guarantees on an issuer’s financial position, financial performance and cash flows. FSP is effective for reporting periods after November 15, 2008. FSP applies to certain credit derivatives, hybrid instruments that have embedded credit derivatives (for example, credit-linked notes), and certain guarantees and it guarantees and it requires additional disclosures regarding credit derivatives with sold protection. The Funds’ management have determined that the FSP has no impact to the financial statements.
In March 2008, Statement of Accounting Financial Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) was issued and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 requires enhanced disclosures about a fund’s derivative and hedging activities. Management is currrently evaluating the impact the adoption of SFAS 161 will have on the Funds’ financial statement disclosures.
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on an identified cost basis. Dividend income is recorded on ex-dividend date. Interest income is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized to interest income over the lives of the respective securities using the effective interest method. Conversion premium is not amortized. Payments received from certain investments may be comprised of dividends, realized gains and return of capital. These payments may initially be recorded as dividend income and may be subsequently be reclassified as realized gains/or return of capital upon receipt of information from the issuer. Payments received on synthetic convertible securities are generally included in dividend income.
The Funds intend to distribute all of their taxable income and to comply with the other requirements of the U.S. Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. The Funds may be subject to excise tax based on the extent of distributions to shareholders.
The Funds declare dividends from net investment income monthly to common shareholders. Distributions of net realized capital gains, if any, are paid at least annually. The Funds record dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These “book-tax” differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal income tax treatment; temporary differences do not require reclassification. To the extent dividends and/or distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as dividends and/or distributions of paid-in capital in excess of par.
It is the Funds’ policy to invest a portion of their assets in convertible securities. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, certain of the Funds’ investments include features which render them more sensitive to price changes in their underlying securities. The value of structured/synthetic convertible securities can be affected by interest rate changes and credit risks of the issuer. Such securities may be structured in ways that limit their potential for capital appreciation and the entire value of the security may be at a risk of loss depending on the performance of the underlying equity security. Consequently, the Funds are exposed to greater downside risk than traditional convertible securities, but still less than that of the underlying common stock. The Funds are also exposed to the risk that the issuers or counterparties to the agreements may be unable to deliver the stated underlying securities or agreed proceeds on maturity.
During the year ended February 28, 2009, the Funds held synthetic convertible securities with Lehman Brothers Holdings, Inc. as the counterparty. On September 15, 2008, Lehman Brothers Holdings, Inc. filed for protection under Chapter 11 of the United States Bankruptcy Code. The value of the relevant securities have been written down to their estimated recoverable values.
Each Fund has an Investment Management Agreement (the “Agreements”) with the Investment Manager. Subject to the supervision of the Funds’ Board of Trustees, the Investment Manager is responsible for managing, either directly or through others selected by it, the Funds’ investment activities, business affairs and administrative matters. Pursuant to the Agreements, the Funds pay the Investment Manager an annual fee, payable on a monthly basis, at the annual rate of 0.70% of the Funds’ average daily total managed assets. Total managed assets refer to the total assets of each Fund (including
| |
Nicholas-Applegate Convertible & Income Funds Notes to Financial Statements |
February 28, 2009 | |
| | |
2. Investment Management/Sub-Adviser (continued)
assets attributable to any preferred shares or other forms of leverage of the Fund that may be outstanding) minus accrued liabilities (other than liabilities representing leverage).
The Investment Manager has retained its affiliate, Nicholas-Applegate Capital Management LLC (the “Sub-Adviser”), to manage the Funds’ investments. Subject to the supervision of the Investment Manager, the Sub-Adviser is responsible for making all of the Funds’ investment decisions. The Investment Manager, and not the Funds, pays a portion of the fees it receives as Investment Manager to the Sub-Adviser in return for its services.
3. Investment in Securities
For the year ended February 28, 2009, purchases and sales of investments, other than short-term securities and U.S. government obligations were:
| | | | | | | | | | | |
| | Convertible & Income | | Convertible & Income II | |
| | | | | | |
Purchases | | | $ | 638,084,480 | | | | $ | 497,365,745 | | |
|
Sales | | | | 745,082,908 | | | | | 675,807,567 | | |
| | | | | | | | | | | |
For the year ended February 28, 2009, purchases and sales of U.S. government obligations were:
| | | | | | | | | | | |
| | Convertible & Income | | Convertible & Income II | |
| | | | | | |
Purchases | | | $ | 42,814,670 | | | | $ | 38,772,166 | | |
|
Sales | | | | 51,099,676 | | | | | 45,624,699 | | |
4. Income Tax Information
Convertible & Income:
For the years ended February 28, 2009 and February 29, 2008, the tax character of dividends paid of $110,164,852 and $134,533,804, respectively, were comprised entirely of ordinary income.
At February 28, 2009, the fund had no distributable earnings.
For the year ended February 28, 2009, permanent differences are primarily attributable to the differing treatment of premium amortization, convertible preferred securities, consent payments and excise taxes. These adjustments were to decrease distributions in excess of net investment income by $4,090,680, increase accumulated net realized loss by $3,847,317 and decrease paid-in-capital in excess of par by $243,363.
At February 28, 2009, Convertible & Income had a capital loss carryforward of $144,134,274 ($1,830,527 of which will expire in 2015, $10,961,628 of which will expire in 2016 and $131,342,119 of which will expire in 2017) available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
In accordance with U.S. Treasury regulations, Convertible & Income elected to defer net realized capital losses of $137,714,679 arising after October 31, 2008. Such losses are treated as rising on March 1, 2009.
The cost basis of portfolio securities for federal income tax purposes is $1,100,316,065. Aggregate gross unrealized appreciation for securities in which there is an excess value over tax cost is $6,132,778; aggregate gross unrealized depreciation for securities in which there is an excess of tax cost over value is $404,215,827; net unrealized depreciation for federal income tax purposes is $398,083,049. The difference between book and tax basis unrealized is attributable to wash sales, and the differing treatment of convertible preferred securities.
The Fund was not able to declare or pay monthly dividends to common shareholders in November and December of 2008 because the Fund’s auction rate preferred shares did not have the required minimum asset coverage. This contributed to the Fund’s incurring excise tax.
Convertible & Income II:
For the years ended February 28, 2009 and February 29, 2008, the tax character of dividends paid of $88,564,571 and $121,539,158, respectively, were comprised entirely of ordinary income.
2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 23
| |
Nicholas-Applegate Convertible & Income Funds | Notes to Financial Statements |
February 28, 2009 | |
| | |
4. Income Tax Information (continued)
At February 28, 2009, the tax character of distributable earnings of $7,371,380 was comprised entirely of ordinary income.
For the year ended February 28, 2009, permanent differences are primarily attributable to the differing treatment of premium amortization, convertible preferred securities, consent payments and excise taxes. These adjustments were to increase undistributed net investment income by $4,822,708, increase accumulated net realized loss by $4,312,513 and decrease paid-in-capital in excess of par by $510,195.
At February 28, 2009, Convertible & Income II had a capital loss carryforward of $143,888,261 ($1,751,653 of which will expire in 2015, $11,338,190 of which will expire in 2016 and $130,798,418 of which will expire in 2017) available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
In accordance with U.S. Treasury regulations, Convertible & Income II elected to defer net realized capital losses of $127,587,602 arising after October 31, 2008. Such losses are treated as rising on March 1, 2009.
The cost basis of portfolio securities for federal income tax purposes is $856,017,726. Aggregate gross unrealized appreciation for securities in which there is an excess value over tax cost is $3,132,279; aggregate gross unrealized depreciation for securities in which there is an excess of tax cost over value is $323,923,547; net unrealized depreciation for federal income tax purposes is $320,791,268. The difference between book and tax basis unrealized is attributable to wash sales and the differing treatment of convertible preferred securities.
The Fund was not able to declare or pay monthly dividends to common shareholders in November and December of 2008 because the Fund’s auction rate preferred shares did not have the required minimum asset coverage. This contributed to the Fund’s incurring excise tax.
5. Auction-Rate Preferred Shares
Convertible & Income has 2,856 shares of Preferred Shares Series A, 2,856 shares of Preferred Shares Series B, 2,856 shares of Preferred Shares Series C, 2,856 shares of Preferred Shares Series D, and 2,856 shares of Preferred Shares Series E outstanding, each with a net asset and liquidation value of $25,000 per share plus any accumulated, unpaid dividends.
Convertible & Income II has 2,192 shares of Preferred Shares Series A, 2,192 shares of Preferred Shares Series B, 2,192 shares of Preferred Shares Series C, 2,192 shares of Preferred Shares Series D, and 2,192 shares of Preferred Shares Series E outstanding, each with a net asset and liquidation value of $25,000 per share plus any accumulated, unpaid dividends.
Dividends are accumulated daily at an annual rate (typically re-set every seven days) through auction procedures. Distributions of net realized long-term gains, if any, are paid annually.
For the year ended February 28, 2009, the annualized dividend rates for the Funds ranged from:
| | | | | | | | | | |
| | High | | Low | | At February 28, 2009 | |
| | | | | | | | |
Series A | | 4.413 | % | | 0.135 | % | | 0.377 | % | |
|
Series B | | 4.383 | % | | 0.135 | % | | 0.377 | % | |
|
Series C | | 4.398 | % | | 0.150 | % | | 0.362 | % | |
|
Series D | | 4.713 | % | | 0.105 | % | | 0.377 | % | |
|
Series E | | 4.473 | % | | 0.075 | % | | 0.377 | % | |
The Funds are subject to certain limitations and restrictions while preferred shares are outstanding. Failure to comply with these limitations and restrictions could preclude the Funds from declaring any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of preferred shares at a price equal to liquidation value plus any accumulated unpaid dividends.
Preferred shareholders, who are entitled to one vote per share, generally vote with the common shareholders but vote separately as a class to elect two Trustees and on any matters affecting the rights of the preferred shareholders.
Since mid-February 2008, holders of auction-rate preferred shares (“ARPS”) issued by the Funds have been directly impacted by an unprecedented lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS, they do not constitute a default or automatically alter the credit quality of the ARPS, and
24 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09
| |
Nicholas-Applegate Convertible & Income Funds | Notes to Financial Statements |
February 28, 2009 | |
| | |
5. Auction-Rate Preferred Shares (continued)
ARPS holders have continued to receive dividends at the defined “maximum rate,” the 7-day “AA” Composite Commercial Paper Rate multiplied by 150% (which is a function of short-term interest rates and typically higher than the rate that would have otherwise been set through a successful auction).
These developments with respect to ARPS have not affected the management or investment policies of the Funds, and the Funds’ outstanding common shares continue to trade on the NYSE without any change. If the Funds’ ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Funds’ common shareholders could be adversely affected.
During the fiscal year ended February 28, 2009, the Funds redeemed, at par, a portion of their ARPS on three separate occasions. In each case, the decision to redeem a portion of the Funds’ ARPS was made by the Funds’ Board of Trustees at the recommendation of the Funds’ Investment Manager and Sub-Adviser with the intention of increasing asset coverage of the Funds’ ARPS above the 200% Level (subject to future market conditions), permitting the Funds to pay/declare common share dividends. The Funds redeemed the ARPS, at the full liquidation preference of $25,000 per share plus accumulated but unpaid dividends, across each Fund’s five series on their respective dates of redemption as follows:
| | | | | | | | | | | | | |
| | Convertible & Income | | Convertible & Income II | | Dates of Redemptions | |
| | | | | | | | |
| | | | | | | | | | | | | |
Beginning balance, 2/29/08 | | | $ | 525,000,000 | | | | $ | 505,000,000 | | | | |
|
Redemption | | | | (25,000,000 | ) | | | | (105,000,000 | ) | | 10/27/08-10/31/08 | |
|
Redemption | | | | (60,000,000 | ) | | | | (60,000,000 | ) | | 11/24/08-11/28/08 | |
|
Redemption | | | | (83,000,000 | ) | | | | (66,000,000 | ) | | 12/26/08-12/31/08 | |
| | | | | | | | | | | | | |
|
Ending balance, 2/28/09 | | | $ | 357,000,000 | | | | $ | 274,000,000 | | | | |
| | | | | | | | | | | | | |
6. Subsequent Common Dividend Declarations
| | | | | | | | | | | | | | | |
| | Amount Per
Common Share | | Declaration
Date | | Payable
Date | | Record
Date | |
| | | | | | | | | | |
|
Convertible & Income | | | $ | 0.09 | | | 3/24/09 | | | 4/17/09 | | | 4/13/09 | | |
|
Convertible & Income | | | $ | 0.09 | | | 4/1/09 | | | 5/1/09 | | | 4/13/09 | | |
| | | | | | | | | | | | | | | | |
|
Convertible & Income II | | | $ | 0.085 | | | 3/24/09 | | | 4/17/09 | | | 4/13/09 | | |
|
Convertible & Income II | | | $ | 0.085 | | | 4/1/09 | | | 5/1/09 | | | 4/13/09 | | |
| | | | | | | | | | | | | | | | |
See Subsequent Event Note.
7. Legal Proceedings
In June and September 2004, the Investment Manager, and certain of its affiliates (including PEA Capital LLC (“PEA”), Allianz Global Investors Distributors LLC (“AGID”) and Allianz Global Investors of America, L.P.) agreed to settle, without admitting or denying the allegations, claims brought by the SEC, and the New Jersey Attorney General alleging violations of federal and state securities laws with respect to certain open-end funds for which the Investment Manager serves as investment adviser. The settlements related to an alleged “market timing” arrangement in certain open-end funds formerly sub-advised by PEA. The Investment Manager and its affiliates agreed to pay a total of $68 million to settle the claims. In addition to monetary payments, the settling parties agreed to undertake certain corporate governance, compliance and disclosure reforms related to market timing and consented to cease and desist orders and censures. Subsequent to these events, PEA Capital LLC deregistered as an investment adviser and dissolved. None of the settlements alleged that any inappropriate activity took place with respect to the Funds.
Since February 2004, the Investment Manager, the Sub-Adviser, and certain of their affiliates and their employees have been named as defendants in a number of pending lawsuits concerning “market timing”, which allege the same or similar conduct underlying the regulatory settlements discussed above. The market timing lawsuits have been consolidated in a multi-district litigation proceeding in the U.S. District Court for the District of Maryland. Any potential resolution of these matters may include, but not be limited to, judgments or settlements for damages against the Investment Manager, the Sub-Adviser, or their affiliates or related injunctions.
The Investment Manager and the Sub-Advisers believe that these matters are not likely to have a material adverse effect on the Funds or on their ability to perform their respective investment advisory activities relating to the Funds.
The foregoing speaks only as of the date hereof.
2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 25
|
Nicholas-Applegate Convertible & Income Fund Financial Highlights |
For a share of common stock outstanding throughout each period: |
| |
| | | | | | | | | | | | | | | | |
| | Year ended | |
| | | |
| | February 28,
2009 | | February 29,
2008 | | February 28,
2007 | | February 28,
2006 | | February 28,
2005 | |
| | | | | | | | | | | |
Net asset value, beginning of year | | $ | 12.52 | | $ | 14.84 | | $ | 14.69 | | $ | 16.07 | | $ | 16.67 | |
| | | | | | | | | | | | | | | | | |
|
Income from Investment Operations: | | | | | | | | | | | | | | | | |
|
Net investment income | | | 1.56 | | | 1.62 | | | 1.66 | | | 1.51 | | | 1.48 | |
| | | | | | | | | | | | | | | | | |
|
Net realized and change in unrealized gain (loss) on investments and interest rate caps | | | (7.75 | ) | | (2.05 | ) | | 0.55 | | | (0.48 | ) | | 0.38 | |
| | | | | | | | | | | | | | | | | |
|
Total from investment operations | | | (6.19 | ) | | (0.43 | ) | | 2.21 | | | 1.03 | | | 1.86 | |
| | | | | | | | | | | | | | | | | |
|
Dividends and Distributions on Preferred Shares from: | | | | | | | | | | | | | | | | |
|
Net investment income | | | (0.17 | ) | | (0.39 | ) | | (0.34 | ) | | (0.25 | ) | | (0.12 | ) |
| | | | | | | | | | | | | | | | | |
|
Net realized gains | | | — | | | — | | | (0.03 | ) | | (0.02 | ) | | (0.02 | ) |
| | | | | | | | | | | | | | | | | |
|
Total dividends and distributions on preferred shares | | | (0.17 | ) | | (0.39 | ) | | (0.37 | ) | | (0.27 | ) | | (0.14 | ) |
| | | | | | | | | | | | | | | | | |
|
Net increase (decrease) in net assets applicable to common shareholders resulting from investment operations | | | (6.36 | ) | | (0.82 | ) | | 1.84 | | | 0.76 | | | 1.72 | |
| | | | | | | | | | | | | | | | | |
|
Dividends and Distributions to Common Shareholders from: | | | | | | | | | | | | | | | | |
Net investment income | | | (1.36 | ) | | (1.50 | ) | | (1.50 | ) | | (1.91 | ) | | (1.50 | ) |
| | | | | | | | | | | | | | | | | |
|
Net realized gains | | | — | | | — | | | (0.19 | ) | | (0.23 | ) | | (0.82 | ) |
| | | | | | | | | | | | | | | | | |
|
Total dividends and distributions to common shareholders | | | (1.36 | ) | | (1.50 | ) | | (1.69 | ) | | (2.14 | ) | | (2.32 | ) |
| | | | | | | | | | | | | | | | | �� |
|
Net asset value, end of year | | $ | 4.80 | | $ | 12.52 | | $ | 14.84 | | $ | 14.69 | | $ | 16.07 | |
| | | | | | | | | | | | | | | | | |
|
Market price, end of year | | $ | 4.05 | | $ | 12.50 | | $ | 16.08 | | $ | 15.69 | | $ | 15.82 | |
| | | | | | | | | | | | | | | | | |
|
Total Investment Return (1) | | | (61.55 | )% | | (13.63 | )% | | 14.60 | % | | 14.30 | % | | 11.53 | % |
| | | | | | | | | | | | | | | | | |
|
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | |
|
Net assets applicable to common shareholders, end of year (000) | | $ | 348,544 | | $ | 895,043 | | $ | 1,050,149 | | $ | 1,017,779 | | $ | 1,086,001 | |
| | | | | | | | | | | | | | | | | |
|
Ratio of expenses to average net assets (2) | | | 1.56 | %(3) | | 1.26 | % | | 1.27 | % | | 1.28 | %(3) | | 1.24 | % |
| | | | | | | | | | | | | | | | | |
|
Ratio of net investment income to average net assets (2) | | | 16.87 | % | | 11.26 | % | | 11.37 | % | | 10.03 | % | | 9.20 | % |
| | | | | | | | | | | | | | | | | |
|
Preferred shares asset coverage per share | | $ | 49,406 | | $ | 67,626 | | $ | 74,981 | | $ | 73,442 | | $ | 76,698 | |
| | | | | | | | | | | | | | | | | |
|
Portfolio turnover | | | 62 | % | | 33 | % | | 67 | % | | 52 | % | | 70 | % |
| | | | | | | | | | | | | | | | | |
| |
(1) | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of the period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. |
| |
(2) | Calculated on the basis of income and expenses applicable to both common and preferred shareholders relative to the average net assets of common shareholders. |
| |
(3) | Ratio of expenses to average net assets, excluding excise tax expense was 1.53% for the year ended February 28, 2009 and 1.26% for the year ended February 28, 2006. |
26 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09 | See accompanying Notes to Financial Statements
|
Nicholas-Applegate Convertible & Income Fund II Financial Highlights |
For a share of common stock outstanding throughout each period: |
| |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | For the Period
July 1, 2005
through
February 28,
2006† | | | | | For the Period
July 31, 2003*
through
June 30,
2004 | |
| | Year ended | | | | | | |
| | | | | Year ended
June 30,
2005 | | |
| | February 28,
2009 | | February 29,
2008 | | February 28,
2007 | | | | |
| | | | | | | | | | | | | |
Net asset value, beginning of year | | $ | 12.38 | | $ | 14.91 | | $ | 14.70 | | $ | 14.61 | | $ | 15.18 | | $ | 14.33 | ** |
| | | | | | | | | | | | | | | | | | | | |
|
Income from Investment Operations: | | | | | | | | | | | | | | | | | | | |
|
Net investment income | | | 1.55 | | | 1.70 | | | 1.69 | | | 1.04 | | | 1.59 | | | 1.23 | |
| | | | | | | | | | | | | | | | | | | | |
|
Net realized and change in unrealized gain (loss) on investments and interest rate caps | | | (8.05 | ) | | (2.17 | ) | | 0.61 | | | 0.58 | | | (0.39 | ) | | 1.10 | |
| | | | | | | | | | | | | | | | | | | | |
|
Total from investment operations | | | (6.50 | ) | | (0.47 | ) | | 2.30 | | | 1.62 | | | 1.20 | | | 2.33 | |
| | | | | | | | | | | | | | | | | | | | |
|
Dividends and Distributions on Preferred Shares from: | | | | | | | | | | | | | | | | | | | |
|
Net investment income | | | (0.20 | ) | | (0.45 | ) | | (0.38 | ) | | (0.17 | ) | | (0.21 | ) | | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Net realized gains | | | — | | | — | | | (0.04 | ) | | (0.05 | ) | | (0.00 | )†† | | — | |
| | | | | | | | | | | | | | | | | | | | |
|
Total dividends and distributions on preferred shares | | | (0.20 | ) | | (0.45 | ) | | (0.42 | ) | | (0.22 | ) | | (0.21 | ) | | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Net increase (decrease) in net assets applicable to common shareholders resulting from investment operations | | | (6.70 | ) | | (0.92 | ) | | 1.88 | | | 1.40 | | | 0.99 | | | 2.25 | |
| | | | | | | | | | | | | | | | | | | | |
|
Dividends and Distributions to Common Shareholders from: | | | | | | | | | | | | | | | | | | | |
|
Net investment income | | | (1.29 | ) | | (1.61 | ) | | (1.42 | ) | | (1.05 | ) | | (1.42 | ) | | (1.24 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Net realized gains | | | — | | | — | | | (0.25 | ) | | (0.26 | ) | | (0.14 | ) | | (0.03 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Total dividends and distributions to common shareholders | | | (1.29 | ) | | (1.61 | ) | | (1.67 | ) | | (1.31 | ) | | (1.56 | ) | | (1.27 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Capital Share Transactions: | | | | | | | | | | | | | | | | | | | |
|
Common stock offering costs charged to paid-in capital in excess of par | | | — | | | — | | | — | | | — | | | — | | | (0.03 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Preferred shares offering costs/underwriting discounts charged to paid-in capital in excess of par | | | — | | | — | | | — | | | — | | | — | | | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Total capital share transactions | | | — | | | — | | | — | | | — | | | — | | | (0.13 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
Net asset value, end of period | | $ | 4.39 | | $ | 12.38 | | $ | 14.91 | | $ | 14.70 | | $ | 14.61 | | $ | 15.18 | |
| | | | | | | | | | | | | | | | | | | | |
|
Market price, end of period | | $ | 3.73 | | $ | 12.09 | | $ | 15.42 | | $ | 15.14 | | $ | 14.74 | | $ | 14.05 | |
| | | | | | | | | | | | | | | | | | | | |
|
Total Investment Return (1) | | | (63.34 | )% | | (12.08 | )% | | 13.99 | % | | 12.10 | % | | 16.44 | % | | 1.88 | % |
| | | | | | | | | | | | | | | | | | | | |
|
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | |
Net assets applicable to common shareholders, end of period (000) | | $ | 263,220 | | $ | 735,359 | | $ | 879,014 | | $ | 850,769 | | $ | 834,909 | | $ | 855,783 | |
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Ratio of expenses to average net assets (2) | | | 1.71 | %(4) | | 1.35 | %(4) | | 1.34 | % | | 1.37 | %(3)(4) | | 1.35 | % | | 1.23 | %(3) |
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Ratio of net investment income to average net assets (2) | | | 17.26 | % | | 11.75 | % | | 11.56 | % | | 10.57 | %(3) | | 9.79 | % | | 8.87 | %(3) |
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Preferred shares asset coverage per share | | $ | 49,015 | | $ | 61,410 | | $ | 68,493 | | $ | 67,096 | | $ | 66,319 | | $ | 67,359 | |
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Portfolio turnover | | | 57 | % | | 34 | % | | 60 | % | | 33 | % | | 67 | % | | 73 | % |
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* | Commencement of operations |
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** | Initial public offering price of $15.00 per share less underwriting discount of $0.675 per share. |
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† | During the period the Fund’s fiscal year-end changed from June 30 to February 28. |
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†† | Less than $0.005 per share. |
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(1) | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of the period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. Total investment return for a period of less than one year is not annualized. |
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(2) | Calculated on the basis of income and expenses applicable to both common and preferred shareholders relative to the average net assets of common shareholders. |
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(3) | Annualized. |
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(4) | Ratio of expenses to average net assets, excluding excise tax expense was 1.63% for the year ended February 28, 2009, 1.34% for the year ended February 29, 2008 and 1.35% for the period July 1, 2005 through February 28, 2006. |
See accompanying Notes to Financial Statements | 2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 27
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Nicholas-Applegate Convertible & Income Funds Report of Independent Registered Public Accounting Firm |
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To the Shareholders and Board of Trustees of: | |
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Nicholas-Applegate Convertible & Income Fund | |
Nicholas-Applegate Convertible & Income Fund II | |
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets applicable to common shareholders and the financial highlights present fairly, in all material respects, the financial position of the Nicholas-Applegate Convertible & Income Fund and Nicholas-Applegate Convertible & Income Fund II (the “Funds”) at February 28, 2009, the results of each of their operations for the year then ended, changes in each of their net assets applicable to common shareholders for the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2009, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 24, 2009
28 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09
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Nicholas-Applegate Convertible & Income Funds Subsequent Events (unaudited) |
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Subsequent Events—Postponement of Payment and Declaration of Common Share Dividends |
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On March 2, 2009, the Funds announced that due to recent market conditions and requirements under the Funds’ By-laws and the Investment Company Act of 1940, as amended (the “1940 Act”) it has postponed the payment of the previously declared (February 2, 2009) dividends on the Funds’ common shares scheduled for payment on March 2, 2009 and the declaration of the next dividends on the Funds’ common shares, which would have been paid in April 2009. |
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The declared dividends ($0.09 and $0.085 per common share for Convertible & Income and Convertible & Income II, respectively) payable on March 2, 2009 to the shareholders of record on February 12, 2009, with an ex-dividend date of February 10, 2009, was not paid on March 2, 2009. |
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In accordance with the 1940 Act and the Funds’ By-laws, the Funds are not permitted to pay or declare common share dividends unless the Funds’ ARPS have a minimum asset coverage of 200% (“200% Level”) after payment of common share dividends or declaration of the common share dividends. |
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On March 19, 2009, Convertible & Income announced that the $0.09 per common share dividend, which was previously declared on February 2, 2009 and postponed on March 2, 2009 will be paid on March 19, 2009 to shareholders of record on February 12, 2009. |
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On March 24, 2009, Convertible & Income II announced that the $0.085 per common share dividend, which was previously declared on February 2, 2009 and postponed on March 2, 2009 will be paid on March 24, 2009 to shareholders of record on February 12, 2009. |
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On March 24, 2009, Convertible & Income and Convertible & Income II declared dividends of $0.09 and $0.085 per common share, respectively, which consist of the monthly dividend amounts that were scheduled to have been declared on March 2, 2009, but were previously postponed. The dividends are payable on April 17, 2009 to shareholders of record on April 13, 2009, with an ex-dividend date of April 8, 2009. |
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2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 29
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Nicholas-Applegate Convertible & Income Funds | Tax Information/Annual
Shareholder Meeting Results |
| (unaudited) |
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Tax Information:
Convertible & Income:
Pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Fund designates qualified dividend income of 27.65% or the maximum allowable amount.
The percentage of ordinary dividends paid by the Fund during the period ended February 28, 2009, which qualified for the Dividends Received Deduction available to corporate shareholders was 20.99% or the maximum allowable amount.
Convertible & Income II:
Pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Fund designates qualified dividend income of 30.03% or the maximum allowable amount.
The percentage of ordinary dividends paid by the Fund during the period ended February 28, 2009, which qualified for the Dividends Received Deduction available to corporate shareholders was 22.71% or the maximum allowable amount.
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Since the Funds’ tax year is not the calendar year, another notification will be sent with respect to calendar year 2009. In January 2010, shareholders will be advised on IRS Form 1099 DIV as to the federal tax status of dividends and distributions received during calendar 2009. The amount that will be reported will be the amount to use on your 2009 federal income tax return and may differ from the amount which must be reported in connection with the Funds’ tax year ended February 29, 2009. Shareholders are advised to consult their tax advisers as to the federal, state and local tax status of the dividend income received from the Funds. |
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Annual Shareholder Meetings Results: |
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The Funds held their annual meetings of shareholders on July 23, 2008. Common/Preferred shareholders voted as indicated below. |
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| | Affirmative | | Withheld
Authority | |
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Convertible & Income | | | | | | | |
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Re-election of John J. Dalessandro II*†—Class II to serve until 2011 | | | 14,643 | | | 1,889 | |
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Re-election of R. Peter Sullivan III—Class II to serve until 2011 | | | 59,856,541 | | | 1,425,376 | |
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Election of Diana L. Taylor**—Class II to serve until 2011 | | | 59,876,793 | | | 1,405,124 | |
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Convertible & Income II | | | | | | | |
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Re-election of John J. Dalessandro II*†—Class II to serve until 2011 | | | 14,703 | | | 1,052 | |
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Re-election of R. Peter Sullivan III—Class II to serve until 2011 | | | 50,576,096 | | | 1,019,046 | |
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Election of Diana L. Taylor**—Class II to serve until 2011 | | | 50,591,181 | | | 1,003,961 | |
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Messrs. Paul Belica, Robert E. Connor*, Hans W. Kertess and William B. Ogden, IV continue to serve as Trustees. | |
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* | Preferred Shares Trustee |
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† | Mr. John J. Dalessandro II served as a Class II Preferred Share Trustee of the Funds until his death on September 14, 2008. |
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** | On October 22, 2008, Ms. Taylor was appointed by the Board to serve as a Preferred Share Trustee of each Fund to fill a vacancy resulting from the death of John J. Dalessandro II, who formerly served as a Trustee elected by the Preferred Shareholders, voting as a separate class, of each Fund. |
30 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09
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Nicholas-Applegate Convertible & Income Funds | Privacy Policy/Proxy Voting |
| Policies & Procedures |
| (unaudited) |
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Privacy Policy |
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Our Commitment to You |
We consider customer privacy to be a fundamental aspect of our relationship with clients. We are committed to maintaining the confidentiality, integrity, and security of our current, prospective and former clients’ personal information. To ensure clients’ privacy, we have developed policies designed to protect this confidentiality, while allowing client needs to be served. |
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Obtaining Personal Information |
In the course of providing you with products and services, we and certain service providers to the Funds, such as the Funds’ investment adviser, may obtain non-public personal information about you. This information may come from sources such as account applications and other forms, from other written, electronic or verbal correspondence, from your transactions, from your brokerage or financial advisory firm, financial adviser or consultant, and/or from information captured on our internet web sites. |
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Respecting Your Privacy |
As a matter of policy, we do not disclose any personal or account information provided by you or gathered by us to non-affiliated third parties, except as required or permitted by law or as necessary for such third parties to perform their agreements with respect to the Funds. As is common in the industry, non-affiliated companies may from time to time be used to provide certain services, such as preparing and mailing prospectuses, reports, account statements and other information, conducting research on client satisfaction, and gathering shareholder proxies. We may also retain non-affiliated companies to market our products and enter in joint marketing agreements with other companies. These companies may have access to your personal and account information, but are permitted to use the information solely to provide the specific service or as otherwise permitted by law. We may also provide your personal and account information to your respective brokerage or financial advisory firm and/or to your financial adviser or consultant. |
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Sharing Information with Third Parties |
We do reserve the right to disclose or report personal information to non-affiliated third parties in limited circumstances where we believe in good faith that disclosure is required under law, to cooperate with regulators or law enforcement authorities, to protect our rights or property, or upon reasonable request by any mutual fund in which you have chosen to invest. In addition, we may disclose information about you or your accounts to a non-affiliated third party with the consent or at your request or if you consent in writing to the disclosure. |
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Sharing Information with Affiliates |
We may share client information with our affiliates in connection with servicing your account or to provide you with information about products and services that we believe may be of interest to you. The information we share may include, for example, your participation in our mutual funds or other investment programs, your ownership of certain types of accounts (such as IRAs), or other data about your accounts. Our affiliates, in turn, are not permitted to share your information with non-affiliated entities, except as required or permitted by law. |
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Procedures to Safeguard Private Information |
We take seriously the obligation to safeguard shareholder non-public personal information. In addition to this policy, we have also implemented procedures that are designed to restrict access to your non-public personal information only to internal personnel who need to know that information in order to provide products or services to you. In order to guard your non-public personal information, physical, electronic and procedural safeguards are in place. |
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Proxy Voting Policies & Procedures: |
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A description of the policies and procedures that the Funds have adopted to determine how to vote proxies relating to portfolio securities and information about how the Funds voted proxies relating to portfolio securities held during the most recent twelve month period ended June 30, is available (i) without charge, upon request, by calling the Funds’ transfer agent at (800) 331-1710; (ii) on the Funds’ website at www.allianzinvestors.com/closedendfunds; and (iii) on the Securities and Exchange Commission’s website at www.sec.gov. |
2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 31
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Nicholas-Applegate Convertible & Income Funds | Dividend Reinvestment Plan |
| (unaudited) |
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Dividend Reinvestment Plan
Pursuant to the Funds’ Dividend Reinvestment Plan (the “Plan”), all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by PFPC Inc., as agent for the Common Shareholders (the “Plan Agent”), unless the shareholder elects to receive cash. An election to receive cash may be revoked or reinstated at the option of the shareholder. In the case of record shareholders such as banks, brokers or other nominees that hold Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. Shareholders whose shares are held in the name of a bank, broker or nominee should contact the bank, broker or nominee for details. All distributions to investors who elect not to participate in the Plan (or whose broker or nominee elects not to participate on the investor’s behalf), will be paid cash by check mailed, in the case of direct shareholder, to the record holder by PFPC Inc., as the Funds’ dividend disbursement agent.
Unless you elect (or your broker or nominee elects) not to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
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(1) | If on the payment date the net asset value of the Common Shares is equal to or less than the market price per Common Share plus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market, the Funds will issue new shares at the greater of (i) the net asset value per Common Share on the payment date or (ii) 95% of the market price per Common Share on the payment date; or |
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(2) | If on the payment date the net asset value of the Common Shares is greater than the market price per Common Share plus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the New York Stock Exchange or elsewhere, for the participants’ accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price on the payment date, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Funds. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market on or shortly after the payment date, but in no event later than the ex-dividend date for the next distribution. Interest will not be paid on any uninvested cash payments. |
You may withdraw from the Plan at any time by giving notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions.
The Plan Agent maintains all shareholders’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. The Plan Agent will also furnish each person who buys Common Shares with written instructions detailing the procedures for electing not to participate in the Plan and to instead receive distributions in cash. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions.
The Funds and the Plan Agent reserve the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Funds reserve the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from the Funds’ transfer agent, PNC Global Investment Servicing, P.O. Box 43027, Providence, RI 02940-3027, telephone number (800) 331-1710.
32 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09
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Nicholas-Applegate Convertible & Income Funds Board of Trustees (unaudited) |
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Name, Date of Birth, Position(s) Held
with Funds, Length of Service, Other
Trusteeships/Directorships Held by
Trustee; Number of Portfolios in Fund
Complex/Outside Fund Complexes
Currently Overseen by Trustee | Principal Occupation(s) During Past 5 Years: |
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The address of each trustee is 1345 Avenue of the Americas, New York, NY 10105 |
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Hans W. Kertess
Date of Birth: 7/12/39 Chairman of the Board of Trustees since: 2007
Trustee since: 2003 Term of office: Expected to stand for re-election
at 2010—NCV and 2009—NCZ annual meeting
of shareholders. Trustee/Director of 48 Funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | President, H. Kertess & Co., a financial advisory company: Formally, Managing Director, Royal Bank of Canada Capital Markets. |
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Paul Belica
Date of Birth: 9/27/21
Trustee since: 2003
Term of Office: Expected to stand for re-election
at 2009—NCV and 2010—NCZ annual meeting
of shareholders Trustee/Director of 48 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly Director, Student Loan Finance Corp., Education Loans, Inc., Goal Funding, Inc., Goal Funding II, Inc. and Surety Loan Fund, Inc.; Formerly, Manager of Stratigos Fund LLC, Whistler Fund LLC, Xanthus Fund LLC & Wynstone Fund LLC. |
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Robert E. Connor
Date of Birth: 9/17/34
Trustee since: 2003
Term of office: Expected to stand for re-election
at 2010—NCV and 2010—NCZ annual meeting
of shareholders. Trustee/Director of 48 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired; Formerly, Senior Vice President, Corporate Office, Smith Barney Inc. |
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William B. Ogden, IV
Date of Birth: 1/11/45
Trustee since: 2006 Term of office: Expected to stand for election
at 2010—NCV and 2010—NCZ annual meeting
of shareholders. Trustee/Director of 48 Funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | Asset Management Industry Consultant; Formerly, Managing Director, Investment Banking Division of Citigroup Global Markets Inc. |
2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 33
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Nicholas-Applegate Convertible & Income Funds Board of Trustees |
| (unaudited) (continued) |
| | |
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Name, Date of Birth, Position(s) Held
with Funds, Length of Service, Other
Trusteeships/Directorships Held by
Trustee; Number of Portfolios in Fund
Complex/Outside Fund Complexes
Currently Overseen by Trustee | Principal Occupation(s) During Past 5 Years: |
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R. Peter Sullivan III
Date of Birth: 9/4/41
Trustee since: 2004 Term of office: Expected to stand for re-election
at 2011—NCV and 2011—NCZ annual meeting
of shareholders. Trustee/Director of 48 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly, Managing Partner, Bear Wagner Specialists LLC, specialist firm on the New York Stock Exchange. |
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Diana L. Taylor
Date of Birth: 2/16/55
Trustee since: 2008 Term of office: Expected to stand for re-election
at 2011—NCV and 2011—NCZ annual meeting
of shareholders. Trustee/Director of 44 funds in Fund Complex Trustee/Director of Brookfield Properties Corporations
and Southeby’s | | Managing Director, Wolfensohn & Co., 2007-present. Formerly, Superintendent of Banks, State of New York, 2003-2007 |
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John C. Maney†
Date of Birth: 8/3/59
Trustee since 2006 Term of office: Expected to stand for election
at 2009—NCV and 2009—NCZ annual meeting
of shareholders. Trustee/Director of 79 Funds in the Fund Complex,
Trustee/Director of no Funds outside the Fund Complex | | Management Board of Allianz Global Investors Fund Management LLC; Management Board and Managing Director of Allianz Global Investors of America L.P. since January 2005 and Chief Operating Officer of Allianz Global Investors of America L.P. since November 2006; Formerly, Executive Vice President and Chief Financial Officer of Apria Healthcare Group, Inc. (1998-2001) |
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† | Mr. Maney is an “interested person” of the Fund due to his affiliation with Allianz Global Investors of America L.P. In addition to Mr. Maney’s positions set forth in the table above, he holds the following positions with affiliated persons: Management Board, Managing Director and Chief Operating Officer of Allianz Global Investors of America L.P., Allianz Global Investors of America LLC and Allianz-Pac Life Partners LLC; Member – Board of Directors and Chief Operating Officer of Allianz Global Investors of America Holdings Inc., Oppenheimer Group, Inc. and PFP Holdings, Inc.; Managing Director and Chief Operating Officer of Allianz Global Investors NY Holdings LLC; Management Board and Managing Director of Allianz Global Investors U.S. Holding LLC; Managing Director and Chief Operating Officer of Allianz Hedge Fund Partners Holding L.P.; Managing Director and Chief Operating Officer of Allianz Global Investors U.S. Retail LLC; Member – Board of Directors and Managing Director of Allianz Global Investors Advertising Agency Inc.; Compensation Committee of NFJ Investment Group LLC.; Management Board of Allianz Global Investors Fund Management LLC, Allianz Global Investors Management Partners LLC, Nicholas-Applegate Holdings LLC and OpCap Advisors LLC; Member – Board of Directors and Chief Operating Officer of PIMCO Global Advisors (Resources) Limited; Executive Vice President of PIMCO Japan Ltd.; and Chief Operating Officer of Allianz Global Investors U.S. Holding II LLC. |
Further information about Funds’ Trustees is available in the Funds’ Statements of Additional Information, dated May 21, 2003 (for the Nicholas-Applegate Convertible & Income Fund) and September 25, 2003 (for Nicholas-Applegate Equity & Convertible Income Fund II), which can be obtained, without charge, by calling the Funds’ shareholder servicing agent at (800) 331-1710.
34 Nicholas-Applegate Convertible & Income Funds Annual Report | 2.28.09
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Nicholas-Applegate Convertible & Income Funds Fund Officers (unaudited) |
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Name, Date of Birth, Position(s) Held with Funds | | Principal Occupation(s) During Past 5 Years: |
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Brian S. Shlissel
Date of Birth: 11/14/64
President & Chief Executive Officer since: 2003 | | Executive Vice President, Director of Fund Administration, Allianz Global Investors Fund Management LLC; President and Chief Executive Officer of 35 funds in the Fund Complex; Treasurer, Principal Financial and Accounting Officer of 46 funds in the Fund Complex and The Korea Fund, Inc. |
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Lawrence G. Altadonna
Date of Birth: 3/10/66 Treasurer, Principal Financial and Accounting Officer
since: 2003 | | Senior Vice President, Allianz Global Investors Fund Management LLC; Treasurer, Principal Financial and Accounting Officer of 35 funds in the Fund Complex; Assistant Treasurer of 46 funds in the Fund Complex and The Korea Fund, Inc. |
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Thomas J. Fuccillo
Date of Birth: 3/22/68 Vice President, Secretary & Chief Legal Officer
since: 2004 | | Executive Vice President, Chief Legal Officer and Secretary of Allianz Global Investors Fund Management LLC and Allianz Global Investors Solutions LLC; Executive Vice President of Allianz Global Investors of America L.P Vice President, Secretary and Chief Legal Officer of 79 funds in the Fund Complex; Secretary and Chief Legal Officer of The Korea Fund, Inc. Formerly, Vice President and Associate General Counsel, Neuberger Berman, LLC, 1991-2004. |
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Scott Whisten
Date of Birth: 3/13/71
Assistant Treasurer since: 2007 | | Vice President, Allianz Global Investors Fund Management LLC; Assistant Treasurer of 81 funds in the Fund Complex; formerly, Accounting Manager, Prudential Investments (2000-2005). |
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Richard J. Cochran
Date of Birth: 1/23/61
Assistant Treasurer since: 2008 | | Vice President, Allianz Global Investors Fund Management LLC; Assistant Treasurer of 81 funds in the Fund Complex. Formerly, Tax Manager, Teacher Insurance Annuity Association/College Retirement Equity Fund (2002-2008) |
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Youse Guia
Date of Birth: 9/3/72
Chief Compliance Officer since: 2004 | | Senior Vice President, Group Compliance Manager, Allianz Global Investors of America L.P.; Chief Compliance Officer of 81 funds in the Fund Complex and The Korea Fund, Inc.; Formerly, Vice President, Group Compliance Manager, Allianz Global Investors of America L.P. (2002-2004). |
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Kathleen A. Chapman
Date of Birth: 11/11/54
Assistant Secretary since: 2006 | | Assistant Secretary of 81 funds in the Fund Complex; Manager - IIG Advisory Law, Morgan Stanley (2004-2005); The Prudential Insurance Company of America; and Assistant Corporate Secretary of affiliated American Skandia companies (1996-2004). |
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Lagan Srivastava
Date of Birth: 9/20/77
Assistant Secretary since: 2006 | | Assistant Secretary of 81 funds in the Fund Complex and The Korea Fund, Inc.; formerly, Research Assistant, Dechert LLP (2004-2005); Research Assistant, Swidler Berlin Shereff Friedman LLP (2002-2004). |
Officers hold office at the pleasure of the Board and until their successors are appointed and qualified or until their earlier resignation or removal.
2.28.09 | Nicholas-Applegate Convertible & Income Funds Annual Report 35
[This page intentionally left blank.]
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Trustees and Fund Officers | |
Hans W. Kertess | Brian S. Shlissel |
Trustee, Chairman of the Board of Trustees | President & Chief Executive Officer |
Paul Belica | Lawrence G. Altadonna |
Trustee | Treasurer, Principal Financial & Accounting Officer |
Robert E. Connor | Thomas J. Fuccillo |
Trustee | Vice President, Secretary & Chief Legal Officer |
John C. Maney | Scott Whisten |
Trustee | Assistant Treasurer |
William B. Ogden, IV | Richard J. Cochran |
Trustee | Assistant Treasurer |
R. Peter Sullivan III | Youse E. Guia |
Trustee | Chief Compliance Officer |
Diana L. Taylor | Kathleen A. Chapman |
Trustee | Assistant Secretary |
| Lagan Srivastava |
| Assistant Secretary |
Investment Manager
Allianz Global Investors Fund Management LLC
1345 Avenue of the Americas
New York, NY 10105
Sub-Adviser
Nicholas-Applegate Capital Management LLC
600 West Broadway, 30th Floor
San Diego, California 92101
Custodian & Accounting Agent
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent, Dividend Paying Agent and Registrar
PNC Global Investment Servicing
P.O. Box 43027
Providence, RI 02940-3027
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
Legal Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02210-2624
This report, including the financial information herein, is transmitted to the shareholders of Nicholas-Applegate Convertible & Income Fund and Nicholas-Applegate Convertible & Income Fund II for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Funds or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Funds may purchase shares of its common stock in the open market.
The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of their fiscal years on Form N-Q. The Funds’ Form N-Q’s are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. The information on Form N-Q is also available on the Funds’ website at www.allianzinvestors.com/closedendfunds.
On July 31, 2008, the Funds submitted a CEO annual certification to the New York Stock Exchange (“NYSE”) on which the Funds’ principal executive officer certified that he was not aware, as of the date, of any violation by the Funds of the NYSE’s Corporate Governance listing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Funds’ principal executive and principal financial officer made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q relating to, among other things, the Funds’ disclosure controls and procedures and internal control over financial reporting, as applicable.
Information on the Funds is available at www.allianzinvestors.com/closedendfunds or by calling the Funds’ shareholder servicing agent at (800) 331-1710.
ITEM 2. CODE OF ETHICS
| | (a) | As of the end of the period covered by this report, the registrant has adopted a code of ethics (the “Section 406 Standards for Investment Companies — Ethical Standards for Principal Executive and Financial Officers”) that applies to the registrant’s Principal Executive Officer and Principal Financial Officer; the registrant’s Principal Financial Officer also serves as the Principal Accounting Officer. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-331-1710. The code of ethics is included as an Exhibit 99.CODEETH hereto. |
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| | (b) | During the period covered by this report, there were not any amendments to a provision of the code of ethics adopted in 2(a) above. |
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| | (c) | During the period covered by this report, there were not any waivers or implicit waivers to a provision of the code of ethics adopted in 2(a) above. |
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ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The registrant’s Board has determined that Mr. Paul Belica, a member of the Board’s Audit Oversight Committee is an “audit committee financial expert,” and that he is “independent,” for purposes of this Item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| | a) | Audit fees. The aggregate fees billed for each of the last two fiscal years (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods were $50,000 in 2008 and $54,000 in 2009. |
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| | b) | Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the principal accountant that are reasonably related to the performance of the audit registrant’s financial statements and are not reported under paragraph (e) of this Item were $10,000 in 2008 and $40,000 in 2009. These services consist of accounting consultations, agreed upon procedure reports (inclusive of annual review of basic maintenance testing associated with the Preferred Shares), attestation reports and comfort letters. |
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| | c) | Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax service and tax planning (“Tax Services”) were $13,000 in 2008 and $13,650 in 2009. These services consisted of review or preparation of U.S. federal, state, local and excise tax returns and calculation of excise tax distributions. |
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| | d) | All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor to the Registrant. |
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| | e) | 1. Audit Committee Pre-Approval Policies and Procedures. The Registrant’s Audit Committee has established policies and procedures for pre-approval of all audit and permissible non-audit services by the Auditor for the Registrant, as well as the Auditor’s engagements related directly to the operations and financial reporting of the Registrant. The Registrant’s policy is stated below. |
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| | | Nicholas-Applegate Convertible & Income Fund (The “Fund”) |
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AUDIT OVERSIGHT COMMITTEE POLICY FOR PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT ACCOUNTANTS
The Fund’s Audit Oversight Committee (“Committee”) is charged with the oversight of the Funds’ financial reporting policies and practices and their internal controls. As part of this responsibility, the Committee must pre-approve any independent accounting firm’s engagement to render audit and/or permissible non-audit services, as required by law. In evaluating a proposed engagement by the independent accountants, the Committee will assess the effect that the engagement might reasonably be expected to have on the accountant’s independence. The Committee’s evaluation will be based on:
a review of the nature of the professional services expected to provided,
the fees to be charged in connection with the services expected to be provided, a
review of the safeguards put into place by the accounting firm to safeguard independence, and
periodic meetings with the accounting firm.
POLICY FOR AUDIT AND NON-AUDIT SERVICES TO BE PROVIDED TO THE FUNDS
On an annual basis, the Fund’s Committee will review and pre-approve the scope of the audits of the Funds and proposed audit fees and permitted non-audit (including audit-related) services that may be performed by the Fund’s independent accountants. At least annually, the Committee will receive a report of all audit and non-audit services that were rendered in the previous calendar year pursuant to this Policy. In addition to the Committee’s pre-approval of services pursuant to this Policy, the engagement of the independent accounting firm for any permitted non-audit service provided to the Fund will also require the separate written pre-approval of the President of the Fund, who will confirm, independently, that the accounting firm’s engagement will not adversely affect the firm’s independence. All non-audit services performed by the independent accounting firm will be disclosed, as required, in filings with the Securities and Exchange Commission.
AUDIT SERVICES
The categories of audit services and related fees to be reviewed and pre-approved annually by the Committee are:
Annual Fund financial statement audits
Seed audits (related to new product filings, as required)
SEC and regulatory filings and consents
Semiannual financial statement reviews
AUDIT-RELATED SERVICES
The following categories of audit-related services are considered to be consistent with the role of the Fund’s independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
Accounting consultations
Fund merger support services
Agreed upon procedure reports (inclusive of the annual review of Basic Maintenance testing associated with issuance of Preferred Shares and semiannual report review)
Other attestation reports
Comfort letters
Other internal control reports
Individual audit-related services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chair (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
TAX SERVICES
The following categories of tax services are considered to be consistent with the role of the Fund’s independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
Tax compliance services related to the filing or amendment of the following:
Federal, state and local income tax compliance; and, sales and use tax compliance
Timely RIC qualification reviews
Tax distribution analysis and planning
Tax authority examination services
Tax appeals support services
Accounting methods studies
Fund merger support service
Other tax consulting services and related projects
Individual tax services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
PROSCRIBED SERVICES
The Fund’s independent accountants will not render services in the following categories of non-audit services:
Bookkeeping or other services related to the accounting records or financial statements of the Funds
Financial information systems design and implementation
Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions or human resources
Broker or dealer, investment adviser or investment banking services
Legal services and expert services unrelated to the audit
Any other service that the Public Company Accounting Oversight Board determines, by regulation, is impermissible
PRE-APPROVAL OF NON-AUDIT SERVICES PROVIDED TO OTHER ENTITIES WITHIN THE FUND COMPLEX
The Committee will pre-approve annually any permitted non-audit services to be provided to Allianz Global Investors Fund Management LLC (Formerly, PA Fund Management LLC) or any other investment manager to the Funds (but not including any sub-adviser whose role is primarily portfolio management and is sub-contracted by the investment manager) (the “Investment Manager”) and any entity controlling, controlled by, or under common control with the Investment Manager that provides ongoing services to the Fund (including affiliated sub-advisers to the Fund), provided, in each case, that the engagement relates directly to the operations and financial reporting of the Fund (such entities, including the Investment Manager, shall be referred to herein as the “Accounting Affiliates”). Individual projects that are not presented to the Committee as part of the annual pre-approval process, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $250,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
Although the Committee will not pre-approve all services provided to the Investment Manager and its affiliates, the Committee will receive an annual report from the Funds’ independent accounting firm showing the aggregate fees for all services provided to the Investment Manager and its affiliates.
DE MINIMUS EXCEPTION TO REQUIREMENT OF PRE-APPROVAL OF NON-AUDIT SERVICES
With respect to the provision of permitted non-audit services to a Fund or Accounting Affiliates, the pre-approval requirement is waived if:
| | | (1) | The aggregate amount of all such permitted non-audit services provided constitutes no more than (i) with respect to such services provided to the Fund, five percent (5%) of the total amount of revenues paid by the Fund to its independent accountant during the fiscal year in which the services are provided, and (ii) with respect to such services provided to Accounting Affiliates, five percent (5%) of the total amount of revenues paid to the Fund’s independent accountant by the Fund and the Accounting Affiliates during the fiscal year in which the services are provided; |
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| | | (2) | Such services were not recognized by the Fund at the time of the engagement for such services to be non-audit services; and |
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| | | (3) | Such services are promptly brought to the attention of the Committee and approved prior to the completion of the audit by the Committee or by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this Committee Chairman or other delegate shall be reported to the full Committee at its next regularly scheduled meeting. |
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| | | | e) 2. No services were approved pursuant to the procedures contained in paragraph (C) (7) (i) (C) of Rule 2-01 of Registration S-X. |
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| | f) | Not applicable |
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| | g) | Non-audit fees. The aggregate non-audit fees billed by the Auditor for services rendered to the Registrant, and rendered to the Adviser, for the 2008 Reporting Period was $487,892 and the 2009 Reporting Period was $348,185. |
| | h) | Auditor Independence. The Registrant’s Audit Oversight Committee has considered whether the provision of non-audit services that were rendered to the Adviser which were not pre-approved is compatible with maintaining the Auditor’s independence. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
The Fund has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The audit committee of the Fund is comprised of Robert E. Connor, Paul Belica, Hans W. Kertess, R. Peter Sullivan III, William B. Ogden, IV and Diana L. Taylor.
ITEM 6. SCHEDULE OF INVESTMENTS
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Nicholas-Applegate Convertible & Income Fund (NCV)
(each a “Trust”)
PROXY VOTING POLICY
| 1. | It is the policy of the Trust that proxies should be voted in the interest of its shareholders, as determined by those who are in the best position to make this determination. The Trust believes that the firms and/or persons purchasing and selling securities for the Trust and analyzing the performance of the Trust’s securities are in the best position and have the information necessary to vote proxies in the best interests of the Trust and its shareholders, including in situations where conflicts of interest may arise between the interests of shareholders, on one hand, and the interests of the investment adviser, a sub-adviser and/or any other affiliated person of the Trust, on the other. Accordingly, the Trust’s policy shall be to delegate proxy voting responsibility to those entities with portfolio management responsibility for the Trust. |
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| 2. | The Trust delegates the responsibility for voting proxies to Allianz Global Investors Fund Management LLC (“AGIFM”), which will in turn delegate such responsibility to the sub-adviser of the Trust. AGIFM’s Proxy Voting Policy Summary is attached as Appendix A hereto. A summary of the detailed proxy voting policy of the Trust’s current sub-adviser is set forth in Appendix B attached hereto. Such summary may be revised from time to time to reflect changes to the sub-adviser’s detailed proxy voting policy. |
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| 3. | The party voting the proxies (i.e., the sub-adviser) shall vote such proxies in accordance with such party’s proxy voting policies and, to the extent consistent with such policies, may rely on information and/or recommendations supplied by others. |
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| 4. | AGIFM and the sub-adviser of the Trust with proxy voting authority shall deliver a copy of its respective proxy voting policies and any material amendments thereto to the applicable Board of the Trust promptly after the adoption or amendment of any such policies. |
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| 5. | The party voting the proxy shall: (i) maintain such records and provide such voting information as is required for the Trust’s regulatory filings including, without limitation, Form N-PX and the required disclosure of policy called for by Item 18 of Form N-2 and Item 7 of Form N-CSR; and (ii) shall provide such additional information as may be requested, from time to time, by the Board or the Trust’s Chief Compliance Officer. |
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| 6. | This Proxy Voting Policy Statement (including Appendix B), the Proxy Voting Policy Summary of AGIFM and summary of the detailed proxy voting policy of the sub-adviser of the Trust with proxy voting authority, shall be made available (i) without charge, upon request, by calling 1-800-426-0107 and (ii) on the Trust’s website at www.allianzinvestors.com. In addition, to the extent required by applicable law or determined by the Trust’s Chief Compliance Officer or Board of Trustees, the Proxy Voting Policy Summary of AGIFM and summary of the detailed proxy voting policy of the Trust’s sub-adviser with proxy voting authority shall also be included in the Trust’s Registration Statements or Form N-CSR filings. |
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Appendix A
ALLIANZ GLOBAL INVESTORS FUND MANAGEMENT LLC (“AGIFM”)
| 1. | It is the policy of AGIFM that proxies should be voted in the interest of the shareholders of the applicable fund, as determined by those who are in the best position to make this determination. AGIFM believes that the firms and/or persons purchasing and selling securities for the funds and analyzing the performance of the funds’ securities are in the best position and have the information necessary to vote proxies in the best interests of the funds and their shareholders, including in situations where conflicts of interest may arise between the interests of shareholders, on one hand, and the interests of the investment adviser, a sub-adviser and/or any other affiliated person of the fund, on the other. Accordingly, AGIFM’s policy shall be to delegate proxy voting responsibility to those entities with portfolio management responsibility for the funds. |
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| 2. | AGIFM, for each fund which it acts as an investment adviser, delegates the responsibility for voting proxies to the sub-adviser for the respective fund, subject to the terms hereof. |
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| 3. | The party voting the proxies (e.g., the sub-adviser) shall vote such proxies in accordance with such party’s proxy voting policies and, to the extent consistent with such policies, may rely on information and/or recommendations supplied by others. |
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| 4. | AGIFM and each sub-adviser of a fund shall deliver a copy of its respective proxy voting policies and any material amendments thereto to the board of the relevant fund promptly after the adoption or amendment of any such policies. |
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| 5. | The party voting the proxy shall: (i) maintain such records and provide such voting information as is required for such funds’ regulatory filings including, without limitation, Form N-PX and the required disclosure of policy called for by Item 18 of Form N-2 and Item 7 of Form N-CSR; and (ii) shall provide such additional information as may be requested, from time to time, by such funds’ respective boards or chief compliance officers. |
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| 6. | This Proxy Voting Policy Summary and summaries of the proxy voting policies for each sub-adviser of a fund advised by AGIFM shall be available (i) without charge, upon request, by calling 1-800-426-0107 and (ii) at www.allianzinvestors.com. In addition, to the extent required by applicable law or determined by the relevant fund’s board of directors/trustees or chief compliance officer, this Proxy Voting Policy Summary and summaries of the detailed proxy voting policies of each sub-adviser and each other entity with proxy voting authority for a fund advised by AGIFM shall also be included in the Registration Statement or Form N-CSR filings for the relevant fund. |
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Appendix B
Nicholas-Applegate Capital Management LLC (“NACM”)
Description of Proxy Voting Policy and Procedures
NACM votes proxies on behalf of its clients pursuant to its written Proxy Policy Guidelines and Procedures (the “Proxy Guidelines”), unless a client requests otherwise. The Proxy Guidelines are designed to honor NACM's fiduciary duties to its clients and protect and enhance its clients' economic welfare and rights.
The Proxy Guidelines are established by a Proxy Committee consisting of executive, investment, sales, marketing, compliance and operations personnel. The Proxy Guidelines reflect NACM's normal voting positions on specific corporate actions, including but not limited to those relating to social and corporate responsibility issues, stock option plans and other management compensation issues, changes to a portfolio company's capital structure and corporate governance. For example, NACM generally votes for proposals to declassify boards and generally supports proposals that remove restrictions on shareholders' ability to call special meetings independently of management. Some issues will require a case-by-case analysis.
The Proxy Guidelines largely follow the recommendations of Glass, Lewis & Co. LLC (“Glass Lewis”), an investment research and proxy advisory firm. The Proxy Guidelines may not apply to every situation and NACM may vote differently than specified by the Proxy Guidelines and/or contrary to Glass Lewis' recommendation if NACM reasonably determines that to do so is in its clients' best interest. Any variance from the Proxy Guidelines is documented.
In the case of a potential conflict of interest, NACM's Proxy Committee will be responsible for reviewing the potential conflict and will have the final decision as to how the relevant proxy should be voted.
Under certain circumstances, NACM may in its reasonable discretion refrain from voting clients' proxies due to cost or other factors.
Item 8
(a)(1) Nicholas-Applegate Capital Management LLC (“Nicholas-Applegate” or the “Investment Adviser”)
As of May 6, 2009, the following individuals constitute the team that has primary responsibility for the day-to-day implementation of the Nicholas-Applegate Convertible & Income Fund (NCV) and Nicholas-Applegate Convertible & Income Fund II (NCZ), with Mr. Forsyth serving as the lead portfolio manager:
Douglas G. Forsyth, CFA
Managing Director, Portfolio Manager
Doug Forsyth is the lead portfolio manager since inception (March and July 2003) and oversees Nicholas-Applegate's Income and Growth Strategies portfolio management and research teams and is a member of the firm’s Executive Committee. Prior to joining Nicholas-Applegate in 1994, Doug was a securities analyst at AEGON USA, where he was responsible for financial and strategic analysis of high yield securities. Mr. Forsyth was previously a research assistant at The University of Iowa, where he earned his B.B.A. in finance. He has seventeen years of investment industry experience.
Justin Kass, CFA
Managing Director
Justin Kass has been a co-portfolio manager since July 2003 (NCV) and since inception (July 2003 - NGZ) and joined the Nicholas-Applegate in 2000 with responsibilities for portfolio management and research on our Income and Growth Strategies team. He was previously an analyst and interned on the team, where he added significant depth to our proprietary Upgrade Alert Model. He earned his M.B.A. in finance from The UCLA Anderson School of Management and his B.S. from the University of California, Davis. He has eleven years of investment industry experience.
(a)(2)
The following summarizes information regarding each of the accounts, excluding the Funds managed by portfolio managers as of February 28, 2009 including accounts managed by a team, committee, or other group that includes the portfolio managers.
| | Other RICs | Other Accounts | Other Pooled | |
| PM | # | AUM($million) | # | AUM($million) | # | AUM($million) | |
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| Douglas G. | 7 | $1,577.3 | 10 | $923.3 | 6 | $613.8* | |
| Forsyth | | | | | | | |
| Justin Kass | 7 | $1,577.3 | 10 | $923.3 | 6 | $613.8* | |
*Performance based fees for two accounts totaling $338.1 million.
Like other investment professionals with multiple clients, a Portfolio Manager for a Fund may face certain potential conflicts of interest in connection with managing both the Fund and other accounts at the same time. The paragraphs below describe some conflicts faced by investment professionals at most major financial firms.
The Investment Adviser has adopted compliance policies and procedures that address certain of these potential conflicts. The management of accounts with different advisory fee rates and/or fee structures, including accounts that pay advisory fees based on account performance may raise potential conflicts of interest by creating an incentive to favor higher-fee accounts. These potential conflicts may include, among others:
| • | The most attractive investments could be allocated to higher-fee accounts or performance fee accounts. |
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| • | The trading of higher-fee accounts could be favored as to timing and/or execution price. For example, higher-fee accounts could be permitted to sell securities earlier than other accounts when a prompt sale is desirable or to buy securities at an earlier and more opportune time. |
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| • | The investment management team could focus their time and efforts primarily on higher-fee accounts due to a personal stake in compensation. |
When the Investment Adviser considers the purchase or sale of a security to be in the best interests of a Fund as well as other accounts, the Investment Adviser’s trading desk may, to the extent permitted by applicable laws and regulations, aggregate the securities to be sold or purchased. Aggregation of trades may create the potential for unfairness to a Fund or another account if one account is favored over another in allocating the securities purchased or sold—for example, by allocating a disproportionate amount of a security that is likely to increase in value to a favored account. The Investment Adviser considers many factors when allocating securities among accounts, including the account’s investment style, applicable investment restrictions, availability of securities, available cash and other current holdings. The Investment Adviser attempts to allocate investment opportunities among accounts in a fair and equitable manner. However, accounts are not assured of participating equally or at all in particular investment allocations due to such factors as noted above.
“Cross trades,” in which one Investment Adviser account sells a particular security to another account (potentially saving transaction costs for both accounts), may also pose a potential conflict of interest if, for example, one account is permitted to sell a security to another account at a higher price than an independent third party would pay. The Investment Adviser has adopted compliance procedures that provide that all cross trades are to be made at an independent current market price, as required by law.
Another potential conflict of interest may arise from the different investment objectives and strategies of a Fund and other accounts. For example, another account may have a shorter-term investment horizon or different investment objectives,
policies or restrictions than a Fund. Depending on another account’s objectives or other factors, a Portfolio Manager may give advice and make decisions that may differ from advice given, or the timing or nature of decisions made, with respect to a Fund. In addition, investment decisions are subject to suitability for the particular account involved. Thus, a particular security may not be bought or sold for certain accounts even though it was bought or sold for other accounts at the same time. More rarely, a particular security may be bought for one or more accounts managed by a Portfolio Manager when one or more other accounts are selling the security (including short sales). There may be circumstances when purchases or sales of portfolio securities for one or more accounts may have an adverse effect on other accounts. The Investment Adviser maintains trading policies designed to provide portfolio managers an opportunity to minimize the effect that short sales in one portfolio may have on holdings in other portfolios.
A Portfolio Manager who is responsible for managing multiple accounts may devote unequal time and attention to the management of those accounts. As a result, the Portfolio Manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular Portfolio Manager have different investment strategies.
A Fund’s Portfolio Manager(s) may be able to select or influence the selection of the broker/dealers that are used to execute securities transactions for the Fund. In addition to executing trades, some brokers and dealers provide the Investment Adviser with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), which may result in the payment of higher brokerage fees than might have otherwise be available. These services may be more beneficial to certain funds or accounts than to others. In order to be assured of continuing to receive services considered of value to its clients, the Investment Adviser has adopted a brokerage allocation policy embodying the concepts of Section 28(e) of the Securities Exchange Act of 1934. The Investment Adviser allocates the payment of brokerage commissions is subject to the requirement that the Portfolio Manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the Fund.
A Fund’s Portfolio Manager(s) may also face other potential conflicts of interest in managing a Fund, and the description above is not a complete description of every conflict that could be deemed to exist in managing both the Funds and other accounts. In addition, a Fund’s Portfolio Manager may also manage other accounts (including their personal assets or the assets of family members) in their personal capacity. The Investment Adviser’s investment personnel, including each Fund’s Portfolio Manager, are subject to restrictions on engaging in personal securities transactions pursuant to the Investment Adviser’s Codes of Ethics, which contain provisions and requirements designed to identify and address conflicts of interest between personal investment activities and the interests of the Funds.
(a) (3)
Nicholas-Applegate believes that competitive compensation is essential to retaining top industry talent. With that in mind, the firm continually reevaluates its compensation policies against industry benchmarks. Its goal is to offer portfolio managers and analysts compensation and benefits in the top quartile for comparable experience, as measured by industry benchmarks surveyed by McLagan and ECS (Watson Wyatt Data Services).
Nicholas-Applegate’s compensation policy features both short-term and long-term components. The firm offers competitive base salaries and bonuses, profit-sharing and generous retirement plans. Investment professionals’ annual compensation is directly affected by the performance of their portfolios, their performance as individuals and the success of the firm. Typically, an investment professional’s compensation is comprised of a base salary and a bonus.
Investment professionals are awarded bonuses based primarily on product performance. A 360-degree qualitative review is also considered. As part of the 360-degree review, analysts and portfolio managers are reviewed by the portfolio manager who is responsible for the team’s final investment decisions and other portfolio managers to whose portfolios they contribute. Portfolio managers responsible for final investment decisions are reviewed by the Chief Investment Officer, who evaluates performance both quantitatively versus benchmarks and peer universes, as well as qualitatively.
Compensation and Account Performance
Compensation pools for investment teams are directly related to the size of the business and the performance of the products. Approximately half of the pool is based on one, three and five year performance relative to benchmarks and peers. The team pools are then subjectively allocated to team members based on individual contributions to client accounts. We believe our compensation system clearly aligns the interests of clients with our people and keeps our compensation competitive with industry norms.
Long-Term Incentive Plan
A Long-Term Incentive Plan provides rewards to certain key staff and executives of Nicholas-Applegate and the other Allianz Global Investors companies to promote long-term growth and profitability. The Plan provides awards that are based on Nicholas-Applegate’s operating earnings growth. The plan provides a link between longer term company performance and participant pay, further motivating participants to make a long-term commitment to the company’s success.
Equity Ownership
In September 2006, Allianz SE approved an equity ownership plan for key employees of Nicholas-Applegate. The plan was implemented as of January 31, 2007. Nicholas-Applegate believes this plan is important in retaining and recruiting key investment
professionals, as well as providing ongoing incentives for Nicholas-Applegate employees.
NACM
The following information is provided as of February 28, 2009.
| | |
| | PM Ownership |
| Douglas G. Forsyth | $50,001 - $100,000 (NCV), None (NCZ) |
| Justin Kass | $100,001 - $500,000 (NCV), None (NCZ) |
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED COMPANIES
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.
ITEM 11. CONTROLS AND PROCEDURES
(a) The registrant’s President and Chief Executive Officer and Treasurer, Principal Financial & Accounting Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Act (17 CFR 270.30a-3(c))), as amended are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no significant changes over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d))) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants control over financial reporting.
ITEM 12. EXHIBITS
(a) (1) Exhibit 99.CODE ETH - Code of Ethics
(a) (2) Exhibit 99 Cert. - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(b) Exhibit 99.906 Cert. - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant) | Nicholas-Applegate Convertible & Income Fund |
By /s/ Brian S. Shlissel
President and Chief Executive Officer
Date May 6, 2009
By /s/ Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Date May 6, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ Brian S. Shlissel
President and Chief Executive Officer
Date May 6, 2009
By /s/ Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Date May 6, 2009
