WASHINGTON, D. C. 20549
DWS High Income Opportunities Fund, Inc.
SEPTEMBER 30, 2011 Annual Report to Stockholders |
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DWS High Income Opportunities Fund, Inc. Ticker Symbol: DHG |
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Contents
3 Portfolio Management Review 20 Statement of Assets and Liabilities 21 Statement of Operations 22 Statement of Cash Flows 23 Statement of Changes in Net Assets 26 Notes to Financial Statements 38 Report of Independent Registered Public Accounting Firm 45 Dividend Reinvestment and Cash Purchase Plan 48 Stockholder Meeting Results 49 Investment Management Agreement Approval 53 Board Members and Officers 57 Additional Information |
Closed-end funds, unlike open-end funds, are not continuously offered. There is a one time public offering and once issued, shares of closed-end funds are sold in the open market through a stock exchange. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the fund's shares is determined by a number of factors, several of which are beyond the control of the fund. Therefore, the fund cannot predict whether its shares will trade at, below or above net asset value.
Any fund that concentrates in a particular segment of the market will generally be more volatile than a fund that invests more broadly. Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investments in lower-quality and non-rated securities present greater risk of loss than investments in higher-quality securities. There are special risks associated with an investment in real estate, including REITS. These risks include credit risk, interest rate fluctuations and the impact of varied economic conditions. Stocks may decline in value. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Leverage results in additional risks and can magnify the effect of any gains or losses.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Portfolio Management Review
Market Overview and Fund Performance
Performance is historical and does not guarantee future results. Investment return and principal fluctuate, so your shares may be worth more or less when redeemed. Current performance may differ from performance data shown. Please visit www.dws-investments.com for the fund's most recent month-end performance. Fund performance includes reinvestment of all distributions.
On a net asset value (NAV) basis, the fund's total return for the 12-month period ended September 30, 2011 was 2.16%. On a market price basis, the return for the same period was 7.66%. The fund's NAV per share as of September 30, 2011 was $13.92, compared with $15.03 as of September 30, 2010. The fund underperformed the 2.61% return of its benchmark, the Credit Suisse High Yield Index, based on its net asset value return, but it outperformed based on its market price return.1
The fund maintained a leverage position throughout the period. At the close of the period, the portfolio was 29.5% leveraged, representing an outstanding loan amount of $98 million. The fund leverages through a secured line of credit and then invests the proceeds in longer-term securities. Low interest rates are beneficial to this strategy by providing the fund with a low cost of funds. Conversely, if interest rates rise or if bond prices fall, a leverage position could be disadvantageous to the fund. There is no assurance that the fund's leverage strategy will be successful.
Although high-yield bonds performed very well for most of the year, the asset class finished the annual period just barely in positive territory. During the period from October 2010 through July 2011, high-yield bonds were energized by a highly favorable environment. Most notably, the Moody's 12-month trailing U.S. speculative-grade bond par default rate remained below 2% as solid issuer results allowed companies to improve their liquidity positions by refinancing debt at lower rates.2 The robust issuance of high-yield bonds during this period was a further indication of the healthy state of the asset class. The market gained additional support from the U.S. Federal Reserve Board's (the Fed's) accommodative monetary policy, which continued to provide a solid underpinning for both investor risk appetites and the high-yield bond market. Another positive factor was the modest pickup in merger and acquisition (M&A) activity, an important development given that the high-yield sector is heavily populated with the type of smaller companies that can become attractive takeover candidates. The result was strong performance for high-yield bonds, both on an absolute basis and relative to other segments of the bond market.3
This positive environment quickly took a turn for the worse in the final three months of the period. High-yield bond prices declined sharply due to the sharp decline in investor risk appetites that resulted from the U.S. debt ceiling debate, the downgrade of the U.S. triple-A rating by the ratings agency Standard & Poor's®, deteriorating U.S. economic data and worries about contagion risk from the European banking system.4 The Credit Suisse High Yield Index returned -5.12% during the July-September interval, wiping out most of the gain registered in the prior nine months. Rising risk aversion within high-yield bonds was most clearly evidenced by the -14.1% loss in triple-C-rated bonds during the third calendar quarter.
For the full year, high-yield bonds outperformed equities, as represented by the 1.14% return of the Standard & Poor's 500® (S&P 500) Index, but lagged the 5.26% return of the Barclays Capital U.S. Aggregate Bond Index, a measure of the broader U.S. bond market performance.5,6
Positive Contributors to Fund Performance
The fund's overweight in the bonds of the European specialty chemical manufacturer Rhodia Group* benefited performance when the company was acquired by the investment-grade issuer Solvay.7 Our overweight in the shortest-maturity bonds of the technology distributor CDW LLC also benefited performance as the issuer tendered for the majority of these bonds at a premium, above their call price.8
An overweight position in the convertible bonds of the food producer Tyson Foods* added value after the issuer reported strong results early in the annual period.9 In addition, the fund's overweight in the aviation interior manufacturer BE Aerospace, Inc. benefited by an upturn in the company's new aircraft orders and deliveries.
Negative Contributors to Fund Performance
The fund's overweight in the junior bonds of the packaging company Reynolds Group Issuer, Inc. detracted from performance following the issuer's leveraged buyout of competitor Graham Packaging. Also weighing on performance were overweights in the travel booking company Travelport LLC, which was hit with an antitrust lawsuit by American Airlines, Inc. earlier in the year, and Ally Financial, Inc., whose mortgage arm was included in the Federal Housing Finance Agency's 17-bank lawsuit regarding faulty loan and foreclosure practices, an overhang that investors worry may delay the issuer's initial public offering of stock.
Outlook and Positioning
While monetary policy in the United States has remained highly accommodative and corporate balance sheets have improved, a high degree of economic and policy uncertainty continued to weigh on investor sentiment as the year drew to a close. Despite this, high-yield default rates have remained subdued due to refinancing activities that have already been completed. The Moody's 12-month trailing U.S. speculative-grade bond par default rate was 1.13% at year-end, compared to 1.44% at the end of the second quarter.10
We maintain a cautiously optimistic outlook on high-yield bonds. We currently favor the single-B credit tier, while remaining underweight in securities rated double-B and approximately neutral-weight in triple-C's. At the end of September 2011, the spread between high-yield bonds and U.S. Treasuries was 811 basis points (8.11 percentage points), up from 569 just three months earlier. That spread is pricing in a higher default rate than we expect to materialize in the near term, and we therefore continue to view the asset class favorably.11
Having said this, we expect that market volatility will remain elevated due to concerns about slowing growth in the developed economies, sovereign debt problems in Europe and potential contagion in the emerging markets.12 In light of the recent rise in yield spreads, we currently believe the asset class offers investors a favorable trade-off of risk and return via the combination of an attractive yield spread and low default rate. However, the low-default environment also means that individual defaults can have an amplified impact on a portfolio's performance.
Investment Advisor
Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for DWS High Income Opportunities Fund, Inc. DIMA and its predecessors have more than 80 years of experience managing mutual funds and DIMA provides a full range of investment advisory services to both institutional and retail clients.
DIMA is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major global banking institution engaged in a wide variety of financial services, including investment management, retail, private and commercial banking, investment banking and insurance.
DWS Investments is the retail brand name in the U.S. for the asset management activities of Deutsche Bank AG and DIMA. As such, DWS is committed to delivering the investing expertise, insight and resources of this global investment platform to American investors.
Portfolio Manager
Gary Russell, CFA
Portfolio Manager
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
1 Credit Suisse High Yield Index is an unmanaged, unleveraged trader-priced Portfolio constructed to mirror the global high-yield debt market. Effective with the changes to the Fund's investment objective, strategies and policies on November 5, 2010, the Credit Suisse High Yield Index replaced the Blended Index as the Fund's benchmark Index.
2 Moody's trailing 12-month issuer-weighted default rate incorporates the last 12 months of data (as opposed to 1 month or 3 months, for instance). Issuer weighting counts the number of individual issuers as a portion of the total number of individual issuers. For instance, if we had 100 individual issuers and 3 of them defaulted over the past 12 months, the trailing 12-month issuer-weighted default rate would be 3%. The ratings of Moody's Investors Service, Inc. (Moody's) represent these companies' opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The fund's credit quality does not remove market risk.
3 Absolute return is the return, expressed as a percentage, which an asset achieves over a certain period of time.
4 Credit quality measures a bond issuer's ability to repay interest and principal in a timely manner. Rating agencies assign letter designations, such as AAA, AA and so forth. The lower the rating, the higher the probability of default. Credit quality does not remove market risk and is subject to change.
5 The S&P 500 Index tracks the performance of 500 leading U.S. stocks and is widely considered representative of the U.S. equity market. Index returns do not reflect any fees or expenses, and it is not possible to invest directly into an index.
6 The Barclays Capital U.S. Aggregate Bond Index tracks the performance of the broad U.S. investment-grade, fixed-rate bond market, including both government and corporate bonds. Index returns do not reflect any fees or expenses, and it is not possible to invest directly into an index.
7 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.
8 The "call" feature spells out the terms under which a bond may be redeemed prior to maturity.
9 A convertible bond is a bond that can be converted into a predetermined amount of a company's stock at certain periods during the life of the bond. The conversion typically takes place at the bondholder's discretion.
10 The default rate is the rate charged to a borrower who fails to remain current on loans.
11 Credit spread refers to the excess yield various bond sectors offer over financial instruments with similar maturities. When spreads widen, yield differences are increasing between bonds in the two sectors being compared. When spreads narrow, the opposite is true.
12 Sovereign debt is government debt issued in foreign currencies.
* Not held in the portfolio as of September 30, 2011.
Performance Summary September 30, 2011
Performance is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when sold, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please visit www.dws-investments.com for the Fund's most recent month-end performance.
Fund specific data and performance are provided for information purposes only and are not intended for trading purposes.
Average Annual Total Returns as of 9/30/11 |
| DWS High Income Opportunities Fund, Inc. | 1-Year | 3-Year | Life of Fund* |
Based on Net Asset Value(a) | 2.16% | -1.97% | -9.56% |
Based on Market Price(a) | 7.66% | 3.29% | -11.57% |
Credit Suisse High-Yield Index(b) | 2.61% | 12.54% | 6.34% |
Morningstar Closed-End High Yield Bond Funds Category(c) | 3.37% | 11.19% | -0.52% |
* The Fund commenced operations on November 22, 2006. Index returns are as of November 30, 2006.
On November 5, 2010, the Fund adopted its current name and investment policies. Prior to that date the Fund was known as DWS Dreman Value Income Edge Fund, Inc. and its investment objective was to seek to achieve a high level of total return. The Fund pursued its investment objective through a combination of an income strategy designed to generate regular income with the potential for capital appreciation while reducing volatility, and a quantitative long/short hedge strategy designed to seek returns that were uncorrelated with the market. Performance prior to November 5, 2010 should not be considered representative of the present Fund.
| Net Asset Value and Market Price | |
| | | As of 9/30/11 | | | As of 9/30/10 | |
| Net Asset Value | | $ | 13.92 | | | $ | 15.03 | |
| Market Price | | $ | 13.07 | | | $ | 13.40 | |
Prices and net asset value fluctuate and are not guaranteed.
| Distribution Information | |
Twelve Months as of 9/30/11: Income Dividends | | $ | 1.42 | |
| September Income Dividend | | $ | .11 | |
Current Annualized Distribution Rate (Based on Net Asset Value) as of 9/30/11+ | | | 9.48 | % |
Current Annualized Distribution Rate (Based on Market Price) as of 9/30/11+ | | | 10.10 | % |
+ Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value/market price on September 30, 2011. Distribution rate simply measures the level of dividends and is not a complete measure of performance. Distribution rates are historical, not guaranteed, and will fluctuate.
Morningstar Rankings — Closed-End High Yield Bond Funds Category as of 9/30/11 |
| Period | Rank | | Number of Funds Tracked | Percentile Ranking (%) |
| 1-Year | 23 | of | 40 | 56 |
| 3-Year | 36 | of | 39 | 92 |
Source: Morningstar, Inc. Rankings are historical and do not guarantee future results. Rankings are based on net asset value total return with distributions reinvested.
(a) Total return based on net asset value reflects changes in the Fund's net asset value during the period. Total return based on market value reflects changes in market value. Each figure assumes that dividend and capital gain distributions, if any, were reinvested. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Fund's shares traded during the period.
(b) Credit Suisse High Yield Index is an unmanaged, unleveraged trader-priced Portfolio constructed to mirror the global high-yield debt market. Effective with the changes to the Fund's investment objective, strategies and policies on November 5, 2010, the Credit Suisse High Yield Index replaced the Blended Index as the Fund's benchmark Index.
(c) Morningstar's Closed- End High Yield Bond Funds category represents portfolios that concentrate on lower-quality bonds, which are riskier than those of higher-quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios primarily invest in U.S. high-income debt securities, where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor's or Moody's at the level of BB (considered speculative for taxable bonds) and below. Category returns assume reinvestment of dividends. It is not possible to invest directly in a Morningstar category.
Asset Allocation (As a % of Investment Portfolio) | | 9/30/11 | | | 9/30/10 | |
| | | | | | | |
| Corporate Bonds | | | 93 | % | | | 89 | % |
| Loan Participations and Assignments | | | 6 | % | | | — | |
| Cash Equivalents | | | 1 | % | | | — | |
Common Stocks: Long Positions | | | — | | | | 16 | % |
| Short Positions | | | — | | | | (7 | )% |
| Convertible Preferred Stocks | | | — | | | | 1 | % |
| Preferred Stocks | | | — | | | | 1 | % |
| | | | 100 | % | | | 100 | % |
Sector Diversification (As a % of Investment Portfolio excluding Cash Equivalents and Common Stocks Sold Short) | | 9/30/11 | | | 9/30/10 | |
| | | | | | | |
| Consumer Discretionary | | | 24 | % | | | 17 | % |
| Industrials | | | 17 | % | | | 17 | % |
| Financials | | | 14 | % | | | 15 | % |
| Telecommunications Services | | | 13 | % | | | 5 | % |
| Materials | | | 9 | % | | | 10 | % |
| Energy | | | 7 | % | | | 16 | % |
| Information Technology | | | 5 | % | | | 5 | % |
| Consumer Staples | | | 4 | % | | | 5 | % |
| Utilities | | | 4 | % | | | 1 | % |
| Health Care | | | 3 | % | | | 9 | % |
| | | | 100 | % | | | 100 | % |
Asset allocation and sector diversification exclude derivatives and are subject to change.
Quality (As a % of Investment Portfolio excluding Cash Equivalents) | 9/30/11 |
| | |
| BB | 21% |
| B | 56% |
| CCC | 20% |
| CC | 1% |
| Not Rated | 2% |
| | 100% |
The quality ratings represents the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Fund's credit quality does not remove market risk and is subject to change.
For more complete details about the Fund's investment portfolio, see page 11. A Fact Sheet is available upon request. Please see the Additional Information section for contact information.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings as of the month-end are posted on www.dws-investments.com on or after the last day of the following month. More frequent posting of portfolio holdings information may be made from time to time on www.dws-investments.com.
Investment Portfolio as of September 30, 2011 | | | Principal Amount ($) (a) | | | Value ($) | |
| | | | |
| Corporate Bonds 129.8% | |
| Consumer Discretionary 31.6% | |
| AMC Entertainment, Inc., 8.0%, 3/1/2014 | | | | 2,255,000 | | | | 2,176,075 | |
| AMC Networks, Inc., 144A, 7.75%, 7/15/2021 | | | | 165,000 | | | | 169,125 | |
| American Achievement Corp., 144A, 10.875%, 4/15/2016 | | | | 255,000 | | | | 193,800 | |
| AutoNation, Inc., 6.75%, 4/15/2018 | | | | 1,040,000 | | | | 1,060,800 | |
| Avis Budget Car Rental LLC, 8.25%, 1/15/2019 | | | | 700,000 | | | | 640,500 | |
| Beazer Homes USA, Inc., 9.125%, 6/15/2018 | | | | 125,000 | | | | 76,875 | |
| Cablevision Systems Corp., 7.75%, 4/15/2018 | | | | 7,250,000 | | | | 7,322,500 | |
| Caesar's Entertainment Operating Co., Inc.: | |
| 10.0%, 12/15/2018 | | | | 1,710,000 | | | | 1,017,450 | |
| 11.25%, 6/1/2017 | | | | 3,900,000 | | | | 3,934,125 | |
| 12.75%, 4/15/2018 | | | | 875,000 | | | | 592,812 | |
| CCH II LLC, 13.5%, 11/30/2016 | | | | 835,000 | | | | 951,900 | |
| CCO Holdings LLC: | |
| 7.0%, 1/15/2019 | | | | 235,000 | | | | 227,950 | |
| 7.875%, 4/30/2018 | | | | 6,300,000 | | | | 6,410,250 | |
| Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017 | | | | 2,940,000 | | | | 2,910,600 | |
| Claire's Stores, Inc.: | |
| 8.875%, 3/15/2019 | | | | 130,000 | | | | 93,600 | |
| 9.625%, 6/1/2015 (PIK) | | | | 1,014,365 | | | | 781,061 | |
| Clear Channel Communications, Inc., 9.0%, 3/1/2021 | | | | 135,000 | | | | 100,238 | |
| Crown Media Holdings, Inc., 144A, 10.5%, 7/15/2019 | | | | 275,000 | | | | 272,250 | |
| Cumulus Media, Inc., 144A, 7.75%, 5/1/2019 | | | | 130,000 | | | | 109,525 | |
| DineEquity, Inc., 9.5%, 10/30/2018 | | | | 1,380,000 | | | | 1,369,650 | |
| DISH DBS Corp.: | |
| 144A, 6.75%, 6/1/2021 | | | | 145,000 | | | | 138,475 | |
| 7.125%, 2/1/2016 | | | | 2,500,000 | | | | 2,531,250 | |
| EH Holding Corp., 144A, 7.625%, 6/15/2021 | | | | 435,000 | | | | 418,688 | |
| Fiesta Restaurant Group, 144A, 8.875%, 8/15/2016 | | | | 310,000 | | | | 301,475 | |
| Gannett Co., Inc., 6.375%, 9/1/2015 | | | | 1,830,000 | | | | 1,816,275 | |
| Hertz Corp.: | |
| 6.75%, 4/15/2019 | | | | 350,000 | | | | 317,625 | |
| 7.5%, 10/15/2018 | | | | 6,000,000 | | | | 5,730,000 | |
| Jarden Corp., 6.125%, 11/15/2022 | | | | 250,000 | | | | 244,375 | |
| Kabel BW Erste Beteiligungs GmbH, 144A, 7.5%, 3/15/2019 | | | | 1,595,000 | | | | 1,551,137 | |
| Levi Strauss & Co., 7.625%, 5/15/2020 | | | | 825,000 | | | | 767,250 | |
| Lions Gate Entertainment, Inc., 144A, 10.25%, 11/1/2016 | | | | 505,000 | | | | 484,800 | |
| Mediacom Broadband LLC, 8.5%, 10/15/2015 | | | | 425,000 | | | | 422,875 | |
| MGM Resorts International: | |
| 7.5%, 6/1/2016 | | | | 550,000 | | | | 477,125 | |
| 7.625%, 1/15/2017 | | | | 385,000 | | | | 330,138 | |
| 144A, 10.0%, 11/1/2016 | | | | 445,000 | | | | 421,638 | |
| 10.375%, 5/15/2014 | | | | 1,900,000 | | | | 2,073,375 | |
| National CineMedia LLC, 7.875%, 7/15/2021 | | | | 465,000 | | | | 460,350 | |
| Palace Entertainment Holdings LLC, 144A, 8.875%, 4/15/2017 | | | | 390,000 | | | | 356,850 | |
| PETCO Animal Supplies, Inc., 144A, 9.25%, 12/1/2018 | | | | 670,000 | | | | 670,000 | |
| Regal Entertainment Group, 9.125%, 8/15/2018 | | | | 350,000 | | | | 346,500 | |
| Rent-A-Center, Inc., 6.625%, 11/15/2020 | | | | 500,000 | | | | 480,000 | |
| Sirius XM Radio, Inc., 144A, 8.75%, 4/1/2015 | | | | 1,015,000 | | | | 1,098,737 | |
| Standard Pacific Corp., 8.375%, 5/15/2018 | | | | 745,000 | | | | 633,250 | |
| Stoneridge, Inc., 144A, 9.5%, 10/15/2017 | | | | 5,100,000 | | | | 5,202,000 | |
| Toys "R" Us, Inc., 7.375%, 10/15/2018 | | | | 2,235,000 | | | | 1,899,750 | |
| Travelport LLC, 9.0%, 3/1/2016 | | | | 1,535,000 | | | | 897,975 | |
| UCI International, Inc., 8.625%, 2/15/2019 | | | | 235,000 | | | | 217,669 | |
| Unitymedia GmbH, 144A, 9.625%, 12/1/2019 | EUR | | | 1,595,000 | | | | 2,062,109 | |
| Unitymedia Hessen GmbH & Co., KG, 144A, 8.125%, 12/1/2017 | | | | 1,830,000 | | | | 1,830,000 | |
| Univision Communications, Inc.: | |
| 144A, 6.875%, 5/15/2019 | | | | 110,000 | | | | 97,900 | |
| 144A, 8.5%, 5/15/2021 | | | | 135,000 | | | | 105,300 | |
| UPC Holding BV: | |
| 144A, 8.375%, 8/15/2020 | EUR | | | 580,000 | | | | 668,267 | |
| 144A, 9.75%, 4/15/2018 | EUR | | | 795,000 | | | | 1,017,172 | |
| Valassis Communications, Inc., 6.625%, 2/1/2021 | | | | 355,000 | | | | 331,925 | |
| Visant Corp., 10.0%, 10/1/2017 | | | | 1,220,000 | | | | 1,128,500 | |
| Visteon Corp., 144A, 6.75%, 4/15/2019 | | | | 820,000 | | | | 738,000 | |
| Wynn Las Vegas LLC, 7.75%, 8/15/2020 | | | | 1,910,000 | | | | 2,005,500 | |
| XM Satellite Radio, Inc., 144A, 7.625%, 11/1/2018 | | | | 3,000,000 | | | | 3,030,000 | |
| Yonkers Racing Corp., 144A, 11.375%, 7/15/2016 | | | | 320,000 | | | | 326,400 | |
| | | | | 74,041,741 | |
| Consumer Staples 3.0% | |
| Alliance One International, Inc., 10.0%, 7/15/2016 | | | | 500,000 | | | | 412,500 | |
| American Rock Salt Co., LLC, 144A, 8.25%, 5/1/2018 | | | | 315,000 | | | | 275,625 | |
| B&G Foods, Inc., 7.625%, 1/15/2018 | | | | 110,000 | | | | 113,575 | |
| Darling International, Inc., 8.5%, 12/15/2018 | | | | 785,000 | | | | 845,838 | |
| Del Monte Foods Co., 144A, 7.625%, 2/15/2019 | | | | 1,025,000 | | | | 866,125 | |
| NBTY, Inc., 9.0%, 10/1/2018 | | | | 1,540,000 | | | | 1,576,575 | |
| Rite Aid Corp.: | |
| 7.5%, 3/1/2017 | | | | 65,000 | | | | 62,075 | |
| 8.0%, 8/15/2020 | | | | 965,000 | | | | 1,006,012 | |
| Stater Bros. Holdings, Inc., 7.375%, 11/15/2018 | | | | 385,000 | | | | 392,700 | |
| Tops Holding Corp., 10.125%, 10/15/2015 | | | | 1,195,000 | | | | 1,195,000 | |
| U.S. Foodservice, 144A, 8.5%, 6/30/2019 | | | | 385,000 | | | | 347,463 | |
| | | | | 7,093,488 | |
| Energy 9.8% | |
| Allis-Chalmers Energy, Inc., 9.0%, 1/15/2014 | | | | 2,237,000 | | | | 2,225,815 | |
| Alpha Natural Resources, Inc., 6.0%, 6/1/2019 | | | | 655,000 | | | | 610,787 | |
| Arch Coal, Inc.: | |
| 144A, 7.0%, 6/15/2019 | | | | 220,000 | | | | 209,000 | |
| 144A, 7.25%, 6/15/2021 | | | | 350,000 | | | | 336,875 | |
| 8.75%, 8/1/2016 | | | | 930,000 | | | | 985,800 | |
| Bill Barrett Corp., 7.625%, 10/1/2019 | | | | 105,000 | | | | 103,163 | |
| Brigham Exploration Co., 6.875%, 6/1/2019 | | | | 220,000 | | | | 214,500 | |
| Chaparral Energy, Inc.: | |
| 8.25%, 9/1/2021 | | | | 795,000 | | | | 725,437 | |
| 9.875%, 10/1/2020 | | | | 4,500,000 | | | | 4,500,000 | |
| CONSOL Energy, Inc.: | |
| 144A, 6.375%, 3/1/2021 | | | | 170,000 | | | | 164,050 | |
| 8.0%, 4/1/2017 | | | | 1,775,000 | | | | 1,854,875 | |
| Crestwood Midstream Partners LP, 144A, 7.75%, 4/1/2019 | | | | 1,735,000 | | | | 1,682,950 | |
| Dresser-Rand Group, Inc., 144A, 6.5%, 5/1/2021 | | | | 780,000 | | | | 733,200 | |
| Eagle Rock Energy Partners LP, 144A, 8.375%, 6/1/2019 | | | | 510,000 | | | | 489,600 | |
| Frontier Oil Corp., 6.875%, 11/15/2018 | | | | 630,000 | | | | 636,300 | |
| Genesis Energy LP, 144A, 7.875%, 12/15/2018 | | | | 440,000 | | | | 418,000 | |
| Inergy LP, 6.875%, 8/1/2021 | | | | 780,000 | | | | 709,800 | |
| Linn Energy LLC, 144A, 6.5%, 5/15/2019 | | | | 560,000 | | | | 515,200 | |
| MEG Energy Corp., 144A, 6.5%, 3/15/2021 | | | | 435,000 | | | | 416,513 | |
| Newfield Exploration Co., 5.75%, 1/30/2022 | | | | 770,000 | | | | 761,337 | |
| Oasis Petroleum, Inc., 144A, 7.25%, 2/1/2019 | | | | 230,000 | | | | 223,100 | |
| Offshore Group Investments Ltd., 144A, 11.5%, 8/1/2015 | | | | 30,000 | | | | 30,900 | |
| Sabine Pass LNG LP, 7.5%, 11/30/2016 | | | | 2,450,000 | | | | 2,266,250 | |
| SandRidge Energy, Inc.: | |
| 144A, 7.5%, 3/15/2021 | | | | 565,000 | | | | 519,800 | |
| 144A, 8.0%, 6/1/2018 | | | | 465,000 | | | | 437,100 | |
| SESI LLC, 144A, 6.375%, 5/1/2019 | | | | 440,000 | | | | 424,600 | |
| Venoco, Inc., 8.875%, 2/15/2019 | | | | 560,000 | | | | 481,600 | |
| Xinergy Corp., 144A, 9.25%, 5/15/2019 | | | | 320,000 | | | | 286,400 | |
| | | | | 22,962,952 | |
| Financials 18.4% | |
| Algoma Acquisition Corp., 144A, 9.875%, 6/15/2015 | | | | 450,000 | | | | 348,750 | |
| Ally Financial, Inc., 6.25%, 12/1/2017 | | | | 7,000,000 | | | | 6,097,770 | |
| Antero Resources Finance Corp.: | |
| 144A, 7.25%, 8/1/2019 | | | | 540,000 | | | | 513,000 | |
| 9.375%, 12/1/2017 | | | | 225,000 | | | | 234,000 | |
| AWAS Aviation Capital Ltd., 144A, 7.0%, 10/15/2016 | | | | 1,023,400 | | | | 1,002,932 | |
| Calpine Construction Finance Co., LP, 144A, 8.0%, 6/1/2016 | | | | 810,000 | | | | 830,250 | |
| Dolphin Subsidiary II, Inc., 144A, 6.5%, 10/15/2016 (b) | | | | 2,395,000 | | | | 2,365,062 | |
| DuPont Fabros Technology LP, (REIT), 8.5%, 12/15/2017 | | | | 750,000 | | | | 776,250 | |
| E*TRADE Financial Corp.: | |
| 6.75%, 6/1/2016 | | | | 545,000 | | | | 543,638 | |
| 7.875%, 12/1/2015 | | | | 2,000,000 | | | | 1,940,000 | |
| 12.5%, 11/30/2017 (PIK) | | | | 2,805,000 | | | | 3,162,637 | |
| Felcor Lodging LP, (REIT), 144A,, 6.75%, 6/1/2019 | | | | 390,000 | | | | 349,050 | |
| Fibria Overseas Finance Ltd., 144A, 6.75%, 3/3/2021 | | | | 220,000 | | | | 196,900 | |
| Ford Motor Credit Co., LLC: | |
| 5.0%, 5/15/2018 | | | | 780,000 | | | | 753,414 | |
| 5.875%, 8/2/2021 | | | | 560,000 | | | | 557,022 | |
| 6.625%, 8/15/2017 | | | | 1,000,000 | | | | 1,041,308 | |
| 8.7%, 10/1/2014 | | | | 2,000,000 | | | | 2,160,456 | |
| Fresenius Medical Care U.S. Finance, Inc.: | |
| 144A, 5.75%, 2/15/2021 | | | | 235,000 | | | | 226,775 | |
| 144A, 6.5%, 9/15/2018 | | | | 210,000 | | | | 213,150 | |
| Hexion U.S. Finance Corp., 8.875%, 2/1/2018 | | | | 4,720,000 | | | | 3,894,000 | |
| International Lease Finance Corp.: | |
| 5.75%, 5/15/2016 | | | | 205,000 | | | | 182,207 | |
| 6.25%, 5/15/2019 | | | | 510,000 | | | | 443,288 | |
| 8.75%, 3/15/2017 | | | | 1,840,000 | | | | 1,849,200 | |
| Level 3 Escrow, Inc., 144A, 8.125%, 7/1/2019 | | | | 375,000 | | | | 331,406 | |
| MPT Operating Partnership LP, (REIT), 144A, 6.875%, 5/1/2021 | | | | 550,000 | | | | 522,500 | |
| NII Capital Corp., 7.625%, 4/1/2021 | | | | 315,000 | | | | 312,638 | |
| Nuveen Investments, Inc.: | |
| 10.5%, 11/15/2015 | | | | 1,420,000 | | | | 1,309,950 | |
| 144A, 10.5%, 11/15/2015 | | | | 895,000 | | | | 816,688 | |
| Odebrecht Finance Ltd., 144A, 6.0%, 4/5/2023 | | | | 800,000 | | | | 744,000 | |
| OMEGA Healthcare Investors, Inc., (REIT), 6.75%, 10/15/2022 | | | | 605,000 | | | | 577,019 | |
| Pinnacle Foods Finance LLC, 9.25%, 4/1/2015 | | | | 1,950,000 | | | | 1,935,375 | |
| Reynolds Group Issuer, Inc.: | |
| 144A, 9.0%, 5/15/2018 | | | | 5,000,000 | | | | 4,225,000 | |
| 144A, 9.0%, 4/15/2019 | | | | 2,330,000 | | | | 1,980,500 | |
| UPCB Finance III Ltd., 144A, 6.625%, 7/1/2020 | | | | 345,000 | | | | 324,300 | |
| Wind Acquisition Finance SA, 144A, 7.25%, 2/15/2018 | | | | 400,000 | | | | 341,500 | |
| | | | | 43,101,935 | |
| Health Care 4.1% | |
| Aviv Healthcare Properties LP, 7.75%, 2/15/2019 | | | | 455,000 | | | | 428,838 | |
| Community Health Systems, Inc., 8.875%, 7/15/2015 | | | | 860,000 | | | | 844,950 | |
| Endo Pharmaceuticals Holdings, Inc.: | |
| 144A, 7.0%, 7/15/2019 | | | | 540,000 | | | | 542,025 | |
| 144A, 7.25%, 1/15/2022 | | | | 545,000 | | | | 546,363 | |
| HCA Holdings, Inc., 144A, 7.75%, 5/15/2021 | | | | 1,275,000 | | | | 1,195,313 | |
| HCA, Inc.: | |
| 6.5%, 2/15/2020 | | | | 2,155,000 | | | | 2,106,512 | |
| 7.5%, 2/15/2022 | | | | 1,615,000 | | | | 1,489,837 | |
| 7.875%, 2/15/2020 | | | | 2,110,000 | | | | 2,183,850 | |
| STHI Holding Corp., 144A, 8.0%, 3/15/2018 | | | | 325,000 | | | | 313,625 | |
| | | | | 9,651,313 | |
| Industrials 20.7% | |
| Accuride Corp., 9.5%, 8/1/2018 | | | | 6,000,000 | | | | 5,520,000 | |
| Aguila 3 SA, 144A, 7.875%, 1/31/2018 | | | | 605,000 | | | | 550,550 | |
| American Airlines, Inc., 144A, 7.5%, 3/15/2016 | | | | 455,000 | | | | 382,200 | |
| Armored Autogroup, Inc., 144A, 9.25%, 11/1/2018 | | | | 500,000 | | | | 401,250 | |
| B-Corp Merger Sub, Inc., 144A, 8.25%, 6/1/2019 | | | | 320,000 | | | | 288,000 | |
| BE Aerospace, Inc., 6.875%, 10/1/2020 | | | | 8,000,000 | | | | 8,340,000 | |
| Boart Longyear Management Pty Ltd., 144A, 7.0%, 4/1/2021 | | | | 360,000 | | | | 356,400 | |
| Briggs & Stratton Corp., 6.875%, 12/15/2020 | | | | 370,000 | | | | 373,700 | |
| Building Materials Corp. of America, 144A, 7.5%, 3/15/2020 | | | | 6,000,000 | | | | 6,000,000 | |
| Casella Waste Systems, Inc., 144A, 7.75%, 2/15/2019 | | | | 820,000 | | | | 774,900 | |
| Cenveo Corp., 8.875%, 2/1/2018 | | | | 2,140,000 | | | | 1,685,250 | |
| CHC Helicopter SA, 144A, 9.25%, 10/15/2020 | | | | 1,560,000 | | | | 1,326,000 | |
| Deluxe Corp., 144A, 7.0%, 3/15/2019 | | | | 335,000 | | | | 323,275 | |
| Ducommun, Inc., 144A, 9.75%, 7/15/2018 | | | | 320,000 | | | | 320,000 | |
| DynCorp International, Inc., 10.375%, 7/1/2017 | | | | 3,000,000 | | | | 2,617,500 | |
| Florida East Coast Railway Corp., 8.125%, 2/1/2017 | | | | 435,000 | | | | 421,950 | |
| H&E Equipment Services, Inc., 8.375%, 7/15/2016 | | | | 9,000,000 | | | | 8,640,000 | |
| Heckler & Koch GmbH, 144A, 9.5%, 5/15/2018 | EUR | | | 555,000 | | | | 461,008 | |
| Huntington Ingalls Industries, Inc.: | |
| 144A, 6.875%, 3/15/2018 | | | | 335,000 | | | | 311,550 | |
| 144A, 7.125%, 3/15/2021 | | | | 110,000 | | | | 102,025 | |
| Interline Brands, Inc., 7.0%, 11/15/2018 | | | | 200,000 | | | | 195,500 | |
| Kansas City Southern de Mexico SA de CV: | |
| 6.625%, 12/15/2020 | | | | 3,000,000 | | | | 3,090,000 | |
| 8.0%, 2/1/2018 | | | | 1,220,000 | | | | 1,299,300 | |
| Navios Maritime Holdings, Inc.: | |
| 8.125%, 2/15/2019 | | | | 770,000 | | | | 642,950 | |
| 8.875%, 11/1/2017 | | | | 815,000 | | | | 794,625 | |
| Ply Gem Industries, Inc., 8.25%, 2/15/2018 | | | | 270,000 | | | | 220,050 | |
| Spirit AeroSystems, Inc., 6.75%, 12/15/2020 | | | | 955,000 | | | | 952,612 | |
United Rentals North America, Inc., 10.875%, 6/15/2016 | | | | 2,010,000 | | | | 2,170,800 | |
| | | | | 48,561,395 | |
| Information Technology 7.2% | |
| Allen Systems Group, Inc., 144A, 10.5%, 11/15/2016 | | | | 225,000 | | | | 204,750 | |
| Amkor Technology, Inc.: | |
| 144A, 6.625%, 6/1/2021 | | | | 140,000 | | | | 125,300 | |
| 7.375%, 5/1/2018 | | | | 660,000 | | | | 636,900 | |
| Avaya, Inc., 144A, 7.0%, 4/1/2019 | | | | 1,605,000 | | | | 1,364,250 | |
| CDW LLC: | |
| 144A, 8.5%, 4/1/2019 | | | | 2,950,000 | | | | 2,596,000 | |
| 11.0%, 10/12/2015 | | | | 256,000 | | | | 255,360 | |
| CommScope, Inc., 144A, 8.25%, 1/15/2019 | | | | 940,000 | | | | 916,500 | |
| eAccess Ltd., 144A, 8.25%, 4/1/2018 | | | | 315,000 | | | | 288,225 | |
| Equinix, Inc.: | |
| 7.0%, 7/15/2021 | | | | 440,000 | | | | 438,350 | |
| 8.125%, 3/1/2018 | | | | 230,000 | | | | 242,075 | |
| First Data Corp.: | |
| 144A, 7.375%, 6/15/2019 | | | | 325,000 | | | | 288,438 | |
| 144A, 8.25%, 1/15/2021 | | | | 735,000 | | | | 580,650 | |
Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018 | | | | 1,995,000 | | | | 2,049,862 | |
| Jabil Circuit, Inc., 5.625%, 12/15/2020 | | | | 3,750,000 | | | | 3,656,250 | |
| MEMC Electronic Materials, Inc., 7.75%, 4/1/2019 | | | | 450,000 | | | | 384,750 | |
| Sanmina-SCI Corp., 144A, 7.0%, 5/15/2019 | | | | 230,000 | | | | 202,400 | |
| Seagate HDD Cayman, 144A, 7.0%, 11/1/2021 | | | | 550,000 | | | | 506,000 | |
| Sensata Technologies BV, 144A, 6.5%, 5/15/2019 | | | | 555,000 | | | | 527,250 | |
| SunGard Data Systems, Inc., 10.25%, 8/15/2015 | | | | 1,600,000 | | | | 1,616,000 | |
| | | | | 16,879,310 | |
| Materials 11.9% | |
| APERAM: | |
| 144A, 7.375%, 4/1/2016 | | | | 405,000 | | | | 356,400 | |
| 144A, 7.75%, 4/1/2018 | | | | 495,000 | | | | 430,650 | |
| Berry Plastics Corp.: | |
| 8.25%, 11/15/2015 | | | | 1,225,000 | | | | 1,246,437 | |
| 9.75%, 1/15/2021 | | | | 1,290,000 | | | | 1,096,500 | |
| Beverage Packaging Holdings Luxembourg II SA, 144A, 8.0%, 12/15/2016 | EUR | | | 1,910,000 | | | | 1,970,370 | |
| Crown Americas LLC, 144A, 6.25%, 2/1/2021 | | | | 105,000 | | | | 105,000 | |
| Essar Steel Algoma, Inc., 144A, 9.375%, 3/15/2015 | | | | 3,345,000 | | | | 2,960,325 | |
| Exopack Holding Corp., 144A, 10.0%, 6/1/2018 | | | | 435,000 | | | | 406,725 | |
| FMG Resources August 2006 Pty Ltd., 144A, 7.0%, 11/1/2015 | | | | 200,000 | | | | 186,000 | |
| Huntsman International LLC, 8.625%, 3/15/2020 | | | | 585,000 | | | | 568,913 | |
| Ineos Finance PLC, 144A, 9.0%, 5/15/2015 | | | | 5,250,000 | | | | 4,987,500 | |
| JMC Steel Group, 144A, 8.25%, 3/15/2018 | | | | 325,000 | | | | 305,500 | |
| Koppers, Inc., 7.875%, 12/1/2019 | | | | 750,000 | | | | 778,125 | |
| Longview Fibre Paper & Packaging, Inc., 144A, 8.0%, 6/1/2016 | | | | 320,000 | | | | 310,400 | |
| Momentive Performance Materials, Inc., 9.0%, 1/15/2021 | | | | 1,425,000 | | | | 976,125 | |
| Nalco Co., 144A, 6.625%, 1/15/2019 | | | | 445,000 | | | | 487,275 | |
| Novelis, Inc.: | |
| 8.375%, 12/15/2017 | | | | 1,595,000 | | | | 1,579,050 | |
| 8.75%, 12/15/2020 | | | | 1,550,000 | | | | 1,519,000 | |
| Owens-Brockway Glass Container, Inc., 7.375%, 5/15/2016 | | | | 3,135,000 | | | | 3,260,400 | |
| Packaging Dynamics Corp., 144A, 8.75%, 2/1/2016 | | | | 610,000 | | | | 597,800 | |
| Phibro Animal Health Corp., 144A, 9.25%, 7/1/2018 | | | | 65,000 | | | | 63,538 | |
| Polymer Group, Inc., 144A, 7.75%, 2/1/2019 | | | | 590,000 | | | | 588,525 | |
| Quadra FNX Mining Ltd., 144A, 7.75%, 6/15/2019 | | | | 1,180,000 | | | | 1,141,650 | |
| SunCoke Energy, Inc., 144A, 7.625%, 8/1/2019 | | | | 320,000 | | | | 312,800 | |
| Verso Paper Holdings LLC, 8.75%, 2/1/2019 | | | | 255,000 | | | | 175,950 | |
| Vulcan Materials Co., 6.5%, 12/1/2016 | | | | 1,520,000 | | | | 1,401,084 | |
| | | | | 27,812,042 | |
| Telecommunication Services 18.0% | |
| Cincinnati Bell, Inc., 8.25%, 10/15/2017 | | | | 5,575,000 | | | | 5,407,750 | |
| Clearwire Communications LLC, 144A, 12.0%, 12/1/2015 | | | | 40,000 | | | | 33,900 | |
| CPI International, Inc., 8.0%, 2/15/2018 | | | | 500,000 | | | | 450,000 | |
| Cricket Communications, Inc.: | |
| 7.75%, 10/15/2020 | | | | 4,500,000 | | | | 3,915,000 | |
| 10.0%, 7/15/2015 | | | | 1,000,000 | | | | 992,500 | |
| Digicel Group Ltd., 144A, 10.5%, 4/15/2018 | | | | 1,170,000 | | | | 1,152,450 | |
| Digicel Ltd., 144A, 8.25%, 9/1/2017 | | | | 835,000 | | | | 784,900 | |
| Frontier Communications Corp., 8.5%, 4/15/2020 | | | | 1,900,000 | | | | 1,843,000 | |
| Intelsat Jackson Holdings SA: | |
| 144A, 7.25%, 10/15/2020 | | | | 5,000,000 | | | | 4,612,500 | |
| 144A, 7.5%, 4/1/2021 | | | | 1,640,000 | | | | 1,525,200 | |
| 8.5%, 11/1/2019 | | | | 1,100,000 | | | | 1,075,250 | |
| Intelsat Luxembourg SA, 11.5%, 2/4/2017 (PIK) | | | | 3,191,718 | | | | 2,744,877 | |
| MetroPCS Wireless, Inc.: | |
| 6.625%, 11/15/2020 | | | | 3,000,000 | | | | 2,640,000 | |
| 7.875%, 9/1/2018 | | | | 835,000 | | | | 809,950 | |
| Nextel Communications, Inc., Series E, 6.875%, 10/31/2013 | | | | 2,790,000 | | | | 2,713,275 | |
| Syniverse Holdings, Inc., 9.125%, 1/15/2019 | | | | 255,000 | | | | 249,900 | |
| Telesat Canada, 11.0%, 11/1/2015 | | | | 95,000 | | | | 101,650 | |
| West Corp., 7.875%, 1/15/2019 | | | | 285,000 | | | | 267,900 | |
| Windstream Corp.: | |
| 7.75%, 10/15/2020 | | | | 355,000 | | | | 346,125 | |
| 8.125%, 9/1/2018 | | | | 10,500,000 | | | | 10,578,750 | |
| | | | | 42,244,877 | |
| Utilities 5.1% | |
| AES Corp., 8.0%, 10/15/2017 | | | | 2,200,000 | | | | 2,211,000 | |
| Calpine Corp., 144A, 7.875%, 7/31/2020 | | | | 4,545,000 | | | | 4,385,925 | |
| Edison Mission Energy, 7.0%, 5/15/2017 | | | | 1,995,000 | | | | 1,187,025 | |
| Energy Future Holdings Corp., Series Q, 6.5%, 11/15/2024 | | | | 1,065,000 | | | | 404,700 | |
| Energy Future Intermediate Holding Co., LLC, 10.0%, 12/1/2020 | | | | 130,000 | | | | 126,750 | |
| Ferrellgas LP, 6.5%, 5/1/2021 | | | | 245,000 | | | | 208,250 | |
| IPALCO Enterprises, Inc., 144A, 5.0%, 5/1/2018 | | | | 1,290,000 | | | | 1,180,350 | |
| NRG Energy, Inc.: | |
| 144A, 7.625%, 1/15/2018 | | | | 380,000 | | | | 353,400 | |
| 8.25%, 9/1/2020 | | | | 1,820,000 | | | | 1,719,900 | |
| Texas Competitive Electric Holdings Co., LLC, Series A, 10.25%, 11/1/2015 | | | | 130,000 | | | | 48,750 | |
| | | | | 11,826,050 | |
Total Corporate Bonds (Cost $327,010,130) | | | | 304,175,103 | |
| | |
| Loan Participations and Assignments 8.2% | |
| Senior Loans * | |
| Clear Channel Communications, Inc., Term Loan B, 3.889%, 1/28/2016 | | | | 1,070,068 | | | | 751,557 | |
| Del Monte Foods Co., Term Loan, 4.5%, 3/8/2018 | | | | 2,024,925 | | | | 1,886,076 | |
| Dunkin' Brands, Inc., Term Loan B2, 4.0%, 11/23/2017 | | | | 724,535 | | | | 703,567 | |
| First Data Corp.: | | | | | | | | | |
| Term Loan B3, 2.985%, 9/24/2014 | | | | 424,306 | | | | 369,810 | |
| Term Loan B, 4.235%, 3/23/2018 | | | | 3,987,082 | | | | 3,475,001 | |
| PETCO Animal Supplies, Inc., Term Loan, 4.5%, 11/24/2017 | | | | 782,100 | | | | 742,506 | |
| Roundy's Supermarkets, Inc., Second Lien Term Loan, 10.0%, 4/18/2016 | | | | 3,000,000 | | | | 2,950,005 | |
| Sealed Air Corp., Term Loan B, 5.0%, 9/21/2018 | | | | 780,000 | | | | 781,407 | |
| Syniverse Technologies, Inc., Term Loan B, 5.25%, 12/21/2017 | | | | 501,212 | | | | 494,948 | |
| Tomkins LLC, Term Loan B, 4.25%, 9/21/2016 | | | | 4,506,422 | | | | 4,436,032 | |
| Volume Services America, Inc., Term Loan A, 10.0%, 9/16/2015 | | | | 2,662,500 | | | | 2,642,531 | |
Total Loan Participations and Assignments (Cost $20,042,677) | | | | 19,233,440 | |
| | | Shares | | | Value ($) | |
| | | | |
| Preferred Stock 0.3% | |
| Financials | |
| Ally Financial, Inc., Series G, 144A, 7.0% (Cost $1,028,412) | | | 1,120 | | | | 750,085 | |
| | |
| Cash Equivalents 1.8% | |
| Central Cash Management Fund, 0.10% (c) (Cost $4,100,124) | | | 4,100,124 | | | | 4,100,124 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $352,181,343)+ | | | 140.1 | | | | 328,258,752 | |
| Notes Payable | | | (41.8 | ) | | | (98,000,000 | ) |
| Other Assets and Liabilities, Net | | | 1.7 | | | | 4,126,770 | |
| Net Assets | | | 100.0 | | | | 234,385,522 | |
* Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury bill rate. These securities are shown at their current rate as of September 30, 2011.
+ The cost for federal income tax purposes was $375,364,291. At September 30, 2011, net unrealized depreciation for all securities based on tax cost was $47,105,539. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $796,082 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $47,901,621.
(a) Principal amount stated in U.S. dollars unless otherwise noted.
(b) When-issued security.
(c) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
PIK: Denotes that all or a portion of the income is paid in kind.
REIT: Real Estate Investment Trust
As of September 30, 2011, the Fund had the following open forward foreign currency exchange contracts:
| Contracts to Deliver | | In Exchange For | | Settlement Date | | Unrealized Appreciation ($) | | Counterparty |
| EUR | | | 4,220,100 | | USD | | | 5,784,514 | | 10/17/2011 | | | 109,470 | | Citigroup, Inc. |
| EUR | | | 534,600 | | USD | | | 723,699 | | 10/17/2011 | | | 4,787 | | JPMorgan Chase Securities, Inc. |
| Total unrealized appreciation | | | 114,257 | | |
| Contracts to Deliver | | In Exchange For | | Settlement Date | | Unrealized Depreciation ($) | | Counterparty |
| USD | | | 143,043 | | EUR | | | 106,200 | | 10/17/2011 | | | (229 | ) | Citigroup, Inc. |
| Currency Abbreviations |
EUR Euro USD United States Dollar |
For information on the Fund's policy and additional disclosure regarding forward foreign currency exchange contracts, please refer to Note B in the accompanying Notes to Financial Statements.
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of September 30, 2011 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Fixed Income Investments (d) | | | | | | | | | | |
| Corporate Bonds | | $ | — | | | $ | 304,170,376 | | | $ | — | | | $ | 304,170,376 | |
| Loan Participations and Assignments | | | — | | | | 19,238,167 | | | | — | | | | 19,238,167 | |
| Preferred Stock | | | — | | | | 750,085 | | | | — | | | | 750,085 | |
| Short-Term Investments | | | 4,100,124 | | | | — | | | | — | | | | 4,100,124 | |
| Derivatives (e) | | | — | | | | 114,257 | | | | — | | | | 114,257 | |
| Total | | $ | 4,100,124 | | | $ | 324,272,885 | | | $ | — | | | $ | 328,373,009 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Derivatives (e) | | $ | — | | | $ | (229 | ) | | $ | — | | | $ | (229 | ) |
| Total | | $ | — | | | $ | (229 | ) | | $ | — | | | $ | (229 | ) |
There have been no transfers between of Level 1 and Level 2 fair value measurements during the year ended September 30, 2011.
(d) See Investment Portfolio for additional detailed categorizations.
(e) Derivatives include unrealized appreciation (depreciation) on forward foreign currency exchange contracts.
Level 3 Reconciliation
The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:
| | | Subordinated Income Notes | |
| Balance as of September 30, 2010 | | $ | 0 | |
| Net realized gain (loss) | | | (23,162,136 | ) |
| Change in unrealized appreciation (depreciation) | | | 23,162,136 | |
| Amortization premium/discount | | | — | |
| Purchases (sales) | | | 0 | |
| Transfers into Level 3 | | | — | |
| Transfers (out) of Level 3 | | | — | |
| Balance as of September 30, 2011 | | $ | — | |
| Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2011 | | $ | — | |
Transfers between price levels are recognized at the beginning of the reporting period.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities | as of September 30, 2011 | |
| Assets | |
| Investments in non-affiliated securities, at value (cost $348,081,219) | | $ | 324,158,628 | |
| Investment in Central Cash Management Fund (cost $4,100,124) | | | 4,100,124 | |
| Total investments in securities, at value (cost $352,181,343) | | | 328,258,752 | |
| Cash | | | 83,888 | |
| Foreign currency, at value (cost $684,982) | | | 682,358 | |
| Receivable for investments sold | | | 233,721 | |
| Interest receivable | | | 8,146,956 | |
| Unrealized appreciation on forward foreign currency exchange contracts | | | 114,257 | |
| Foreign taxes recoverable | | | 35,700 | |
| Other assets | | | 1,328 | |
| Total assets | | | 337,556,960 | |
| Liabilities | |
| Payable for investments purchased | | | 2,145,360 | |
| Payable for investments purchased — when-issued securities | | | 2,395,000 | |
| Notes payable | | | 98,000,000 | |
| Interest on notes payable | | | 34,149 | |
| Unrealized depreciation on forward foreign currency exchange contracts | | | 229 | |
| Accrued management fee | | | 240,275 | |
| Other accrued expenses and payables | | | 356,425 | |
| Total liabilities | | | 103,171,438 | |
| Net assets, at value | | $ | 234,385,522 | |
| Net Assets Consist of | |
| Undistributed net investment income | | | 1,838,829 | |
Net unrealized appreciation (depreciation) on: Investments | | | (23,922,591 | ) |
| Foreign currency | | | 109,692 | |
| Accumulated net realized gain (loss) | | | (604,203,153 | ) |
| Cost of 9,324,192 shares held in treasury | | | (136,211,432 | ) |
| Paid-in capital | | | 996,774,177 | |
| Net assets, at value | | $ | 234,385,522 | |
| Net Asset Value | |
Class A Net Asset Value per share ($234,385,522 ÷ 16,841,021 shares of common stock issued and outstanding, $.01 par value, 100,000,000 shares authorized) | | $ | 13.92 | |
The accompanying notes are an integral part of the financial statements.
| for the year ended September 30, 2011 | |
| Investment Income | |
| Interest (net of foreign taxes withheld of $3,451) | | $ | 29,016,600 | |
| Dividends (net of foreign taxes withheld of $23,105) | | | 291,503 | |
| Income distributions — Central Cash Management Fund | | | 19,320 | |
| Total income | | | 29,327,423 | |
Expenses: Management fee | | | 3,926,425 | |
| Administration fee | | | 392,642 | |
| Services to shareholders | | | 9,661 | |
| Custodian fee | | | 27,050 | |
| Professional fees | | | 355,862 | |
| Reports to shareholders | | | 365,797 | |
| Directors' fees and expenses | | | 8,966 | |
| Interest expense* | | | 1,762,944 | |
| Dividend expense on securities sold short | | | 17,341 | |
| Stock exchange listing fees | | | 40,522 | |
| Other | | | 197,495 | |
| Total expenses before expense reductions | | | 7,104,705 | |
| Expense reductions | | | (588,964 | ) |
| Total expenses after expense reductions | | | 6,515,741 | |
| Net investment income | | | 22,811,682 | |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: Investments | | | (80,778,509 | ) |
| Securities sold short | | | (5,298,765 | ) |
| Futures | | | 2,237,809 | |
| Foreign currency | | | 124,858 | |
| | | | (83,714,607 | ) |
Change in net unrealized appreciation (depreciation) on: Investments | | | 64,428,112 | |
| Securities sold short | | | 3,976,718 | |
| Futures | | | (983,475 | ) |
| Foreign currency | | | 109,579 | |
| | | | 67,530,934 | |
| Net gain (loss) | | | (16,183,673 | ) |
| Net increase (decrease) in net assets resulting from operations | | $ | 6,628,009 | |
* Includes $8,337 of borrowing costs on securities sold short.
The accompanying notes are an integral part of the financial statements.
| for the year ended September 30, 2011 | |
Increase (Decrease) in Cash: Cash Flows from Operating Activities | | | |
| Net increase (decrease) in net assets resulting from operations | | $ | 6,628,009 | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: Purchases of long-term investments | | | (476,220,763 | ) |
| Net purchases, sales and maturities of short-term investments | | | (4,100,124 | ) |
| Net amortization/accretion of premium (discount) | | | 985,072 | |
| Proceeds from sales and maturities of long-term investments | | | 537,947,600 | |
| Purchases to cover securities sold short | | | (28,775,210 | ) |
| (Increase) decrease in deposit with broker for securities sold short | | | 22,994,944 | |
| (Increase) decrease in deposit with broker on open futures contracts | | | 1,011,375 | |
| (Increase) decrease in receivable for investments sold | | | 17,015,280 | |
| (Increase) decrease in interest receivable | | | (1,492,266 | ) |
| (Increase) decrease in dividends receivable | | | 218,626 | |
| (Increase) decrease in daily variation margin on open futures contracts | | | 983,475 | |
| (Increase) decrease in other assets | | | 1,197 | |
| Increase (decrease) in interest on notes payable | | | (32,477 | ) |
| Increase (decrease) in dividends payable for securities sold short | | | (20,907 | ) |
| Increase (decrease) in payable for investments purchased and investments purchased — when-issued securities | | | (15,683,561 | ) |
| Increase (decrease) in other accrued expenses and payables | | | 132,863 | |
| Change in unrealized (appreciation) depreciation on investments | | | (64,428,112 | ) |
| Change in unrealized (appreciation) depreciation on securities sold short | | | (3,976,718 | ) |
| Change in net unrealized (appreciation) depreciation on forward foreign currency exchange contracts | | | (114,028 | ) |
| Net realized (gain) loss on securities sold short | | | 5,298,765 | |
| Net realized (gain) loss from investments | | | 80,778.509 | |
| Cash provided (used) by operating activities | | $ | 79,151,549 | |
| Cash Flows from Financing Activities | | | | |
| Net increase (decrease) in notes payable | | | 48,000,000 | |
| Cost of shares tendered and accepted | | | (91,827,570 | ) |
| Cost of shares repurchased | | | (19,834,658 | ) |
| Distributions paid to shareholders | | | (25,724,865 | ) |
| Cash provided (used) for financing activities | | | (89,387,093 | ) |
| Increase (decrease) in cash | | | (10,235,544 | ) |
| Cash at beginning of period (including foreign currency) | | | 11,001,790 | |
| Cash at end of period (including foreign currency) | | $ | 766,246 | |
| Supplemental disclosure | | | | |
| Interest paid on notes | | | (1,787,084 | ) |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets | | | Years Ended September 30, | |
| Increase (Decrease) in Net Assets | | 2011 | | | 2010 | |
Operations: Net investment income | | $ | 22,811,682 | | | $ | 25,890,021 | |
| Net realized gain (loss) | | | (83,714,607 | ) | | | (17,910,345 | ) |
| Change in net unrealized appreciation (depreciation) | | | 67,530,934 | | | | 47,586,498 | |
| Net increase (decrease) in net assets resulting from operations | | | 6,628,009 | | | | 55,566,174 | |
Distributions to shareholders from: Net investment income | | | (25,724,865 | ) | | | (21,910,540 | ) |
| Total distributions | | | (25,724,865 | ) | | | (21,910,540 | ) |
Fund share transactions: Cost of shares tendered | | | (91,827,570 | ) | | | — | |
| Cost of shares repurchased | | | (19,834,658 | ) | | | (18,941,231 | ) |
| Net increase (decrease) in net assets from Fund share transactions | | | (111,662,228 | ) | | | (18,941,231 | ) |
| Increase (decrease) in net assets | | | (130,759,084 | ) | | | 14,714,403 | |
| Net assets at beginning of period | | | 365,144,606 | | | | 350,430,203 | |
| Net assets at end of period (including undistributed net investment income of $1,838,829 and $3,345,282, respectively) | | $ | 234,385,522 | | | $ | 365,144,606 | |
| Other Information | |
| Shares outstanding at beginning of period | | | 24,293,008 | | | | 25,800,109 | |
| Shares tendered | | | (6,073,252 | ) | | | — | |
| Shares repurchased | | | (1,378,735 | ) | | | (1,507,101 | ) |
| Shares outstanding at end of period | | | 16,841,021 | | | | 24,293,008 | |
The accompanying notes are an integral part of the financial statements.
| | | Years Ended September 30, | | | | |
| | | | 2011 | | | 2010 | | | | 2009 | g | | | 2008 | g | | Period Ended 9/30/07a,g | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 15.03 | | | $ | 13.58 | | | $ | 20.67 | | | $ | 35.83 | | | $ | 38.20 | d |
Income (loss) from investment operations: Net investment incomeb | | | 1.25 | | | | 1.03 | | | | 1.16 | | | | 2.86 | | | | 2.76 | |
| Net realized and unrealized gain (loss) | | | (1.09 | ) | | | 1.19 | | | | (6.79 | ) | | | (14.86 | ) | | | (2.91 | ) |
| Total from investment operations | | | .16 | | | | 2.22 | | | | (5.63 | ) | | | (12.00 | ) | | | (.15 | ) |
Less distributions from: Net investment income | | | (1.42 | ) | | | (.88 | ) | | | (1.42 | ) | | | (3.18 | ) | | | (2.16 | ) |
| Return of capital | | | — | | | | — | | | | (.06 | ) | | | — | | | | — | |
| Total distributions | | | (1.42 | ) | | | (.88 | ) | | | (1.48 | ) | | | (3.18 | ) | | | (2.16 | ) |
NAV accretion resulting from repurchases of shares and shares tendered at valueb | | | .15 | | | | .11 | | | | .02 | | | | .02 | | | | .00 | *** |
| Offering costs charged to paid-in capital | | | — | | | | — | | | | — | | | | — | | | | (.06 | ) |
| Net asset value, end of period | | $ | 13.92 | | | $ | 15.03 | | | $ | 13.58 | | | $ | 20.67 | | | $ | 35.83 | |
| Market value, end of period | | $ | 13.07 | | | $ | 13.40 | | | $ | 11.18 | | | $ | 16.60 | | | $ | 30.04 | |
| Total Return | |
Based on net asset value (%)c | | | 2.16 | e | | | 18.67 | e | | | (22.28 | ) | | | (34.70 | ) | | | (.23 | )** |
Based on market value (%)c | | | 7.66 | | | | 28.42 | | | | (20.29 | ) | | | (37.47 | ) | | | (20.15 | )** |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 234 | | | | 365 | | | | 350 | | | | 539 | | | | 937 | |
Ratio of expenses before fee reductions (including interest expense and dividend expense for securities sold short) (%)h | | | 2.52 | | | | 1.64 | | | | 2.42 | | | | 2.63 | | | | 4.17 | * |
Ratio of expenses after fee reductions (including interest expense and dividend expense for securities sold short) (%)h | | | 2.31 | | | | 1.50 | | | | 2.42 | | | | 2.63 | | | | 4.17 | * |
Ratio of expenses after fee reductions (excluding interest expense and dividend expense for securities sold short) (%)h | | | 1.68 | | | | 1.24 | | | | 1.54 | | | | 1.47 | | | | 1.61 | * |
| Ratio of net investment income (%) | | | 8.08 | | | | 7.18 | | | | 10.40 | | | | 9.23 | | | | 8.65 | * |
| Portfolio turnover rate (%) | | | 134 | | | | 154 | | | | 27 | | | | 75 | | | | 160 | ** |
| Total debt outstanding, end of period ($ thousands) | | | 98,000 | | | | 50,000 | | | | 15,000 | | | | 266,000 | | | | — | |
Asset coverage per $1,000 of debtf | | | 3,392 | | | | 8,303 | | | | 24,362 | | | | 3,026 | | | | — | |
a For the period from November 22, 2006 (commencement of operations) to September 30, 2007. b Based on average shares outstanding during the period. c Total return based on net asset value reflects changes in the Fund's net asset value during the period. Total return based on market value reflects changes in market value. Each figure assumes that dividend and capital gain distributions, if any, were reinvested. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Fund's shares traded during the period. d Beginning per share amount reflects $20.00 initial public offering price net of sales load ($0.90 per share). Adjusted to reflect the effects of a 1 for 2 reverse stock split. e Total return would have been lower had certain fees not been reduced. f Asset coverage equals the total net assets plus borrowings of the Fund divided by the borrowings outstanding at period end. g Per share data, including the proportionate impact to market price, have been restated to reflect the effects of a 1 for 2 reverse stock split effective prior to the opening of trading on the NYSE on August 10, 2009. h Prior to November 5, 2010, the Fund utilized short sales as part of the hedge strategy that sought to provide returns that were uncorrelated with the market. * Annualized ** Not annualized *** Amount is less than $.005. |
Notes to Financial Statements
A. Organization and Significant Accounting Policies
DWS High Income Opportunities Fund, Inc. (formerly DWS Dreman Value Income Edge Fund, Inc.) (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "1940 Act''), as a closed-end, non-diversified management investment company organized as a Maryland corporation.
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.
Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation.
Debt securities and senior loans are valued at prices supplied by independent pricing services approved by the Fund's Board. If the pricing services are unable to provide valuations, securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. These securities are generally categorized as Level 2.
Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost, which approximates value, and are categorized as Level 2. Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and are categorized as Level 2.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund's valuation procedures, factors used in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security's disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company's or issuer's financial statements; an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold and with respect to debt securities; the maturity, coupon, creditworthiness, currency denomination, and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities.
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Short Sales. When the Fund takes a short position, it sells at the current market price a stock it does not own but has borrowed in anticipation that the market price of the stock will decline. To complete, or close out, the short sale transaction, the Fund buys the same stock in the market and returns it to the lender. For the period from October 1, 2010 through November 5, 2010, the Fund utilized short sales as part of the hedge strategy that sought to provide returns that were uncorrelated with the market.
Upon entering into a short sale, the Fund is required to designate liquid assets it owns in the form of cash or securities as segregated assets on the books of its custodian in an amount at least equal to its obligations to purchase the securities sold short (exclusive of short sales proceeds held with the broker-dealer). For financial statements purposes, segregated cash is reflected as an asset in the Statement of Assets and Liabilities, and the settlement amount for securities sold short is reflected as a corresponding liability. Securities segregated as collateral are identified in the Investment Portfolio. The amount of the liability is marked-to-market to reflect the current value of the short position.
The Fund may receive or pay the net of the broker's fee on the borrowed securities and any income earned on the cash collateral deposited with the broker. The net amounts of income or fees are included as interest income, or interest expense in the Statement of Operations.
Short sales involve the risk that the Fund will incur a loss by subsequently buying a security at a higher price than the price at which the Fund previously sold the security short. Any loss will be increased by the amount of compensation, interest or dividends, and transaction costs the Fund must pay to a lender of the security. In addition, because the Fund's loss on a short sale stems from increases in the value of the security sold short, the extent of such loss, like the price of the security sold short, is theoretically unlimited. By contrast, the Fund's loss on a long position arises from decreases in the value of the security held by the Fund and therefore is limited by the fact that a security's value cannot drop below zero.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gain/appreciation and loss/depreciation on investments.
When-Issued/Delayed Delivery Securities. The Fund may purchase or sell securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the transaction is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. At the time the Fund enters into a purchase transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.
Certain risks may arise upon entering into when-issued or delayed delivery transactions from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.
Loan Participations and Assignments. Loan Participations and Assignments are portions of loans originated by banks and sold in pieces to investors. These fixed and floating rate loans ("Loans") in which the Fund invests, are arranged between the borrower and one or more financial institutions ("Lenders"). These Loans may take the form of Senior Loans, which are corporate obligations often issued in connection with recapitalizations, acquisitions, leveraged buy-outs and refinancings, and Sovereign Loans, which are debt instruments between a foreign sovereign entity and one or more financial institutions. The Fund invests in such Loans in the form of participations in Loans ("Participations") or assignments of all or a portion of Loans from third parties ("Assignments"). Participations typically result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund has the right to receive payments of principal, interest and any fees to which it is entitled from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, or any rights of set-off against the borrower, and the Fund will not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. Assignments typically result in the Fund having a direct contractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. All Loan Participations and Assignments involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders.
At September 30, 2011, the Fund had a net tax basis capital loss carryforward of approximately $511,896,000, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until September 30, 2016 ($58,426,000), September 30, 2017 ($198,233,000), September 30, 2018 ($243,689,000) and September 30, 2019 ($11,548,000), the respective expiration dates, whichever occurs first.
In addition, from November 1, 2010 through September 30, 2011, the Fund incurred approximately $69,124,000 of net realized capital losses. As permitted by tax regulations, the Fund intends to elect to defer these losses and treat them as arising in the fiscal year ending September 30, 2012.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the "Act") was enacted. Under the Act, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses. As a result of this ordering rule, pre-enactment capital loss carryforwards may expire unused, whereas under the previous rules these losses may have been utilized. This change is effective for fiscal years beginning after the date of enactment.
The Fund has reviewed the tax positions for the open tax years as of September 30, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund is declared and distributed to shareholders monthly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually.
The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to certain securities sold at a loss and forward foreign currency commitments. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
At September 30, 2011, the Fund's components of distributable earnings (accumulated losses) on a tax basis were as follows:
| Undistributed ordinary income* | | $ | 1,952,858 | |
| Capital loss carryfowards | | $ | (511,896,000 | ) |
| Net unrealized appreciation (depreciation) on investments | | $ | (47,105,539 | ) |
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
| | | Years Ended September 30, | |
| | | 2011 | | | 2010 | |
Distributions from ordinary income* | | $ | 25,724,865 | | | $ | 21,910,540 | |
* For tax purposes, short-term capital gains distributions are considered ordinary income distributions.
Statement of Cash Flows. Information on financial transactions which have been settled through the receipt and disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows represents the cash and foreign currency position at the Fund's custodian bank at September 30, 2011.
Contingencies. In the normal course of business, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date, net of foreign withholding taxes. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation. All premiums and discounts are amortized/accreted for financial reporting purposes, with the exception of securities in default of principal.
B. Derivative Instruments
Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearing house in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). For the period from October 1, 2010 through November 5, 2010, the Fund used futures contracts as part of the hedge strategy to provide equity exposure.
Futures contracts are valued at the most recent settlement price. Upon entering into a futures contract, the Fund is required to deposit with a financial intermediary cash or securities ("initial margin") in an amount equal to a certain percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund dependent upon the daily fluctuations in the value and are recorded for financial reporting purposes as unrealized gains or losses by the Fund. Gains or losses are realized when the contract expires or is closed. Since all futures contracts are exchange traded, counterparty risk is minimized as the exchange's clearinghouse acts as the counterparty, and guarantees the futures against default.
Certain risks may arise upon entering into futures contracts, including the risk that an illiquid market will limit the Fund's ability to close out a futures contract prior to the settlement date and the risk that the futures contract is not well correlated with the security, index or currency to which it relates. Risk of loss may exceed amounts recognized in the Statement of Assets and Liabilities.
There are no open futures contracts as of September 30, 2011. During the year ended September 30, 2011, the investment in futures contracts purchased had a total notional value generally indicative of a range from $0 to approximately $27,683,000.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. For the year ended September 30, 2011, the Fund entered into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. On the settlement date of the forward currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was closed. Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. The maximum counterparty credit risk to the Fund is measured by the unrealized gain on appreciated contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.
A summary of the open forward currency contracts as of September 30, 2011 is included in a table following the Fund's Investment Portfolio. For the year ended September 30, 2011, the investment in forward currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from $0 to approximately $6,508,000, and the investment in forward currency contracts long vs. U.S. dollars had a total contract value generally indicative of a range from $0 to approximately $1,251,000.
The following tables summarize the value of the Fund's derivative instruments held as of September 30, 2011 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivative | | Forward Contracts | |
| Foreign Exchange Contracts (a) | | $ | 114,257 | |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized appreciation on forward foreign currency exchange contracts
| Liability Derivative | | Forward Contracts | |
| Foreign Exchange Contracts (a) | | $ | (229 | ) |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized depreciation on forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended September 30, 2011 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Forward Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | 2,237,809 | | | $ | 2,237,809 | |
| Foreign Exchange Contracts (b) | | | 256,030 | | | | — | | | | 256,030 | |
| | | $ | 256,030 | | | $ | 2,237,809 | | | $ | 2,493,839 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Net realized gain (loss) from futures
(b) Net realized gain (loss) from foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
| Change in Net Unrealized Appreciation (Depreciation) | | Forward Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | (983,475 | ) | | $ | (983,475 | ) |
| Foreign Exchange Contracts (b) | | | 114,028 | | | | — | | | | 114,028 | |
| | | $ | 114,028 | | | $ | (983,475 | ) | | $ | (869,447 | ) |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) on futures
(b) Change in net unrealized appreciation (depreciation) on foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
C. Purchases and Sales of Securities
During the year ended September 30, 2011, purchases and sales of investment securities (excluding short-term instruments and short sales transactions) aggregated $476,220,763 and $537,947,600, respectively. Purchases to cover securities sold short aggregated $28,775,210.
D. Related Parties
Management Agreement. Under the Investment Management Agreement with Deutsche Investment Management Americas, Inc. ("DIMA" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The management fee payable under the Investment Management Agreement is equal to an annual rate of 1.00% of the Fund's average daily managed assets, computed and accrued daily and payable monthly. Total managed assets equal the net asset value of the common shares plus the principal amount of any borrowings.
Until November 5, 2010, Dreman Value Management LLC ("DVM") served as the subadvisor for the Fund. DIMA compensated DVM out of the investment management fee it received from the Fund. Effective as of the close of business on November 5, 2010, the sub-advisory agreement with DVM was terminated and day-to-day portfolio management of the Fund transitioned to DIMA. At that time, the Fund's name changed from "DWS Dreman Value Income Edge Fund, Inc." to "DWS High Income Opportunities Fund, Inc." In addition, the Fund's management team, investment objective, investment strategy and related investment policies changed. For more information, please see the "Other Information" sections of the Fund's Annual Report to Stockholders dated September 30, 2010, and the Fund's Semiannual Report to Stockholders dated March 31, 2011
For the period from October 1, 2010 through September 30, 2012, the Advisor has contractually agreed to waive 0.15% of its management fee.
Accordingly, for the year ended September 30, 2011, the fee pursuant to the Investment Management Agreement aggregated $3,926,425, of which $588,964 was waived, resulting in an annual effective rate of 0.85% of the Fund's average daily managed assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays the Advisor an annual fee ("Administration fee") of 0.10% of the Fund's average daily managed assets, computed and accrued daily and payable monthly. For the year ended September 30, 2011, the Administration Fee was $392,642, of which $28,268 is unpaid.
Service Provider Fees. DWS Investments Service Company ("DISC"), an affiliate of the Advisor, is the transfer agent and dividend-paying agent for the Fund. Pursuant to a sub-transfer agency agreement between DISC and DST Systems, Inc. ("DST"), DISC has delegated certain transfer agent and dividend-paying agent functions to DST. DISC compensates DST out of the shareholder servicing fee it receives from the Fund. For the year ended September 30, 2011, the amount charged to the Fund by DISC aggregated $7,766, of which $43 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the year ended September 30, 2011, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $17,810, of which $10,057 is unpaid.
Directors' Fees and Expenses. The Fund paid each Director not affiliated with the Advisor retainer fees plus specified amounts for various committee services and for the Board Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. Central Cash Management Fund does not pay the Advisor an investment management fee. Central Cash Management Fund seeks a high level of current income consistent with liquidity and the preservation of capital.
E. Investing in High-Yield Securities
The Fund's performance could be hurt if a security declines in credit quality or goes into default, or if an issuer does not make timely payments of interest or principal. Because the issuers of high-yield debt securities or junk bonds (debt securities rated below the fourth-highest category) may be in uncertain financial health, the prices of their debt securities can be more vulnerable to bad economic news, or even the expectation of bad news, than investment-grade debt securities. Because the Fund may invest in securities not paying current interest or in securities already in default, these risks may be more pronounced.
F. Borrowings
The Fund has a secured line of credit with a commercial bank with a commitment amount up to $125,000,000 ($100,000,000 prior to November 5, 2010 and $150,000,000 prior to September 26, 2011) with a maturity date of September 24, 2012. The note bears interest at the higher of either the Overnight Federal Funds rate, the Overnight LIBOR rate or the LIBOR Term Rate, plus 1.05 percent (1.25% prior to September 26, 2011). At September 30, 2011, this was 1.41%. A commitment fee on the unused portion of the facility is charged to the Fund and is included with "interest expense" in the Statement of Operations.
At September 30, 2011, the Fund had a notes payable outstanding of $98,000,000. The weighted average outstanding daily balance of all loans during the year ended September 30, 2011 was approximately $109,888,000, with a weighted average interest rate of 1.60%. The borrowings were valued at cost, which approximates fair value.
Leverage involves risks and special considerations for the Fund's stockholders, including the likelihood of greater volatility of net asset value and market price of, and dividends on, the Fund's shares than a comparable portfolio without leverage; the risk that fluctuations in interest rates on such borrowings will reduce the return to stockholders; and the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the Fund's shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Fund's shares.
Changes in the value of the Fund's portfolio will be borne entirely by the stockholders. If there is a net decrease (or increase) in the value of the Fund's investment portfolio, leverage will decrease (or increase) the net asset value per share to a greater extent than if leverage were not used. It is also possible that the Fund will be required to sell assets at a time when it would otherwise not do so, possibly at a loss, in order to redeem or meet payment obligations on borrowings to comply with asset coverage or other restrictions imposed by the lender. The Fund is subject to certain restrictions on its investments under the terms of its credit agreement. Moreover, certain covenants contained in the credit agreement impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act.
During periods in which the Fund is using leverage, the fees received by the Advisor for investment management and advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund's total managed assets, including proceeds from the use of leverage.
There is no assurance that the Fund's leveraging strategy will be successful.
G. Share Repurchases
The Board of Directors previously authorized the Fund to effect periodic repurchases for up to 5% of its shares in the open market from time to time during the period from December 1, 2009 through November 30, 2010, when the Fund's shares traded at a discount to their net asset value. For the period ended November 30, 2010, the Board also ratified the repurchase of 113,166 shares in excess of the 5% limit. There were no share repurchases for the period from October 1, 2010 through November 30, 2010 under this program.
The Board of Directors previously authorized the Fund to effect periodic repurchases for up to 5% of its shares in the open market from time to time when the Fund's shares trade at a discount to their net asset value during the period December 1, 2010 through November 30, 2011. During the year ended September 30, 2011, the Fund purchased 26,080 shares of common stock on the open market at a total cost of $343,845 ($13.18 average per share) under this program. The average discount of these purchases, comparing the purchase price to the net asset value at the time of purchase was approximately 8.6%.
On October 4, 2010, the Fund announced that the Board has also approved an enhancement to the current program for the Fund to purchase its own shares on the open market, which was in effect from December 1, 2010 until May 31, 2011. Under the enhanced program, during times when the Fund's common shares were trading on the NYSE at a discount to net asset value per share in excess of 5%, the Fund repurchased up to a maximum of 2% of its total outstanding common shares per month. This enhanced repurchase program was in addition to the above-referenced one-year extension of the Fund's existing repurchase program, under which the Fund is permitted to purchase an aggregate of up to 5% of its outstanding shares over the period from December 1, 2010 until November 30, 2011. During the year ended September 30, 2011, the Fund purchased 1,352,655 shares of common stock on the open market at a total cost of $19,490,813 ($14.41 average per share) under this enhanced repurchase program. The average discount of these purchases, comparing the purchase price to the net asset value at the time of purchase was approximately 7.8%.
In addition, the Board of Directors has authorized the Fund to effect periodic repurchases for up to 5% of its shares in the open market from time to time when the Fund's shares trade at a discount to their net asset value during the period December 1, 2011 through November 30, 2012.
H. Tender Offer
On October 4, 2010, the Fund announced that its Board of Directors had authorized the Fund to conduct an issuer self-tender offer to purchase up to 25% of its outstanding common shares for cash at a price per share equal to 99% of its NAV as of the close of trading on the NYSE on the day after the date on which the offer expired. The offer commenced on October 22, 2010 and expired on November 19, 2010. The Fund accepted 6,073,252 tendered shares at a price equal to 99% of the net asset value per share as of the close of the regular trading session of the New York Stock Exchange on November 22, 2010. Approximately 11,332,261 shares of common stock, or approximately 47% of the fund's common stock outstanding, were tendered through the expiration date. Because the offer was oversubscribed, not all of the tendered shares were accepted for payment by the Fund. Under the final pro-ration calculation, approximately 54% of the tendered shares were accepted for payment. The shares accepted for payment received cash at a repurchase price of $15.12 per share, which was equal to 99% of the Fund's net asset value per share on November 22, 2010.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of DWS High Income Opportunities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of DWS High Income Opportunities Fund, Inc. (formerly "DWS Dreman Value Income Edge Fund, Inc.") (the "Fund"), including the investment portfolio, as of September 30, 2011, and the related statements of operations and cash flows for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits 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 and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2011, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of DWS High Income Opportunities Fund, Inc. at September 30, 2011, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
| | | |
Boston, Massachusetts November 21, 2011 | | |
Tax Information (Unaudited)
For federal income tax purposes, the Fund designates $346,000, or the maximum amount allowable under tax law, as qualified dividend income.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call (800) 621-1048.
On September 9, 2011, for convenience of administration of the Fund, the Fund's Board of Directors approved a consolidation and restatement of the Fund's principal investment policies. No material changes in the Fund's investment policies were intended by this process. Set forth below is a description of the Fund's investment objectives and principal investment policies resulting from this action.
Except as otherwise indicated, the Fund's investment objectives and policies are not fundamental and may be changed by the Board of Directors without a shareholder vote. References herein to the "1940 Act" mean the Investment Company Act of 1940, as amended. References herein to the "1933 Act" mean the Securities Act of 1933, as amended.
Investment Objectives
The Fund seeks high current income with a secondary objective of total return.
Principal Investment Policies
The Fund pursues its investment objectives by investing primarily in securities designed to generate income, with the potential for capital appreciation being a secondary consideration. The Fund may invest in a broad range of income-producing securities, including, but not limited to, domestic and foreign debt securities of any credit quality or maturity (including below-investment-grade debt securities and debt securities of issuers located in countries with new or emerging securities markets); convertible securities (including convertible bonds); dividend-paying common stocks, preferred stocks, and securities of real estate investment trusts ("REITs"); energy trusts; and other investment companies. The Fund may invest in debt securities not paying interest currently and securities in default. In addition, the Fund may invest in senior bank loans, including bank loan participations and assignments. The Fund may buy or sell protection on credit exposure and may also purchase securities on a when-issued basis and engage in short sales. The Fund may invest in cash or money market instruments in the event portfolio management determines that securities meeting the Fund's investment objectives are not readily available for purchase.
Borrowing and Use of Leverage. The Fund may borrow and/or issue preferred stock or debt securities to the extent permitted by the 1940 Act. The Fund also may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions, which otherwise might require untimely dispositions of the Fund's portfolio securities.
Loans of Portfolio Securities. To increase income, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions if (i) the loan is collateralized in accordance with applicable regulatory requirements and (ii) no loan will cause the value of all loaned securities to exceed 331/3% of the value of the Fund's total assets.
Temporary Investments. Pending investment of offering or leverage proceeds or when attractive investment opportunities are not available, the Fund may invest without limit in securities issued by the U.S. government or its agencies or instrumentalities and in short-term debt securities, including commercial paper, repurchase agreements, certificates of deposits, and other money market instruments, including securities of money market funds, or in cash or cash equivalents.1 The Fund also may invest in high-quality short-term securities or cash on a temporary basis to meet working capital needs, including, but not limited to, for collateral in connection with certain investment techniques, to hold a reserve pending payment of dividends and distributions, and to facilitate the payment of expenses and settlement of trades.
1 The Fund may use uninvested cash to purchase shares of affiliated money market funds for which the Fund's investment adviser ("the Adviser") may act as investment adviser now or in the future that are registered under the 1940 Act or that operate in accordance with Rule 2a-7 under the 1940 Act, but are excluded from the definition of "investment company" under Section 3(c)(1) or 3(c)(7) of the 1940 Act. Investments in such cash management vehicles may exceed the limits of Section 12(d)(1)(A) of the 1940 Act.
Below-Investment-Grade Securities. The Fund may invest in foreign and domestic fixed-income securities of below-investment-grade quality. These securities may be preferred stock or debt securities.
Investment-Grade Debt Securities. The Fund may invest in foreign and domestic investment-grade bonds. Bonds are fixed- or variable-rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities.
Convertible Securities. The Fund may invest in convertible securities. A convertible security is a preferred stock, warrant or other security that may be converted into or exchanged for a prescribed amount of common stock or other security of the same or a different issuer, or into cash within a particular period of time at a specified price or formula.
Foreign Securities. The Fund may invest without limit in securities of foreign issuers, including securities of issuers located in new or emerging securities markets. Investments in foreign securities may also include American Depository Receipts ("ADRs") and other types of depository receipts denominated in U.S. dollars, whether sponsored or unsponsored.
Common Stock. The Fund may invest in common stock.
Preferred Stock. The Fund may invest in preferred stock.
REITs. The Fund may invest in common stocks, preferred stocks, convertible securities, and rights and warrants, each issued by REITs.
Energy Trusts. The Fund may invest in units of Canadian royalty income trusts that own and/or operate energy related assets ("Energy Trusts").
Investment Companies. The Fund may invest in securities of other open- or closed-end investment companies to the extent permitted by the 1940 Act. These investments may include securities of exchange-traded funds ("ETFs") and business development companies.
Strategic Transactions and Derivatives. The Fund is permitted to use various types of derivative products (contracts whose value depends on, for example, indexes, currencies or securities). Derivatives may be used for hedging or risk management to manage the effective maturity or duration of income-producing securities or for non-hedging purposes to seek to enhance potential returns. The Fund also may use derivatives when portfolio management believes they offer an economical means of gaining exposure to a particular asset class or to maintain exposure to a market. These strategies may be executed through the use of derivative contracts. In the course of pursuing these investment strategies, the Fund may purchase and sell exchange-listed and over-the-counter put and call options on securities, equity and fixed-income indices and other instruments; purchase and sell futures contracts and options on futures; invest in structured notes; or enter into various transactions, such as swaps (including, among other things, the purchase and sale of credit default swaps), caps, floors or collars (collectively, all the above are called "Strategic Transactions"). In addition, Strategic Transactions may also include new techniques, instruments or strategies that are permitted as regulatory changes occur. The Fund's portfolio management team does not currently anticipate investing more than 30% of the Fund's assets in credit default swaps (measured by the notional amount of the credit default swap) and structured notes.
Restricted and Illiquid Securities. The Fund may invest in securities for which there is no readily available trading market or that are otherwise illiquid. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant to Section 4(2) of the 1933 Act, and securities eligible for resale pursuant to Rule 144A thereunder. The Fund may also acquire securities through private placements under which it may agree to contractual restrictions on the resale of such securities.
Senior Bank Loans. The Fund may invest up to 60% of the Fund's total managed assets in senior bank loans ("Senior Loans"), including bank loan participations and assignments. For these purposes, the term "total managed assets" means the total assets of the Fund, including assets attributable to leverage, minus liabilities (other than debt representing financial leverage).
Mortgage-Backed Securities. The Fund may invest in mortgage-backed securities representing direct or indirect participations in, or obligations collateralized by and payable from, mortgage loans secured by real property.
When-Issued Securities. The Fund may purchase equity and debt securities on a "when-issued," "delayed delivery" or "forward delivery" basis.
Short Sales. The Fund may engage in short sales. The Fund may make short sales "against the box." In this type of short sale, at the time of the sale, the Fund will own, or have the immediate and unconditional right to acquire at no additional cost, the identical security.
Repurchase Agreements. The Fund may invest in repurchase agreements.
Non-Diversified Classification. The Fund is classified as non-diversified within the meaning of the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that it may invest in securities of a single issuer. However, the Fund's investments will be limited so as to qualify the Fund as a "regulated investment company" for purposes of the Internal Revenue Code. To qualify, among other requirements, the Fund will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of its total assets will be invested in the securities (other than U.S. government securities) of a single issuer and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities (other than U.S. government securities) of a single issuer, and the Fund will not own more than 10% of the outstanding voting securities of a single issuer.
Investment Restrictions
Any investment restrictions herein that involve a maximum percentage of securities or assets shall not be considered to be violated unless an excess over the percentage occurs immediately after and is caused by an acquisition or encumbrance of securities or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Fund will not:
• borrow money, except as permitted under the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time;
• issue senior securities, except as permitted under the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time;
• concentrate its investments in a particular industry, as that term is used in the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time;
• engage in the business of underwriting securities issued by others, except to the extent that the Fund may be deemed to be an underwriter in connection with the disposition of portfolio securities;
• purchase or sell real estate, which term does not include securities of companies which deal in real estate or mortgages or investments secured by real estate or interests therein, except that the Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund's ownership of securities;
• purchase physical commodities or contracts relating to physical commodities except as permitted by the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time; or
• make loans except as permitted under the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time.
A fundamental policy may not be changed without the approval of a majority of the outstanding voting securities of the Fund which, under the 1940 Act and the rules thereunder and as used herein, means the lesser of (1) 67% or more of the voting securities present at such meeting, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Fund.
As a non-fundamental policy:
• The Fund may lend its portfolio securities to securities broker-dealers or financial institutions if (i) the loan is collateralized in accordance with applicable regulatory requirements and (ii) no loan will cause the value of all loaned securities to exceed 331/3% of the value of the Fund's total assets.
• The Fund will not sell put options if, as a result, more than 50% of the Fund's total assets would be required to be segregated to cover its potential obligations under such put options other than those with respect to futures and options thereon.
• The Fund will only sell over-the-counter options ("OTC options") (other than OTC currency options) that are subject to a buyback provision permitting the Fund to require the counterparty to sell the option back to the Fund at a formula price within seven days.
• The Fund will engage in OTC option transactions only with U.S. government securities dealers recognized by the Federal Reserve Bank of New York as "primary dealers" or broker/dealers, domestic or foreign banks or other financial institutions which have received (or the guarantors of the obligation of which have received) a short-term credit rating of A-1 from S&P, or P-1 from Moody's or an equivalent rating from any nationally recognized statistical rating organization ("NRSRO'') or, in the case of OTC currency transactions, are determined to be of equivalent credit quality by the Adviser.
• The Fund will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Fund may be obligated to pay.
• The Fund will not enter into any swap, cap, floor or collar transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least A by S&P or Moody's, or has an equivalent rating from another NRSRO or is determined to be of equivalent credit quality by the Adviser.
• The Fund will only sell credit protection with respect to securities in which it would be authorized to invest directly.
• The Fund may invest up to 60% of the Fund's total managed assets in Senior Loans, including bank loan participations and assignments.
Dividend Reinvestment and Cash Purchase Plan
The Board of Directors of the Fund has established a Dividend Reinvestment and Cash Purchase Plan (the "Plan") for shareholders that elect to have all dividends and distributions automatically reinvested in shares of common stock of the Fund (each a "Participant"). Computershare Inc. (the "Plan Agent") has been appointed by the Fund's Board of Directors to act as agent for each Participant.
A summary of the Plan is set forth below. Shareholders may obtain a copy of the entire Dividend Reinvestment and Cash Purchase Plan by visiting the Fund's Web site at www.dws-investments.com or by calling (800) 349-4281.
Whenever the Fund declares an income dividend or a capital gains distribution payable in common shares or cash at the option of the shareholders, each Participant is deemed to have elected to take such dividend or distribution entirely in additional shares of common stock of the Fund. If the market price per share of the Fund's common stock on the valuation date equals or exceeds the net asset value per share on the valuation date, the number of additional shares to be issued by the Fund and credited to the Participant's account shall be determined by dividing the dollar amount of the dividend or capital gains distribution payable on the Participant's shares by the greater of the following amounts per share of the Fund's common stock on the valuation date: (a) the net asset value, or (b) 95% of the market price. If the market price per share of the Common Shares on the valuation date is less than the net asset value per share on the valuation date, the Plan Agent shall apply the dollar amount of the dividend or capital gains distribution on such Participant's shares (less such Participant's pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of such dividend and distribution) to the purchase on the open market of shares of the common stock for the Participant's account. Should the Fund declare an income dividend or capital gains distribution payable only in cash, the amount of such dividend or distribution on each Participant's shares (less such Participant's pro rata share of brokerage commissions incurred with respect to open-market purchases in connection with the reinvestment of such dividend or distribution) shall be applied to the purchase on the open market of shares of common stock for the Participant's account. Each Participant, semiannually, also has the option of sending additional funds, in any amount from $100 to $3,000, for the purchase on the open market of shares of common stock for such Participant's account. Voluntary payments will be invested by the Plan Agent on or shortly after the 15th of February and August, and in no event more than 45 days after such dates, except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities law. Optional cash payments received from a Participant on or prior to the fifth day preceding the 15th of February or August will be applied by the Plan Agent to the purchase of additional shares of common stock as of that investment date. Funds received after the fifth day preceding the 15th of February or August and prior to the 30th day preceding the next investment date will be returned to the Participant. No interest will be paid on optional cash payments held until investment. Consequently, Participants are strongly urged to make their optional cash payments shortly before the 15th of February or August. Optional cash payments should be made in U.S. dollars and be sent by first-class mail, postage prepaid, to the Fund's transfer agent and dividend-disbursing agent at the following address:
DWS High Income Opportunities Fund, Inc.
Dividend Reinvestment and Cash Purchase Plan
210 West 10th Street, Kansas City, MO 64105
(800) 294-4366
Participants may withdraw their entire voluntary cash payment by written notice received by the Plan Agent not less than 48 hours before such payment is to be invested.
Investment of voluntary cash payments and other open-market purchases may be made on any securities exchange where the shares of common stock are traded, in the OTC market or in negotiated transactions.
A statement reflecting the amount of cash received by the Fund's Transfer Agent will be issued on receipt of each cash deposit. The statements are the record of the costs of shares and should be retained for tax purposes.
The reinvestment of dividends and capital gains distributions does not relieve the Participant of any tax that may be payable on such dividends and distributions. The Fund's Transfer Agent will report to each Participant the taxable amount of dividends and distributions credited to his or her account. Participants will be treated as receiving the amount of the distributions made by the Fund, which amount generally will be either equal to the amount of the cash distribution the shareholder would have received if the shareholder had elected to receive cash or, for shares issued by the Fund, the fair market value of the shares issued to the shareholder.
The service fees for handling capital gains distributions or income dividends will be paid by the Fund. Participants will be charged a $1.00 service fee for each optional cash investment and a pro rata share of brokerage commissions on all open market purchases.
Participants may terminate their accounts under the Plan by notifying the Fund's Transfer Agent in writing. Such termination will be effective immediately if such Participant's notice is received by the Fund's Transfer Agent not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective as soon as practicable upon completion of the reinvestment of capital gains distributions or income dividends. The Plan may be terminated by the Fund upon notice in writing mailed to Participants at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund. The terms and conditions of the Plan may be amended or supplemented by the Fund at any time or times, but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission, any securities exchange on which shares of the Fund are listed, or any other regulatory authority and with certain other limited exceptions, only by mailing to Participants appropriate written notice at least 30 days prior to the effective date thereof.
If a Participant elects by notice to the Plan Agent in writing in advance of such termination to have the Plan Agent sell part or all of such Participant's shares and remit the proceeds to such Participant, the Plan Agent is authorized to deduct a fee of 5% of the gross proceeds, to a maximum of $3.50, plus brokerage commissions for this transaction and any transfer taxes.
All correspondence and inquiries concerning the Plan, and requests for additional information about the Plan, should be directed to DWS Investments Service Company at P.O. Box 219066, Kansas City, Missouri 64105 or (800) 294-4366.
Stockholder Meeting Results (Unaudited)
The Annual Meeting of Stockholders (the "Meeting") of DWS High Income Opportunities Fund, Inc. (the "Fund") was held on June 3, 2011 at the offices of Deutsche Investment Management Americas Inc., 24th Floor, 345 Park Avenue, New York, New York 10154.
At the Meeting, there were issued and outstanding 17,200,799 shares of common stock, each being entitled to one vote, constituting all of the Fund's outstanding voting securities. At the Meeting, the holders of 16,291,698 shares of common stock were represented in person or by proxy, constituting a quorum. The following matter was voted upon by the stockholders (the resulting votes are presented below).
1. Election of four Class I Board Members.
| Number of Votes: |
| | For | Against |
| John W. Ballantine | 15,378,118 | 913,580 |
| Dawn-Marie Driscoll | 15,377,814 | 913,884 |
| Kenneth C. Froewiss | 15,380,401 | 911,297 |
| Rebecca W. Rimel | 15,374,196 | 917,502 |
1. Election of four Class III Board Members.
| Number of Votes: |
| | For | Against |
| Henry P. Becton, Jr. | 15,370,504 | 921,194 |
| Paul K. Freeman | 15,382,210 | 909,488 |
| William McClayton | 15,377,506 | 914,192 |
| Jean Gleason Stromberg | 15,372,300 | 919,398 |
Investment Management Agreement Approval
The Board of Directors, including the Independent Directors, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2011.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2011, all of the Fund's Directors were independent of DWS and its affiliates.
• The Directors met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Directors regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Directors were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Board, which consists of all Independent Directors. The Board then reviewed the Contract Committee's findings and recommendations.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by an independent fund data service), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one- and three-year periods ended December 31, 2010, the Fund's performance was in the 4th quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one- and three-year periods ended December 31, 2010. The Board noted the disappointing investment performance of the Fund in recent periods and continued to discuss with senior management of DWS the factors contributing to such underperformance and actions being taken to improve performance. The Board observed that the Fund had experienced improved relative performance during the first seven months of 2011. The Board recognized that DWS has made significant changes in the Fund's structure, including repositioning the Fund as a pure high yield fund and transitioning portfolio management to DWS's high yield team in November 2010.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (3rd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2010). The Board noted that the management fee and administrative services fee are charged on managed assets and the management fees received by DWS will be higher during periods in which the Fund uses leverage. The Board considered that the Fund currently employs leverage through borrowings. The Board noted that the Fund's total (net) operating expenses including leverage costs and based on managed assets were expected to be higher than the median (4th quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2010). The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board noted that, in connection with the 2011 contract renewal process, DWS had agreed to reduce the Fund's contractual management fee rate by 0.15% through September 30, 2012.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS U.S. mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Europe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board and the independent fee consultant reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Directors and their counsel present. It is possible that individual Directors may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the fund as of September 30, 2011. Each Board Member's year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Paul K. Freeman, Independent Chairman, DWS Funds, PO Box 101833, Denver, CO 80250-1833. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the fund. The Board Members may also serve in similar capacities with other funds in the fund complex. The Length of Time Served represents the year in which the Board Member joined the Board of one or more DWS funds now overseen by the Board.
| Independent Board Members |
Name, Year of Birth, Position with the Fund and Length of Time Served1 | | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen |
Other Directorships Held by Board Member |
Paul K. Freeman (1950) Chairperson since 2009 Board Member since 1993 | | Consultant, World Bank/Inter-American Development Bank; Executive and Governing Council of the Independent Directors Council (education committees); formerly: Project Leader, International Institute for Applied Systems Analysis (1998-2001); Chief Executive Officer, The Eric Group, Inc. (environmental insurance) (1986-1998) | 112 | — |
John W. Ballantine (1946) Board Member since 1999 | | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996-1998); Executive Vice President and Head of International Banking (1995-1996). Directorships: Chairman of the Board, Healthways, Inc. (provider of disease and care management services); Portland General Electric (utility company); Stockwell Capital Investments PLC (private equity); former Directorships: First Oak Brook Bancshares, Inc. and Oak Brook Bank; Prisma Energy International | 112 | — |
Henry P. Becton, Jr. (1943) Board Member since 1990 | | Vice Chair and former President, WGBH Educational Foundation. Directorships: Association of Public Television Stations; Public Radio International; Public Radio Exchange (PRX); The PBS Foundation; former Directorships: Boston Museum of Science; American Public Television; Concord Academy; New England Aquarium; Mass. Corporation for Educational Telecommunications; Committee for Economic Development; Public Broadcasting Service | 112 | Lead Director, Becton Dickinson and Company2 (medical technology company); Lead Director, Belo Corporation2 (media company) |
Dawn-Marie Driscoll (1946) Board Member since 1987 | | President, Driscoll Associates (consulting firm); Executive Fellow, Center for Business Ethics, Bentley University; formerly, Partner, Palmer & Dodge (1988-1990); Vice President of Corporate Affairs and General Counsel, Filene's (1978-1988). Directorships: Director of ICI Mutual Insurance Company (since 2007); Advisory Board, Center for Business Ethics, Bentley University; Trustee, Southwest Florida Community Foundation (charitable organization); former Directorships: Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | 112 | Trustee, Sun Capital Advisers, Inc. (22 open-end mutual funds advised by Sun Capital Advisers, Inc.) (since 2007) |
Keith R. Fox, CFA (1954) Board Member since 1996 | | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods importer and distributor); BoxTop Media Inc. (advertising); The Kennel Shop (retailer); former Chairman, National Association of Small Business Investment Companies | 112 | Trustee, Sun Capital Advisers, Inc. (22 open-end mutual funds advised by Sun Capital Advisers, Inc.) (since 2011) |
Kenneth C. Froewiss (1945) Board Member since 2001 | | Adjunct Professor of Finance, NYU Stern School of Business (September 2009-present; Clinical Professor from 1997-September 2009); Member, Finance Committee, Association for Asian Studies (2002-present); Director, Mitsui Sumitomo Insurance Group (US) (2004-present); prior thereto, Managing Director, J.P. Morgan (investment banking firm) (until 1996) | 112 | — |
Richard J. Herring (1946) Board Member since 1990 | | Jacob Safra Professor of International Banking and Professor, Finance Department, The Wharton School, University of Pennsylvania (since July 1972); Co-Director, Wharton Financial Institutions Center (since July 2000); Co-Chair, U.S. Shadow Financial Regulatory Committee; Executive Director, Financial Economists Roundtable; formerly: Vice Dean and Director, Wharton Undergraduate Division (July 1995-June 2000); Director, Lauder Institute of International Management Studies (July 2000-June 2006) | 112 | Director, Japan Equity Fund, Inc. (since September 2007), Thai Capital Fund, Inc. (since September 2007), Singapore Fund, Inc. (since September 2007), Independent Director of Barclays Bank Delaware (since September 2010) |
William McClayton (1944) Board Member since 2004 | | Private equity investor (since October 2009); previously, Managing Director, Diamond Management & Technology Consultants, Inc. (global consulting firm) (2001-2009); Directorship: Board of Managers, YMCA of Metropolitan Chicago; formerly: Senior Partner, Arthur Andersen LLP (accounting) (1966-2001); Trustee, Ravinia Festival | 112 | — |
Rebecca W. Rimel (1951) Board Member since 1995 | | President and Chief Executive Officer, The Pew Charitable Trusts (charitable organization) (1994 to present); Trustee, Thomas Jefferson Foundation (charitable organization) (1994 to present); Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001-2007); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983-2004); Board Member, Investor Education (charitable organization) (2004-2005); Trustee, Pro Publica (charitable organization) (2007-2010) | 112 | Director, CardioNet, Inc. (health care) (2009- present); Director, Viasys Health Care2 (January 2007- June 2007) |
William N. Searcy, Jr. (1946) Board Member since 1993 | | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989-September 2003) | 112 | Trustee, Sun Capital Advisers, Inc. (22 open-end mutual funds advised by Sun Capital Advisers, Inc.) (since 1998) |
Jean Gleason Stromberg (1943) Board Member since 1997 | | Retired. Formerly, Consultant (1997-2001); Director, Financial Markets US Government Accountability Office (1996-1997); Partner, Fulbright & Jaworski, L.L.P. (law firm) (1978-1996). Directorships: The William and Flora Hewlett Foundation; former Directorships: Service Source, Inc., Mutual Fund Directors Forum (2002-2004), American Bar Retirement Association (funding vehicle for retirement plans) (1987-1990 and 1994-1996) | 112 | — |
Robert H. Wadsworth (1940) Board Member since 1999 | | President, Robert H. Wadsworth & Associates, Inc. (consulting firm) (1983 to present); Director, The Phoenix Boys Choir Association | 115 | — |
Officers4 |
Name, Year of Birth, Position with the Fund and Length of Time Served5 | Principal Occupation(s) During Past 5 Years and Other Directorships Held |
W. Douglas Beck, CFA9 (1967) President, 2011-present | Managing Director3, Deutsche Asset Management (2006-present); President of DWS family of funds and Head of Product Management, US for DWS Investments; formerly, Executive Director, Head of Product Management (2002-2006) and President (2005-2006) of the UBS Funds at UBS Global Asset Management; Co-Head of Manager Research/Managed Solutions Group, Merrill Lynch (1998-2002) |
John Millette7 (1962) Vice President and Secretary, 1999-present | Director3, Deutsche Asset Management |
Paul H. Schubert6 (1963) Chief Financial Officer, 2004-present Treasurer, 2005-present | Managing Director3, Deutsche Asset Management (since July 2004); formerly, Executive Director, Head of Mutual Fund Services and Treasurer for UBS Family of Funds (1998-2004); Vice President and Director of Mutual Fund Finance at UBS Global Asset Management (1994-1998) |
Caroline Pearson7 (1962) Chief Legal Officer, 2010-present | Managing Director3, Deutsche Asset Management; formerly, Assistant Secretary for DWS family of funds (1997-2010) |
Rita Rubin8 (1970) Assistant Secretary, 2009-present | Director3 and Senior Counsel, Deutsche Asset Management (since October 2007); formerly, Vice President, Morgan Stanley Investment Management (2004-2007) |
Paul Antosca7 (1957) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management (since 2006); Vice President, The Manufacturers Life Insurance Company (U.S.A.) (1990-2006) |
Jack Clark7 (1967) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management (since 2007); formerly, Vice President, State Street Corporation (2002-2007) |
Diane Kenneally7 (1966) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management |
John Caruso8 (1965) Anti-Money Laundering Compliance Officer, 2010-present | Managing Director3, Deutsche Asset Management |
Robert Kloby8 (1962) Chief Compliance Officer, 2006-present | Managing Director3, Deutsche Asset Management |
1 The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board.
2 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
3 Executive title, not a board directorship.
4 As a result of their respective positions held with the Advisor, these individuals are considered "interested persons" of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the fund.
5 The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds.
6 Address: 100 Plaza One, Jersey City, NJ 07311.
7 Address: One Beacon Street, Boston, MA 02108.
8 Address: 60 Wall Street, New York, NY 10005.
9 Address: 345 Park Avenue, New York, NY 10154.
| |
| Automated Information Line | | DWS Investments Closed-End Fund Info Line (800) 349-4281 |
| Web Site | | www.dws-investments.com Obtain fact sheets, financial reports, press releases and webcasts when available. |
| Written Correspondence | | Deutsche Investment Management Americas Inc. 345 Park Avenue New York, NY 10154 |
| Proxy Voting | | The fund's policies and procedures for voting proxies for portfolio securities and information about how the fund voted proxies related to its portfolio securities during the 12-month period ended June 30 are available on our Web site — www.dws-investments.com (click on "proxy voting"at the bottom of the page) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the fund's policies and procedures without charge, upon request, call us toll free at (800) 621-1048. |
| Legal Counsel | | Vedder Price P.C. 222 North LaSalle Street Chicago, IL 60601 |
| Dividend Reinvestment Plan Agent | | Computershare Inc. P.O. Box 43078 Providence, RI 02940-3078 |
| Transfer Agent | | DWS Investments Service Company P.O. Box 219066 Kansas City, MO 64121-9066 (800) 294-4366 |
| Custodian | | State Street Bank and Trust Company Lafayette Corporate Center 2 Avenue De Lafayette Boston, MA 02111 |
| Independent Registered Public Accounting Firm | | Ernst & Young LLP 200 Clarendon Street Boston, MA 02116 |
| NYSE Symbol | | DHG |
| CUSIP Number | | 23339M204 |
Proxy Voting and Guidelines
I. INTRODUCTION
Deutsche Asset Management (“AM”) has adopted and implemented the following policies and procedures, which it believes are reasonably designed to ensure that proxies are voted in the best economic interest of clients, in accordance with its fiduciary duties and local regulation. These Proxy Voting Policies, Procedures and Guidelines shall apply to all accounts managed by US domiciled advisers and to all US client accounts managed by non US regional offices. Non US regional offices are required to maintain procedures and to vote proxies as may be required by law on behalf of their non US clients. In addition, AM’s proxy policies reflect the fiduciary standards and responsibilities for ERISA accounts.
The attached guidelines represent a set of global recommendations that were determined by the Global Proxy Voting Sub-Committee (“the GPVSC”). These guidelines were developed to provide AM with a comprehensive list of recommendations that represent how AM will generally vote proxies for its clients. The recommendations derived from the application of these guidelines are not intended to influence the various AM legal entities either directly or indirectly by parent or affiliated companies. In addition, the organizational structures and documents of the various AM legal entities allows, where necessary or appropriate, the execution by individual AM subsidiaries of the proxy voting rights independently of any DB parent or affiliated company. This applies in particular to non U.S. fund management companies. The individuals that make proxy voting decisions are also free to act independently, subject to the normal and customary supervision by the management/boards of these AM legal entities.
II. AM’S PROXY VOTING RESPONSIBILITIES
Proxy votes are the property of AM’s advisory clients.1 As such, AM’s authority and responsibility to vote such proxies depend upon its contractual relationships with its clients. AM has delegated responsibility for effecting its advisory clients’ proxy votes to Institutional Shareholder Services (“ISS”), an independent third-party proxy voting specialist. ISS votes AM’s advisory clients’ proxies in accordance with AM’s proxy guidelines or AM’s specific instructions. Where a client has given specific instructions as to how a proxy should be voted, AM will notify ISS to carry out those instructions. Where no specific instruction exists, AM will follow the procedures in voting the proxies set forth in this document. Certain Taft-Hartley clients may direct AM to have ISS vote their proxies in accordance with Taft Hartley voting Guidelines
Clients may in certain instances contract with their custodial agent and notify AM that they wish to engage in securities lending transactions. In such cases, it is the responsibility of the custodian to deduct the number of shares that are on loan so that they do not get voted twice.
III. POLICIES
1. Proxy voting activities are conducted in the best economic interest of clients
AM has adopted the following policies and procedures to ensure that proxies are voted in accordance with the best economic interest of its clients, as determined by AM in good faith after appropriate review.
2. The Global Proxy Voting Sub-Committee
The Global Proxy Voting Sub-Committee (the “GPVSC”) is an internal working group established by the applicable AM’s Investment Risk Oversight Committee pursuant to a written charter. The GPVSC is responsible for overseeing AM’s proxy voting activities, including:
| (i) | adopting, monitoring and updating guidelines, attached as Exhibit A (the “Guidelines”), that provide how AM will generally vote proxies pertaining to a comprehensive list of common proxy voting matters; |
| (ii) | voting proxies where (A) the issues are not covered by specific client instruction or the Guidelines; (B) the Guidelines specify that the issues are to be determined on a case-by-case basis; or (C) where an exception to the Guidelines may be in the best economic interest of AM’s clients; and |
| (iii) | monitoring the Proxy Vendor Oversight’s proxy voting activities (see below). |
AM’s Proxy Vendor Oversight, a function of AM’s Operations Group, is responsible for coordinating with ISS to administer AM’s proxy voting process and for voting proxies in accordance with any specific client instructions or, if there are none, the Guidelines, and overseeing ISS’ proxy responsibilities in this regard.
3. Availability of Proxy Voting Policies and Procedures and proxy voting record
Copies of these Policies and Procedures, as they may be updated from time to time, are made available to clients as required by law and otherwise at AM’s discretion. Clients may also obtain information on how their proxies were voted by AM as required by law and otherwise at AM’s discretion; however, AM must not selectively disclose its investment company clients’ proxy voting records. The Proxy Vendor Oversight will make proxy voting reports available to advisory clients upon request. The investment companies’ proxy voting records will be disclosed to shareholders by means of publicly-available annual filings of each company’s proxy voting record for 12-month periods ended June 30 (see “Recordkeeping” below), if so required by relevant law.
IV. PROCEDURES
The key aspects of AM’s proxy voting process are as follows:
1. The GPVSC’s Proxy Voting Guidelines
The Guidelines set forth the GPVSC’s standard voting positions on a comprehensive list of common proxy voting matters. The GPVSC has developed, and continues to update the Guidelines based on consideration of current corporate governance principles, industry standards, client feedback, and the impact of the matter on issuers and the value of the investments.
The GPVSC will review the Guidelines as necessary to support the best economic interests of AM’s clients and, in any event, at least annually. The GPVSC will make changes to the Guidelines, whether as a result of the annual review or otherwise, taking solely into account the best economic interests of clients. Before changing the Guidelines, the GPVSC will thoroughly review and evaluate the proposed change and the reasons therefore, and the GPVSC Chair will ask GPVSC members whether anyone outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client has requested or attempted to influence the proposed change and whether any member has a conflict of interest with respect to the proposed change. If any such matter is reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management Sub-Committee (see below) and will defer the approval, if possible. Lastly, the GPVSC will fully document its rationale for approving any change to the Guidelines.
The Guidelines may reflect a voting position that differs from the actual practices of the public company(ies) within the Deutsche Bank organization or of the investment companies for which AM or an affiliate serves as investment adviser or sponsor. Investment companies, particularly closed-end investment companies, are different from traditional operating companies. These differences may call for differences in voting positions on the same matter. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised or sponsored investment company solicits proxies from its shareholders. As reflected in the Guidelines, proxies solicited by closed-end (and open-end) investment companies are generally voted in accordance with the pre-determined guidelines of ISS. See Section IV.3.B.
Funds (“Underlying Funds”) in which Topiary Fund Management Fund of Funds (each, a “Fund”) invest, may from time to time seek to revise their investment terms (i.e. liquidity, fees, etc.) or investment structure. In such event, the Underlying Funds may require approval/consent from its investors to effect the relevant changes. Topiary Fund Management has adopted Proxy Voting Procedures which outline the process for these approvals.
2. Specific proxy voting decisions made by the GPVSC
The Proxy Vendor Oversight will refer to the GPVSC all proxy proposals (i) that are not covered by specific client instructions or the Guidelines; or (ii) that, according to the Guidelines, should be evaluated and voted on a case-by-case basis.
Additionally, if, the Proxy Vendor Oversight, the GPVSC Chair or any member of the GPVSC, a portfolio manager, a research analyst or a sub-adviser believes that voting a particular proxy in accordance with the Guidelines may not be in the best economic interests of clients, that individual may bring the matter to the attention of the GPVSC Chair and/or the Proxy Vendor Oversight.2
If the Proxy Vendor Oversight refers a proxy proposal to the GPVSC or the GPVSC determines that voting a particular proxy in accordance with the Guidelines is not in the best economic interests of clients, the GPVSC will evaluate and vote the proxy, subject to the procedures below regarding conflicts.
The GPVSC endeavors to hold meetings to decide how to vote particular proxies sufficiently before the voting deadline so that the procedures below regarding conflicts can be completed before the GPVSC’s voting determination.
3. Certain proxy votes may not be cast
In some cases, the GPVSC may determine that it is in the best economic interests of its clients not to vote certain proxies. If the conditions below are met with regard to a proxy proposal, AM will abstain from voting:
| n | Neither the Guidelines nor specific client instructions cover an issue; |
| n | ISS does not make a recommendation on the issue; |
| n | The GPVSC cannot convene on the proxy proposal at issue to make a determination as to what would be in the client’s best interest. (This could happen, for example, if the Conflicts of Interest Management Sub-committee found that there was a material conflict or if despite all best efforts being made, the GPVSC quorum requirement could not be met). |
In addition, it is AM’s policy not to vote proxies of issuers subject to laws of those jurisdictions that impose restrictions upon selling shares after proxies are voted, in order to preserve liquidity. In other cases, it may not be possible to vote certain proxies, despite good faith efforts to do so. For example, some jurisdictions do not provide adequate notice to shareholders so that proxies may be voted on a timely basis. Voting rights on securities that have been loaned to third-parties transfer to those third-parties, with loan termination often being the only way to attempt to vote proxies on the loaned securities. Lastly, the GPVSC may determine that the costs to the client(s) associated with voting a particular proxy or group of proxies outweighs the economic benefits expected from voting the proxy or group of proxies.
The Proxy Vendor Oversight will coordinate with the GPVSC Chair regarding any specific proxies and any categories of proxies that will not or cannot be voted. The reasons for not voting any proxy shall be documented.
4. Conflict of Interest Procedures
A. Procedures to Address Conflicts of Interest and Improper Influence
Overriding Principle. In the limited circumstances where the GPVSC votes proxies,3 the GPVSC will vote those proxies in accordance with what it, in good faith, determines to be the best economic interests of AM’s clients.4
Independence of the GPVSC. As a matter of Compliance policy, the GPVSC and the Proxy Vendor Oversight are structured to be independent from other parts of Deutsche Bank. Members of the GPVSC and the employee responsible for Proxy Vendor Oversight are employees of AM. As such, they may not be subject to the supervision or control of any employees of Deutsche Bank Corporate and Investment Banking division (“CIB”). Their compensation cannot be based upon their contribution to any business activity outside of AM without prior approval of Legal and Compliance. They can have no contact with employees of Deutsche Bank outside of the Private Client and Asset Management division (“PCAM”) regarding specific clients, business matters or initiatives without the prior approval of Legal and Compliance. They furthermore may not discuss proxy votes with any person outside of AM (and within AM only on a need to know basis).
Conflict Review Procedures. There will be a committee (the “Conflicts of Interest Management Sub-Committee”) established within AM that will monitor for potential material conflicts of interest in connection with proxy proposals that are to be evaluated by the GPVSC. Promptly upon a determination that a vote shall be presented to the GPVSC, the GPVSC Chair shall notify the Conflicts of Interest Management Sub-Committee. The Conflicts of Interest Management Sub-Committee shall promptly collect and review any information deemed reasonably appropriate to evaluate, in its reasonable judgment, if AM or any person participating in the proxy voting process has, or has the appearance of, a material conflict of interest. For the purposes of this policy, a conflict of interest shall be considered “material” to the extent that a reasonable person could expect the conflict to influence, or appear to influence, the GPVSC’s decision on the particular vote at issue. GPVSC should provide the Conflicts of Interest Management Sub-Committee a reasonable amount of time (no less than 24 hours) to perform all necessary and appropriate reviews. To the extent that a conflicts review can not be sufficiently completed by the Conflicts of Interest Management Sub-Committee the proxies will be voted in accordance with the standard guidelines.
The information considered by the Conflicts of Interest Management Sub-Committee may include without limitation information regarding (i) AM client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management Sub-Committee or brought to the attention of that sub-committee; (iii) and any communications with members of the GPVSC (or anyone participating or providing information to the GPVSC) and any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may consult with, and shall be entitled to rely upon, all applicable outside experts, including legal counsel.
Upon completion of the investigation, the Conflicts of Interest Management Sub-Committee will document its findings and conclusions. If the Conflicts of Interest Management Sub-Committee determines that (i) AM has a material conflict of interest that would prevent it from deciding how to vote the proxies concerned without further client consent or (ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee will so inform the GPVSC chair.
If notified that AM has a material conflict of interest as described above, the GPVSC chair will obtain instructions as to how the proxies should be voted either from (i) if time permits, the effected clients, or (ii) in accordance with the standard guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the GPVSC Chair shall do so in accordance with the procedures set forth below.
Note: Any AM employee who becomes aware of a potential, material conflict of interest in respect of any proxy vote to be made on behalf of clients shall notify Compliance. Compliance shall call a meeting of the conflict review committee to evaluate such conflict and determine a recommended course of action.
Procedures to be followed by the GPVSC. At the beginning of any discussion regarding how to vote any proxy, the GPVSC Chair (or his or her delegate) will inquire as to whether any GPVSC member (whether voting or ex officio) or any person participating in the proxy voting process has a personal conflict of interest or has actual knowledge of an actual or apparent conflict that has not been reported to the Conflicts of Interest Management Sub-Committee.
The GPVSC Chair also will inquire of these same parties whether they have actual knowledge regarding whether any director, officer or employee outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client, has: (i) requested that AM, the Proxy Vendor Oversight (or any member thereof) or a GPVSC member vote a particular proxy in a certain manner; (ii) attempted to influence AM, the Proxy Vendor Oversight (or any member thereof), a GPVSC member or any other person in connection with proxy voting activities; or (iii) otherwise communicated with a GPVSC member or any other person participating or providing information to the GPVSC regarding the particular proxy vote at issue, and which incident has not yet been reported to the Conflicts of Interest Management Sub- Committee.
If any such incidents are reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management Sub-Committee and, if possible, will delay the vote until the Conflicts of Interest Management Sub-Committee can complete the conflicts report. If a delay is not possible, the Conflicts of Interest Management Sub-Committee will instruct the GPVSC whether anyone should be recused from the proxy voting process, or whether AM should vote the proxy in accordance with the standard guidelines, seek instructions as to how to vote the proxy at issue from ISS or, if time permits, the effected clients. These inquiries and discussions will be properly reflected in the GPVSC’s minutes.
Duty to Report. Any AM employee, including any GPVSC member (whether voting or ex officio), that is aware of any actual or apparent conflict of interest relevant to, or any attempt by any person outside of the AM organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as a AM advisory client to influence, how AM votes its proxies has a duty to disclose the existence of the situation to the GPVSC Chair (or his or her designee) and the details of the matter to the Conflicts of Interest Management Sub-Committee. In the case of any person participating in the deliberations on a specific vote, such disclosure should be made before engaging in any activities or participating in any discussion pertaining to that vote.
Recusal of Members. The GPVSC will recuse from participating in a specific proxy vote any GPVSC members (whether voting or ex officio) and/or any other person who (i) are personally involved in a material conflict of interest; or (ii) who, as determined by the Conflicts of Interest Management Sub-Committee, have actual knowledge of a circumstance or fact that could effect their independent judgment, in respect of such vote. The GPVSC will also exclude from consideration the views of any person (whether requested or volunteered) if the GPVSC or any member thereof knows, or if the Conflicts of Interest Management Sub-Committee has determined, that such other person has a material conflict of interest with respect to the particular proxy, or has attempted to influence the vote in any manner prohibited by these policies.
If, after excluding all relevant GPVSC voting members pursuant to the paragraph above, there are three or more GPVSC voting members remaining, those remaining GPVSC members will determine how to vote the proxy in accordance with these Policies and Procedures. If there are fewer than three GPVSC voting members remaining, the GPVSC Chair will vote the proxy in accordance with the standard guidelines, will obtain instructions as to how to have the proxy voted from, if time permits, the effected clients and otherwise from ISS.
B. Investment Companies and Affiliated Public Companies
Investment Companies. As reflected in the Guidelines, all proxies solicited by open-end and closed-end investment companies are voted in accordance with the pre-determined guidelines of ISS, unless the investment company client directs AM to vote differently on a specific proxy or specific categories of proxies. However, regarding investment companies for which AM or an affiliate serves as investment adviser or principal underwriter, such proxies are voted in the same proportion as the vote of all other shareholders (i.e., “mirror” or “echo” voting). Master fund proxies solicited from feeder funds are voted in accordance with applicable provisions of Section 12 of the Investment Company Act of 1940.
Subject to participation agreements with certain Exchange Traded Funds ("ETF") issuers that have received exemptive orders from the U.S. Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and (B) of the Investment Company Act of 1940, DeAM will echo vote proxies for ETFs in which Deutsche Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
Affiliated Public Companies. For proxies solicited by non-investment company issuers of or within the Deutsche Bank organization, e.g., Deutsche bank itself, these proxies will be voted in the same proportion as the vote of other shareholders (i.e., “mirror” or “echo” voting).
Note: With respect to the Central Cash Management Fund (registered under the Investment Company Act of 1940), the Fund is not required to engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to vote contrary to the positions in the Guidelines, consistent with the Fund’s best interest.
C. Other Procedures That Limit Conflicts of Interest
AM and other entities in the Deutsche Bank organization have adopted a number of policies, procedures and internal controls that are designed to avoid various conflicts of interest, including those that may arise in connection with proxy voting, including:
| n | Deutsche Bank Americas Restricted Activities Policy. This policy provides for, among other things, independence of AM employees from CIB, and information barriers between AM and other affiliates. Specifically, no AM employee may be subject to the supervision or control of any employee of CIB. No AM employee shall have his or her compensation based upon his or her contribution to any business activity within the Bank outside of the business of AM, without the prior approval of Legal or Compliance. Further, no employee of CIB shall have any input into the compensation of a AM employee without the prior approval of Legal or Compliance. Under the information barriers section of this policy, as a general rule, AM employees who are associated with the investment process should have no contact with employees of Deutsche Bank or its affiliates, outside of PCAM, regarding specific clients, business matters, or initiatives. Further, under no circumstances should proxy votes be discussed with any Deutsche Bank employee outside of AM (and should only be discussed on a need-to-know basis within AM). |
Other relevant internal policies include the Deutsche Bank Americas Code of Professional Conduct, the Deutsche Asset Management Information Sharing Procedures, the Deutsche Asset Management Code of Ethics, the Sarbanes-Oxley Senior Officer Code of Ethics, and the Deutsche Bank Group Code of Conduct. The GPVSC expects that these policies, procedures and internal controls will greatly reduce the chance that the GPVSC (or, its members) would be involved in, aware of or influenced by, an actual or apparent conflict of interest.
V. RECORDKEEPING
At a minimum, the following types of records must be properly maintained and readily accessible in order to evidence compliance with this policy.
| n | AM will maintain a record of each vote cast by AM that includes among other things, company name, meeting date, proposals presented, vote cast and shares voted. |
| n | The Proxy Vendor Oversight maintains records for each of the proxy ballots it votes. Specifically, the records include, but are not limited to: |
| – | The proxy statement (and any additional solicitation materials) and relevant portions of annual statements. |
| – | Any additional information considered in the voting process that may be obtained from an issuing company, its agents or proxy research firms. |
| – | Analyst worksheets created for stock option plan and share increase analyses. |
| – | Proxy Edge print-screen of actual vote election. |
| n | AM will retain these Policies and Procedures and the Guidelines; will maintain records of client requests for proxy voting information; and will retain any documents the Proxy Vendor Oversight or the GPVSC prepared that were material to making a voting decision or that memorialized the basis for a proxy voting decision. |
| n | The GPVSC also will create and maintain appropriate records documenting its compliance with these Policies and Procedures, including records of its deliberations and decisions regarding conflicts of interest and their resolution. |
| n | With respect to AM’s investment company clients, ISS will create and maintain records of each company’s proxy voting record for 12-month periods ended June 30. AM will compile the following information for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which the company was entitled to vote: |
| – | The name of the issuer of the portfolio security; |
| – | The exchange ticker symbol of the portfolio security (if symbol is available through reasonably practicable means); |
| – | The Council on Uniform Securities Identification Procedures number for the portfolio security (if the number is available through reasonably practicable means); |
| – | The shareholder meeting date; |
| – | A brief identification of the matter voted on; |
| – | Whether the matter was proposed by the issuer or by a security holder; |
| – | Whether the company cast its vote on the matter; |
| – | How the company cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and |
| – | Whether the company cast its vote for or against management. |
Note: This list is intended to provide guidance only in terms of the records that must be maintained in accordance with this policy. In addition, please note that records must be maintained in accordance with the applicable AM Records Management Policy.
With respect to electronically stored records, “properly maintained” is defined as complete, authentic (unalterable) usable and backed-up. At a minimum, records should be retained for a period of not less than six years (or longer, if necessary to comply with applicable regulatory requirements), the first three years in an appropriate AM office.
VI. THE GPVSC’S OVERSIGHT ROLE
In addition to adopting the Guidelines and making proxy voting decisions on matters referred to it as set forth above, the GPVSC will monitor the proxy voting process by reviewing summary proxy information presented by ISS. The GPVSC will use this review process to determine, among other things, whether any changes should be made to the Guidelines. This review will take place at least quarterly and will be documented in the GPVSC’s minutes.
| 1 | For purposes of these Policies and Procedures, “clients” refers to persons or entities: for which AM serves as investment adviser or sub-adviser; for which AM votes proxies; and that have an economic or beneficial ownership interest in the portfolio securities of issuers soliciting such proxies. |
| 2 | The Proxy Vendor Oversight generally monitors upcoming proxy solicitations for heightened attention from the press or the industry and for novel or unusual proposals or circumstances, which may prompt the Proxy Vendor Oversight to bring the solicitation to the attention of the GPVSC Chair. AM portfolio managers, AM research analysts and sub-advisers also may bring a particular proxy vote to the attention of the GPVSC Chair, as a result of their ongoing monitoring of portfolio securities held by advisory clients and/or their review of the periodic proxy voting record reports that the GPVSC Chair distributes to AM portfolio managers and AM research analysts. |
| 3 | As mentioned above, the GPVSC votes proxies (i) where neither a specific client instruction nor a Guideline directs how the proxy should be voted, (ii) where the Guidelines specify that an issue is to be determined on a case by case basis or (iii) where voting in accordance with the Guidelines may not be in the best economic interests of clients. |
| 4 | The Proxy Vendor Oversight, who serves as the non-voting secretary of the GPVSC, may receive routine calls from proxy solicitors and other parties interested in a particular proxy vote. Any contact that attempts to exert improper pressure or influence shall be reported to the Conflicts of Interest Management Sub-Committee. |
Attachment A – Global Proxy Voting Guidelines
Deutsche Asset Management
Global Proxy Voting Guidelines
As Amended October 2010
[GRAPHIC OMITTED]
Table of contents
| I | Board Of Directors And Executives |
| B | Classified Boards Of Directors |
| C | Board And Committee Independence |
| D | Liability And Indemnification Of Directors |
| E | Qualifications Of Directors |
| F | Removal Of Directors And Filling Of Vacancies |
| G | Proposals To Fix The Size Of The Board |
| H | Proposals to Restrict Chief Executive Officer’s Service on Multiple Boards |
| I | Proposals to Restrict Supervisory Board Members Service on Multiple Boards |
| J | Proposals to Establish Audit Committees |
| A | Authorization Of Additional Shares |
| B | Authorization Of “Blank Check” Preferred Stock |
| C | Stock Splits/Reverse Stock Splits |
| D | Dual Class/Supervoting Stock |
| F | Recapitalization Into A Single Class Of Stock |
| H | Reductions In Par Value |
| III | Corporate Governance Issues |
| C | Supermajority Voting Requirements |
| D | Shareholder Right To Vote |
| A | Establishment of a Remuneration Committee |
| B | Executive And Director Stock Option Plans |
| C | Employee Stock Option/Purchase Plans |
| E | Proposals To Limit Benefits Or Executive Compensation |
| G | Management board election and motion |
| H | Remuneration (variable pay) |
| I | Long-term incentive plans |
| J | Shareholder Proposals Concerning “Pay For Superior Performance” |
| K | Executive Compensation Advisory |
| V | Anti-Takeover Related Issues |
| A | Shareholder Rights Plans (“Poison Pills”) |
| D | Exemption From State Takeover Laws |
| E | Non-Financial Effects Of Takeover Bids |
| VI | Mergers & Acquisitions |
| VII | Social & Political Issues |
| F | Principles for Responsible Investment (“PRI”)Environmental Issues |
| A | Ratification Of Auditors |
| B | Limitation Of Non-Audit Services Provided By Independent Auditor |
| D | Transaction Of Other Business |
| E | Motions To Adjourn The Meeting |
| H | Proposals Related To The Annual Meeting |
| I | Reimbursement Of Expenses Incurred From Candidate Nomination |
| J | Investment Company Proxies |
| K | International Proxy Voting |
These Guidelines may reflect a voting position that differs from the actual practices of the public company(ies) within the Deutsche Bank organization or of the investment companies for which AM or an affiliate serves as investment adviser or sponsor.
NOTE: Because of the unique structure and regulatory scheme applicable to closed-end investment companies, the voting guidelines (particularly those related to governance issues) generally will be inapplicable to holdings of closed-end investment companies. As a result, determinations on the appropriate voting recommendation for closed-end investment company shares will be made on a case-by-case basis.
I. Board of Directors and Executives
A. Election of Directors
Routine: AM Policy is to vote “for” the uncontested election of directors. Votes for a director in an uncontested election will be withheld in cases where a director has shown an inability to perform his/her duties in the best interests of the shareholders.
Proxy contest: In a proxy contest involving election of directors, a case-by-case voting decision will be made based upon analysis of the issues involved and the merits of the incumbent and dissident slates of directors. AM will incorporate the decisions of a third party proxy research vendor, currently, Institutional Shareholder Services (“ISS”) subject to review by the Proxy Voting Sub-Committee (GPVSC) as set forth in the AM’s Proxy Voting Policies and Procedures.
Rationale: The large majority of corporate directors fulfill their fiduciary obligation and in most cases support for management’s nominees is warranted. As the issues relevant to a contested election differ in each instance, those cases must be addressed as they arise.
B. Classified Boards of Directors
AM policy is to vote against proposals to classify the board and for proposals to repeal classified boards and elect directors annually.
Rationale: Directors should be held accountable on an annual basis. By entrenching the incumbent board, a classified board may be used as an anti-takeover device to the detriment of the shareholders in a hostile take-over situation.
C. Board and Committee Independence
AM policy is to vote:
| 1. | “For” proposals that require that a certain percentage (majority up to 66 2/3%) of members of a board of directors be comprised of independent or unaffiliated directors. |
| 2. | “For” proposals that require all members of a company's compensation, audit, nominating, or other similar committees be comprised of independent or unaffiliated directors. |
| 3. | “Against” shareholder proposals to require the addition of special interest, or constituency, representatives to boards of directors. |
| 4. | “For” separation of the Chairman and CEO positions. |
| 5. | “Against” proposals that require a company to appoint a Chairman who is an independent director. |
Rationale: Board independence is a cornerstone of effective governance and accountability. A board that is sufficiently independent from management assures that shareholders' interests are adequately represented. However, the Chairman of the board must have sufficient involvement in and experience with the operations of the company to perform the functions required of that position and lead the company.
No director qualifies as 'independent' unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
Whether a director is in fact not "independent" will depend on the laws and regulations of the primary market for the security and the exchanges, if any, on which the security trades.
D. Liability and Indemnification of Directors
AM policy is to vote “for” management proposals to limit directors' liability and to broaden the indemnification of directors, unless broader indemnification or limitations on directors' liability would effect shareholders' interests in pending litigation.
Rationale: While shareholders want directors and officers to be responsible for their actions, it is not in the best interests of the shareholders for them to be to risk averse. If the risk of personal liability is too great, companies may not be able to find capable directors willing to serve. We support expanding coverage only for actions taken in good faith and not for serious violations of fiduciary obligation or negligence.
E. Qualifications of Directors
AM policy is to follow management’s recommended vote on either management or shareholder proposals that set retirement ages for directors or require specific levels of stock ownership by directors.
Rationale: As a general rule, the board of directors, and not the shareholders, is most qualified to establish qualification policies.
F. Removal of Directors and Filling of Vacancies
AM policy is to vote “against” proposals that include provisions that directors may be removed only for cause or proposals that include provisions that only continuing directors may fill board vacancies.
Rationale: Differing state statutes permit removal of directors with or without cause. Removal of directors for cause usually requires proof of self-dealing, fraud or misappropriation of corporate assets, limiting shareholders' ability to remove directors except under extreme circumstances. Removal without cause requires no such showing.
Allowing only incumbent directors to fill vacancies can serve as an anti-takeover device, precluding shareholders from filling the board until the next regular election.
G. Proposals to Fix the Size of the Board
AM policy is to vote:
| 1. | “For” proposals to fix the size of the board unless: (a) no specific reason for the proposed change is given; or (b) the proposal is part of a package of takeover defenses. |
| 2. | “Against” proposals allowing management to fix the size of the board without shareholder approval. |
Rationale: Absent danger of anti-takeover use, companies should be granted a reasonable amount of flexibility in fixing the size of its board.
H. Proposals to Restrict Chief Executive Officer’s Service on Multiple Boards
AM policy is to vote “For” proposals to restrict a Chief Executive Officer from serving on more than three outside boards of directors.
Rationale: Chief Executive Officer must have sufficient time to ensure that shareholders’ interests are represented adequately.
Note: A director’s service on multiple closed-end fund boards within a fund complex are treated as service on a single Board for the purpose of the proxy voting guidelines.
I. Proposals to Restrict Supervisory Board Members Service on Multiple Boards (For FFT Securities)
AM policy is to vote “for” proposals to restrict a Supervisory Board Member from serving on more than five supervisory boards.
Rationale: We consider a strong, independent and knowledgeable supervisory board as important counter-balance to executive management to ensure that the interests of shareholders are fully reflected by the company.
Full information should be disclosed in the annual reports and accounts to allow all shareholders to judge the success of the supervisory board controlling their company.
Supervisory Board Member must have sufficient time to ensure that shareholders’ interests are represented adequately.
Note: A director’s service on multiple closed-end fund boards within a fund complex are treated as service on a single Board for the purpose of the proxy voting guidelines.
J. Proposals to Establish Audit Committees (For FFT and U.S. Securities)
AM policy is to vote “for” proposals that require the establishment of audit committees.
Rationale: The audit committee should deal with accounting and risk management related questions, verifies the independence of the auditor with due regard to possible conflicts of interest. It also should determine the procedure of the audit process.
II. Capital Structure
A. Authorization of Additional Shares (For U.S. Securities)
AM policy is to vote “for” proposals to increase the authorization of existing classes of stock that do not exceed a 3:1 ratio of shares authorized to shares outstanding for a large cap company, and do not exceed a 4:1 ratio of shares authorized to shares outstanding for a small-midcap company (companies having a market capitalization under one billion U.S. dollars.).
Rationale: While companies need an adequate number of shares in order to carry on business, increases requested for general financial flexibility must be limited to protect shareholders from their potential use as an anti-takeover device. Requested increases for specifically designated, reasonable business purposes (stock split, merger, etc.) will be considered in light of those purposes and the number of shares required.
B. Authorization of “Blank Check” Preferred Stock (For U.S. Securities)
AM policy is to vote:
| 1. | “Against” proposals to create blank check preferred stock or to increase the number of authorized shares of blank check preferred stock unless the company expressly states that the stock will not be used for anti-takeover purposes and will not be issued without shareholder approval. |
| 2. | “For” proposals mandating shareholder approval of blank check stock placement. |
Rationale: Shareholders should be permitted to monitor the issuance of classes of preferred stock in which the board of directors is given unfettered discretion to set voting, dividend, conversion and other rights for the shares issued.
C. Stock Splits/Reverse Stock Splits
AM policy is to vote “for” stock splits if a legitimate business purpose is set forth and the split is in the shareholders' best interests. A vote is cast “for” a reverse stock split only if the number of shares authorized is reduced in the same proportion as the reverse split or if the effective increase in authorized shares (relative to outstanding shares) complies with the proxy guidelines for common stock increases (see, Section II.A, above.)
Rationale: Generally, stock splits do not detrimentally effect shareholders. Reverse stock splits, however, may have the same result as an increase in authorized shares and should be analyzed accordingly.
D. Dual Class/Supervoting Stock
AM policy is to vote “against” proposals to create or authorize additional shares of super-voting stock or stock with unequal voting rights.
Rationale: The “one share, one vote” principal ensures that no shareholder maintains a voting interest exceeding their equity interest in the company.
E. Large Block Issuance (For U.S. Securities)
AM policy is to address large block issuances of stock on a case-by-case basis, incorporating the recommendation of an independent third party proxy research firm (currently ISS) subject to review by the GPVSC as set forth in AM’s Proxy Policies and Procedures.
Additionally, AM supports proposals requiring shareholder approval of large block issuances.
Rationale: Stock issuances must be reviewed in light of the business circumstances leading to the request and the potential impact on shareholder value.
F. Recapitalization into a Single Class of Stock
AM policy is to vote “for” recapitalization plans to provide for a single class of common stock, provided the terms are fair, with no class of stock being unduly disadvantaged.
Rationale: Consolidation of multiple classes of stock is a business decision that may be left to the board and/management if there is no adverse effect on shareholders.
G. Share Repurchases
AM policy is to vote “for” share repurchase plans provided all shareholders are able to participate on equal terms.
Rationale: Buybacks are generally considered beneficial to shareholders because they tend to increase returns to the remaining shareholders.
H. Reductions in Par Value
AM policy is to vote “for” proposals to reduce par value, provided a legitimate business purpose is stated (e.g., the reduction of corporate tax responsibility.)
Rationale: Usually, adjustments to par value are a routine financial decision with no substantial impact on shareholders.
III. Corporate Governance Issues
A. Confidential Voting
AM policy is to vote “for” proposals to provide for confidential voting and independent tabulation of voting results and to vote “against” proposals to repeal such provisions.
Rationale: Confidential voting protects the privacy rights of all shareholders. This is particularly important for employee-shareholders or shareholders with business or other affiliations with the company, who may be vulnerable to coercion or retaliation when opposing management. Confidential voting does not interfere with the ability of corporations to communicate with all shareholders, nor does it prohibit shareholders from making their views known directly to management.
B. Cumulative Voting (For U.S. Securities)
AM policy is to vote “against” shareholder proposals requesting cumulative voting and “for”management proposals to eliminate it. The protections afforded shareholders by cumulative voting are not necessary when a company has a history of good performance and does not have a concentrated ownership interest. Accordingly, a vote is cast “against” cumulative voting and “for” proposals to eliminate it if:
| a) | The company has a five year return on investment greater than the relevant industry index, |
| b) | All directors and executive officers as a group beneficially own less than 10% of the outstanding stock, and |
| c) | No shareholder (or voting block) beneficially owns 15% or more of the company. |
Thus, failure of any one of the three criteria results in a vote for cumulative voting in accordance with the general policy.
Rationale: Cumulative voting is a tool that should be used to ensure that holders of a significant number of shares may have board representation; however, the presence of other safeguards may make their use unnecessary.
C. Supermajority Voting Requirements
AM policy is to vote “against” management proposals to require a supermajority vote to amend the charter or bylaws and to vote “for” shareholder proposals to modify or rescind existing supermajority requirements.
*Exception made when company holds a controlling position and seeks to lower threshold to maintain control and/or make changes to corporate by-laws.
Rationale: Supermajority voting provisions violate the democratic principle that a simple majority should carry the vote. Setting supermajority requirements may make it difficult or impossible for shareholders to remove egregious by-law or charter provisions. Occasionally, a company with a significant insider held position might attempt to lower a supermajority threshold to make it easier for management to approve provisions that may be detrimental to shareholders. In that case, it may not be in the shareholders interests to lower the supermajority provision.
D. Shareholder Right to Vote
AM policy is to vote “against” proposals that restrict the right of shareholders to call special meetings, amend the bylaws, or act by written consent. Policy is to vote “for” proposals that remove such restrictions.
Rationale: Any reasonable means whereby shareholders can make their views known to management or effect the governance process should be supported.
IV. Compensation
Annual Incentive Plans or Bonus Plans are often submitted to shareholders for approval. These plans typically award cash to executives based on company performance. Deutsche Bank believes that the responsibility for executive compensation decisions rest with the board of directors and/or the compensation committee, and its policy is not to second-guess the board’s award of cash compensation amounts to executives unless a particular award or series of awards is deemed excessive. If stock options are awarded as part of these bonus or incentive plans, the provisions must meet Deutsche Bank’s criteria regarding stock option plans, or similar stock-based incentive compensation schemes, as set forth below.
A. Establishment of a Remuneration Committee (For FFT Securities)
AM policy is to vote “for” proposals that require the establishment of a remuneration committee.
Rationale: Corporations should disclose in each annual report or proxy statement their policies on remuneration. Essential details regarding executive remuneration including share options, long-term incentive plans and bonuses, should be disclosed in the annual report, so that investors can judge whether corporate pay policies and practices meet the standard.
The remuneration committee shall not comprise any board members and should be sensitive to the wider scene on executive pay. It should ensure that performance-based elements of executive pay are designed to align the interests of shareholders.
B. Executive and Director Stock Option Plans
AM policy is to vote “for” stock option plans that meet the following criteria:
| (1) | The resulting dilution of existing shares is less than (a) 15 percent of outstanding shares for large capital corporations or (b) 20 percent of outstanding shares for small-mid capital companies (companies having a market capitalization under one billion U.S. dollars.) |
| (2) | The transfer of equity resulting from granting options at less than FMV is no greater than 3% of the over-all market capitalization of large capital corporations, or 5% of market cap for small-mid capital companies. |
| (3) | The plan does not contain express repricing provisions and, in the absence of an express statement that options will not be repriced; the company does not have a history of repricing options. |
| (4) | The plan does not grant options on super-voting stock. |
AM will support performance-based option proposals as long as a) they do not mandate that all options granted by the company must be performance based, and b) only certain high-level executives are subject to receive the performance based options.
AM will support proposals to eliminate the payment of outside director pensions.
Rationale: Determining the cost to the company and to shareholders of stock-based incentive plans raises significant issues not encountered with cash-based compensation plans. These include the potential dilution of existing shareholders' voting power, the transfer of equity out of the company resulting from the grant and execution of options at less than FMV and the authority to reprice or replace underwater options. Our stock option plan analysis model seeks to allow reasonable levels of flexibility for a company yet still protect shareholders from the negative impact of excessive stock compensation. Acknowledging that small mid-capital corporations often rely more heavily on stock option plans as their main source of executive compensation and may not be able to compete with their large capital competitors with cash compensation, we provide slightly more flexibility for those companies.
C. Employee Stock Option/Purchase Plans
AM policy is to vote for employee stock purchase plans (ESPP's) when the plan complies with Internal Revenue Code 423, allowing non-management employees to purchase stock at 85% of FMV.
AM policy is to vote “for” employee stock option plans (ESOPs) provided they meet the standards for stock option plans in general. However, when computing dilution and transfer of equity, ESOPs are considered independently from executive and director option plans.
Rationale: ESOPs and ESPP’s encourage rank-and-file employees to acquire an ownership stake in the companies they work for and have been shown to promote employee loyalty and improve productivity.
D. Golden Parachutes
AM policy is to vote “for” proposals to require shareholder approval of golden parachutes and for proposals that would limit golden parachutes to no more than three times base compensation. Policy is to vote “against” more restrictive shareholder proposals to limit golden parachutes.
Rationale: In setting a reasonable limitation, AM considers that an effective parachute should be less attractive than continued employment and that the IRS has opined that amounts greater than three times annual salary, are excessive.
E. Proposals to Limit Benefits or Executive Compensation
AM policy is to vote “against”
| 1. | Proposals to limit benefits, pensions or compensation and |
| 2. | Proposals that request or require disclosure of executive compensation greater than the disclosure required by Securities and Exchange Commission (SEC) regulations. |
Rationale: Levels of compensation and benefits are generally considered to be day-to-day operations of the company, and are best left unrestricted by arbitrary limitations proposed by shareholders.
F. Option Expensing
AM policy is to support proposals requesting companies to expense stock options.
Rationale: Although companies can choose to expense options voluntarily, the Financial Accounting Standards Board (FASB) does not yet require it, instead allowing companies to disclose the theoretical value of options as a footnote. Because the expensing of stock options lowers earnings, most companies elect not to do so. Given the fact that options have become an integral component of compensation and their exercise results in a transfer of shareholder value, AM agrees that their value should not be ignored and treated as “no cost” compensation. The expensing of stock options would promote more modest and appropriate use of stock options in executive compensation plans and present a more accurate picture of company operational earnings.
G. Management board election and motion (For FFT Securities)
AM policy is to vote “against”:
| • | the election of board members with positions on either remuneration or audit committees; |
| • | the election of supervisory board members with too many supervisory board mandates; |
| • | “automatic” election of former board members into the supervisory board. |
Rationale: Management as an entity, and each of its members, are responsible for all actions of the company, and are - subject to applicable laws and regulations - accountable to the shareholders as a whole for their actions.
Sufficient information should be disclosed in the annual company report and account to allow shareholders to judge the success of the company.
H. Remuneration (variable pay): (For FFT Securities)
Executive remuneration for Management Board
AM policy is to vote “for” remuneration for Management Board that is transparent and linked to results.
Rationale: Executive compensation should motivate management and align the interests of management with the shareholders. The focus should be on criteria that prevent excessive remuneration; but enable the company to hire and retain first-class professionals.
Shareholder interests are normally best served when management is remunerated to optimize long-term returns. Criteria should include suitable measurements like return on capital employed or economic value added.
Interests should generally also be correctly aligned when management own shares in the company – even more so if these shares represent a substantial portion of their own wealth.
Its disclosure shall differentiate between fixed pay, variable (performance related) pay and long-term incentives, including stock option plans with valuation ranges as well as pension and any other significant arrangements.
Executive remuneration for Supervisory Board
AM policy is to vote “for” remuneration for Supervisory Board that is at least 50% in fixed form.
Rationale: It would normally be preferable if performance linked compensation were not based on dividend payments, but linked to suitable result based parameters. Consulting and procurement services should also be published in the company report.
I. Long-term incentive plans (For FFT Securities)
AM policy is to vote “for” long-term incentive plans for members of a management board that reward for above average company performance.
Rationale: Incentive plans will normally be supported if they:
| • | directly align the interests of members of management boards with those of shareholders; |
| • | establish challenging performance criteria to reward only above average performance; |
| • | measure performance by total shareholder return in relation to the market or a range of comparable companies; |
| • | are long-term in nature and encourage long-term ownership of the shares once exercised through minimum holding periods; |
| • | do not allow a repricing of the exercise price in stock option plans. |
J. Shareholder Proposals Concerning “Pay for Superior Performance”
AM policy is to address pay for superior performance proposals on a case-by-case basis, incorporating the recommendation of an independent third party proxy research firm (currently ISS) subject to review by the GPVSC as set forth in AM’s Proxy Policies and Procedures.
Rationale: While AM agrees that compensation issues are better left to the discretion of management, they appreciate the need to monitor for excessive compensation practices on a case by case basis. If, after a review of the ISS metrics, AM is comfortable with ISS’s applying this calculation and will vote according to their recommendation.
K. Executive Compensation Advisory
AM policy is to follow management’s recommended vote on shareholder proposals to propose an advisory resolution seeking to ratify the compensation of the company’s named executive officers (NEOs) on an annual basis.
Rationale: AM believes that controls exist within senior management and corporate compensation committees, ensuring fair compensation to executives. This might allow shareholders to require approval for all levels of management’s compensation.
V. Anti-Takeover Related Issues
A. Shareholder Rights Plans (“Poison Pills”)
AM policy is to vote “for” proposals to require shareholder ratification of poison pills or that request boards to redeem poison pills, and to vote “against” the adoption of poison pills if they are submitted for shareholder ratification.
Rationale: Poison pills are the most prevalent form of corporate takeover defenses and can be (and usually are) adopted without shareholder review or consent. The potential cost of poison pills to shareholders during an attempted takeover outweighs the benefits.
B. Reincorporation
AM policy is to examine reincorporation proposals on a case-by-case basis. The voting decision is based on: (1) differences in state law between the existing state of incorporation and the proposed state of incorporation; and (2) differences between the existing and the proposed charter/bylaws/articles of incorporation and their effect on shareholder rights. If changes resulting from the proposed reincorporation violate the corporate governance principles set forth in these guidelines, the reincorporation will be deemed contrary to shareholder’s interests and a vote cast “against.”
Rationale: Reincorporations can be properly analyzed only by looking at the advantages and disadvantages to their shareholders. Care must be taken that anti-takeover protection is not the sole or primary result of a proposed change.
C. Fair-Price Proposals
AM policy is to vote “for” management fair-price proposals, provided that: (1) the proposal applies only to two-tier offers; (2) the proposal sets an objective fair-price test based on the highest price that the acquirer has paid for a company's shares; (3) the supermajority requirement for bids that fail the fair-price test is no higher than two-thirds of the outstanding shares; (4) the proposal contains no other anti-takeover provisions or provisions that restrict shareholders rights.
A vote is cast for shareholder proposals that would modify or repeal existing fair-price requirements that do not meet these standards.
Rationale: While fair price provisions may be used as anti-takeover devices, if adequate provisions are included, they provide some protection to shareholders who have some say in their application and the ability to reject those protections if desired.
D. Exemption from state takeover laws
AM policy is to vote “for” shareholder proposals to opt out of state takeover laws and to vote “against” management proposals requesting to opt out of state takeover laws.
Rationale: Control share statutes, enacted at the state level, may harm long-term share value by entrenching management. They also unfairly deny certain shares their inherent voting rights.
E. Non-financial Effects of Takeover Bids
Policy is to vote “against” shareholder proposals to require consideration of non-financial effects of merger or acquisition proposals.
Rationale: Non-financial effects may often be subjective and are secondary to AM’s stated purpose of acting in its client’s best economic interest.
VI. Mergers & Acquisitions
Evaluation of mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) are performed on a case-by-case basis incorporating information from an independent proxy research source (currently ISS.) Additional resources including portfolio management and research analysts may be considered as set forth in AM’s Policies and Procedures.
VII. Social, Environmental & Political Issues
Social and environmental issues are becoming increasingly important to corporate success. We incorporate social and environmental considerations into both our investment decisions and our proxy voting decisions – particularly if the financial performance of the company could be impacted. In addition, AM has incorporated the Principles for Responsible Investment (PRI) in these Proxy Voting Guidelines.
A. Labor & Human Rights
AM policy is to vote “against” adopting global codes of conduct or workplace standards exceeding those mandated by law.
Rationale: Additional requirements beyond those mandated by law are deemed unnecessary and potentially burdensome to companies
B. Diversity & Equality
| 1. | AM policy is to vote “against” shareholder proposals to force equal employment opportunity, affirmative action or board diversity. |
Rationale: Compliance with State and Federal legislation along with information made available through filings with the EEOC provides sufficient assurance that companies act responsibly and make information public.
| 2. | AM policy is also to vote “against” proposals to adopt the Mac Bride Principles. The Mac Bride Principles promote fair employment, specifically regarding religious discrimination. |
Rationale: Compliance with the Fair Employment Act of 1989 makes adoption of the Mac Bride Principles redundant. Their adoption could potentially lead to charges of reverse discrimination.
C. Health & Safety
| 1. | AM policy is to vote “against” adopting a pharmaceutical price restraint policy or reporting pricing policy changes. |
Rationale: Pricing is an integral part of business for pharmaceutical companies and should not be dictated by shareholders (particularly pursuant to an arbitrary formula.) Disclosing pricing policies may also jeopardize a company’s competitive position in the marketplace.
| 2. | AM policy is to vote “against” shareholder proposals to control the use or labeling of and reporting on genetically engineered products. |
Rationale: Additional requirements beyond those mandated by law are deemed unnecessary and potentially burdensome to companies.
D. Government/Military
| 1. | AM policy is to vote against shareholder proposals regarding the production or sale of military arms or nuclear or space-based weapons, including proposals seeking to dictate a company's interaction with a particular foreign country or agency. |
Rationale: Generally, management is in a better position to determine what products or industries a company can and should participate in. Regulation of the production or distribution of military supplies is, or should be, a matter of government policy.
| 2. | AM policy is to vote “against” shareholder proposals regarding political contributions and donations. |
Rationale: The Board of Directors and Management, not shareholders, should evaluate and determine the recipients of any contributions made by the company.
| 3. | AM policy is to vote “against” shareholder proposals regarding charitable contributions and donations. |
Rationale: The Board of Directors and Management, not shareholders, should evaluate and determine the recipients of any contributions made by the company.
E. Tobacco
| 1. | AM policy is to vote “against” shareholder proposals requesting additional standards or reporting requirements for tobacco companies as well as “against” requesting companies to report on the intentional manipulation of nicotine content. |
Rationale: Where a tobacco company’s actions meet the requirements of legal and industry standards, imposing additional burdens may detrimentally effect a company's ability to compete. The disclosure of nicotine content information could affect the company's rights in any pending or future litigation.
| 2. | Shareholder requests to spin-off or restructure tobacco businesses will be opposed. |
Rationale: These decisions are more appropriately left to the Board and management, and not to shareholder mandate.
F. Principles for Responsible Investment
AM policy is to engage actively with companies on ESG issues and participate in collaborative engagement initiatives. In this context, AM is willing to participate in the development of policy, regulation and standard setting (such as promoting and protecting shareholder rights). AM could support shareholder initiatives and also file shareholder resolutions with long term ESG considerations and improved ESG disclosure, when applicable. In addition, AM could ask for standardized ESG reporting and issues to be integrated within annual financial reports.
G. Environmental Issues
AM policy is to vote “for” increased disclosure on CERES Principles, ESG issues or other similar environmental mandates (e.g., those relating to Greenhouse gas emissions or the use of nuclear power) and to follow management's recommended vote on all other matters related to the above issues.
Rationale: Environmental issues are extensively regulated by outside agencies and compliance with additional requirements often involves significant cost to companies.
VIII. Miscellaneous Items
A. Ratification of Auditors
AM policy is to vote “for” a) the management recommended selection of auditors and b) proposals to require shareholder approval of auditors.
Rationale: Absent evidence that auditors have not performed their duties adequately, support for management’s nomination is warranted.
B. Limitation of non-audit services provided by independent auditor
AM policy is to support proposals limiting non-audit fees to 50% of the aggregate annual fees earned by the firm retained as a company's independent auditor.
Rationale: In the wake of financial reporting problems and alleged audit failures at a number of companies, AM supports the general principle that companies should retain separate firms for audit and consulting services to avoid potential conflicts of interest. However, given the protections afforded by the recently enacted Sarbanes-Oxley Act of 2002 (which requires Audit Committee pre-approval for non-audit services and prohibits auditors from providing specific types of services), and the fact that some non-audit services are legitimate audit-related services, complete separation of audit and consulting fees may not be warranted. A reasonable limitation is appropriate to help ensure auditor independence and it is reasonable to expect that audit fees exceed non-audit fees.
C. Audit firm rotation
AM policy is to support proposals seeking audit firm rotation unless the rotation period sought is less than five years.
Rationale: While the Sarbanes-Oxley Act mandates that the lead audit partner be switched every five years, AM believes that rotation of the actual audit firm would provide an even stronger system of checks and balances on the audit function.
D. Transaction of Other Business
AM policy is to vote against “transaction of other business” proposals.
Rationale: This is a routine item to allow shareholders to raise other issues and discuss them at the meeting. As the nature of these issues may not be disclosed prior to the meeting, we recommend a vote against these proposals. This protects shareholders voting by proxy (and not physically present at a meeting) from having action taken at the meeting that they did not receive proper notification of or sufficient opportunity to consider.
E. Motions to Adjourn the Meeting
AM Policy is to vote against proposals to adjourn the meeting.
Rationale: Management may seek authority to adjourn the meeting if a favorable outcome is not secured. Shareholders should already have had enough information to make a decision. Once votes have been cast, there is no justification for management to continue spending time and money to press shareholders for support.
F. Bundled Proposals
AM policy is to vote against bundled proposals if any bundled issue would require a vote against it if proposed individually.
Rationale: Shareholders should not be forced to “take the good with the bad” in cases where the proposals could reasonably have been submitted separately.
G. Change of Company Name
AM policy is to support management on proposals to change the company name.
Rationale: This is generally considered a business decision for a company.
H. Proposals Related to the Annual Meeting
AM Policy is to vote in favor of management for proposals related to the conduct of the annual meeting (meeting time, place, etc.)
Rationale: These are considered routine administrative proposals.
I. Reimbursement of Expenses Incurred from Candidate Nomination
AM policy is to follow management’s recommended vote on shareholder proposals related to the amending of company bylaws to provide for the reimbursement of reasonable expenses incurred in connection with nominating one or more candidates in a contested election of directors to the corporation’s board of directors.
Rationale: Corporations should not be liable for costs associated with shareholder proposals for directors.
J. Investment Company Proxies
Proxies solicited by investment companies are voted in accordance with the recommendations of an independent third party, currently ISS. However, regarding investment companies for which AM or an affiliate serves as investment adviser or principal underwriter, such proxies are voted in the same proportion as the vote of all other shareholders. Proxies solicited by master funds from feeder funds will be voted in accordance with applicable provisions of Section 12 of the Investment Company Act of 1940.
Investment companies, particularly closed-end investment companies, are different from traditional operating companies. These differences may call for differences in voting positions on the same matter. For example, AM could vote “for” staggered boards of closed-end investment companies, although AM generally votes “against” staggered boards for operating companies. Further, the manner in which AM votes investment company proxies may differ from proposals for which a AM-advised investment company solicits proxies from its shareholders. As reflected in the Guidelines, proxies solicited by closed-end (and open-end) investment companies are voted in accordance with the pre-determined guidelines of an independent third-party.
Subject to participation agreements with certain Exchange Traded Funds ("ETF") issuers that have received exemptive orders from the U.S. Securities and Exchange Commission allowing investing DWS funds to exceed the limits set forth in Section 12(d)(1)(A) and (B) of the Investment Company Act of 1940, DeAM will echo vote proxies for ETFs in which Deutsche Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements and SEC orders.
Note: With respect to the Central Cash Management Fund (registered under the Investment Company Act of 1940), the Fund is not required to engage in echo voting and the investment adviser will use these Guidelines, and may determine, with respect to the Central Cash Management Fund, to vote contrary to the positions in the Guidelines, consistent with the Fund’s best interest.
K. International Proxy Voting
The above guidelines pertain to issuers organized in the United States, Canada and Germany. Proxies solicited by other issuers are voted in accordance with international guidelines or the recommendation of ISS and in accordance with applicable law and regulation.
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.
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.
