The financial sector accounts for substantially all of the Funds assets. There are three areas of primary
focus within the financial sector: community bank debt, non-bank financials debt, and tactical opportunities (largely from preferred equity). The Funds asset allocation comprises 54% of assets in
community bank debt, 34% of assets in non-bank financials, and 10% in tactical opportunities. In addition, 2% of the assets are in cash and other assets.
Financials debt outperformed the broader corporate credit market due to the fundamental strength of the sector as well as its short-duration profile. Additionally, the
investor base of the underlying bonds tends toward buy-and-hold investors, which contributes to the low relative volatility.
We maintain a high degree of conviction toward the financial sector broadly heading into 2022, with
positive tailwinds to growth driven by the continued economic recovery and the expected Fed Funds rate hikes. We see compelling opportunities across community bank debt, small-cap non-bank financials debt, and select pockets of financial services preferred and common equity.
The outlook is particularly
bright for the banking sector in 2022, with the Fed poised to raise rates, loan growth inflecting positively, and significant excess liquidity available for deployment. Bank mergers and acquisitions (M&A) continue to accelerate from COVID-19 lows and have hit 20-plus-year highs in terms of mega deals (deal value more than $500 million). In the banking sector, we see the best relative value in
the community bank sub-sector, in both subordinated debt and small-cap equities.
Fundamentally, banks should benefit from stronger net interest income and earnings as (1) net interest margin (NIM) expands from a combination of higher rates, low
deposit betas, and a mix shift from cash and investments to loans, and (2) higher-earning asset balances as PPP forgiveness runs its course and organic loan growth accelerates.
We believe community bank debt offers one of the best risk/reward opportunities across investment-grade credit, with its excess yield, short-duration, and low
volatility profile. Bank debt issuance remains robust, with expected community bank debt issuance in the range of $8-$10 billion annually. While spreads compressed in 2021 as the market continued to
mature, and the investor base expanded to see broader participation from banks, we expect spreads will begin to normalize toward 2019 levels as banks excess liquidity gets redeployed into lending opportunities.
On the equity side, despite relative outperformance in 2021, banking sector valuations remain attractive relative to historical levels and the broader market. We expect
NIM expansion and higher loan growth will benefit valuation multiples, and we see value in the smaller banks, which tend to be more asset sensitive. Additionally, smaller banks could see outsized returns as likely consolidation targets in an
accelerating M&A environment.
Across the financial services landscape more broadly, we are most positive on investment-grade, small-cap insurance senior debt and residential mortgage REIT common and preferred equities.
We do not anticipate any meaningful credit deterioration in 2022. We believe nonperforming asset levels remain strong, sitting at the lowest level in 15 years. We
believe industry profitability remains solid, and capital levels continue to increase, providing a sizable cushion for any adverse credit events as well as currency for inorganic growth opportunities. We remain disciplined in our investment process,
with particular emphasis on credit and interest rate risks.
Bloomberg U.S. Aggregate Bond Index: An unmanaged index that
measures the performance of the investment-grade universe of bonds issued in the United States. The index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities. It is not possible to invest directly
in an index.
Duration: Measures a portfolios sensitivity to changes in interest rates. Generally, the longer the duration, the greater the price change
relative to interest rate movements.
Spread: The difference in yield between two bonds of similar maturity but different credit quality.
Tier 1 Capital: Tier 1 capital comprises common equity, retained earnings, and perpetual preferred stock. Tier 1 capital represents the core source of funding that
the bank uses to ensure long term viability and acts as a cushion to protect depositors against loss.
The investment objective of Angel Oak Dynamic Financial Strategies Income Fund is to seek current income with a secondary objective of total return.
* As a percentage of total investments. The percentages presented in the table above may differ from those in the Schedule of
Investments because the percentages in the Schedule of Investments are calculated based on net assets.
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Name and Year of Birth |
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Position with the Fund |
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Term of Office and Length of Time Served |
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Principal Occupation(s) During Past 5 Years |
|
Number of Portfolios in
Fund Complex(1) Overseen by Trustee |
|
Other Directorships Held During the Past 5
Years |
Independent Trustees(2) |
Ira P. Cohen
1959 |
|
Independent Trustee, Chair
(Class III) |
|
Trustee since 2019, Chair
since 2019; 3 year term |
|
Executive Vice President, Recognos Financial (investment industry data analysis provider) (2015-2021);
Independent financial services consultant (since 2005). |
|
9 |
|
Trustee, Valued Advisers Trust (since 2010); Trustee,
Griffin Institutional Access Credit Fund (since 2017); Trustee, Griffin Institutional Access Real Estate Access Fund (since 2014); Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee,
U.S. Fixed Income Trust (since 2019); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018); Trustee, Angel Oak Credit Opportunities Term Trust (since
2021). |
Alvin R. Albe,
Jr. 1953 |
|
Independent Trustee (Class I) |
|
Since 2019; 3 year
term |
|
Retired. |
|
9 |
|
Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee, Angel Oak Financial Strategies
Income Term Trust (since 2018); Trustee, Angel Oak Credit Opportunities Term Trust (since 2021). |
27
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Name and Year of Birth |
|
Position with the Fund |
|
Term of Office and Length of Time Served |
|
Principal Occupation(s) During Past 5 Years |
|
Number of Portfolios in
Fund Complex(1) Overseen by Trustee |
|
Other Directorships Held During the Past 5
Years |
Keith M.
Schappert 1951 |
|
Independent Trustee (Class II) |
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Since 2019; 3 year
term |
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President, Schappert Consulting LLC (investment industry consulting) (since 2008). |
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9 |
|
Trustee, Mirae Asset Discovery Funds (since 2010); Director,
Commonfund Capital, Inc. (since 2015); Director, The Commonfund (since 2012); Director, Calamos Asset Management, Inc. (2012 2017); Trustee, Angel Oak Funds
Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018); Trustee, Angel Oak Credit Opportunities Term Trust (since 2021). |
Andrea N. Mullins
1967 |
|
Independent Trustee (Class II) |
|
Since 2019; 3 year
term |
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Private Investor; Independent Contractor, SWM Advisors (since 2014). |
|
9 |
|
Trustee, Valued Advisors Trust (since 2013, Chair since
2017); Trustee, Angel Oak Funds Trust (since 2019); Trustee, Angel Oak Strategic Credit Fund (since 2019); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2019); Trustee, Angel Oak Credit Opportunities Term
Trust (since 2021); Trustee and Audit Committee Chair, Cushing Mutual Funds Trust (since 2021); Trustee and Audit Committee Chair, Cushing MLP & Infrastructure Fund
(since 2021); Trustee and Audit Committee Chair, Cushing Nextgen Infrastructure Income Fund (since 2021). |
28
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Name and Year of Birth |
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Position with the Fund |
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Term of Office and Length of Time Served |
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Principal Occupation(s) During Past 5 Years |
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Number of Portfolios in
Fund Complex(1) Overseen by Trustee |
|
Other Directorships Held During the Past 5
Years |
Interested Trustees |
Samuel R. Dunlap,
III 1979 |
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Interested Trustee (Class
I) |
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Since 2019; 3 year term |
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Chief Investment Officer-Public Strategies, Angel Oak Capital Advisors, LLC (investment management)
(since 2009). |
|
9 |
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Trustee, Angel Oak Funds Trust (since 2019); Trustee, Angel Oak Strategic Credit Fund (since 2019); Angel Oak Credit Opportunities Term Trust
(since 2021): Trustee, Angel Oak Financial Strategies Income Term Trust (since 2022). |
Cheryl M. Pate
1976 |
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Interested Trustee (Class
III) |
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Since 2022; 3 year term |
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Portfolio Manager, Angel Oak Capital Advisors, LLC (investment management) (since 2017). |
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8 |
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Trustee, Angel Oak Funds Trust (since 2022); Trustee, Angel Oak Strategic Credit Fund (since 2022); Trustee, Angel Oak Credit Opportunities
Term Trust (since 2022). |
(1) |
The Fund Complex includes the Fund, each series of Angel Oak Funds Trust, Angel Oak Strategic Credit Fund, Angel Oak
Financial Strategies Income Term Trust and Angel Oak Credit Opportunities Term Trust. |
(2) |
The Trustees of the Fund who are not interested persons of the Fund as defined in the 1940 Act
(Independent Trustees). |
29
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Name and Year of Birth |
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Position with the Fund |
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Term of Office and Length of Time Served |
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Principal Occupation(s) During Past 5
Years |
Officers |
Dory S. Black, Esq.
1975 |
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President |
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Since 2019; indefinite term |
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General Counsel, Angel Oak Companies (since 2014). |
Adam Langley
1967 |
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Chief Compliance Officer |
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Since 2019; indefinite term |
|
Chief Compliance Officer, Angel Oak Capital Advisors, LLC (since 2015); Chief Compliance Officer, Buckhead One Financial Opportunities, LLC
(since 2015); Chief Compliance Officer, Angel Oak Capital Partners II, LLC (since 2016); Chief Compliance Officer of Falcons I, LLC (since 2018); Chief Compliance Officer, Hawks I, LLC (since 2018); Chief Compliance Officer, Angel Oak Commercial
Real Estate Solutions (since 2021); Chief Compliance Officer, Angel Oak Funds Trust (since 2015); Chief Compliance Officer, Angel Oak Strategic Credit Fund (since 2017); Chief Compliance Officer, Angel Oak Financial Strategies Income Term Trust
(since 2018); Chief Compliance Officer, Angel Oak Credit Opportunities Fund (since 2021); Chief Operating Officer, Angel Oak Capital Advisors, LLC (since 2021). |
John Hsu
1965 |
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Secretary |
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Since 2020; indefinite term |
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Chief Risk Officer, Angel Oak Capital Advisors, LLC (since 2020), Head of Treasury Strategies, Angel Oak Capital Advisors, LLC (since 2018),
Head of Capital Markets, Angel Oak Capital Advisors, LLC (2014-2018). |
Daniel Fazioli
1981 |
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Treasurer |
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Since 2019; indefinite term |
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Chief Accounting Officer, Angel Oak Capital Advisors, LLC (since 2015). |
Each officer holds office at the pleasure of the Board.
8. Investment Objective and Policies of the Fund
Investment Objective
The Fund seeks current income with a secondary objective of total return. There can be no assurance that the Fund will achieve its investment objective.
Investment Strategies
On August 17, 2021, the Adviser proposed and the Board
approved changes to the Funds Investment Strategies, including, among other things, eliminating that the Fund will target investing at least 80% of the Funds net assets plus the amount of any borrowings for investment purposes in debt
issued by U.S. community banks and U.S. and non-U.S. non-bank financial institutions.
Under normal circumstances, the Fund will invest at least 80% of the value of
its net assets plus the amount of any borrowings for investment purposes in securities of U.S. and non-U.S. financial institutions, which may include, but are not limited to, banks, thrifts, finance companies,
business development companies (BDCs) that invest primarily in loans, commercial mortgage and residential mortgage real estate investment trusts (REITs), brokerage and advisory firms, insurance companies and financial holding
companies. In pursuing its investment objective, the Fund invests primarily in debt issued by financial
30
institutions, including subordinated debt (sub-debt), unrated debt, senior debt and high yield securities. The Fund may also invest in common
equity, preferred equity, convertible securities, warrants and trust-preferred securities (TruPS) of these institutions. The Funds investment policy to invest at least 80% of its assets in securities of U.S. and non-U.S. financial institutions is not fundamental and may be changed without Shareholder approval. The Fund will provide Shareholders with 60 days notice of any change in this 80% investment policy.
The Fund will, under normal circumstances, invest at least 50% of its debt investments in debt investments rated investment grade by Standard & Poors Rating
Services (S&P) or of equivalent quality rating by another Nationally Recognized Statistical Ratings Organization, or if unrated, considered by the Adviser to be of comparable quality based on the Advisers internal quantitative
models. The Fund will not invest more than 15% of its Managed Assets in credit instruments rated below Caa2 by Moodys Investors Service, Inc. (Moodys) or CCC by S&P or Fitch Ratings (Fitch). Below investment
grade credit instruments are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal.
Under
normal circumstances, the Fund will concentrate its investments (i.e., invest 25% or more of its total assets (measured at the time of purchase)) in the group of industries related to banks and diversified financials. The Fund will not concentrate
in any industry other than the group of industries related to banks and diversified financials.
The Fund may invest up to 30% of its net assets plus the amount of
any borrowings for investment purposes in securities issued by non-U.S. issuers and in markets outside the United States. The Funds investments in structured credit instruments, which are commonly issued
by special purpose vehicles formed in jurisdictions outside of the United States, are not subject to or limited by this policy.
The Fund may invest up to 20% of
its net assets plus the amount of any borrowings for investment purposes indirectly in securities issued by financial institutions through Structured Products and credit derivatives. In particular, the Fund may invest in equity and junior debt
tranches of ABS and debt securitizations, which are collateralized by a portfolio consisting primarily of unsecured, subordinated loans made to, and unsecured, subordinated debentures, notes or other securities issued by, financial institutions
(Structured Products).
The Fund does not have a policy to target a particular average maturity or duration and may invest in bonds of any maturity or
duration. Maturity refers to the length of time until a bonds principal is repaid with interest. Duration is a measure used to determine the sensitivity of a securitys price to changes in interest rates that incorporates a
securitys yield, coupon, final maturity and call features, among other characteristics.
The Fund may also leverage to the extent permitted by the 1940 Act.
Although the Fund normally seeks to invest substantially all of its assets in securities issued by financial institutions, the Fund reserves the ability to invest
up to 20% of its net assets plus the amount of any borrowings for investment purposes in other types of securities and instruments (measured at the time of purchase). Additionally, the Fund may take temporary defensive positions that are
inconsistent with its investment strategy in attempting to respond to adverse market, economic, political or other conditions. If the Fund does so, it may not achieve its investment objective. The Fund may also choose not to take defensive
positions.
The Fund may invest without limitation in securities that are illiquid (e.g., non-investment grade sub-debt and junior debt tranches of Structured Products) and expects that a substantial portion of its assets will be illiquid. The Fund may also invest in restricted securites (i.e., securities the disposition of
which is restricted under the federal securities laws).
The Fund will not invest more than 5% of its Managed Assets in securities of any one single issuer. In
addition, the Fund will not invest more than 10% of its Managed Assets in preferred shares of commercial mortgage and residential mortgage REITs and will not invest more than 10% of its Managed Assets in securities issued by BDCs.
The Investment Process
Idea generation
The Advisers portfolio managers utilize various data sources to generate investment ideas. Most of the idea generation and sourcing of potential alpha
opportunities is driven by internal research and analysis (alpha refers to excess returns relative to a benchmark). In addition, portfolio managers and analysts regularly monitor market conditions, trade flows and trade execution. Active
market participation provides a strong understanding of current market trends, which leads to formation of immediate views on the relative value of investment opportunities within the structured fixed income markets, thus generating new investment
ideas in real time.
31
The Advisers investment committee meets frequently to discuss strategies in the context of current market events and
their impact on the Fund, and existing approaches to each strategy are affirmed or altered based on these discussions. The Adviser makes its investment decisions based on its view of macroeconomic (i.e., large-scale, economy-wide) trends as
well as by identifying opportunities in the capital markets it believes are providing the greatest relative value.
Research
The Adviser uses a combination of proprietary fundamental and quantitative research to analyze opportunities. Fundamental analysis involves evaluating the value of an
instrument based on the issuers financial profile, management and other considerations. In selecting investments, the Adviser may consider maturity, yield and ratings information and opportunities for price appreciation among other criteria.
As part of this fundamental analysis, the Adviser considers certain environmental, social and governance (ESG) factors that it believes could have a material negative or positive impact on the risk profiles of the issuers of certain
securities in which the Fund may invest. These determinations may not be conclusive, and securities that may be negatively impacted by such factors may be purchased and retained by the Fund while the Fund may divest or not invest in securities that
may be positively impacted by such factors. Examples of the types of factors the Adviser may consider as part of its proprietary assessment, include, without limitation: environmental issues, such as carbon emissions and energy efficiency; social
issues, such as affordable housing and community investment; and corporate governance issues, such as board independence and diversity. In evaluating an issuers ESG practices, the Adviser will use its own proprietary assessments of material
ESG factors and may also reference standards as set forth by recognized global organizations, including the United Nations Principles for Responsible Investing, the United Nations Sustainable Development Goals, the Task Force on Climate-
Related Financial Disclosures, the Carbon Disclosure Project, the Sustainable Accounting Standards Board and the Global Reporting Initiative. Additionally, the Adviser may engage proactively with issuers to encourage them to improve their ESG
factors. In this regard, the Adviser may engage in direct dialogue with company management, including through in-person meetings, phone calls, electronic communications, and letters. These engagement
activities are designed to facilitate the Advisers efforts to identify opportunities for companies to improve their ESG practices and to work collaboratively with company management to establish concrete objectives and to develop a plan for
meeting those objectives. The Fund may invest in securities issued by companies whose ESG practices, at the time of the investment, do not fully meet the Advisers proprietary standards, with the expectation that the Advisers engagement
efforts and/or the companys own initiatives will lead to improvements in the companys ESG practices over time. It may also exclude those issuers that are not receptive to the Advisers engagement efforts, as determined in the
Advisers sole discretion.
Quantitative analysis refers to a data-oriented analysis of financial information, market trends and other factors. This discipline
is conducted from a bottom-up (i.e., opportunity-by-opportunity) perspective. The research teams risk modeling analysis
provides a granular focus on seeking to mitigate credit risk. Scenario analysis is conducted to help portfolio managers understand how an individual security would perform under a range of economic and capital market conditions. Scenario analysis is
completed by applying multiple interest rate, credit and cash flow assumptions. Once the critical factors for individual security selection have been evaluated, a recommendation is made. The Adviser also makes use of various third-party analytical
systems and uses proprietary models to confirm or eliminate results of non-proprietary models. Portfolio managers and analysts merge the outputs of these analytical models with their own views on future market
and economic conditions to generate more qualified pre-purchase assumptions.
Portfolio Construction
The Adviser will construct the portfolio investments in two ways. First, the Adviser will participate in the primary market via a syndicated transaction brought to
market by a broker/dealer specializing in the financial institutions sector. These deals have the potential to trade for higher prices in the secondary market and may allow the Fund to generate secondary trading profits. Second, the Adviser will
source transactions in the secondary market. Although this may be infrequent, the Adviser believes it is well suited to take advantage of opportunities in the secondary market.
The Adviser will use fundamental analysis based on publicly available information to refine the pipeline of potential issuers. The Adviser will look for healthy, well
capitalized institutions with a history of sound performance. The Adviser is not interested in financial institutions that are attempting to fill a capital hole or address their asset quality challenges. Rather, the Adviser will look for those well
capitalized institutions where capital can be utilized strategically.
The Adviser may sell investments if it determines that an investment is no longer earning a
return commensurate with its risk or that a different security will better help the Fund achieve its investment objective.
32
Portfolio Composition
The
Funds portfolio will consist primarily of:
Subordinated debt, senior debt and preferred securities of banks and diversified financial companies
Subordinated debt securities, sometimes also called junior debt, are debt securities for which the issuers obligations to make principal and interest
payment are secondary to the issuers payment obligations to more senior debt securities. Such investments will consist primarily of debt issued by community banks or savings institutions (or their holding companies), which are subordinated to
senior debt issued by the banks and deposits held by the bank, but are senior to trust preferred obligations, preferred stock and common stock issued by the bank. Many subordinated debt securities may be unrated and some may be considered high-yield
securities or junk bonds. See High yield securities. Preferred securities may pay fixed or adjustable rates of return and are subject to many of the risks associated with debt securities, as well as issuer-specific and market
risks applicable generally to equity securities. A companys preferred securities generally pay dividends only after the company makes required payments to holders of its bonds and other debt.
Community bank subordinated debt securities and Structured Products collateralized by such securities typically have floating or variable interest rates based on the
London Inter-bank Offered Rate (LIBOR) or a future replacement rate, or may have a fixed coupon for a period of years and then convert to a floating rate, and are subject to the risks associated with securities tied to LIBOR, including
the risks associated with the future replacement of LIBOR with an alternative reference rate. See LIBOR risk.
High yield securities
The Fund may invest up to 50% of its net assets plus the amount of any borrowings for investment purposes in below investment grade securities, including certain
securities issued by U.S. community banks and other financial institutions. These high-yield securities (also known as junk bonds) will generally be rated BB or lower by S&P or will be of equivalent quality rating from
another Nationally Recognized Statistical Ratings Organization, or if unrated, considered by the Adviser to be of comparable quality. There is no minimum credit quality for securities in which the Fund may invest, provided that not more than 15% of
the Funds net assets plus the amount of any borrowings for investment purposes may be invested in credit instruments rated below Caa2 by Moodys Investors Service, Inc. (Moodys) or CCC by Standard & Poors
Ratings Services (S&P) or Fitch Ratings (Fitch).
Real Estate Investment Trusts (REITs)
REITs are financial vehicles that pool investors capital to invest primarily in income-producing real estate or real estate-related loans or interests. The
Funds REIT investments can generally be classified as Mortgage REITs, Equity REITs and Hybrid REITs. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents, royalties and lease payments. Hybrid REITs combine the characteristics of both Mortgage REITs
and Equity REITs. The Fund may invest in REIT shares, including preferred shares, that trade in the secondary market on a U.S. securities exchange or invest in an initial public offering of REIT shares. The Fund also may invest in debt securities of
REITs. Debt securities issued by a REIT are, for the most part, general and unsecured obligations and are subject generally to risks associated with the REIT. Distributions received by the Fund from REITs may consist of dividends, capital gains
and/or return of capital. REITs are not taxed on income distributed to their shareholders provided they comply with the applicable requirements of the Internal Revenue Code of 1986, as amended (the Code). The securities of REITs, which
are required to distribute substantially all of their income to investors in order to not be subject to entity level taxation, often offer a yield advantage over securities of other issuers, such as corporations, that are taxed on income at the
entity level and are able to retain all or a portion of their income rather than distributing it to investors. Many of these distributions, however, will not generally qualify for favorable treatment as qualified dividend income. As an investor in
common equity securities of a REIT, the Fund will indirectly bear its proportionate share of any management and other operating expenses charged by the REITs in which it invests, in addition to the expenses paid by the Fund. The Fund considers
Mortgage REITs to be financial institutions for purposes of the Funds policy of investing at least 80% of its assets in financial institutions.
33
Business Development Companies (BDCs)
BDCs are a type of closed-end fund regulated under the 1940 Act. BDCs typically invest in and lend to small- and medium-sized private and certain public companies that may not have access to public equity markets for capital raising. The interest earned by a BDC flows through to investors in the form of a dividend, normally
without being taxed at the BDC entity level. BDCs may invest in a diverse array of industries. BDCs are unique in that generally, at least 70% of their investments must be made in private and certain public U.S. businesses, and BDCs are required to
make available significant managerial assistance to their portfolio companies. Unlike corporations, BDCs are not taxed on income distributed to their shareholders provided they comply with the applicable requirements of the Code. Similar to REITs,
the securities of BDCs, which are required to distribute substantially all of their income on an annual basis to investors in order to not be subject to entity level taxation, often offer a yield advantage over securities of other issuers, such as
corporations, that are taxed on income at the entity level and are able to retain all or a portion of their income rather than distributing it to investors. The Fund may invest in common equity, preferred equity and debt securities of BDCs, and is
not limited with respect to the specific types of BDCs in which it may invest. As an investor in common equity securities of a BDC, the Fund will indirectly bear its proportionate share of any management and other expenses, and of any performance
based or incentive fees, charged by the BDCs in which it invests, in addition to the expenses paid by the Fund. The Fund considers BDCs that invest primarily in loans to be financial institutions for purposes of the Funds policy of investing
at least 80% of its assets in financial institutions.
Structured Products
The Fund may invest in certain Structured Products, including community bank debt securitizations. The risks of an investment in a Structured Product depend largely on
the type of the collateral securities and the class of the Structured Product in which the Fund invests. Some Structured Products have credit ratings, but are typically issued in various classes with various priorities. Normally, Structured Products
are privately offered and sold (that is, they are not registered under the securities laws) and may be difficult for the Fund to sell particular within a reasonable time at a favorable price. However an active dealer market may exist for Structured
Products that qualify for Rule 144A transactions. In addition to the normal interest rate, default and other risks of fixed income securities, Structured Products carry additional risks, including the possibility that distributions from collateral
securities will not be adequate to make interest or other payments, the quality of the collateral may decline in value or default, the Fund may invest in Structured Products that are subordinate to other classes, values may be volatile and disputes
with the issuer may produce unexpected investment results. The senior and junior tranches of Structured Products collateralized by community bank debt securitizations typically have floating or variable interest rates based on LIBOR and are subject
to the risks associated with securities tied to LIBOR, including the risks associated with the future replacement of LIBOR with an alternative reference rate. See LIBOR risk.
Subordinated/equity tranches of Structured Products.
The Fund may
also invest in the equity tranches of a Structured Product, which typically represent the first loss position in the Structured Product, are unrated and are subject to higher risks. Equity tranches of Structured Products typically do not have a
fixed coupon and payments on equity tranches will be based on the income received from the underlying collateral and the payments made to the senior tranches, both of which may be based on floating rates based on LIBOR or an alternative reference
rate.
Derivatives
Derivatives, which are instruments that have a value
based on another instrument, exchange rate or index, may be used as substitutes for securities in which the Fund can invest. The Fund uses derivatives to gain or adjust exposure to markets, sectors, securities and currencies and to manage exposure
to risks relating to creditworthiness, interest rate spreads, volatility and changes in yield curves. In certain market environments, the Fund may use interest rate swaps and futures contracts to help protect its portfolio from interest rate risk.
The Fund may also invest in swaps, including total return swaps and credit default swaps, options and warrants. The Fund will, under normal circumstances, invest no more than 25% of its net assets plus the amount of any borrowings for investment
purposes in derivative instruments, excluding derivative instruments used for hedging purposes.
International securities
The Fund may invest up to 30% of its net assets plus the amount of any borrowings for investment purposes in the securities of
non-U.S. issuers, including direct investments in companies whose securities are principally traded outside the United States on foreign exchanges or foreign over-the-counter markets. The Fund intends to invest in securities of companies in developed
34
markets. The Funds investments in structured credit instruments, which are commonly issued by special purpose vehicles formed in jurisdictions outside of the United States, are not subject
to or limited by this policy.
Convertible securities
The Fund may
invest in convertible securities which are preferred stocks or bonds that pay a fixed dividend or interest payment and are convertible into common stock or other equity interests at a specified price or conversion ratio during a specified period.
Common and preferred stock
The Fund may invest in common stock. Common
stock represents an equity (ownership) interest in a company, and usually possesses voting rights and earns dividends. Dividends on common stock are not fixed but are declared at the discretion of the issuer. Common stock generally represents the
riskiest investment in a company. In addition, common stock generally has the greatest appreciation and depreciation potential because increases and decreases in earnings are usually reflected in a companys stock price. The Fund may invest in
preferred stock. Preferred stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior to the debt
securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change based on changes in interest rates.
Trust
preferred securities
The Fund may invest in TruPS, which are securities that are typically issued by banks and other financial institutions that combine the
features of corporate debt securities and preferred securities as well as certain features of equity securities. TruPS are typically issued by banks and other financial institutions, generally in the form of interest bearing notes with preferred
securities characteristics, or by an affiliated business trust, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. Many TruPS are issued by trusts or other special purpose entities
established by banks and other financial institutions and are not a direct obligation of those banks and other financial institutions. The TruPS market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature
or have stated maturity dates. TruPS are typically issued with a final maturity date, although some (usually those of foreign issuers) are perpetual in nature. TruPS are typically junior and fully subordinated liabilities of an issuer and benefit
from a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, TruPS typically permit an issuer to defer the payment of income for five years or more without triggering an event of default. Because of
their subordinated position in the capital structure of an issuer, the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by
the issuer or ultimate guarantor when full cumulative payments on the TruPS have not been made), TruPS are often deemed to be a close substitute for traditional preferred securities. TruPS also possess many of the typical characteristics of equity
securities due to their subordinated position in an issuers capital structure and because their quality and value are heavily dependent on the issuers profitability as opposed to any legal claims to specific assets or cash flows.
9. Principal Risks of Investing in the Fund
General market risk. The
capital markets may experience periods of disruption, instability and volatility due to, among other things, social, political, economic and other conditions and events such as natural disasters, terrorism, epidemics and pandemics. Such conditions
may materially and adversely affect the markets globally and the issuers, industries, governments and jurisdictions in which the Fund invests, which may have a negative impact on the Funds performance. These impacts can be exacerbated by
failures of governments and societies to adequately respond to an emerging event or threat.
For example, the coronavirus and related respiratory disease (COVID-19) outbreak has led to disruptions in local, regional, national and global markets and economies affected thereby. Periods of market disruption and instability, like the one due to the COVID-19 outbreak, could severely adversely impact the companies in which the Fund invests and significantly reduce the Funds returns. Although it is impossible to predict the precise nature and consequences
of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty on applicable laws or regulations that impact the Fund or its portfolio securities, it is clear that these types of events
will adversely impact the Fund and its portfolio securities. For example, insurance companies, tenants of properties owned by REITs, and obligors of banks and BDCs in which the Fund invests have been significantly negatively impacted by these
emerging events and the uncertainty caused by the COVID-19 outbreak. The COVID-19 outbreak has had, and any future outbreaks could have, an adverse impact on the markets
and the economy in general, which could have a material adverse impact on financial institutions, including, among other
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things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in
the event of a borrower default, each of which could negatively impact, among other things, the amount and quality of loans available for investment by the Funds portfolio securities and, consequently, the performance of the Fund.
The COVID-19 outbreak has resulted in the government imposition of various forms of stay at home orders and the
closing of non-essential businesses resulting in significant disruption to the financial institutions in which the Fund invests, including increased loan defaults and/or difficulty in obtaining
refinancing, difficulty in valuing loans during periods of increased volatility and liquidity issues. Rapidly evolving proposals and/or actions by state and federal governments to address the crisis are impacting markets, businesses and the economy
in general. The Fund will be impacted if, among other things, the value of loans, real estate and other assets held on the balance sheets of the companies in which the Fund invests decreases. The Fund will also be negatively affected if the
operations and effectiveness of the Adviser or a portfolio company (or any of the key personnel or service providers of the foregoing) are compromised or if necessary or beneficial systems and processes are disrupted. Remote work arrangements for an
extended period of time can strain the Advisers business continuity plan, introducing operational risks and risks related to the Advisers reliance on third-party service providers for critical business activities including certain
communication and information systems. As a result, if the Advisers business continuity plan fails or one of its third-party service providers experiences operational failures, it may have a material adverse effect on the operation of the
Fund, its financial condition, liquidity and cash flows.
The NAV of the Fund and investment return will fluctuate based upon changes in the value of its portfolio
securities. The market value of securities in which the Fund invests is based upon the markets perception of value and is not necessarily an objective measure of the securities value. Other general market risks include: (i) the
market may not recognize what the Adviser believes to be the true value or growth potential of the securities held by the Fund; (ii) the earnings of the companies in which the Fund invests will not continue to grow at expected rates, thus
causing the price of the underlying securities to decline; (iii) the smaller a companys market capitalization, the greater the potential for price fluctuations and volatility of its securities due to lower trading volume for the stock,
less publicly available information about the company and less liquidity in the market for the stock; (iv) the potential for price fluctuations in the securities of a medium capitalization company may be greater than that of a large
capitalization company; (v) the Advisers judgment as to the growth potential or value of a security may prove to be wrong; and (vi) a decline in investor demand for the securities held by the Fund also may adversely affect the value
of the securities.
Management risk. The Fund is actively managed and its performance may reflect the Advisers ability to make decisions which
are suited to achieving the Funds investment objective. Additionally, the Advisers consideration of certain ESG factors when making investment decisions may affect the Funds performance relative to that of funds that do not
consider ESG factors. Due to its active management, the Fund could underperform other funds with a similar investment objective.
Market discount
risk. Shares of closed-end management investment companies frequently trade at a discount from their NAV, which is a risk separate and distinct from the risk that the Funds NAV could decrease as
a result of its investment activities. Although the value of the Funds net assets is generally considered by market participants in determining whether to purchase or sell Shares, whether investors will realize gains or losses upon the sale of
Shares will depend entirely upon whether the market price of Shares at the time of sale is above or below the investors purchase price for Shares. Because the market price of Shares will be determined by factors such as NAV, dividend and
distribution levels (which are dependent, in part, on expenses), supply of and demand for Shares, stability of dividends or distributions, trading volume of Shares, general market and economic conditions and other factors beyond the control of the
Fund, the Fund cannot predict whether Shares will trade at, below or above NAV or at, below or above the initial public offering price. Shares of the Fund are designed primarily for long-term investors; investors in Shares should not view the Fund
as a vehicle for trading purposes.
Limited term risk. Unless the Fund completes a tender offer to all shareholders to purchase shares of the Fund at
a price equal to the NAV per share on the expiration date of the tender offer (an Eligible Tender Offer) and converts to perpetual existence, the Fund will terminate on or about the Termination Date. The Fund is not a so called
target date or life cycle fund whose asset allocation becomes more conservative over time as its target date, often associated with retirement, approaches. In addition, the Fund is not a target term fund whose
investment objective is to return its original NAV on the termination date. The Funds investment objective and policies are not designed to seek to return to investors their initial investment on the Termination Date or in an Eligible
Tender Offer, and investors may receive more or less than their original investment upon termination or in an Eligible Tender Offer. See Market discount risk.
Because the assets of the Fund will be liquidated in connection with the termination, the Fund will incur transaction costs in connection with dispositions of portfolio
securities. The Fund does not limit its investments to securities having a maturity date prior to the Termination Date and may be required to sell portfolio securities when it otherwise would not, including at times
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when market conditions are not favorable, which may cause the Fund to lose money. In particular, the Funds portfolio may still have large exposures to illiquid securities as the Termination
Date approaches, and losses due to portfolio liquidation may be significant. During the wind-down period, beginning one year before the Termination Date, the Fund may begin liquidating all or a portion of the Funds portfolio, and may deviate
from its investment policies and may not achieve its investment objective. During the wind-down period, the Funds portfolio composition may change as more of its portfolio holdings are called or sold and portfolio holdings are disposed of in
anticipation of liquidation. The disposition of portfolio investments by the Fund could cause market prices of such instruments, and hence the NAV and market price of the Shares, to decline. In addition, disposition of portfolio investments will
cause the Fund to incur increased brokerage and related transaction expenses. The Fund may receive proceeds from the disposition of portfolio investments that are less than the valuations of such investments by the Fund. Rather than reinvesting the
proceeds of matured, called or sold securities, the Fund may invest such proceeds in short-term or other lower yielding securities or hold the proceeds in cash, which may adversely affect its performance and the market price of the Shares. The Fund
may distribute the proceeds in one or more liquidating distributions prior to the final liquidation, which may cause fixed expenses to increase when expressed as a percentage of assets under management. Upon a termination, it is anticipated that the
Fund will have distributed substantially all of its net assets to Shareholders, although securities for which no market exists or securities trading at depressed prices, if any, may be placed in a liquidating trust. Shareholders will bear the costs
associated with establishing and maintaining a liquidating trust, if necessary. Securities placed in a liquidating trust may be held for an indefinite period of time until they can be sold or pay out all of their cash flows. The Fund cannot predict
the amount, if any, of securities that will be required to be placed in a liquidating trust.
If the Fund conducts an Eligible Tender Offer, the Fund anticipates
that funds to pay the aggregate purchase price of Shares accepted for purchase pursuant to the tender offer will be first derived from any cash on hand and then from the proceeds from the sale of portfolio investments held by the Fund. In addition,
the Fund may be required to dispose of portfolio investments in connection with any reduction in the Funds outstanding leverage necessary in order to maintain the Funds desired leverage ratios following a tender offer. The risks related
to the disposition of securities in connection with the Funds termination also would be present in connection with the disposition of securities in connection with an Eligible Tender Offer. It is likely that during the pendency of a tender
offer, and possibly for a time thereafter, the Fund will hold a greater than normal percentage of its total assets in cash and cash equivalents, which may impede the Funds ability to achieve its investment objective and decrease returns to
Shareholders. If the Funds tax basis for the investments sold is less than the sale proceeds, the Fund will recognize capital gains, which the Fund will be required to distribute to Shareholders. In addition, the Funds purchase of
tendered Shares pursuant to a tender offer will have tax consequences for tendering Shareholders and may have tax consequences for non-tendering Shareholders. The purchase of Shares by the Fund pursuant to a
tender offer will have the effect of increasing the proportionate interest in the Fund of non-tendering Shareholders. All Shareholders remaining after a tender offer will be subject to proportionately higher
expenses due to the reduction in the Funds total assets resulting from payment for the tendered Shares. Such reduction in the Funds total assets may also result in less investment flexibility, reduced diversification and greater
volatility for the Fund, and may have an adverse effect on the Funds investment performance.
The Fund is not required to conduct an Eligible Tender Offer. If
the Fund conducts an Eligible Tender Offer, there can be no assurance that the number of tendered Shares would not result in the Funds net assets totaling less than $100 million of net assets (the Termination Threshold), in which
case the Eligible Tender Offer will be terminated, no Shares will be repurchased pursuant to the Eligible Tender Offer and the Fund will terminate on or before the Termination Date (subject to possible extensions). Following the completion of an
Eligible Tender Offer in which the number of tendered Shares would result in the Funds net assets totaling greater than the Termination Threshold, the Board may eliminate the Termination Date upon the affirmative vote of a majority of the
Board and without Shareholder approval. Thereafter, the Fund will have a perpetual existence. The Adviser may have a conflict of interest in recommending to the Board that the Termination Date be eliminated and the Fund have a perpetual existence.
The Fund is not required to conduct additional tender offers following an Eligible Tender Offer and conversion to perpetual existence. Therefore, remaining Shareholders may not have another opportunity to participate in a tender offer. Shares of closed-end management investment companies frequently trade at a discount from their NAV, and as a result remaining Shareholders may only be able to sell their Shares at a discount to NAV.
Banks and diversified financials concentration risk. Companies in the group of industries related to banks and diversified financials are often subject to
extensive governmental regulation and intervention, which may adversely affect the scope of their activities, the prices they can charge and the amount of capital they must maintain. Governmental regulation may change frequently and may have
significant adverse consequences for companies in the group of industries related to banks and diversified financials, including effects not intended by such regulation. The impact of recent or future regulation in various countries on any
individual financial company or on the industries as a whole cannot be predicted. The Funds emphasis on community banks may make the Fund more economically vulnerable in the event of a downturn in the banking industry. Community banks may face
heightened risks of failure during times of economic downturns than larger banks. Community banks may also be subject to greater lending risks than larger banks.
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Certain risks may impact the value of investments in the group of industries related to banks and diversified financials
more severely than those of investments outside these industries, including the risks associated with companies that operate with substantial financial leverage. Companies in the group of industries related to banks and diversified financials may
also be adversely affected by increases in interest rates and loan losses, decreases in the availability of money or asset valuations, credit rating downgrades and adverse conditions in other related markets.
Insurance companies, in particular, may be subject to severe price competition and/or rate regulation, which may have an adverse impact on their profitability.
Insurance companies are subject to extensive government regulation in some countries and can be significantly affected by changes in interest rates, general economic conditions, price and marketing competition, the imposition of premium rate caps or
other changes in government regulation or tax law. Different segments of the insurance industry can be significantly affected by mortality and morbidity rates, environmental clean-up costs and catastrophic
events such as earthquakes, hurricanes and terrorist acts.
During the financial crisis that began in 2007, the deterioration of the credit markets impacted a broad
range of mortgage, asset-backed, auction rate, sovereign debt and other markets, including U.S. and non-U.S. credit and interbank money markets, thereby affecting a wide range of financial institutions and
markets. A number of large financial institutions failed during that time, merged with stronger institutions or had significant government infusions of capital. Instability in the financial markets caused certain financial companies to incur large
losses. Some financial companies experienced declines in the valuations of their assets, took actions to raise capital (such as the issuance of debt or equity securities), or even ceased operations. Some financial companies borrowed significant
amounts of capital from government sources and may face future government-imposed restrictions on their businesses or increased government intervention. Those actions caused the securities of many financial companies to decline in value.
The COVID-19 pandemic led to extreme market volatility and dislocations in the financial markets, causing significant yield
spread widening on fixed income assets, equities sell-offs, evaporating liquidity, and significantly less transparency in the pricing of many asset classes. During the COVID-19 pandemic, the Federal Reserve
System and other central banks around the world applied various stimulus tools available to them, including the reduction of short-term interest rates to seek to mitigate the economic impact of the pandemic on global economies. A prolonged reduction
in interest rates could adversely impact the earnings of banks and other financial institutions, which could detract from the Funds performance. In addition, certain banks are making short-term loan modifications for borrowers impacted by COVID-19, including principal and interest deferrals. Banks have also reduced their investment portfolios to increase cash positions in light of potential liquidity needs and have significantly increased the amount
of capital set aside in anticipation of loan defaults. Financial institutions will continue to be subject to unpredictable risks as they adapt to the economic crisis.
The group of industries related to banks and diversified financials is also a target for cyber attacks and may experience technology malfunctions and disruptions. In
recent years, cyber attacks and technology failures have become increasingly frequent and have caused significant losses.
Risks specific to the bank and
diversified financial group of industries also may include:
Asset quality and credit risk. When financial institutions loan money, commit to
loan money or enter into a letter of credit or other contract with a counterparty, they incur credit risk, or the risk of losses if their borrowers do not repay their loans or their counterparties fail to perform according to the terms of their
contract. The companies in which the Fund will invest offer a number of products which expose them to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. Financial institutions allow for and create loss reserves against credit risks based on an assessment of credit losses inherent in their credit exposure (including unfunded credit commitments).
This process, which is critical to their financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of their borrowers
to repay their loans. As is the case with any such assessments, there is always the chance that the financial institutions in which the Fund invests will fail to identify the proper factors or that they will fail to accurately estimate the impacts
of factors that they identify. Failure to identify credit risk factors or the impact of credit factors may result in increased non-performing assets, which will result in increased loss reserve provisioning
and reduction in earnings. Poor asset quality can also affect earnings through reduced interest income which can impair a banks ability to service debt obligations or to generate sufficient income for equity holders. Bank failure may result
due to inadequate loss reserves, inadequate capital to sustain credit losses or reduced earnings due to non-performing assets. The Fund will not have control over the asset quality of the financial
institutions in which the Fund will invest, and these institutions may experience substantial increases in the level of their non-performing assets which may have a material adverse impact on the Funds
investments.
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Capital risk. A banks capital position is extremely important to its overall financial condition and
serves as a cushion against losses. U.S. banking regulators have established specific capital requirements for regulated banks. Federal banking regulators proposed amended regulatory capital regulations in response to the Dodd-Frank Act and the
international capital and liquidity requirements set forth by the Basel Committee on Banking Supervision (Basel III) protocols which would impose even more stringent capital requirements. In the event that a regulated bank falls below
certain capital adequacy standards, it may become subject to regulatory intervention including, but not limited to, being placed into a FDIC-administered receivership or conservatorship. The regulatory provisions under which the regulatory
authorities act are intended to protect depositors. The deposit insurance fund and the banking system are not intended to protect shareholders or other investors in other securities issued by a bank or its holding company. The effect of inadequate
capital can have a potentially adverse consequence on the institutions financial condition, its ability to operate as a going concern and its ability to operate as a regulated financial institution and may have a material adverse impact on the
Funds investments.
Earnings risk. Earnings are the primary means for financial institutions to generate capital to support asset growth, to
provide for loan losses and to support their ability to pay dividends to shareholders. The quantity as well as the quality of earnings can be affected by excessive or inadequately managed credit risk that may result in losses and require additions
to loss reserves, or by high levels of market risk that may unduly expose an institutions earnings to volatility in interest rates. The quality of earnings may also be diminished by undue reliance on extraordinary gains, nonrecurring events,
or favorable tax effects. Future earnings may be adversely affected by an inability to forecast or control funding and operating expenses, net interest margin compression improperly executed or ill-advised
business strategies, or poorly managed or uncontrolled exposure to other risks. Deficient earnings can result in inadequate capital resources to support asset growth or insufficient cash flow to meet the financial institutions near term
obligations. Under certain circumstances, this may result in the financial institution being required to suspend operations or the imposition of a cease-and-desist order
by regulators which could potentially impair the Funds investments.
Management risk. The ability of management to identify, measure, monitor
and control the risks of an institutions activities and to ensure a financial institutions safe, sound and efficient operation in compliance with applicable laws and regulations are critical. Depending on the nature and scope of an
institutions activities, management practices may need to address some or all of the following risks: credit, market, operating, reputation, strategic, compliance, legal, liquidity and other risks. The Fund will not have direct or indirect
control over the management of the financial institutions in which the Fund will invest and, given the Funds long-term investment strategy, it is likely that the management teams and their policies may change. The inability of management to
operate their financial institution in a safe, sound and efficient manner in compliance with applicable laws and regulations, or changes in management of financial institutions in which the Fund invests, may have an adverse impact on the Funds
investment.
Litigation risk. Financial institutions face significant legal risks in their businesses, and the volume of claims and amount of damages
and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against the companies in which the Fund invests could have material adverse
financial effects or cause significant reputational harm to these companies, which in turn could seriously harm their business prospects. Legal liability or regulatory action against the companies in which the Fund invests could have material
adverse financial effects on the Fund and adversely affect the Funds earnings and book value.
Market risk. The financial institutions in which
the Fund will invest are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market
risk is inherent in the financial instruments associated with the operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives of the financial
institutions in which the Fund will invest. Market risk includes, but is not limited to, fluctuations in interest rates, equity and futures prices, changes in the implied volatility of interest rates, equity and futures prices and price
deterioration or changes in value due to changes in market perception or actual credit quality of the issuer. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on the
operations and overall financial condition of the financial institutions in which the Fund will invest as well as adverse effects on the Funds results from operations and overall financial condition.
Monetary policy risk. Monetary policies have had, and will continue to have, significant effects on the operations and results of financial institutions.
There can be no assurance that a particular financial institution will not experience a material adverse effect on its net interest income in a changing interest rate environment. Factors such as the liquidity of the global financial markets, and
the availability and cost of credit may significantly affect the activity levels of customers with respect to the size, number and timing of transactions. Fluctuation in interest rates, which affect the value of assets and the cost of funding
liabilities, are not predictable or controllable, may vary and may impact economic activity in various regions.
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Competition. The group of industries related to banks and diversified financials, including the banking
sector, is extremely competitive, and it is expected that the competitive pressures will increase. Merger activity in the financial services industry has resulted in and is expected to continue to result in, larger institutions with greater
financial and other resources that are capable of offering a wider array of financial products and services. The group of industries related to banks and diversified financials has become considerably more concentrated as numerous financial
institutions have been acquired by or merged into other institutions. The majority of financial institutions in which the Fund will invest will be relatively small with significantly fewer resources and capabilities than larger institutions; this
size differential puts them at a competitive disadvantage in terms of product offering and access to capital. Technological advances and the growth of e-commerce have made it possible for non-financial institutions and non-bank financial institutions to offer products and services that have traditionally been offered by banking and other financial institutions.
It is expected that the cross-industry competition and inter-industry competition will continue to intensify and may be adverse to the financial institutions in which the Fund invests.
Regulatory risk. Financial institutions, including community banks, are subject to various state and federal banking regulations that impact how they
conduct business, including but not limited to how they obtain funding, their ability to operate and the value of the Funds investments. Changes to these regulations could have an adverse effect on their operations and operating results and
the Funds investments. The Fund expects to make long-term investments in financial institutions that are subject to various state and federal regulations and oversight. Congress, state legislatures and the various bank regulatory agencies
frequently introduce proposals to change the laws and regulations governing the banking industry in response to the Dodd-Frank Act, Consumer Financial Protection Bureau (the CFPB) rulemaking or otherwise. The likelihood and timing of any
proposals or legislation and the impact they might have on the Funds investments in financial institutions affected by such changes cannot be determined and any such changes may be adverse to the Funds investments. Ownership of the stock
of certain types of regulated banking institutions may subject the Fund to additional regulations. Investments in banking institutions and transactions related to the Funds investments may require approval from one or more regulatory
authorities. If the Fund were deemed to be a bank holding company or thrift holding company, bank holding companies or thrift holding companies that invest in the Fund would be subject to certain restrictions and regulations. To the extent the Fund
invests in brokers, dealers or registered investment advisers, it will do so in compliance with Rule 12d3-1 under the 1940 Act and applicable SEC interpretive positions and guidance thereunder.
BDC risk. Investments in closed-end funds that elect to be treated as BDCs may be subject to a high degree of risk
and speculative investing. BDCs typically invest in and lend to small and medium-sized private and certain public companies that may not have access to public equity markets or capital raising. As a result, a
BDCs portfolio typically will include a substantial amount of securities purchased in private placements, and its portfolio may carry risks similar to those of a private equity or private debt fund. Securities that are not publicly registered
may be difficult to value and may be difficult to sell at a price representative of their intrinsic value. Small and medium-sized companies also may have fewer lines of business so that changes in any one line
of business may have a greater impact on the value of their stock than is the case with a larger company. Some BDCs invest substantially, or even exclusively, in one sector or industry group and therefore carry risk of that particular sector or
industry group. To the extent a BDC focuses its investments in a specific sector, the BDC will be susceptible to adverse conditions and economic or regulatory occurrences affecting the specific sector or industry group, which tends to increase
volatility and result in higher risk.
Investments in BDCs are also subject to the risk that the management team will be unable to meet the BDCs investment
objective or manage the BDCs portfolio when the underlying securities are redeemed or sold, particularly during periods of market turmoil and as investors perceptions regarding a BDC or its underlying investments change. Common shares of
BDCs are not redeemable at the option of the BDC shareholder and, as with shares of other closed-end funds, they may trade in the secondary market at a discount to their NAV. Shares of non-listed BDCs generally do not trade in a secondary market and, accordingly, have little or no liquidity.
BDCs may utilize
leverage in their portfolios through borrowings or the issuance of preferred stock. While leverage often serves to increase the yield of a BDC, this leverage also subjects the BDC to increased risks, including the likelihood of increased volatility
and the possibility that the BDCs common share income may fall if the interest rate on any borrowings rises.
Instability in the financial markets or
deterioration in credit and financing conditions could have material and adverse consequences on the availability of debt and equity capital relied on by certain BDCs, and the companies in which they invest, to grow or could otherwise increase the
costs of such capital and/or result in less favorable terms and conditions, thereby decreasing the investment income or otherwise damaging the business of such BDCs. For example, changes in the economic and business environment attributable to COVID-19, the state and national emergencies that have been declared and the resultant risk the pandemic poses for business disruptions for small and medium-sized companies in
which BDCs invest may lead to credit quality decline. Portfolio companies of BDCs are subject to the risks related to the ongoing economic effects of the pandemic,
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including temporary and permanent business closures, increased unemployment, and the disruption of supply chains. The inability of companies to make timely payments on obligations could result in
reduced cash flow for BDCs and could adversely impact their ability to make distributions to investors such as the Fund and impact the value of the BDCs investments. Defaults by portfolio companies could also negatively impact the NAV of BDCs
held by the Fund. In addition, disruptions in the global financial markets could impair a BDCs access to credit, reducing its ability to take advantage of investment opportunities.
The Fund may invest in various parts of a BDCs capital structure, including equity, debt and preferred securities. These investments carry the risks generally
associated with such asset classes, including the fact that equity and preferred securities are generally subordinated to bonds and other debt securities in terms of priority for payment of income and in the event of a liquidation. In addition,
certain types of securities issued by a BDC may trade less frequently and in a more limited volume than other types of securities issued by the BDC and, as a result, may be subject to more abrupt or erratic price movements or have more limited
liquidity. In the event that event that the Fund acquires equity interests in BDCs, the Fund will indirectly bear its proportionate share of any management fees and other operating expenses incurred by the BDCs and of any performance-based or
incentive fees payable by the BDCs, in addition to the expenses paid by the Fund.
BDCs are generally taxed as RICs under Subchapter M of the Code. To qualify and
remain eligible for the special tax treatment accorded to RICs and their shareholders, such BDCs must meet certain source-of-income, asset diversification and annual
distribution requirements. If a BDC in which the Fund invests fails to qualify as a RIC, such BDC would be liable for federal, and possibly state, corporate taxes on its taxable income and gains. Such failure by a BDC could substantially reduce the
BDCs net assets and the amount of income available for distribution to the Fund, which would in turn decrease the total return of the Fund in respect of such investment.
Closed-end fund risk. The Fund is a diversified, closed-end management
investment company and designed primarily for long term investors. Closed-end funds differ from open-end management investment companies (commonly known as mutual funds)
because investors in a closed-end fund do not have the right to redeem their shares on a daily basis. Shares of the Fund may trade at a discount to the Funds NAV. See Market discount risk.
REIT risk. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in
general. An Equity REIT may be affected by changes in the value of the underlying properties owned by the REIT. A Mortgage REIT may be affected by the ability of the issuers of its portfolio mortgages to repay their obligations. REITs are dependent
upon the skills of their managers and are not necessarily diversified. REITs are generally dependent upon maintaining cash flows to repay borrowings and to make distributions to shareholders and are subject to the risk of default by lessees or
borrowers. For example, the COVID-19 pandemic has disproportionately impacted retail purpose commercial real estate operators, as well as hotel and restaurant operators. REITs may experience adverse impacts
when commercial tenants are unwilling or unable to satisfy their obligations or continue to pay rent on time or at all, or choose not to renew their leases or re-lease properties on the same or better terms in
the event of non renewal or early termination of existing leases. A rise in unemployment will directly impact residential mortgage REITs in a similar fashion when obligors are unable to make mortgage payments on time.
REITs also are subject to the possibilities of failing to qualify for tax free pass-through of income under the Code, and failing to maintain their exemption from
registration under the 1940 Act. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to risks associated with such industry. By investing in REITs, the Fund will
indirectly bear its proportionate share of the expenses of the REITs. The expenses at the REIT level are not included in the Funds expense table as acquired fund fees and expenses. REITs (especially Mortgage REITs) are also subject to interest
rate risks. When interest rates decline, the value of a REITs investment in fixed rate obligations may be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected
to decline. If the REIT invests in adjustable rate mortgage loans, the interest rates on which are reset periodically and yields on a REITs investments in such loans will gradually align themselves to reflect changes in market interest rates.
This causes the value of such investments to potentially fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. In addition, shares of publicly-traded REITs may trade less frequently
than shares of other issuers, which means that purchase and sale transactions in those shares could have a magnified impact on share price, resulting in abrupt or erratic price fluctuations.
The Fund may invest in various parts of a REITs capital structure, including equity, debt and preferred securities. These investments carry the risks generally
associated with such asset classes, including the fact that equity and preferred securities are generally subordinated to bonds and other debt securities in terms of priority for payment of income and in the event of a liquidation. In addition,
certain types of securities issued by a REIT may trade less frequently and in a more limited volume than other types of securities issued by the REIT and, as a result, may be subject to more abrupt or erratic price movements or have more limited
liquidity.
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Risks relating to various types of REITs and to REITs generally may also include:
Mortgage REIT risk. Mortgage REITs lend money to developers and owners of properties and invest primarily in mortgages and similar real estate interests.
Mortgage REITs receive interest payments from the owners of the mortgaged properties. Accordingly, mortgage REITs are subject to the credit risk of the borrowers to whom they extend funds, which is the risk that the borrower will not be able to make
timely interest and principal payments on the loan to the mortgage REIT. Mortgage REITs also are subject to the risk that the value of mortgaged properties may be less than the amounts owed on the properties. If a mortgage REIT is required to
foreclose on a borrower, the amount recovered in connection with the foreclosure may be less than the amount owed to the mortgage REIT. Mortgage REITs are subject to significant interest rate risk. During periods when interest rates are declining,
mortgages are often refinanced or prepaid. Refinancing or prepayment of mortgages may reduce the yield of mortgage REITs. When interest rates decline, the value of a mortgage REITs investment in fixed rate obligations can be expected to rise.
Conversely, when interest rates rise, the value of a mortgage REITs investment in fixed rate obligations can be expected to decline. In addition, rising interest rates generally increase the costs of obtaining financing, which could cause the
value of a mortgage REITs investments to decline. A mortgage REITs investment in adjustable rate obligations may react differently to interest rate changes than an investment in fixed rate obligations. As interest rates on adjustable
rate mortgage loans are reset periodically, yields on a mortgage REITs investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate obligations. Mortgage REITs typically use leverage (and in many cases, may be highly leveraged), which increases investment risk and could adversely affect a mortgage
REITs operations and market value in periods of rising interest rates, increased interest rate volatility, downturns in the economy, reductions in the availability of financing or deterioration in the conditions of the mortgage REITs
mortgage-related assets.
Equity REIT risk. Equity REITs make direct investments in real estate. Equity REITs invest primarily in real properties and
may earn rental income from leasing those properties. Equity REITs may also realize gains or losses from the sale of properties. Equity REITs will be affected by conditions in the real estate rental market and by changes in the value of the
properties they own. A decline in rental income may occur because of extended vacancies, limitations on rents, the failure to collect rents, increased competition from other properties or poor management. Equity REITs also can be affected by rising
interest rates. Rising interest rates may cause investors to demand a high annual yield from future distributions that, in turn, could decrease the market prices for such REITs and for the properties held by such REITs. In addition, rising interest
rates also increase the costs of obtaining financing for real estate projects. Because many real estate projects are dependent upon receiving financing, this could cause the value of the Equity REITs in which the Fund invests to decline.
Hybrid REIT risk. Because they combine the characteristics of Mortgage REITs and Equity REITs, Hybrid REITs are subject to the risks associated with both
Mortgage REITs and Equity REITs, as described above, and to the risks associated with REITs generally.
REIT tax risk. Qualification as a REIT under
the Code in any particular year is a complex analysis that depends on a number of factors. There can be no assurance that an entity in which the Fund invests with the expectation that it will be taxed as a REIT will, in fact, qualify as a REIT. An
entity that fails to qualify as a REIT would be subject to a corporate level tax, would not be entitled to a deduction for dividends paid to its shareholders and would not pass through to its shareholders the character of income earned by the
entity. Dividends paid by REITs may not receive preferential tax treatment afforded other dividends. The failure of a company to qualify as a REIT could have adverse consequences for the Fund, including significantly reducing the return to the Fund
on its investment in such company.
Real estate industry risk. Ownership of real estate is subject to a number of risks, including (i) changes in
the general economic climate (such as changes in interest rates or the credit markets) and social and economic trends; (ii) local real estate conditions (such as an oversupply of space or a reduction in demand for space); (iii) the quality and
philosophy of management; (iv) competition (such as competition based on rental rates); (v) specific features of properties (such as location); (vi) financial condition of tenants, buyers and sellers of properties; (vii) quality of maintenance,
insurance and management services; (viii) changes in operating costs; (ix) government regulations (including those governing usage, improvements, zoning, limitations on rents and taxes); (x) the availability of financing; (xi) difficulties
in valuing and disposing of real estate; (xii) risk of casualty or condemnation losses; (xiii) delays in completion of construction; (xiv) losses due to special hazards (e.g., floods, earthquakes and hurricanes); (xv) potential liability
under environmental and other laws (such as successor liability if investing in existing entities); and (xvi) the possibility of borrowers paying off mortgages sooner than expected, which may lead to reinvestment of assets at lower prevailing
interest rates.
Credit risk. Credit risk is the risk that securities owned by the Fund will decline in value or the issuer of a security owned by the
Fund will not be able to make interest or principal payments on the security when due because the issuer of the security experiences a decline in its financial circumstances. Certain investments may be exposed to the credit risk of the
counterparties with whom the Fund deals.
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Equity risk. The Funds investments in equity securities may subject the Fund to volatility and the
following risks: (i) prices of stock may fall over short or extended periods of time; (ii) cyclical movements of the equity market may cause the value of the Funds securities to fluctuate drastically from day to day; and
(iii) individual companies may report poor results or be negatively affected by industry and or economic trends and developments.
In general, stock values are
affected by activities specific to the company as well as general market, economic and political conditions. The NAV of the Fund and investment return will fluctuate based upon changes in the value of its portfolio securities. The market value of
securities in which the Fund invests is based upon the markets perception of value and is not necessarily an objective measure of the securities value. Other general market risks include: (i) the market may not recognize what the
Adviser believes to be the true value or growth potential of the stocks held by the Fund; (ii) the earnings of the companies in which the Fund invests will not continue to grow at expected rates, thus causing the price of the underlying stocks
to decline; (iii) the smaller a companys market capitalization, the greater the potential for price fluctuations and volatility of its stock due to lower trading volume for the stock, less publicly available information about the company
and less liquidity in the market for the stock; (iv) the potential for price fluctuations in the stock of a medium capitalization company may be greater than that of a large capitalization company; (v) the Advisers judgment as to the
growth potential or value of a stock may prove to be wrong; and (vi) a decline in investor demand for the stocks held by the Fund also may adversely affect the value of the securities.
Extension risk. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of
longer-term securities generally changes more in response to changes in interest rates than shorter-term securities. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Fixed-income instruments risk. Changes in interest rates generally will cause the value of fixed-income instruments held by the Fund to vary inversely to
such changes. Prices of longer-term fixed-income instruments generally fluctuate more than the prices of shorter-term fixed income instruments as interest rates change. In addition, a fund with a longer average portfolio duration will be more
sensitive to changes in interest rates than a fund with a shorter average portfolio duration. Duration is a measure used to determine the sensitivity of a securitys price to changes in interest rates that incorporates a securitys yield,
coupon, final maturity and call features, among other characteristics. For example, if a portfolio has a duration of three years, and interest rates increase (fall) by 1%, the portfolio would decline (increase) in value by approximately 3%. However,
duration may not accurately reflect the true interest rate sensitivity of instruments held by a fund and, therefore, the Funds exposure to changes in interest rates. A fund with a negative average portfolio duration may increase in value when
interest rates rise, and generally incurs a loss when interest rates decline. If an issuer calls or redeems an instrument held by a fund during a time of declining interest rates, the Fund might need to reinvest the proceeds in an investment
offering a lower yield, and therefore may not benefit from any increase in value as a result of declining interest rates.
Fixed-income instruments that are
fixed-rate are generally more susceptible than floating rate instruments to price volatility related to changes in prevailing interest rates. The prices of floating rate fixed-income instruments tend to have less fluctuation in response to changes
in interest rates, but will have some fluctuation, particularly when the next interest rate adjustment on such security is further away in time or adjustments are limited in amount over time. The Fund may invest in short-term securities that, when
interest rates decline, affect the Funds yield as these securities mature or are sold and the Fund purchases new short-term securities with lower yields. Subordinated debt securities that receive payments of interest and principal after other
more senior security holders are paid carry the risk that the issuer will not be able to meet its obligations and that the subordinated investments may lose value. An obligors willingness and ability to pay interest or to repay principal due
in a timely manner may be affected by its cash flow.
Floating or variable rate securities risk. Floating or variable rate securities pay interest at
rates that adjust in response to changes in a specified interest rate or reset at predetermined dates (such as the end of a calendar quarter). Securities with floating or variable interest rates are generally less sensitive to interest rate changes
than securities with fixed interest rates, but may decline in value if their interest rates do not rise as much, or as quickly, as comparable market interest rates. Conversely, floating or variable rate securities will not generally increase in
value if interest rates decline. The impact of interest rate changes on floating or variable rate securities is typically mitigated by the periodic interest rate reset of the investments. Floating or variable rate securities can be rated below
investment grade or unrated; therefore, the Fund relies heavily on the analytical ability of the Adviser. Lower-rated floating or variable rate securities are subject to many of the same risks as high yield securities, although these risks are
reduced when the instruments are senior and secured as opposed to many high yield securities that are junior and unsecured. Floating or variable rate securities are often subject to restrictions on resale, which can result in reduced liquidity.
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High yield securities risk. Below investment grade instruments are commonly referred to as junk
or high yield instruments and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal. Lower grade instruments may be particularly susceptible to economic downturns. It is likely that
a prolonged or deepening economic recession could adversely affect the ability of the issuers of such instruments to repay principal and pay interest thereon, increase the incidence of default for such instruments and severely disrupt the market
value of such instruments. There is no minimum credit quality for securities in which the Fund may invest, provided that not more than 15% of its Managed Assets in credit instruments rated below rated CCC by S&P or Fitch or Caa2 by Moodys.
Lower grade instruments, though higher yielding, are characterized by higher risk. The retail secondary market for lower grade instruments, which are often thinly
traded or subject to irregular trading, may be less liquid than that for higher rated instruments. Such instruments can be more difficult to sell and to value than higher rated instruments because there is generally less public information available
about such securities. As a result, subjective judgment may play a greater role in valuing such instruments. Adverse conditions could make it difficult at times for the Fund to sell certain instruments or could result in lower prices than those used
in calculating the Funds NAV. Because of the substantial risks associated with investments in lower grade instruments, investors could lose money on their investment in the Fund, both in the short-term and the long-term.
Illiquid securities risk. It is expected that a substantial portion of the securities and instruments in which the Fund invests will not trade on any
exchange and will be illiquid. The Fund may also invest in restricted securities. Investments in restricted securities could have the effect of increasing the amount of the Funds assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase these securities.
Illiquid and restricted securities may be difficult to dispose of at a fair price at the times
when the Fund believes it is desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the
sale of such securities. Illiquid and restricted securities are also more difficult to value, especially in challenging markets. The Advisers judgment may play a greater role in the valuation process. Investment of the Funds assets in
illiquid and restricted securities may restrict the Funds ability to take advantage of market opportunities. To dispose of an unregistered security, the Fund, where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered, thereby enabling the Fund to sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the issuer and acquiror of the securities. In either case, the Fund would bear market risks during that period. Liquidity risk may impact the Funds ability to meet
Shareholder repurchase requests and as a result, the Fund may be forced to sell securities at inopportune prices.
Certain fixed-income instruments are not readily
marketable and may be subject to restrictions on resale. Fixed-income instruments may not be listed on any national securities exchange and no active trading market may exist for certain of the fixed-income instruments in which the Fund will invest.
Where a secondary market exists, the market for some fixed-income instruments may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. In addition, dealer inventories of certain securities are at
historic lows in relation to market size, which indicates a potential for reduced liquidity as dealers may be less able to make markets for certain fixed-income securities.
Certain Structured Products may be thinly traded or have a limited trading market. Structured products are typically privately offered and sold, and thus, are not
registered under the securities laws, which means less information about the security may be available as compared to publicly offered securities and only certain institutions may buy and sell them. As a result, investments in Structured Products
may be characterized by the Fund as illiquid securities.
Convertible securities risk. The Fund may invest in convertible securities which are
preferred stocks or bonds that pay a fixed dividend or interest payment and are convertible into common stock or other equity interests at a specified price or conversion ratio during a specified period. Although convertible bonds, convertible
preferred stocks and other securities convertible into equity securities may have some attributes of income securities or debt securities, the Fund generally treats such securities as equity securities. By investing in convertible securities, the
Fund may seek income, and may also seek the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock or other interests into which the securities are convertible, while potentially earning a higher
fixed rate of return than is ordinarily available in common stocks. While the value of convertible securities depends in part on interest rate changes and the credit quality of the issuers, the value of these securities will also change based on
changes in the value of the underlying stock. Income paid by a convertible security may provide a limited cushion against a decline in the price of the security; however, convertible securities generally have less potential for gain than common
stocks. Also, convertible bonds generally pay less income than non-convertible bonds.
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Senior debt, subordinated debt and preferred securities of banks and diversified financial companies risk.
Banks may issue subordinated debt securities, which have a lower priority to full payment behind other more senior debt securities. This means, for example, that if the issuing bank were to become insolvent, subordinated debt holders may not
receive a full return of their principal because the bank would have to satisfy the claims of senior debt holders first. To the extent a bank in which the Fund invests were to be placed into a FDIC-administered receivership or conservatorship, the
Fund would not be entitled to the same rights that it would have as a creditor in a typical bankruptcy proceeding, and creditors of failed banking organizations typically receive little or no recovery. See Banks and diversified financials
concentration risk Capital risk. In addition to the risks generally associated with fixed income instruments (e.g., interest rate risk, credit risk, etc.), bank subordinated debt is also subject to risks inherent to banks. Because banks
are highly regulated and operate in a highly competitive environment, it may be difficult for a bank to meet its debt obligations. Banks also may be affected by changes in legislation and regulations applicable to the financial markets. This is
especially true in light of the large amount of regulatory developments in recent years. Bank subordinated debt is often issued by smaller community banks that may be overly concentrated in a specific geographic region, lack the capacity to comply
with new regulatory requirements or lack adequate capital. Smaller banks may also have a lower capacity to withstand negative developments in the market in general. If any of these or other factors were to negatively affect a banks operations,
the bank could fail to make payments on its debt obligations, which would hurt the Funds bank subordinated debt investments.
Preferred securities are subject
to risks associated with both equity and debt instruments. Because some preferred securities allow the issuer to convert its preferred stock into common stock, preferred securities are often sensitive to declining common stock values. In addition,
certain preferred securities contain provisions that allow an issuer to skip or defer distributions, which may be more likely when the issuer is less able to make dividend payments as a result of financial difficulties. Preferred securities can also
be affected by changes in interest rates, especially if dividends are paid at a fixed rate, and may also include call features in favor of the issuer. In the event of redemptions by the issuer, the Fund may not be able to reinvest the proceeds at
comparable or favorable rates of return. Preferred securities are generally subordinated to bonds and other debt securities in an issuers capital structure in terms of priority for corporate income and liquidation payments, and may trade less
frequently and in a more limited volume and may be subject to more abrupt or erratic price movements than many other securities.
Although the Fund will invest in
securities and other obligations of FDIC-insured depository institutions and their affiliates, neither those securities and obligations nor your investment in the Fund will be protected by FDIC insurance.
Structured Products risk. The Structured Products in which the Fund may invest include community bank debt securitizations and other ABS and debt
securitizations (which may be referred to as collateralized debt securities or CDOs), which are collateralized by a portfolio consisting primarily of unsecured, subordinated loans made to, and unsecured, subordinated debentures, notes or other
securities issued by, community banks or other financial institutions. Holders of Structured Products bear risks of the underlying assets and are subject to counterparty risk. The Fund (and other investors in the Structured Product) ultimately bear
the credit risk associated with the underlying assets. Most Structured Products are issued in multiple tranches that offer investors various maturity and credit risk characteristics, which are often categorized as senior, mezzanine, and
subordinated/equity. The Fund may invest in any tranche of a Structured Product, including the subordinated/ equity tranches.
The ability of the Structured Product
to make distributions will be subject to various limitations, including the terms and covenants of the debt it issues. For example, performance tests (based on interest coverage or other financial ratios or other criteria) may restrict the
Funds ability, as holder of the equity interests in a Structured Product, to receive cash flow from these investments. There is no assurance any such performance tests will be satisfied. Also, a Structured Product may take actions that delay
distributions in order to preserve ratings and to keep the cost of present and future financings lower or the Structured Product may be obligated to retain cash or other assets to satisfy over-collateralization requirements commonly provided for
holders of the Structured Products debt. As a result, there may be a lag, which could be significant, between the repayment or other realization on a loan or other assets in, and the distribution of cash out of, a Structured Product, or cash
flow may be completely restricted for the life of the Structured Product. If the Fund does not receive cash flow from any such Structured Product that is necessary to satisfy the annual distribution requirement for maintaining the Funds RIC
status, and the Fund is unable to obtain cash from other sources necessary to satisfy this requirement, the Fund could fail to maintain its status as a RIC, which would have a material adverse effect on the Funds financial performance.
If applicable accounting pronouncements or SEC staff guidance require the Fund to consolidate the Structured Products financial statements with the Funds
financial statements, any debt issued by the Structured Product would be generally treated as if it were issued by the Fund for purposes of the asset coverage ratio applicable to the Fund. Further, there can be no assurance that a bankruptcy court,
in the exercise of its broad equitable powers, would not order that the Funds assets and liabilities be substantively consolidated with those of a Structured Product, rather than kept separate, and that creditors of the
45
Structured Product would have claims against the consolidated bankruptcy estate (including the Funds assets). If a Structured Product is not consolidated with the Fund, the Funds only
interest in the Structured Product will be the value of its retained subordinated interest and the income allocated to it, which may be more or less than the cash the Fund received from the Structured Product, and none of the Structured
Products liabilities would be reflected as the Funds liabilities. If the assets of a Structured Product are not consolidated with the Funds assets and liabilities, then the leverage incurred by such Structured Product may or may
not be treated as borrowings by the Fund for purposes applicable limitations on the Funds ability to issue debt.
The Fund generally may have the right to
receive payments only from the Structured Product, and generally does not have direct rights against the issuer or the entity that sold the underlying collateral assets. While certain Structured Products enable the investor to acquire interests in a
pool of securities without the brokerage and other expenses associated with directly holding the same securities, investors in Structured Products generally pay their share of the Structured Products administrative and other expenses. Although
it is difficult to predict whether the prices of assets underlying Structured Products will rise or fall, these prices (and, therefore, the prices of Structured Products) will be influenced by the same types of political and economic events that
affect issuers of securities and capital markets generally. If the issuer of a Structured Product uses shorter-term financing to purchase longer-term securities, the issuer may be forced to sell its securities at below-market prices if it
experiences difficulty in obtaining short-term financing, which may adversely affect the value of the Structured Products owned by the Fund.
The activities of the
issuers of certain Structured Products, including bank debt securitizations, will generally be directed by a collateral manager. In the Funds capacity as holder of interests in such a Structured Product, the Fund is generally not able to make
decisions with respect to the management, disposition or other realization of any investment, or other decisions regarding the business and affairs, of the Structured Product. Consequently, the success of the securitizations in will depend, in part,
on the financial and managerial expertise of the collateral manager. Subject to certain exceptions, any change in the investment professionals of the collateral manager will not present grounds for termination of the collateral management agreement.
In addition, such investment professionals may not devote all of their professional time to the affairs of the Structured Product. There can be no assurance that for any Structured Product, in the event that underlying instruments are prepaid, the
collateral manager will be able to reinvest such proceeds in new instruments with equivalent investment returns. If the collateral manager cannot reinvest in new instruments with equivalent investment returns, the interest proceeds available to pay
interest on the Structured Product may be adversely affected. The Structured Products in which the Fund invests are generally not registered as investment companies under the 1940 Act. As investors in these Structured Products, the Fund is not
afforded the protections that shareholders in an investment company registered under the 1940 Act would have.
Certain Structured Products may be thinly traded or
have a limited trading market. Structured products are typically privately offered and sold, and thus, are not registered under the securities laws, which means less information about the security may be available as compared to publicly offered
securities and only certain institutions may buy and sell them. As a result, investments in Structured Products may be characterized by the Fund as illiquid securities. An active dealer market may exist for certain of these investments that can be
resold in Rule 144A transactions, but there can be no assurance that such a market will exist or will be active enough for the Fund to sell such securities. In addition, certain Structured Products may not be purchased or sold as easily as publicly
traded securities, and, historically, the trading volume has been small relative to other markets. Structured Products may encounter trading delays due to their unique and customized nature, and transfers may require the consent of an agent bank
and/or borrower. To the extent a trading market exists for a Structured Product, the market value may be affected by a variety of factors, including changes in the market value or dividends paid by the underlying collateral of the Structured
Product; prepayments, defaults and recoveries on the underlying collateral; and other risks associated with the underlying collateral. The leveraged nature of equity interests in Structured Products are likely to magnify the adverse impact of such
factors on equity interests in Structured Products. Because of the limited market, there may be less information available to investors regarding the underlying assets of a Structured Product than if the investors invested directly in the debt of
the underlying obligors.
In addition to the general risks associated with fixed-income securities discussed herein, Structured Products carry additional risks,
including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the
possibility that the investments in Structured Products are subordinate to other classes or tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the
issuer or unexpected investment results.
To the extent that an affiliate of the Adviser serves as the sponsor and/or collateral manager of a Structured Product in
which the Fund invests, or the Adviser or its affiliates hold other interests in Structured Products in which the Fund invests, the Fund may
46
be limited in its ability to participate in certain transactions with the Structured Product and may not be able to dispose of its interests in the Structured Product if no secondary market
exists for the interests. Even if a secondary market exists, the Adviser or its affiliates at times may possess material non-public information that may restrict the Funds ability to dispose of its
interests in the Structured Product. The Fund does not currently contemplate making investments in any specific investments sponsored by the Adviser or an affiliate; however, to the extent the Fund does, it will do so only as permitted under the
1940 Act and the rules thereunder.
Additional risks relating to investing in the subordinated/equity tranche of Structured Products.
Up to all of the Funds investments in Structured Products may be in the subordinated/equity tranches. Investments in the equity tranches of Structured Products
typically represent the first loss position, are unrated and are subject to greater risk. To the extent that any losses are incurred by the Structured Product in respect of any collateral, such losses will be borne first by the owners of the equity
interests, which may include the Fund. Any equity interests that the Fund holds in a Structured Product will not be secured by the assets of the Structured Product or guaranteed by any party, and the Fund will rank behind all creditors of the
Structured Product, including the holders of the secured notes issued by the Structured Product. Equity interests are typically subject to certain payment restrictions in the indenture governing the senior tranches. Accordingly, equity interests may
not be paid in full, may be adversely impacted by defaults by a relatively small number of underlying assets held by the Structured Product and may be subject to up to 100% loss. Structured Products may be highly levered, and therefore equity
interests may be subject to a higher risk of loss, including the potential for total loss. The market value of equity interests may be significantly affected by a variety of factors, including changes in interest rates, changes in the market value
of the collateral held by the securitization, defaults and recoveries on that collateral and other risks associated with that collateral. The leveraged nature of equity interest is likely to magnify these impacts. Equity interests typically do not
have a fixed coupon and payments on equity interests will be based on the income received from the underlying collateral and the payments made to the senior tranches, both of which may be based on floating rates. While the payments on equity
interest will be variable, equity interests may not offer the same level of protection against changes in interest rates as other floating rate instruments. Equity interests are typically illiquid investments and subject to extensive transfer
restrictions, and no party is under any obligation to make a market for equity interests. At times, there may be no market for equity interests, and the Fund may not be able to sell or otherwise transfer equity interests at their fair value, or at
all, in the event that it determines to sell them.
Derivatives risk. The Funds derivative investments have risks similar to their underlying
assets and may have additional risks, including the imperfect correlation between the value of such instruments and the underlying asset, rate or index, which creates the possibility that the loss on such instruments may be greater than the gain in
the value of the underlying asset, rate or index; the loss of principal; the possible default of the other party to the transaction; illiquidity of the derivative investments; risks arising from margin requirements; and risks arising from mispricing
or valuation complexity. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the
derivative contract in a bankruptcy or other reorganization proceeding, or may not recover at all. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative contract would typically be terminated at
its fair market value. If the Fund is owed this fair market value in the termination of the derivative contract and its claim is unsecured, the Fund will be treated as a general creditor of such counterparty, and will not have any claim with respect
to the underlying security. Certain of the derivative investments in which the Fund may invest may, in certain circumstances, give rise to a form of financial leverage, which may magnify the risk of owning such instruments. The ability to
successfully use derivative investments depends on the ability of the Adviser to predict pertinent market movements, which cannot be assured. In addition, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with
respect to the Funds derivative investments would not be available to the Fund for other investment purposes, which may result in lost opportunities for gain.
Regulation of the derivatives market presents additional risks to the Fund and may limit the ability of the Fund to use, and the availability or performance of, such
instruments. For instance, in October 2020, the SEC adopted Rule 18f-4 under the 1940 Act providing for the regulation of a registered investment companys use of derivatives, short sales, reverse
repurchase agreements, and certain other instruments. Under Rule 18f-4, a funds derivatives exposure is limited through a
value-at-risk test and requires the adoption and implementation of a derivatives risk management program for certain derivatives users. However, subject to certain
conditions, funds that do not invest heavily in derivatives may be deemed limited derivatives users (as defined in Rule 18f-4) and would not be subject to the full requirements of Rule 18f-4. In connection with the adoption of Rule 18f-4, the SEC also eliminated the asset segregation and cover framework arising from prior SEC guidance for covering
derivatives and certain financial instruments, as discussed herein, effective at the time that the Fund complies with Rule 18f-4. Rule 18f-4 could limit the Funds
ability to engage in certain derivatives and other transactions and/or increase the costs of such transactions, which could adversely affect the value or performance of the Fund. Compliance with Rule 18f-4
will be required in August 2022.
47
The derivative instruments and techniques that the Fund may principally use include:
Futures. A futures contract is a standardized agreement to buy or sell a specific quantity of an underlying instrument at a specific price at a
specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical
delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures involves the exercise of skill and judgment and even a
well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures can be highly volatile, using futures can lower total return, and the
potential loss from futures can exceed the Funds initial investment in such contracts.
Options. If the Fund buys an option, it buys a
legal contract giving it the right to buy or sell a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium paid by the Fund. If the Fund sells an
option, it sells to another person the right to buy from or sell to the Fund a specific amount of the underlying instrument or futures contract on the underlying instrument at an agreed-upon price typically in exchange for a premium received by the
Fund. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be
highly volatile and the use of options can lower total returns.
Swaps. A swap contract is an agreement between two parties pursuant to which
the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indexes, reference rates, currencies or other instruments. Most swap agreements provide
that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Funds obligations or rights
under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements are particularly
subject to counterparty credit, liquidity, valuation, correlation and leverage risk. Certain standardized swaps are now subject to mandatory central clearing requirements and others are now required to be exchange-traded. While central clearing and
exchange-trading are intended to reduce counterparty and liquidity risk, they do not make swap transactions risk-free. Swaps could result in losses if interest rate or foreign currency exchange rates or credit quality changes are not correctly
anticipated by the Fund or if the reference index, security or investments do not perform as expected. The Funds use of swaps may include those based on the credit of an underlying security, commonly referred to as credit default
swaps. Where the Fund is the buyer of a credit default swap contract, it would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract only in the event of a default or
similar event by a third party on the debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term of the contract and received no benefit from the contract. When the Fund is the
seller of a credit default swap contract, it receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of a referenced debt obligation upon the default or similar event of that obligation. The
use of credit default swaps can result in losses if the Funds assumptions regarding the creditworthiness of the underlying obligation prove to be incorrect. The Fund will cover its swap positions by segregating an amount of cash
and/or liquid securities as required by the 1940 Act and applicable SEC interpretations and guidance from time to time. In cases where the Fund is the writer, or seller, of a credit default swap agreement, the segregated amount will be equal to the
full, un-netted amount of the Funds contractual obligation (the notional amount).
Interest rate
risk. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of longer-term securities generally changes more in response to changes in interest rates than
shorter-term securities. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
LIBOR risk.
The terms of many investments, financings or other transactions in in which the Fund may invest have been historically tied to LIBOR, which functions as a reference rate or benchmark for such investments, financings or other transactions.
LIBOR may be a significant factor in determining payment obligations under derivatives transactions, the cost of financing of Fund investments or the value or return on certain other Fund investments. As a result, LIBOR may be relevant to, and
directly affect, a Funds performance.
In July 2017, the United Kingdom Financial Conduct Authority, which regulates the LIBOR administrator, announced that
the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.
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As for the most common tenors (overnight and one, three, six and 12 months) for U.S. dollar LIBOR, the LIBOR administrator
has published a consultation regarding its intention to cease publication of U.S. dollar LIBOR as of June 30, 2023 (instead of December 31, 2021, as previously expected). The FCA and other regulators have stated that they welcome the LIBOR
Administrators action. An extension to 2023 means that many legacy U.S. dollar LIBOR contracts would terminate before related LIBOR rates cease to be published. However, the same regulators emphasized that, despite any continued publication of
U.S. dollar LIBOR through June 30, 2023, no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Moreover, the LIBOR administrators consultation also relates to the LIBOR administrators
intention to cease publication of non-U.S. dollar LIBOR after December 31, 2021. There is no assurance that LIBOR, of any particular currency and tenor, will continue to be published until any particular
date.
Although the financial regulators and industry working groups have suggested alternative reference rates, such as the European Interbank Offer Rate
(EURIBOR), Sterling Overnight Interbank Average Rate (SONIA) and Secured Overnight Financing Rate (SOFR), global consensus on alternative rates is incomplete, and the process for amending existing contracts or
instruments to transition from LIBOR remains unclear.
It is not possible to predict the effect that these announcements or any such discontinuance will have on
LIBOR or on floating rate securities linked to LIBOR.
Leverage risk. The Fund presently utilizes leverage, but there can be no assurance that the
Fund will be successful during any period in which it is employed. Leverage is a speculative technique that exposes the Fund to greater risk and higher costs than if it were not implemented. The Fund uses leverage through borrowings from certain
financial institutions or the use of reverse repurchase agreements. The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including through funds borrowed from banks or other financial institutions
(i.e., a credit facility), margin facilities, the issuance of preferred shares or notes and the leverage attributable to reverse repurchase agreements, dollar rolls or similar transactions or derivatives that have the effect of leverage in an
aggregate amount up to 50% of the Funds Managed Assets (which equates to 100% of its net assets) immediately after giving effect to the leverage. The Fund may use leverage opportunistically and may choose to increase or decrease its leverage,
or use different types or combinations of leveraging instruments, at any time based on the Advisers assessment of market conditions and the investment environment. The Funds Managed Assets include assets attributable to financial
leverage instruments of any form. The Funds total leverage, either through borrowings, preferred stock issuance or effective leverage, may not exceed 50% of the Funds Managed Assets.
The use of leverage through borrowing of money or the issuance of preferred shares to purchase additional securities creates an opportunity for increased net investment
income, but also creates risks for the holders of Shares, including increased variability of the Funds net income, distributions and/or NAV in relation to market changes. Increases and decreases in the value of the Funds portfolio will
be magnified when the Fund uses leverage. As a result, leverage may cause greater changes in the Funds NAV, which could have a material adverse impact on the Funds business, financial condition and results of operations. The Fund will
also have to pay interest and dividends on its borrowings, which may reduce the Funds current income. This interest expense may be greater than the Funds current income on the underlying investment. The Funds leveraging strategy
may not be successful. The use of leverage to purchase additional investments creates an opportunity for increased Share dividends, but also creates special risks and considerations for the Shareholders, including:
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The likelihood of greater volatility of NAV, market price and dividend rate of the Shares than a comparable portfolio
without leverage; |
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The risk that fluctuations in interest rates on borrowings and short-term debt or in the interest or dividend rates on any
leverage that the Fund must pay will reduce the return to the Shareholders; |
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The effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Shares than if
the Fund were not leveraged, may result in a greater decline in the market price of the Shares; |
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When the Fund uses financial leverage, the investment advisory fees payable to the Adviser will be higher than if the Fund
did not use leverage, including periods when the Fund is losing money, and because the fees paid will be calculated based on the Funds Managed Assets there may be a financial incentive to the Adviser to increase the Funds use of leverage
and create an inherent conflict of interests; |
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Leverage increases operating costs, which will be borne entirely by the Shareholders and may reduce total return; and
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Certain types of borrowings and issuances of preferred stock by the Fund may result in the Fund being subject to covenants
relating to asset coverage and Fund composition requirements. |
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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 use of leverage and is in the best interests of the Fund. To seek to manage any potential conflicts of interest that may arise in connection with its
use of leverage, the Adviser will periodically review its performance and use of leverage with the Board.
Under the Funds credit facility, the Fund may be
required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Fund may also have to indemnify the lenders under the credit facility against liabilities they may incur in connection
therewith. In addition, the Funds credit facility may contain covenants that, among other things, likely would limit the Funds ability to pay distributions in certain circumstances, incur additional debt, change certain of its investment
policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. The Fund may be required to pledge its assets and to maintain a portion of its assets
in cash or high-grade securities as a reserve against interest or principal payments and expenses.
Reverse repurchase agreements involve the risks that the
interest income earned on the investment of the proceeds will be less than the interest expense and fund expenses, that the market value of the securities sold by the Fund may decline below the price of the securities the Fund is obligated to
repurchase and that the securities may not be returned to the Fund. There is no assurance that reverse repurchase agreements can be successfully employed.
The Fund
may in the future issue preferred shares as a form of financial leverage. Any such preferred shares of the Fund would be senior to the Funds Shares, such that holders of preferred shares would have priority over the distribution of the
Funds assets, including dividends and liquidating distributions. If preferred shares are issued and outstanding, holders of the preferred shares would elect two trustees of the Fund, voting separately as a class.
A decline in the Funds NAV could affect the ability of the Fund to make dividend payments. If the asset coverage for preferred shares or debt securities declines
to less than two hundred or three hundred percent, respectively (as a result of market fluctuations or otherwise), the Fund may have to sell a portion of its investments at an inopportune time.
Conflicts of interest risk. There are significant and potential conflicts of interest that could impact the Funds investment returns, including the
potential for portfolio managers to devote unequal time and attention to the management of the Fund and any other accounts managed; identify a limited investment opportunity that may be suitable for more than one client; and acquire material non-public information or otherwise be restricted from trading in certain potential investments. While the Fund generally may not purchase Structured Products sponsored by the Adviser or its affiliates directly from
the issuer thereof, the Fund may, under certain circumstances, purchase Structured Products sponsored by the Adviser or its affiliates from third parties in secondary market transactions. The Fund does not currently contemplate making investments in
any specific investments sponsored by the Adviser or an affiliate; however, to the extent the Fund does, it will do so only as permitted under the 1940 Act and the rules thereunder. To the extent that the Fund holds Structured Products sponsored by
the Adviser or its affiliates, or holds Structured Products in which the Adviser or its affiliates also hold interests, certain conflicts of interest may arise. The Fund may be limited in its ability to participate in certain transactions with the
Structured Product and may not be able to dispose of its interests in the Structured Product if no secondary market exists for the interests. Even if a secondary market exists, the Adviser or its affiliates at times may possess material non-public information that may restrict the Funds ability to dispose of its interests in the Structured Product. Additionally, because the amount of fees paid to the Adviser for its services is based on the
Funds Managed Assets, the fees paid to the Adviser will be higher if the Fund uses leverage, which may create an incentive for the Adviser to leverage the Fund or increase the Funds use of leverage.
Distributions risk. The Funds distributions may include a return of capital, thus reducing a Shareholders cost basis in his or her Fund Shares
and reducing the amount of capital available to the Fund for investment and likely increasing the Funds expense ratio. A Shareholder who receives a capital distribution may be subject to tax even though the Shareholder has experienced a net
loss on his or her investment in the Fund. Any capital returned to Shareholders through distributions will be distributed after the payment of fees and expenses. Shareholders who periodically receive payment of a distribution consisting of a return
of capital may be under the impression that they are receiving net income or profits when they are not. A return of capital to Shareholders is a return of a portion of their original investment in the Fund. Shareholders should not assume that the
source of a distribution from the Fund is net income or profit.
Trust preferred securities risk. The risks associated with TruPS include those risks
typically associated with debt securities and preferred securities, including the risk of default. TruPS are typically subordinated to other classes of debt of the bank or other financial institution. As a result, the risk of recovery in case of
default is higher for these securities than senior debt securities. Because the issuer is typically able to defer or skip payments for up to five years without being in default, distributions may not be made for extended periods of time. These
securities are also subject to prepayment risk. Holders of TruPS generally have
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limited voting rights to control the activities of the trust and no voting rights with respect to the parent corporation. The market for TruPS may be limited due to restrictions on resale, and
the market value may be more volatile than those of conventional debt securities. Many TruPS are issued by trusts or other special purpose entities established by banks and financial institutions and are not a direct obligation of banks and other
financial institutions.
Prepayment risk. When interest rates decline, fixed income securities with stated interest rates may have their principal
paid earlier than expected. This may result in the Fund having to reinvest that money at lower prevailing interest rates, which can reduce the returns of the Fund.
International securities risk. Certain foreign countries may impose exchange control regulations, restrictions on repatriation of profit on investments or
of capital invested, local taxes on investments and restrictions on the ability of issuers of non-U.S. securities to make payments of principal and interest to investors located outside the country, whether
from currency blockage or otherwise. In addition, the Fund will be subject to risks associated with adverse political and economic developments in foreign countries, including seizure or nationalization of foreign deposits, the imposition of
economic sanctions, different legal systems and laws relating to bankruptcy and creditors rights and the potential inability to enforce legal judgments, all of which could cause the Fund to lose money on its investments in non-U.S. securities. The cost of servicing external debt will also generally be adversely affected by rising international interest rates, as many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. Because non-U.S. securities may trade on days when the Funds Shares are not priced, NAV may change at times when the Funds Shares cannot be sold.
Foreign banks and securities depositories at which the Fund holds its international securities and cash may be recently organized or new to the foreign custody business
and may be subject to only limited or no regulatory oversight. Additionally, many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have
laws to protect investors that are comparable to U.S. securities laws. Settlement and clearance procedures in certain foreign markets may result in delays in payment for or delivery of securities not typically associated with settlement and
clearance of U.S. investments.
Less information may be publicly available with respect to foreign issuers than is available with respect to U.S. companies.
Accounting standards in non-U.S. countries may differ from U.S. accounting standards. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be more
difficult to completely and accurately assess a companys financial condition.
The volume of transactions on foreign stock exchanges is generally lower than
the volume of transactions on U.S. exchanges. Therefore, the market for securities that trade on foreign stock exchanges may be less liquid and their prices may be more volatile than securities that trade on U.S. securities. In recent years, the
European financial markets have experienced volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of, several European countries. These events may spread to other countries in Europe, including
countries that do not use the Euro. These events may affect the value and liquidity of certain of the Funds investments.
Unrated securities risk.
The Fund may purchase unrated securities which are not rated by a rating agency if the Adviser determines that the security is of comparable quality to a rated security that the Fund may purchase. Unrated securities may be less liquid than
comparable rated securities and involve the risk that the Adviser may not accurately evaluate the securitys comparative credit rating. Analysis of creditworthiness of issuers of high yield securities may be more complex than for issuers of
higher-quality debt securities. To the extent that the Fund purchases unrated securities, the Funds success in achieving its investment objective may depend more heavily on the Advisers creditworthiness analysis than if the Fund invested
exclusively in rated securities.
Large investors risk. Ownership of Shares may be concentrated among certain institutional investors who purchase
Shares. The ownership of large numbers of Shares by one or more institutional investors could, depending on the size of such ownership, result in such investors being in a position to exercise significant influence on matters put to a vote of
Shareholders. Dispositions of a large number of Shares could adversely impact the market price and premium or discount to NAV at which the Shares trade. As a result of the concentration of a significant portion of the Funds outstanding Shares
among a limited number of investors and the applicable restrictions on resale, the trading volume of Shares may be lesser than that of funds of a similar size whose shares are more widely held. As a result, there may be less secondary market
liquidity for the Shares, the Shares may be subject to wider bid-ask spreads and the market price of the Shares may fluctuate more sharply.
Limited investment opportunities risk. Certain markets in which the Fund may invest are extremely competitive for attractive investment opportunities and,
as a result, there may be reduced expected investment returns. The market for debt issued by
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financial institutions is more limited than the market for other debt issuances. There can be no assurance that sufficient investment opportunities will be available. The Funds primary
competitors in providing financing and capital to financial institutions include public and private funds, commercial banks, investment banks, correspondent banks, commercial financing companies, high net worth individuals, private equity funds and
hedge funds. Some of the Funds competitors may be substantially larger than the Fund and may have access to greater financial, technical, and marketing resources that the Fund. There can be no assurance that the Adviser will be able to
identify or successfully pursue attractive investment opportunities in such environments. Among other factors, competition for suitable investments from other pooled investment vehicles and other classes of investors may reduce the availability of
investment opportunities. Certain of the Funds competitors may not be subject to the regulatory restrictions that the 1940 Act imposes on the Fund as an investment company or to the source-of-income, asset diversification and distribution requirements the Fund intends to satisfy to qualify as a RIC under Subchapter M under the Code. Certain competitors may also have higher risk
tolerances or different risk assumptions, which could allow them to consider a wider array of investment opportunities than the Fund intends to consider. There has been significant growth in the number of firms organized to make investments similar
to those which the Fund intends to make, which may result in increased competition to the Fund in obtaining suitable investments. Additionally, the Adviser may have to allocate the available investment opportunities between various other Funds and
accounts managed by the Adviser with similar investment strategies. Such allocation decisions will be made subject to the Advisers Trade Aggregation and Allocation Policies and Procedures. There may also be competition to sell investments. If
many investment funds that pursue similar strategies were forced to liquidate positions at the same time, market liquidity would be reduced, which may cause prices to drop, and volatility to increase and may exacerbate the losses of the Fund.
Limited operating history risk. The Fund is a diversified, closed-end investment company with limited operating
history. As a result, prospective investors in the Fund have limited track record or history for the Fund on which to base their investment decision. The Fund is subject to all of the business risks and uncertainties associated with any new
business, including the risk that the Fund will not achieve its investment objective.
Maturity and duration risk. Prices of longer-term fixed-income
instruments generally fluctuate more than the prices of shorter-term fixed income instruments as interest rates change. In addition, a fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with
a shorter average portfolio duration. Duration is a measure used to determine the sensitivity of a securitys price to changes in interest rates that incorporates a securitys yield, coupon, final maturity and call features, among other
characteristics. For example, if a portfolio has a duration of three years, and interest rates increase (fall) by 1%, the portfolio would decline (increase) in value by approximately 3%.
Liquidity and valuation risk. It may be difficult for the Fund to purchase and sell particular investments within a reasonable time at a favorable price.
The capacity of traditional fixed-income market makers has not kept pace with the consistent growth in the fixed-income markets in recent years, which has led to reductions in the capacity of such market makers to engage in fixed-income trading and,
as a result, dealer inventories of corporate fixed-income and floating rate instruments are at or near historic lows relative to market size. These concerns may be more pronounced in the case of high yield fixed-income and floating rate instruments
than higher quality fixed-income instruments. Market makers tend to provide stability and liquidity to debt-securities markets through their intermediary services, and their reduced capacity and number could lead to diminished liquidity and
increased volatility in the fixed-income markets. In addition, the Funds ability to sell an instrument under favorable conditions may be negatively impacted by, among other things, the sale of the same or similar instruments by other market
participants at the same time.
To the extent that there is not an established liquid market for instruments in which the Fund invests, or there is a reduced number
or capacity of traditional market makers with respect to certain instruments, trading in such instruments may be relatively inactive or irregular. In addition, during periods of reduced market liquidity or market turmoil, or in the absence of
readily accessible market quotations for an investment in the Funds portfolio, the ability of the Fund to assign an accurate daily value to that investment may be limited and the Adviser may be required to perform a fair valuation of the
instrument. Fair value determinations are inherently subjective and reflect good faith judgments based on available information. Accordingly, there can be no assurance that the determination of an instruments fair value, conducted in
accordance with the Funds valuation procedures, will in fact approximate the price at which the Fund could sell that instrument at the time of the fair valuation. The Fund relies on various sources of information to value investments and
calculate NAV. The Fund may obtain pricing information from third parties that are believed to be reliable. In certain cases, this information may be unavailable or this information may be inaccurate because of errors by the third parties,
technological issues, absence of current or reliable market data or otherwise, which could impact the Funds ability to accurately value its investments or calculate its NAV.
Liquidity and valuation risks may be more pronounced in a rising interest rate environment, and the Fund that hold a significant percentage of fair valued or otherwise
difficult to value securities may be particularly susceptible to the risks associated with
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valuation. Portions of the Funds portfolio that are fair valued or difficult to value vary from time to time. The Funds Shareholder reports contain detailed information about the
Funds holdings that are fair valued or difficult to value, including values of such holdings as of the dates of the reports.
Portfolio turnover risk.
The Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. The portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. High
portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to Shareholders, will be taxable as ordinary income. In addition, a higher portfolio turnover rate results in correspondingly
greater brokerage and other transactional expenses that are borne by the Fund.
Rating agencies risk. Rating agencies may fail to make timely changes
in credit ratings and an issuers current financial condition may be better or worse than a rating indicates. In addition, rating agencies are subject to an inherent conflict of interest because they are often compensated by the same issuers
whose securities they grade.
Regulatory and legal risk. U.S. and non-U.S. government agencies and other
regulators regularly adopt new regulations and legislatures enact new statutes that affect the investments held by the Fund, the strategies used by the Fund or the level of regulation or taxation that applies to the Fund.
Changes in government legislation, regulation and/or intervention may change the way the Adviser or the Fund is regulated, affect the expenses incurred directly by the
Fund and the value of its investments and limit and/or preclude the Funds ability to implement, or increase the Funds costs associated with implementing, its investments strategies. Changes to tax laws and regulations may also result in
certain tax consequences for the Fund and/or investors. Government regulation may change frequently and may have significant adverse consequences. Moreover, government regulation may have unpredictable and unintended effects. In addition to exposing
the Fund to potential new costs and expenses, additional regulation or changes to existing regulation may also require changes to the Funds investment practices. The Adviser cannot predict the effects of any new governmental regulation that
may be implemented, and there can be no assurance that any new governmental regulation will not adversely affect the Funds ability to achieve its respective investment objective.
Repurchase agreement risk. Repurchase agreements typically involve the acquisition by the Fund of fixed-income securities from a selling financial
institution such as a bank or broker-dealer. The agreement provides that the Fund will sell the securities back to the institution at a fixed time in the future. Repurchase agreements involve the risk that a seller will become subject to bankruptcy
or other insolvency proceedings or fail to repurchase a security from the Fund. In such situations, the Fund may incur losses including as a result of (i) a possible decline in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (ii) a possible lack of access to income on the underlying security during this period, and (iii) expenses of enforcing its rights.
Reverse repurchase agreement risk. A reverse repurchase agreement is the sale by the Fund of a debt obligation to a party for a specified price, with the
simultaneous agreement by the Fund to repurchase that debt obligation from that party on a future date at a higher price. Similar to borrowing, reverse repurchase agreements provide the Fund with cash for investment purposes, which creates leverage
and subjects the Fund to the risks of leverage, including increased volatility. Reverse repurchase agreements also involve the risk that the other party may fail to return the securities in a timely manner or at all. The Fund could lose money if it
is unable to recover the securities and the value of collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value of securities. Reverse repurchase agreements also create Fund expenses and
require that the Fund have sufficient cash available to purchase the debt obligations when required. Reverse repurchase agreements also involve the risk that the market value of the debt obligation that is the subject of the reverse repurchase
agreement could decline significantly below the price at which the Fund is obligated to repurchase the security.
When required by law, at the time the Fund enters
into a reverse repurchase agreement, it will segregate, and maintain, liquid assets having a dollar value equal to the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Funds use of the proceeds from the sale of the securities may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds obligations to repurchase the securities.
Risk relating to the Funds RIC status. To qualify and remain eligible for the special tax treatment accorded to a RIC and its shareholders
under the Code, the Fund must meet certain source-of-income, asset diversification and annual distribution requirements. Very generally, to qualify as a RIC, the Fund
must derive at least 90% of its gross income for each taxable year from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, net income from
certain publicly traded partnerships or other income derived with respect to its
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business of investing in stock or other securities. The Fund must also meet certain asset diversification requirements at the end of each quarter of each of its taxable years. Failure to meet
these diversification requirements on the last day of a quarter may result in the Fund having to dispose of certain investments quickly to prevent the loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and
may result in substantial losses to the Fund. In addition, to be eligible for the special tax treatment accorded RICs, the Fund must meet the annual distribution requirement, requiring it to distribute with respect to each taxable year an amount at
least equal to 90% of the sum of its investment company taxable income (generally its taxable ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, and determined without
regard to any deduction for dividends paid) and its net tax-exempt income (if any), to its Shareholders. If the Fund fails to qualify as a RIC for any reason and becomes subject to corporate tax, the resulting
corporate taxes could substantially reduce its net assets, the amount of income available for distribution and the amount of its distributions. Such a failure would have a material adverse effect on the Fund and its Shareholders. In addition, the
Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions to re-qualify as a RIC.
Certain of the Funds investments will require the Fund to recognize taxable income in a taxable year in excess of the cash generated on those investments during
that year. In particular, the Fund expects to invest in debt obligations that will be treated as having market discount and/or OID for U.S. federal income tax purposes. Additionally, some of the Structured Products or issuers in which
the Fund invests may be considered passive foreign investment companies, or under certain circumstances, controlled foreign corporations. Because the Fund may be required to recognize income in respect of these investments before, or without
receiving, cash representing such income, the Fund may have difficulty satisfying the annual distribution requirements applicable to RICs and avoiding Fund-level U.S. federal income and/or excise taxes. Accordingly, the Fund may be required to sell
assets, including at potentially disadvantageous times or prices, raise additional debt or equity capital, make taxable distributions of its Shares or debt securities, or reduce new investments, to obtain the cash needed to make these income
distributions. If the Fund liquidates assets to raise cash, the Fund may realize gain or loss on such liquidations; in the event the Fund realizes net capital gains from such liquidation transactions, the Fund Shareholders may receive larger capital
gain distributions than they would in the absence of such transactions. Furthermore, under proposed treasury regulations, certain income derived by the Fund from a passive foreign investment company or controlled foreign corporation would generally
constitute qualifying income for purposes of the income test applicable to RICs only to the extent the applicable issuer makes current distributions of the corresponding income to the Fund. The proposed regulations, if adopted, would apply to
taxable years beginning on or after 90 days after the regulations are published as final.
Uncertain tax treatment risk. The Fund may invest a portion
of its net assets in below investment grade instruments. Investments in these types of instruments and certain other investments may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as
when the Fund may cease accruing interest, OID or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and
income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. Although the Fund will seek to address these and other issues to the extent necessary to seek to ensure that it distributes sufficient income that it
does not become subject to U.S. federal income or excise tax, no assurances can be given that the Fund will not be adversely affected as a result of such issues.
U.S. government securities risk. Some obligations issued or guaranteed by U.S. government agencies, instrumentalities or U.S. government sponsored
enterprises (GSEs), including, for example, pass-through certificates issued by Ginnie Mae, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies or GSEs, such as
securities issued by Fannie Mae or Freddie Mac, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency or GSE, while other obligations issued by or guaranteed by federal agencies or
GSEs, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. The maximum potential liability of the issuers of some U.S. government securities held by the Fund may greatly exceed
their current resources, including their legal right to support from the U.S. Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
Other Risks Relating to the Fund
Cybersecurity risk.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack or damage. The Fund and its respective affiliates and
third-party service providers are subject to cybersecurity risks. Cybersecurity risks have significantly increased in recent years, and the Fund could suffer material losses relating to cyber attacks or other information security breaches in the
future. The Funds and its respective affiliates and third-party service providers computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that
could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic
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personal information and sensitive business data, processed and stored in, and transmitted through, computer systems and networks, or otherwise cause interruptions or malfunctions in the
Funds operations or the operations of its respective affiliates and third-party service providers. This could result in financial losses to the Fund and its Shareholders. These failures or breaches may also result in disruptions to business
operations, potentially resulting in financial losses; interference with the Funds ability to calculate its NAV, process Shareholder transactions or otherwise transact business with Shareholders; impediments to trading; violations of
applicable privacy and other laws; regulatory fines; penalties; reputational damage; reimbursement or other compensation costs; or additional compliance costs. In addition, substantial costs may be incurred in an attempt to prevent any cyber
incidents in the future. The Fund has established risk management systems and business continuity plans designed to reduce the risks associated with cybersecurity. However, there is no guarantee that such efforts will succeed, especially since the
Fund does not directly control the cybersecurity systems of issuers or third-party service providers. The Fund and its Shareholders could be negatively impacted as a result.
Other investment companies risk. To the extent the Fund invests in other investment companies that invest in fixed-income securities, risks associated
with investments in other investment companies will include fixed-income securities risks. In addition to the brokerage costs associated with the Funds purchase and sale of the underlying securities, ETFs, mutual funds and closed-end funds incur fees that are separate from those of the Fund. As a result, Shareholders will indirectly bear a proportionate share of the operating expenses of the ETFs, mutual funds and closed-end funds, in addition to Fund expenses. Because the Fund is not required to hold shares of underlying funds for any minimum period, it may be subject to, and may have to pay, short-term redemption fees
imposed by the underlying funds. ETFs are subject to additional risks such as the fact that the market price of its shares may trade above or below its NAV or an active market may not develop. The Fund has no control over the investments and related
risks taken by the underlying funds in which it invests.
In addition to risks generally associated with investments in mutual fund securities, ETFs and closed-end funds are subject to the following risks that do not apply to traditional mutual funds: (i) the market price of an ETFs or closed-end funds shares
may be above or below its NAV; (ii) an active trading market for an ETFs and closed-end funds shares may not develop or be maintained; (iii) the ETF or
closed-end fund may employ an investment strategy that utilizes high leverage ratios; (iv) trading of an ETFs or closed-end funds shares may be halted
if the listing exchanges officials deem such action appropriate; and (v) underlying ETF or closed-end fund shares may be de-listed from the exchange or the
activation of market-wide circuit breakers (which are tied to large decreases in stock prices) may temporarily stop stock trading.
Management of
similar funds risk. The name, investment objective and policies of the Fund are similar to other funds advised by the Adviser. However, the investment results of the Fund may be higher or lower than, and there is no guarantee that the
investment results of the Fund will be comparable to, any other of the funds. In addition, the Advisers management of similar funds gives rise to various conflicts of interest, including conflicts relating to the allocation of investment
opportunities, the potential for portfolio managers to devote unequal time and attention to the management of the Fund and the other funds and the potential acquisition of material nonpublic information.
10. Fundamental Investment Restrictions
The investment policies described
below have been adopted by the Fund with respect to the Fund and are fundamental (Fundamental Policies), and may not be changed without the affirmative vote of a majority of the outstanding shares of the Fund. The term majority of
the outstanding shares of the Fund means the lesser of: (1) 67% or more of the outstanding shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding shares of the Fund are present or represented at such
meeting; or (2) more than 50% of the outstanding shares of the Fund. Except for those investment policies specifically identified as fundamental, the Funds investment objective and all other investment policies and practices of the Fund
are non-fundamental and may be changed by the Board without the approval of Shareholders.
The fundamental policies adopted
with respect to the Fund are as follows:
a. Borrowing Money. The Fund may borrow money to the extent permitted under the 1940 Act, the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Fund from the provisions of the 1940 Act.
b. Senior Securities. The Fund may issue senior securities, as defined in the 1940 Act, as permitted under the 1940 Act, the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Fund from the provisions of the 1940 Act.
c. Underwriting. The Fund may act as an underwriter of securities within the meaning of the 1933 Act, to the extent permitted under the 1933 Act,
as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time.
55
d. Real Estate. The Fund may purchase or sell real estate to the extent permitted under the 1940
Act, the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Fund from the provisions of the 1940 Act. This includes that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in instruments of issuers that deal in real estate or are engaged in the real estate business, including real estate investment trusts, (iii) invest in instruments secured by real estate or
interests therein, (iv) hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Funds ownership of such instruments.
e. Commodities. The Fund may purchase or sell commodities to the extent permitted under the 1940 Act, the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Fund from the provisions of the 1940 Act. The Fund may purchase or sell options or futures contracts, invest in securities or other instruments
backed by commodities or invest in companies that are engaged in a commodities business or have a significant portion of their assets in commodities.
f. Loans. The Fund may make loans to other persons to the extent permitted under the 1940 Act, the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Fund from the provisions of the 1940 Act.
g.
Concentration. Under normal circumstances, the Fund will invest more than 25% of its total assets (measured at the time of purchase) in the group of industries related to banks and diversified financials. The Fund will not concentrate in any
industry other than the group of industries related to banks and diversified financials.
11. Effects of Leverage
Assuming the utilization of leverage through borrowings of approximately 33.3% of the Funds Managed Assets, at an interest rate of 1.45% payable on such
borrowings, the income generated by the Funds portfolio (net of non-leverage expenses) must exceed 0.15% in order to cover such interest payments and other expenses specifically related to borrowings.
These numbers are merely estimates, used for illustration. Actual interest rates may vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on Share total return, assuming investment
portfolio total returns (comprised of income and changes in the value of securities held in the Funds portfolio) of 10%, 5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not
necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. The table further reflects the use of borrowings representing 33.3% of the Funds Managed Assets and the Funds currently
projected annual interest rate on its leverage of 1.45%.
|
|
|
|
|
|
|
|
|
|
|
Assumed annual return on the Funds portfolio (net of expenses) |
|
(10)% |
|
(5)% |
|
0% |
|
5% |
|
10% |
Share Total
Return |
|
(15.73%) |
|
(8.23%) |
|
(0.73%) |
|
(6.78%) |
|
14.28% |
Share Total Return is composed of two elements: the Share dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying interest on its leverage) and gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table above assumes that the Fund is more likely to suffer capital losses than
to enjoy capital appreciation. For example, to assume a total return of 0% the Fund must assume that the interest it receives on its portfolio investments is entirely offset by losses in the value of those investments
56
Angel Oak Dynamic Financial Strategies Income Term Trust
Notice of Privacy Policy & Practices
Your privacy is important to us. We are committed to maintaining the confidentiality, integrity and security of your personal information. When you provide personal
information, we believe that you should be aware of policies to protect confidentiality of that information.
We collect the following nonpublic personal
information about you:
|
|
|
Information we receive from you on or in applications or other forms, correspondence, or conversations, including, but not
limited to, your name, address, phone number, social security number, assets, income and date of birth; and |
|
|
|
Information about your transactions with us, our affiliates, or others, including, but not limited to, your account number
and balance, payments history, parties to transactions, cost basis information, and other financial information. |
We do not disclose any nonpublic
personal information about our current or former shareholders to nonaffiliated third parties, except as permitted by law. For example, we are permitted by law to disclose all of the information we collect, as described above, to our transfer agent
to process your transactions. Furthermore, we restrict access to your nonpublic personal information to those persons who require such information to provide products or services to you. We maintain physical, electronic, and procedural safeguards
that comply with federal standards to guard your nonpublic personal information.
In the event that you hold shares of the Fund through a financial intermediary,
including, but not limited to, a broker-dealer, bank, or trust company, the privacy policy of your financial intermediary would govern how your nonpublic personal information would be shared with nonaffiliated third parties.
57
INVESTMENT ADVISER
Angel Oak
Capital Advisors, LLC
3344 Peachtree Road NE, Suite 1725
Atlanta, GA 30326
SHAREHOLDER SERVICER
Destra Capital Advisors LLC
444 West Lake Street, Suite 1700
Chicago, IL 60606
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cohen & Company, Ltd.
1350 Euclid Avenue, Suite 800
Cleveland, OH 44115
LEGAL COUNSEL
Dechert LLP
1900 K Street NW
Washington, DC 20006
CUSTODIAN
U.S. Bank National Association
1555 North Rivercenter Drive, Suite 302
Milwaukee, WI 53202
ADMINISTRATOR, TRANSFER AGENT, AND FUND ACCOUNTANT
U.S Bancorp Fund
Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
AR-DYFN