |
|
Form of Distribution Agreement dated [DATE], 2012 between John Hancock Funds,
LLC and the Registrant FILED HEREWITH. |
|
(i) |
|
Bonus or Profit Sharing Contracts. Not applicable. |
|
(j) |
|
Custodian Agreement. Master Custodian Agreement dated September 10, 2008 between the
Fund and State Street Bank and Trust Company previously filed as exhibit 99.(j) to the
Funds Shelf Registration Statement on Form N-2 filed with the SEC on May 21, 2012
(Accession No. 0000950123-12-008305). |
|
(k) |
|
Other Material Contracts. |
|
(1) |
|
Service Agreement dated July 1, 2009 with John Hancock Advisers, LLC
previously filed as exhibit 99.(k)(1) to the Funds Shelf Registration Statement on
Form N-2 filed with the SEC on May 21, 2012 (Accession No. 0000950123-12-008305). |
|
|
(2) |
|
Service Agreement for Transfer Agent Services dated June 1, 2002 with
Computershare Shareowner Services LLC (formerly, Mellon Investor Services, LLC)
previously filed as exhibit 99.(k)(1) to pre-effective amendment No. 1 to the Funds
Preferred Shares Registration Statement on Form N-2 filed with the SEC on October 27,
2003 (Accession No. 0000950135-03-005304. |
|
(a) |
|
Amendment dated July 1, 2007 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(a) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
|
|
(b) |
|
Amendment dated September 25, 2007 to the Service Agreement for
Transfer Agent Services previously filed as exhibit 99.(k)(2)(b) to the Funds
Shelf Registration Statement on Form N-2 filed with the SEC on May 21, 2012
(Accession No. 0000950123-12-008305). |
|
|
(c) |
|
Amendment dated October 10, 2007 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(c) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
C-2
|
(d) |
|
Amendment dated July 1, 2010 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(d) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
|
|
(e) |
|
Amendment dated October 18, 2010 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(e) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
|
|
(f) |
|
Amendment dated April 6, 2011 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(f) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
|
|
(g) |
|
Amendment dated January 27, 2012 to the Service Agreement for Transfer
Agent Services previously filed as exhibit 99.(k)(2)(g) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession
No. 0000950123-12-008305). |
|
(3) |
|
Chief Compliance Officer Services Agreement dated March 10, 2009 by and among the Fund,
John Hancock Investment Management Services, LLC, John Hancock Advisers, LLC, and the Funds
Chief Compliance Officer previously filed as exhibit 99.(k)(3) to the Funds Shelf
Registration Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession No.
0000950123-12-008305). |
|
(1) |
|
Opinion and consent of K&L Gates LLP dated
August 13, 2012 as to the Funds Common Shares
FILED HEREWITH. |
|
(m) |
|
Non-resident Consent to Service of Process. Not applicable. |
|
|
(n) |
|
Other Opinions. Consent of Independent Registered Public Accounting Firm dated August
7, 2012 FILED HEREWITH. |
|
|
(o) |
|
Omitted Financial Statements. Not applicable. |
|
|
(p) |
|
Agreement Related to Initial Capital. Not applicable. |
|
|
(q) |
|
Model Retirement Plan. Not applicable. |
|
|
(r) |
|
Codes of Ethics. |
|
(1) |
|
Code of Ethics dated January 1, 2008 (as revised January 1, 2012) of John
Hancock Advisers, LLC and John Hancock Investment Management Services, LLC (each, a
John Hancock Adviser), John Hancock Funds, LLC, John Hancock Distributors, LLC, and
each open-end and closed-end fund advised by a John Hancock Adviser FILED HEREWITH. |
|
|
(2) |
|
Code of Ethics adopted by John Hancock Asset Management a division of Manulife
Asset Management (US) LLC (formerly, MFC Global Investment Management (U.S.), LLC,
formerly Sovereign Asset Management, LLC) amended as of January 5, 2012
FILED HEREWITH. |
|
(s) |
|
Powers of Attorney. Power of Attorney dated March 6, 2012 for Keith F. Hartstein,
Charles A. Rizzo, William H. Cunningham, Deborah C. Jackson, Stanley Martin,
Patti McGill Peterson, Hugh McHaffie, John A. Moore, Steven R. Pruchansky, Gregory A. Russo
and John G. Vrysen previously filed as exhibit 99.(s) to the Funds Shelf Registration
Statement on Form N-2 filed with the SEC on May 21, 2012 (Accession No.
0000950123-12-008305). |
C-3
|
|
|
ITEM 26. |
|
MARKETING ARRANGEMENTS |
See Form of Underwriting Agreement FILED HEREWITH
|
|
|
ITEM 27. |
|
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION |
The approximate expenses in connection with the offering are as follows:
|
|
|
|
|
Registration and Filing Fees |
|
$ |
2,980 |
|
Financial Industry Regulatory Authority Fee |
|
$ |
4,400 |
|
New York Stock Exchange Fee |
|
$ |
3,500 |
|
Cost of Printing and Engraving |
|
$ |
30,000 |
|
Accounting Fee and Expenses |
|
$ |
5,000 |
|
Legal Fees and Expenses |
|
$ |
70,000 |
|
|
|
|
|
Total |
|
$ |
115,880 |
|
|
|
|
ITEM 28. |
|
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL |
John Hancock Advisers, LLC (the Adviser) is the investment adviser to the Fund. The Adviser is a
wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.), which in turn is a
subsidiary of Manulife Financial Corporation (Manulife Financial), a publicly traded company
based in Toronto, Canada. A corporate organization list is set forth below.
C-4
MANULIFE FINANCIAL CORPORATION
PRINCIPAL
SUBSIDIARIES December 31, 2011
|
|
|
ITEM 29. |
|
NUMBER OF HOLDERS OF SECURITIES |
Set forth below is the number of record holders as of July 31, 2012 of each class of securities of
the Fund:
|
|
|
Title of Class |
|
Number of Record Holders |
Shares of Common Stock, no par value
|
|
2,025 |
Indemnification provisions relating to the Funds Trustees, officers, employees and agents are set
forth in Section 4.3 of Article IV of Funds Declaration of Trust, as previously filed.
The form of Underwriting Agreement (to be filed by amendment) contains provisions limiting the
liability and providing for indemnification of the Trustees and officers under certain
circumstances.
The Funds Trustees and officers are insured under a standard investment company errors and
omissions insurance policy covering loss incurred by reason of negligent errors and omissions
committed in their official capacities as such. Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended (the Securities Act), may be permitted to Trustees,
officers and controlling persons of the Fund pursuant to the provisions described in this Item 30,
or otherwise, the Fund has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the Fund
of expenses incurred or paid by a Trustee, officer or controlling person of the Fund in the
successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Article V of the Limited Liability Company Agreement of the Adviser provides as follows:
Section 5.06. Indemnity and Exculpation.
|
(a) |
|
No Indemnitee, and no shareholder, director, officer, member, manager, partner,
agent, representative, employee or Affiliate of an Indemnitee, shall have any liability
to the Company or to any Member for any loss suffered by the Company (or the
Corporation) which arises out of any action or inaction by such Indemnitee with respect
to the Company (or the Corporation) if such Indemnitee so acted or omitted to act (i)
in the good faith (A) belief that such course of conduct was in, or was not opposed to,
the best interests of the Company (or the Corporation), or (B) reliance on the
provisions of this Agreement, and (ii) such course of conduct did not constitute gross
negligence or willful misconduct of such Indemnitee. |
|
(b) |
|
The Company shall, to the fullest extent permitted by applicable law, indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was, or has agreed
to become, a Director or Officer, or is or was serving, or has agreed to serve, at the
request of the Company (or previously at the request of the Corporation), as a
director, officer, manager or trustee of, or in a similar capacity with, another
corporation, partnership, limited liability company, joint venture, trust or other
enterprise (including any employee benefit plan) (all such persons being referred to
hereafter as an Indemnitee), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses (including attorneys fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by or on behalf
of an Indemnitee in connection with such action, suit or proceeding and any appeal
therefrom. |
|
(c) |
|
As a condition precedent to his right to be indemnified, the Indemnitee must notify
the Company in writing as soon as practicable of any action, suit, proceeding or
investigation involving him for which indemnity hereunder will or could be sought.
With respect to any action, suit, proceeding or investigation of which the Company is
so notified, the Company will be entitled to participate therein at its own expense
and/or to assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee. |
|
(d) |
|
In the event that the Company does not assume the defense of any action, suit,
proceeding or investigation of which the Company receives notice under this Section
5.06, the Company shall pay in advance of the final disposition of such matter any
expenses (including attorneys fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom; provided,
however, that the payment of such expenses incurred by an Indemnitee in advance of the
final disposition of such matter shall be made only upon receipt of an undertaking by
or on behalf of the Indemnitee to repay all amounts so advanced in the event that it
shall ultimately be determined that the Indemnitee is not entitled to be indemnified by
the Company as authorized in this Section 5.06, which undertaking shall be accepted
without reference to the financial ability of the Indemnitee to make such repayment;
and further provided that no such advancement of expenses shall be made if it is
determined that (i) the Indemnitee did not act in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the Company, or
(ii) with respect to any criminal action or proceeding, the Indemnitee had reasonable
cause to believe his conduct was unlawful. |
|
(e) |
|
The Company shall not indemnify an Indemnitee seeking indemnification in connection
with a proceeding (or part thereof) initiated by such Indemnitee unless the initiation
thereof was approved by the Board of Directors. In addition, the Company shall not
indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds
of insurance, and in the event the Company makes any indemnification payments to an
Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of
insurance, such Indemnitee shall promptly refund such indemnification payments to the
Company to the extent of such insurance reimbursement. |
C-5
|
(f) |
|
All determinations hereunder as to the entitlement of an Indemnitee to
indemnification or advancement of expenses shall be made in each instance by (a) a
majority vote of the Directors consisting of persons who are not at that time parties
to the action, suit or proceeding in question (Disinterested Directors), whether or
not a quorum, (b) a majority vote of a quorum of the outstanding Common Shares, which
quorum shall consist of Members who are not at that time parties to the action, suit or
proceeding in question, (c) independent legal counsel (who may, to the extent permitted
by law, be regular legal counsel to the Company), or (d) a court of competent
jurisdiction. |
|
(g) |
|
The indemnification rights provided in this Section 5.06 (i) shall not be deemed
exclusive of any other rights to which an Indemnitee may be entitled under any law,
agreement or vote of Members or Disinterested Directors or otherwise, and (ii) shall
inure to the benefit of the heirs, executors and administrators of the Indemnitees.
The Company may, to the extent authorized from time to time by its Board of Directors,
grant indemnification rights to other employees or agents of the Company or other
persons serving the Company and such rights may be equivalent to, or greater or less
than, those set forth in this Section 5.06. Any indemnification to be provided
hereunder may be provided although the person to be indemnified is no longer a Director
or Officer. |
|
|
|
ITEM 31. |
|
BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER |
For information as to the business, profession, vocation or employment of a substantial nature of
each of the directors and executive officers of the Adviser and the Subadviser, reference is made
to the information set forth under: (i) the caption Investment Advisory and Other Services in the
Statement of Additional Information; (ii) Item 6 of the Form ADV Part II of John Hancock Advisers,
LLC (File No. 801-8124) filed with the SEC; and (iii) Item 6 of the Form ADV Part II of John
Hancock Asset Management a division of Manulife Asset Management (US) LLC (File No. 801-42023)
filed with the SEC, all of which are incorporated herein by reference.
|
|
|
ITEM 32. |
|
LOCATION OF ACCOUNTS AND RECORDS |
All applicable accounts, books and documents required to be maintained by the Fund by Section 31(a)
of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder are in the
possession and custody of the Funds custodian, State Street Bank and Trust Company, 2 Avenue de
Lafayette, Boston, Massachusetts 02111, and its transfer agent, Computershare Shareowner Services
LLC, 480 Washington Boulevard, Jersey City, New Jersey 07310, with the exception of certain
corporate documents and portfolio trading documents that are in the possession and custody of the
Adviser, 601 Congress Street, Boston, Massachusetts, 02210, and the Subadviser, 101 Huntington
Avenue, Boston, MA 02199-7603. The Fund is informed that all applicable accounts, books
and documents required to be maintained by registered investment advisers are in the custody and
possession of the Adviser and the Subadviser.
|
|
|
ITEM 33. |
|
MANAGEMENT SERVICES |
Not applicable.
1. |
|
The Fund undertakes to suspend the offering of Common Shares until the Prospectus and any
applicable Prospectus Supplement are amended if (a) subsequent to the effective date of this
registration Statement, the net asset value declines more than 10 percent from its net asset
value as of the effective date of this Registration Statement or (b) the net asset value
increases to an amount greater than its net proceeds as stated in the Prospectus and any other
applicable Prospectus Supplement. |
C-6
4. |
|
The Common Shares being registered will be offered on a delayed or continuous basis in
reliance on Rule 415 under the Securities Act. Accordingly, the Fund undertakes: |
|
a. |
|
To file, during any period in which offers or sales are being made, a post-effective
amendment to the Registration Statement: |
|
(1) |
|
To include any prospectus required by Section 10(a)(3) of the Securities Act; |
|
|
(2) |
|
To reflect in the prospectus any facts or events after the effective date of
the Registration Statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and |
|
|
(3) |
|
To include any material information with respect to the plan of distribution
not previously disclosed in the Registration Statement or any material change to such
information in the Registration Statement. |
|
b. |
|
That, for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof; and |
|
c. |
|
To remove from registration by means of a post-effective amendment any of the Common
Shares being registered which remain unsold at the termination of the offering. |
|
d. |
|
That, for the purpose of determining liability under the Securities Act to any
purchaser, if the Fund is subject to Rule 430C: Each prospectus filed pursuant to Rule
497(b), (c), (d) or (e) under the Securities Act as part of a Registration Statement
relating to an offering, other than prospectuses filed in reliance on Rule 430A under the
Securities Act, shall be deemed to be part of and included in the Registration Statement as
of the date it is first used after effectiveness. Provided, however, that no statement
made in a Registration Statement or prospectus that is part of the Registration Statement
or made in a document incorporated or deemed incorporated by reference into the
Registration Statement or prospectus that is part of the Registration Statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the Registration Statement or prospectus that was part of
the Registration Statement or made in any such document immediately prior to such date of
first use. |
|
e. |
|
That for the purpose of determining liability of the Fund under the Securities Act to
any purchaser in the initial distribution of Common Shares: |
|
|
|
The undersigned Fund undertakes that in a primary offering of securities of the undersigned
Fund pursuant to this Registration Statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned Fund will be a
seller to the purchaser and will be considered to offer or sell such securities to the
purchaser: |
|
(1) |
|
any preliminary prospectus or prospectus of the undersigned Fund relating to
the offering required to be filed pursuant to Rule 497 under the Securities Act; |
|
(2) |
|
the portion of any advertisement pursuant to Rule 482 under the Securities Act
relating to the offering containing material information about the undersigned Fund or
its securities provided by or on behalf of the undersigned Fund; and |
|
(3) |
|
any other communication that is an offer in the offering made by the
undersigned Fund to the purchaser. |
5. |
|
The Fund undertakes that, for the purpose of determining any liability under the Securities
Act: |
C-7
|
a. |
|
the information omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the
Fund pursuant to 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective; and |
|
b. |
|
each post- effective amendment that contains a form of prospectus shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering
thereof. |
6. |
|
The Fund undertakes to send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of an oral or written request, its
Statement of Additional Information. |
C-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The Commonwealth of
Massachusetts, on the 13th day of August 2012.
|
|
|
|
|
|
JOHN HANCOCK INVESTORS TRUST
|
|
|
By: |
/s/Keith F. Hartstein
|
|
|
|
Keith F. Hartstein |
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
President and
Chief Executive Officer
|
|
August 13, 2012 |
Keith F. Hartstein |
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
August 13, 2012 |
Charles A. Rizzo
|
|
(Principal Financial Officer &
Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ William H. Cunningham *
|
|
Trustee
|
|
August 13, 2012 |
William H. Cunningham |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
August 13, 2012 |
Deborah C. Jackson |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
August 13, 2012 |
Hugh McHaffie |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
August 13, 2012 |
John A. Moore |
|
|
|
|
|
|
|
|
|
/s/ Steven R. Pruchansky *
|
|
Trustee
|
|
August 13, 2012 |
Steven R. Pruchansky |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
August 13, 2012 |
Gregory A. Russo |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
August 13, 2012 |
John G. Vrysen |
|
|
|
|
*By: Power of Attorney
|
|
|
|
|
|
|
|
|
By: |
/s/ Kinga Kapusckinski
|
|
|
|
Kinga Kapuscinski
Attorney-in-Fact
*pursuant to Power of Attorney filed with Amendment No. 17 filed on May 21, 2012 |
|
EXHIBIT INDEX
|
|
|
(2)(h)(1)
|
|
Form of Distribution Agreement dated [ ] between John Hancock Funds, LLC and the
Registrant |
|
|
|
(2)(l)(1)
|
|
Opinion and Consent of K&L Gates dated
August 13, 2012 as to the Funds Common Shares |
|
|
|
(2)(n)
|
|
Consent of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP dated
August 7, 2012 |
|
|
|
(2)(r)(1)
|
|
Code of Ethics dated January 1, 2012 of John Hancock Advisers, LLC and John Hancock
Investment Management Services, LLC (each, a John Hancock Adviser), John Hancock Funds, LLC,
John Hancock Distributors, LLC, and each open-end and closed-end fund advised by a John
Hancock Adviser. |
|
|
|
(2)(r)(2)
|
|
Code of Ethics dated January 5, 2012 of John Hancock Asset Management a division of
Manulife Asset Management (US) LLC. |
C-9