Accounting for uncertainty in income taxes establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Funds’ management has determined that its evaluation has resulted in no material impact to the Funds’ financial statements at August 31, 2010. The Funds’ federal tax returns for the prior three fiscal years remain subject to examination by the Internal Revenue Service.
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 their respective 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 GAAP. 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 to shareholders from return of capital.
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 in convertible securities 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 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 stock.
In the normal course of business the Funds trade financial instruments and enter into financial transactions where risk of potential loss exists due to, among other things, changes in the market (market risk) or failure of the other party to a transaction to perform (counterparty risk). The Funds also are exposed to various risks such as, but not limited to, interest rate and credit risks.
Interest rate risk is the risk that fixed income securities will decline in value because of changes in interest rates. As nominal interest rates rise, the value of certain fixed income securities held by the Funds are likely to decrease. A nominal interest rate can be described as the sum of a real interest rate and an expected inflation rate. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Duration is used primarily as a measure of the sensitivity of a fixed income security’s market price to interest rate (i.e. yield) movements.
The Funds are exposed to credit risk which is the risk of losing money if the issuer or guarantor of a fixed income security is unable or unwilling, or is perceived (whether by market participants, rating agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings.
Similar to credit risk, the Funds are exposed to counterparty risk, or the risk that an institution or other entity with which the Funds have unsettled or open transactions will default. The potential loss to the Funds could exceed the value of the financial assets recorded in the Funds’ financial statements. Financial assets, which potentially expose the Funds to counterparty risk, consist principally of cash due from counterparties and investments. The Funds’ sub-adviser, Allianz Global Investors Capital LLC (“AGIC” or the “Sub-Adviser”), an affiliate of the Investment Manager, seeks to minimize the Funds’
| |
AGIC Convertible & Income Funds | Notes to Financial Statements |
August 31, 2010 (unaudited) |
| |
2. Principal Risks (continued)
counterparty risks by performing reviews of each counterparty and by minimizing concentration of counterparty risk by undertaking transactions with multiple customers and counterparties on recognized and reputable exchanges. Delivery of securities sold is only made once the Funds have received payment. Payment is made on the purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.
The market values of equity securities, such as common stock and preferred stock and securities convertible into equity securities, may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment. They may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities generally have greater market price volatility than fixed income securities.
During the six months ended August 31, 2010, the Funds held synthetic convertible securities with Lehman Brothers, 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.
3. Investment Manager/Sub-Adviser
Each Fund has an Investment Management Agreement (each an “Agreement”) 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 each Agreement, the Investment Manager receives an annual fee, payable monthly, at the annual rate of 0.70% of each Fund’s average daily total managed assets. Total managed assets refer to the total assets of each Fund (including assets attributable to any preferred shares or other forms of leverage that may be outstanding) minus accrued liabilities (other than liabilities representing leverage).
The Investment Manager has retained 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.
Effective August 25, 2010, the Sub-Advisory Agreements between the Investment Manager and Nicholas-Applegate Capital Management LLC (“NACM”) were novated from NACM to AGIC, the indirect parent of NACM.
The novation coincided with a larger corporate reorganization transferring the advisory businesses of NACM and Oppenheimer Capital LLC (“OCC”) to AGIC. Since 2009, AGIC has assumed a number of non-advisory functions from both NACM and OCC, and the transaction in August 2010 marked the last step in the full integration of these businesses under a single name and corporate entity.
4. Investments in Securities
Purchases and sales of investments, other than short-term securities for the six months ended August 31, 2010 were:
| | | | | | | |
| | Purchases | | Sales | |
| | | | | | |
Convertible & Income | | $ | 212,688,932 | | $ | 202,638,477 | |
Convertible & Income II | | | 172,701,436 | | | 167,437,050 | |
5. Income Tax Information
The cost basis of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at August 31, 2010 were:
| | | | | | | | | | | | | |
| | Cost of
Investments | | Gross
Unrealized
Appreciation | | Gross
Unrealized
Depreciation | | Net
Unrealized
Depreciation | |
| | | | | | | | | | |
Convertible & Income | | $ | 999,539,261 | | $ | 80,920,124 | | $ | (96,969,039 | ) | $ | (16,048,915 | ) |
Convertible & Income II | | | 762,464,068 | | | 63,000,601 | | | (78,655,319 | ) | | (15,654,718 | ) |
The difference between book and tax cost is attributable to the differing treatment of market premium amortization on corporate bonds.
| |
| AGIC Convertible & Income Fund |
30 | AGIC Convertible & Income Fund II Semi-Annual Report | 8.31.10 | |
| |
AGIC Convertible & Income Funds | Notes to Financial Statements |
August 31, 2010 (unaudited) |
| |
6. 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 liquidation preference 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 liquidation preference 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 capital gains, if any, are paid annually.
For the six months ended August 31, 2010, the annualized dividend rates for the Funds ranged from:
| | | | | | | | | | |
| | High | | Low | | At August 31, 2010 | |
| | | | | | | | |
Series A | | | 0.542% | | | 0.150% | | | 0.195% | |
Series B | | | 0.422% | | | 0.105% | | | 0.270% | |
Series C | | | 0.452% | | | 0.120% | | | 0.270% | |
Series D | | | 0.527% | | | 0.135% | | | 0.270% | |
Series E | | | 0.452% | | | 0.135% | | | 0.225% | |
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 or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of Preferred Shares at their liquidation value plus any accumulated, unpaid dividends.
Preferred shareholders, who are entitled to one vote per share, generally vote together with the common shareholders but vote separately as a class to elect two Trustees and on any matters affecting the rights of the Preferred Shares.
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 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). 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.
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 and Allianz Global Investors of America, L.P.), agreed to settle, without admitting or denying the allegations, claims brought by the Securities and Exchange Commission (“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 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 and certain of its 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 multidistrict litigation proceeding in the U.S. District Court for the District of Maryland (the “MDL Court”). After a number of claims in the lawsuits were dismissed by the MDL Court, the parties entered into a stipulation of settlement, which was publicly filed with the MDL Court in April 2010, resolving all remaining claims, but the settlement remains subject to the approval of the MDL Court.
| | |
| AGIC Convertible & Income Fund | |
| 8.31.10 | | AGIC Convertible & Income Fund II Semi-Annual Report | 31 |
| |
AGIC Convertible & Income Funds | Notes to Financial Statements |
August 31, 2010 (unaudited) |
| |
7. Legal Proceedings (continued)
Beginning in May 2010, several closed-end funds managed by the Investment Manager, including the Funds, each received a demand letter from a law firm on behalf of certain common shareholders. The demand letters allege that the Investment Manager and certain officers and trustees of the funds breached their fiduciary duties in connection with the redemption at par of a portion of the funds’ ARPS and demand that the boards of trustees take certain action to remedy those alleged breaches. After conducting an investigation, in August 2010 the independent trustees of each Fund rejected the demands made in the demand letters.
The Investment Manager and the Sub-Adviser 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.
8. Subsequent Events
On September 1, 2010 the following monthly dividends were declared to shareholders, payable September 29, 2010 to shareholders of record on September 13, 2010:
| | |
Convertible & Income | | $0.09 per common share |
Convertible & Income II | | $0.085 per common share |
On October 1, 2010 the following monthly dividends were declared to shareholders, payable November 1, 2010 to shareholders of record on October 11, 2010:
| | |
Convertible & Income | | $0.09 per common share |
Convertible & Income II | | $0.085 per common share |
| |
| AGIC Convertible & Income Fund |
32 | AGIC Convertible & Income Fund II Semi-Annual Report | 8.31.10 | |
|
AGIC Convertible & Income Fund Financial Highlights |
For a common share outstanding throughout each period: |
| | | | | | | | | | | | | | | | | | |
| | Six Months
ended
August 31, 2010
(unaudited) | | | | | | | | | | |
| | | Year ended |
| | | February 28,
2010 | | February 28,
2009 | | February 29,
2008 | | February 28,
2007 | | February 28,
2006 |
| | | | | | |
Net asset value, beginning of period | | $8.80 | | | $4.80 | | | $12.52 | | | $14.84 | | | $14.69 | | | $16.07 | |
Investment Operations: | | | | | | | | | | | | | | | | | | |
Net investment income | | 0.60 | | | 1.07 | | | 1.56 | | | 1.62 | | | 1.66 | | | 1.51 | |
Net realized and change in unrealized
gain (loss) on investments and interest
rate caps | | (0.17 | ) | | 4.02 | | | (7.75 | ) | | (2.05 | ) | | 0.55 | | | (0.48 | ) |
Total from investment operations | | 0.43 | | | 5.09 | | | (6.19 | ) | | (0.43 | ) | | 2.21 | | | 1.03 | |
Dividends and Distributions on
Preferred Shares from: | | | | | | | | | | | | | | | | | | |
Net investment income | | (0.01 | ) | | (0.01 | ) | | (0.17 | ) | | (0.39 | ) | | (0.34 | ) | | (0.25 | ) |
Net realized gain | | — | | | — | | | — | | | — | | | (0.03 | ) | | (0.02 | ) |
Total dividends and distributions on
preferred shares | | (0.01 | ) | | (0.01 | ) | | (0.17 | ) | | (0.39 | ) | | (0.37 | ) | | (0.27 | ) |
Net increase (decrease) in net assets
applicable to common shareholders
resulting from investment operations | | 0.42 | | | 5.08 | | | (6.36 | ) | | (0.82 | ) | | 1.84 | | | 0.76 | |
Dividends and Distributions to
Common Shareholders from: | | | | | | | | | | | | | | | | | | |
Net investment income | | (0.54 | ) | | (1.08 | ) | | (1.36 | ) | | (1.50 | ) | | (1.50 | ) | | (1.91 | ) |
Net realized gains | | — | | | — | | | — | | | — | | | (0.19 | ) | | (0.23 | ) |
Total dividends and distributions to
common shareholders | | (0.54 | ) | | (1.08 | ) | | (1.36 | ) | | (1.50 | ) | | (1.69 | ) | | (2.14 | ) |
Net asset value, end of period | | $8.68 | | | $8.80 | | | $4.80 | | | $12.52 | | | $14.84 | | | $14.69 | |
Market price, end of period | | $9.25 | | | $9.39 | | | $4.05 | | | $12.50 | | | $16.08 | | | $15.69 | |
Total Investment Return (1) | | 4.43 | % | | 166.37 | % | | (61.55 | )% | | (13.63 | )% | | 14.60 | % | | 14.30 | % |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | |
Net assets, applicable to common
shareholders, end of period (000s) | | $640,103 | | | $644,408 | | | $348,544 | | | $895,043 | | | $1,050,149 | | | $1,017,779 | |
Ratio of expenses to average net assets (2) | | 1.27 | %(4) | | 1.39 | % | | 1.56 | %(3) | | 1.26 | % | | 1.27 | % | | 1.28 | %(3) |
Ratio of net investment income to average
net assets (2) | | 13.50 | %(4) | | 14.21 | % | | 16.87 | % | | 11.26 | % | | 11.37 | % | | 10.03 | % |
Preferred shares asset coverage per share | | $69,824 | | | $70,125 | | | $49,406 | | | $67,626 | | | $74,981 | | | $73,442 | |
Portfolio turnover | | 21 | % | | 58 | % | | 62 | % | | 33 | % | | 67 | % | | 52 | % |
| |
(1) | Total investment return is calculated assuming a purchase of a common share at the current market price on the first day and a sale of a common share 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. |
(2) | Calculated on the basis of income and expenses applicable to both common shares and preferred shares relative to the average net assets of common shareholders. |
(3) | Ratio of expenses to average net assets of common shareholders, excluding excise tax expense was 1.53% for the year ended February 28, 2009 and 1.26% for the year ended February 28, 2006. |
(4) | Annualized. |
| | |
| AGIC Convertible & Income Fund | |
See accompanying Notes to Financial Statements | 8.31.10 | | AGIC Convertible & Income Fund II Semi-Annual Report | 33 |
|
AGIC Convertible & Income Fund II Financial Highlights |
For a common share outstanding throughout each period: |
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months
ended
August 31, 2010
(unaudited) | | | | | | | | | | For the period
July 1, 2005
through
February 28
2006* | | Year ended
June 30, 2005 |
| | | | | | | | | | | |
| | | Year ended | | |
| | | February 28,
2010 | | February 28,
2009 | | February 29,
2008 | | February 28,
2007 | | |
| | | | | | | |
Net asset value,
beginning of period | | $8.02 | | | $4.39 | | | $12.38 | | | $14.91 | | | $14.70 | | | $14.61 | | | $15.18 | |
Investment Operations: | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | 0.55 | | | 0.98 | | | 1.55 | | | 1.70 | | | 1.69 | | | 1.04 | | | 1.59 | |
Net realized and change
in unrealized gain (loss)
on investments and
interest rate caps | | (0.15 | ) | | 3.80 | | | (8.05 | ) | | (2.17 | ) | | 0.61 | | | 0.58 | | | (0.39 | ) |
Total from investment
operations | | 0.40 | | | 4.78 | | | (6.50 | ) | | (0.47 | ) | | 2.30 | | | 1.62 | | | 1.20 | |
Dividends and Distributions
on Preferred Shares from: | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | (0.01 | ) | | (0.01 | ) | | (0.20 | ) | | (0.45 | ) | | (0.38 | ) | | (0.17 | ) | | (0.21 | ) |
Net realized gain | | — | | | — | | | — | | | — | | | (0.04 | ) | | (0.05 | ) | | (0.00 | )** |
Total dividends and
distributions on
preferred shares | | (0.01 | ) | | (0.01 | ) | | (0.20 | ) | | (0.45 | ) | | (0.42 | ) | | (0.2 2 | ) | | (0.21 | ) |
Net increase (decrease) in
net assets applicable to
common shareholders
resulting from investment
operations | | 0.39 | | | 4.77 | | | (6.70 | ) | | (0.92 | ) | | 1.88 | | | 1.40 | | | 0.99 | |
Dividends and Distributions to
Common Shareholders from: | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | (0.51 | ) | | (1.14 | ) | | (1.29 | ) | | (1.61 | ) | | (1.42 | ) | | (1.05 | ) | | (1.42 | ) |
Net realized gains | | — | | | — | | | — | | | — | | | (0.25 | ) | | (0.26 | ) | | (0.14 | ) |
Total dividends and
distributions to common
shareholders | | (0.51 | ) | | (1.14 | ) | | (1.29 | ) | | (1.61 | ) | | (1.67 | ) | | (1.31 | ) | | (1.56 | ) |
Net asset value,
end of period | | $7.90 | | | $8.02 | | | $4.39 | | | $12.38 | | | $14.91 | | | $14.70 | | | $14.61 | |
Market price,
end of period | | $8.64 | | | $8.76 | | | $3.73 | | | $12.09 | | | $15.42 | | | $15.14 | | | $14.74 | |
Total Investment Return (1) | | 4.67 | % | | 174.62 | % | | (63.34 | )% | | (12.08 | )% | | 13.99 | % | | 12.10 | % | | 16.44 | % |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | | | |
Net assets, applicable to
common shareholders,
end of period (000s) | | $483,139 | | | $487,130 | | | $263,220 | | | $753,359 | | | $879,014 | | | $850,769 | | | $834,909 | |
Ratio of expenses to
average net assets (2) | | 1.29 | %(4) | | 1.42 | % | | 1.71 | %(3) | | 1.35 | %(3) | | 1.34 | % | | 137 | %(3)(4) | | 1.35 | % |
Ratio of net investment
income to average
net assets (2) | | 13.46 | %(4) | | 14.20 | % | | 17.26 | % | | 11.75 | % | | 11.56 | % | | 10.57 | %(4) | | 9.79 | % |
Preferred shares asset
coverage per share | | $69,081 | | | $69,445 | | | $49,015 | | | $61,410 | | | $68,493 | | | $67,096 | | | $66,319 | |
Portfolio turnover | | 22 | % | | 58 | % | | 57 | % | | 34 | % | | 60 | % | | 33 | % | | 67 | % |
| |
| AGIC Convertible & Income Fund |
34 | AGIC Convertible & Income Fund II Semi-Annual Report | 8.31.10 | See accompanying Notes to Financial Statements |
|
AGIC Convertible & Income Fund II Financial Highlights |
For a common share outstanding throughout each period: |
| |
* | During the period the Fund’s fiscal year-end changed from June 30 to February 28. |
** | Less than $0.005 per common share. |
(1) | Total investment return is calculated assuming a purchase of a common share at the current market price on the first day and a sale of a common share 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. |
(2) | Calculated on the basis of income and expenses applicable to both common shares and preferred shares relative to the average net assets of common shareholders. |
(3) | Ratio of expenses to average net assets of common shareholders, 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. |
(4) | Annualized. |
| | |
| AGIC Convertible & Income Fund | |
See accompanying Notes to Financial Statements | 8.31.10 | | AGIC Convertible & Income Fund II Semi-Annual Report | 35 |
| |
AGIC Convertible & Income Funds | Annual Shareholder Meeting Results/Changes to
Board of Trustees/Proxy Voting and Procedures
(unaudited) |
Annual Shareholder Meeting Results:
The Funds held their joint annual meeting of shareholders on July 21, 2010. Common/Preferred shareholders voted as indicated below:
| | | | | | | |
Convertible & Income | | Affirmative | | Withheld
Authority | |
| | | | | | | |
Election of James A. Jacobson* – Class II to serve until 2011 | | | 10,563 | | | 102 | |
Re-election of Hans W. Kertess – Class I to serve until 2013 | | | 64,989,435 | | | 2,087,322 | |
Re-election of William B. Ogden, IV – Class I to serve until 2013 | | | 64,896,519 | | | 2,180,238 | |
Election of Alan Rappaport* – Class I to serve until 2013 | | | 10,563 | | | 102 | |
Messrs. Paul Belica and John C. Maney† continue to serve as Trustees of the Fund.
| | |
| |
* | Preferred Shares Trustee |
† | Interested Trustee |
| | | | | | | |
Convertible & Income II | | Affirmative | | Withheld
Authority | |
| | | | | | | |
Re-election of Paul Belica – Class I to serve until 2013 | | | 52,976,212 | | | 1,837,107 | |
Election of James A. Jacobson* – Class II to serve until 2011 | | | 8,092 | | | 121 | |
Re-election of William B. Ogden, IV – Class I to serve until 2013 | | | 53,015,204 | | | 1,798,115 | |
Election of Alan Rappaport* – Class I to serve until 2013 | | | 8,092 | | | 121 | |
Messrs. Hans W. Kertess and John C. Maney† continue to serve as Trustees of the Fund.
| | |
| |
* | Preferred Shares Trustee |
† | Interested Trustee |
| |
| |
Changes to Board of Trustees:
Robert E. Connor served as Trustee of the Funds until his death on April 8, 2010.
Effective June 22, 2010, the Funds’ Board of Trustees appointed Alan Rappaport as a Trustee.
R. Peter Sullivan, III retired from the Funds’ Board of Trustees effective July 31, 2010.
Effective September 21, 2010, the Funds’ Board of Trustees appointed Bradford K. Gallagher as a Class II Trustee to serve until 2011.
Proxy Voting Policies & Procedures:
A description of the polices 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’ shareholder servicing agent at (800) 254-5197; (ii) on the Funds’ website at www.allianzinvestors.com/closedendfunds; and (iii) on the Securities and Exchange Commission’s website at www.sec.gov.
| |
| AGIC Convertible & Income Fund |
36 | AGIC Convertible & Income Fund II Semi-Annual Report | 8.31.10 | |
| |
AGIC Convertible & Income Funds | Matters Relating to the Trustees’ Consideration of
the Investment Management & Portfolio
Management Agreements (unaudited) |
The Investment Company Act of 1940 requires that both the full Board of Trustees (the “Trustees”) and a majority of the non-interested Trustees (the “Independent Trustees”), voting separately, annually approve the continuance of the Funds’ Management Agreements (the “Advisory Agreements”) with the Investment Manager and Portfolio Management Agreements (the “Sub-Advisory Agreements”, and together with the Advisory Agreements, the “Agreements”) between the Investment Manager and the Sub-Adviser. The Trustees met in person on June 22-23, 2010 (the “contract review meeting”) for the specific purpose of considering whether to approve the continuation of the Advisory Agreements and the Sub-Advisory Agreements. The Independent Trustees were assisted in their evaluation of the Agreements by independent legal counsel, from whom they received separate legal advice and with whom they met separately from Fund management during the contract review meeting.
Based on their evaluation of factors that they deemed to be material, including those factors described below, the Board of Trustees, including a majority of the Independent Trustees, concluded that the continuation of the Funds’ Advisory Agreements and the Sub-Advisory Agreements, should be approved for a one-year period commencing July 1, 2010.
In connection with their deliberations regarding the continuation of the Agreements, the Trustees, including the Independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. As described below, the Trustees considered the nature, quality, and extent of the various investment management, administrative and other services performed by the Investment Manager or the Sub-Adviser under the applicable Agreement.
In connection with the contract review meeting, the Trustees received and relied upon materials provided by the Investment Manager which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the total return investment performance (based on net assets) of the Funds for various time periods and the investment performance of a group of funds with substantially similar investment classifications/objectives as the Funds identified by Lipper and the performance of applicable benchmark indices, (ii) information provided by Lipper on the Funds’ management fees and other expenses and the management fees and other expenses of comparable funds identified by Lipper, (iii) information regarding the investment performance and management fees of comparable portfolios of other clients of the Sub-Adviser, including institutional separate accounts and other clients, (iv) the profitability to the Investment Manager and the Sub-Adviser from their relationship with the Funds for the one year period ended March 31, 2010, (v) descriptions of various functions performed by the Investment Manager and the Sub-Adviser for the Funds, such as portfolio management, compliance monitoring and portfolio trading practices, and (vi) information regarding the overall organization of the Investment Manager and the Sub-Adviser, including information regarding senior management, portfolio managers and other personnel providing investment management, administrative and other services to the Funds.
The Trustees’ conclusions as to the continuation of the Agreements were based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.
As part of their review, the Trustees examined the Investment Manager’s and the Sub-Adviser’s abilities to provide high quality investment management and other services to the Funds. The Trustees considered the investment philosophy and research and decision-making processes of the Sub-Adviser; the experience of key advisory personnel of the Sub-Adviser responsible for portfolio management of the Funds; the ability of the Investment Manager and the Sub-Adviser to attract and retain capable personnel; the capability and integrity of the senior management and staff of the Investment Manager and the Sub-Adviser; and the level of skill required to manage the Funds. In addition, the Trustees reviewed the quality of the Investment Manager’s and the Sub-Adviser’s services with respect to regulatory compliance and compliance with the investment policies of the Funds; the nature and quality of certain administrative services the Investment Manager is responsible for providing to the Funds; and conditions that might affect the Investment Manager’s or the Sub-Adviser’s ability to provide high quality services to the Funds in the future under the Agreements, including each organization’s respective business reputation, financial condition and operational stability. Based on the foregoing, the Trustees concluded that the Sub-Adviser’s investment process, research capabilities and philosophy were well suited to each of the Funds given their respective investment objectives and policies, and that the Investment Manager and the Sub-Adviser would be able to continue to meet any reasonably foreseeable obligations under the Agreements.
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| AGIC Convertible & Income Fund | |
| 8.31.10 | | AGIC Convertible & Income Fund II Semi-Annual Report | 37 |
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AGIC Convertible & Income Funds | Matters Relating to the Trustees’ Consideration of
the Investment Management & Portfolio
Management Agreements (unaudited) |
Based on information provided by Lipper, the Trustees also reviewed each Fund’s total return investment performance as well as the performance of comparable funds identified by Lipper. In the course of their deliberations, the Trustees took into account information provided by the Investment Manager in connection with the contract review meeting, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding each Fund’s performance.
In assessing the reasonableness of each Fund’s fees under the Agreements, the Trustees considered, among other information, each Fund’s management fee and the total expense ratio as a percentage of average net assets attributable to common and preferred shares and the management fee and total expense ratios of comparable funds identified by Lipper.
For each of the Funds, the Trustees specifically took note of how each Fund compared to its Lipper peers as to performance, management fee expenses and total expenses. The Trustees noted that the Investment Manager had provided a memorandum containing comparative information on the performance and expenses information of the Funds compared to the their Lipper peer categories. The Trustees noted that while the Funds are not charged a separate administration fee, it was not clear whether the peer funds in the Lipper categories were charged such a fee by their investment managers.
Convertible & Income:
The Trustees noted that the expense group for Convertible & Income provided by Lipper is small, consisting of a total of four leveraged closed-end funds, not including Convertible & Income. The Trustees also noted that average net assets of the common shares of the funds in the peer group ranged from $70 million to $548.2 million, and that all of the funds are smaller in asset size than the Convertible & Income. The Trustees also noted that Convertible & Income was ranked second out of four funds in the expense peer group for actual management fees and first out of four funds for actual total expenses (with funds ranked first having the lowest fees/expenses and ranked fourth having the highest fees/expenses in the peer group).
With respect to performance, the Trustees also noted that Convertible & Income outperformed its benchmark and had first quintile performance for the one-year period ended March 31, 2010 against a peer group of six funds. The Trustees also noted that Convertible & Income was ranked four out of a peer group of five funds in performance for the three-year and five-year period ended March 31, 2010.
Convertible & Income II:
The Trustees noted that the expense group for Convertible & Income II provided by Lipper is small, consisting of a total of four leveraged closed-end funds, not including Convertible & Income II. The Trustees also noted that average net assets of the common shares of the funds in the peer group ranged from $70 million to $548.2 million, and that all of the funds except one is smaller in asset size than Convertible & Income II. The Trustees also noted that Convertible & Income II was ranked second out of four funds in the expense peer group for actual management fees and first out of four funds for actual total expenses (with funds ranked first having the lowest fees/expenses and ranked fourth having the highest fees/expenses in the peer group).
With respect to performance, the Trustees also noted that Convertible & Income II outperformed its benchmark and had first quintile performance for the one-year period ended March 31, 2010 against a peer group of six funds. The Trustees also noted that Convertible & Income II was ranked five out of a peer group of five funds in performance for the three-year and five-year period ended March 31, 2010.
At the request of the Trustees, the Investment Manager and Sub-Adviser agreed to continue to provide performance information related to the Funds on a monthly basis.
After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreements, that they were satisfied with the Investment Manager’s and the Sub-Adviser’s responses and efforts to continue to improve the Funds’ investment performance. The Trustees agreed to reassess the services provided by the Investment Manager and Sub-Adviser under the Agreements in light of the Fund’s ongoing performance at each quarterly Board meeting.
The Trustees also considered the management fees charged by Sub-Adviser to other clients, including institutional separate accounts with investment strategies similar to those of the Funds. Regarding the institutional separate accounts,
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| AGIC Convertible & Income Fund |
38 | AGIC Convertible & Income Fund II Semi-Annual Report | 8.31.10 | |
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AGIC Convertible & Income Funds | Matters Relating to the Trustees’ Consideration of
the Investment Management & Portfolio
Management Agreements (unaudited) |
they noted that the management fees paid by the Funds are generally higher than the fees paid by these clients of the Sub-Adviser, but the Trustees were advised by the Sub-Adviser that the administrative burden for the Investment Manager and the Sub-Adviser with respect to the Funds are also relatively higher, due in part to the more extensive regulatory regime to which the Funds are subject in comparison to institutional separate accounts. The Trustees noted that the management fees paid by the Funds are generally higher than the fees paid by the open-end funds offered for comparison but were advised that there are additional portfolio management challenges in managing the Funds, such as the use of leverage and meeting a regular dividend.
The Trustees also took into account that the Funds have preferred shares outstanding, which increases the amount of fees received by the Investment Manager and the Sub-Adviser under the Agreements (because the fees are calculated based on either the Funds’ net assets or total managed assets, including assets attributable to preferred shares and other forms of leverage outstanding but not deducting any liabilities connected to the leverage). In this regard, the Trustees took into account that the Investment Manager and the Sub-Adviser have a financial incentive for the Funds to continue to have preferred shares outstanding, which may create a conflict of interest between the Investment Manager and the Sub-Adviser, on one hand, and the Funds’ common shareholders, on the other. In this regard, the Trustees considered information provided by the Investment Manager and the Sub-Adviser indicating that each Funds’ use of leverage through preferred shares continues to be appropriate and in the interests of the respective Fund’s common shareholders.
Based on a profitability analysis provided by the Investment Manager, the Trustees also considered the profitability of the Investment Manager and the Sub-Adviser from their relationship with each Fund and determined that such profitability was not excessive.
The Trustees also took into account that, as closed-end investment companies, the Funds do not currently intend to raise additional assets, so the assets of the Funds will grow (if at all) only through the investment performance of each Fund. Therefore, the Trustees did not consider potential economies of scale as a principal factor in assessing the fee rates payable under the Agreements.
Additionally, the Trustees considered so-called “fall-out benefits” to the Investment Manager and the Sub-Adviser, such as reputational value derived from serving as Investment Manager and Sub-Adviser to the Funds.
After reviewing these and other factors described herein, the Trustees concluded with respect to each Fund, within the context of their overall conclusions regarding the Agreements that the fees payable under the Agreements represent reasonable compensation in light of the nature and quality of the services being provided by the Investment Manager and Sub-Adviser to the Funds.
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| AGIC Convertible & Income Fund | |
| 8.31.10 | | AGIC Convertible & Income Fund II Semi-Annual Report | 39 |
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Trustees | Fund Officers |
Hans W. Kertess | Brian S. Shlissel |
Chairman of the Board of Trustees | President & Chief Executive Officer |
Paul Belica | Lawrence G. Altadonna |
Bradford K. Gallagher | Treasurer, Principal Financial & Accounting Officer |
James A. Jacobson | Thomas J. Fuccillo |
John C. Maney | Vice President, Secretary & Chief Legal Officer |
William B. Ogden, IV | Scott Whisten |
Alan Rappaport | Assistant Treasurer |
| Richard J. Cochran |
| Assistant Treasurer |
| Youse E. Guia |
| Chief Compliance Officer |
| Kathleen A. Chapman |
| 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 |
Allianz Global Investors Capital LLC
600 West Broadway, 30th Floor
San Diego, CA 92101 |
|
Custodian & Accounting Agent |
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109 |
|
Transfer Agent, Dividend Paying Agent and Registrar |
BNY Mellon
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
Prudential Tower
800 Boylston Street
Boston, MA 02199 |
This report, including the financial information herein, is transmitted to the shareholders of AGIC Convertible & Income Fund and AGIC 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.
The financial information included herein is taken from the records of the Funds without examination by an independent registered public accounting firm, who did not express an opinion herein.
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 its common shares in the open market.
The Funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of their fiscal year on Form N-Q. Each Fund’s Form N-Q is 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.
Information on the Funds is available at www.allianzinvestors.com/closedendfunds or by calling the Funds’ shareholder servicing agent at (800) 254-5197.
Receive this report electronically and eliminate paper mailings. To enroll, go to www.allianzinvestors.com/edelivery.
AZ603SA_083110
ITEM 2. CODE OF ETHICS
| | (a) | N/A |
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| | (b) | The CODE OF ETHICS PURSUANT TO SECTION 406 OF THE SARBANES-OXLEY ACT OF 2002 FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS (the “Code”) was updated to remove interested trustees from being subject to the Code, which is not required under Section 406 of the Sarbanes-Oxley Act of 2002. The Code also was updated to remove examples of specific conflict of interest situations and to add an annual certification requirement for covered Officers. In addition, the approval of ratification process for material amendments to the Code was clarified to include approval by a majority of the independent trustees. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-254-5197. The Investment Manager’s code of ethics is included as an exhibit Exhibit 99.CODE ETH hereto. |
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not required in this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not required in this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
Not required in this filing.
ITEM 6. SCHEDULE OF INVESTMENTS
| | (a) | The registrant’s Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this form. |
| | | |
| | (b) | Not Applicable due to no such divestments during the semi-annual period covered since the previous Form N-CSR filing. |
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED END MANAGEMENT INVESTMENT COMPANIES.
Not required in this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED END MANAGEMENT INVESTMENT COMPANIES
| | (a) | Not required in this filing. |
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 and Accounting Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Act (17 CFR 270.3a-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 270.3a-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 registrant’s control over financial reporting.
ITEM 12. EXHIBITS
(a) (1) Exhibit 99 CODE ETH - Code of Ethics
(a) (2) Exhibit 99.302 Cert.- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(a) (3) Not Applicable
(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.
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(Registrant) | AGIC Convertible & Income Fund |
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By | /s/ Brian S. Shlissel | |
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President and Chief Executive Officer |
|
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By | /s/ Lawrence G. Altadonna | |
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Treasurer, Principal Financial & Accounting Officer |
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.
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By | /s/ Brian S. Shlissel | |
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President and Chief Executive Officer |
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By | /s/ Lawrence G. Altadonna | |
| | |
Treasurer, Principal Financial & Accounting Officer |
