Popular Income Plus Fund, Inc.
Schedule of Investments
September 30, 2023 (Unaudited)
Principal Amount/Description | Rate | Maturity | Value | ||||||||||||
Puerto Rico Government General Obligations (11.83%) | |||||||||||||||
$ | 1,239,560 | Commonwealth of Puerto Rico - Notes (Series 2022 A-1) (a) | 0.000 | % | 11/01/43 | $ | 643,022 | ||||||||
42,507 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1)(a) | 0.000 | % | 07/01/24 | 41,062 | ||||||||||
336,273 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1)(a) | 0.000 | % | 07/01/33 | 198,188 | ||||||||||
261,303 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 4.000 | % | 07/01/33 | 234,215 | ||||||||||
201,586 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 4.000 | % | 07/01/37 | 169,218 | ||||||||||
274,081 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 4.000 | % | 07/01/41 | 220,365 | ||||||||||
285,039 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 4.000 | % | 07/01/46 | 219,759 | ||||||||||
291,019 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 5.375 | % | 07/01/25 | 294,007 | ||||||||||
288,383 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 5.625 | % | 07/01/27 | 295,928 | ||||||||||
283,706 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 5.625 | % | 07/01/29 | 293,156 | ||||||||||
275,559 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 5.750 | % | 07/01/31 | 287,772 | ||||||||||
234,877 | Commonwealth of Puerto Rico - General Obligation Unlimited Bonds (Series 2022 A-1) | 4.000 | % | 07/01/35 | 204,120 | ||||||||||
Total Puerto Rico Government General Obligations | $ | 3,100,812 | |||||||||||||
(Cost $3,368,178) |
Principal Amount/Description | Rate | Maturity | Value | ||||||||||||
Puerto Rico Government Instrumentalities Tax Exempt Notes (15.50%) | |||||||||||||||
30,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/24 | 29,042 | ||||||||||
138,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/27 | 117,505 | ||||||||||
134,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/29 | 104,190 | ||||||||||
172,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/31 | 121,850 | ||||||||||
194,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/33 | 124,305 | ||||||||||
1,850,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/46 | 476,908 | ||||||||||
1,508,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Capital Appreciation Restructured Series A-1)(a)(b)(c) | 0.000 | % | 07/01/51 | 279,372 | ||||||||||
732,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-2)(b)(c) | 4.329 | % | 07/01/40 | 655,626 | ||||||||||
142,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-1)(b)(c) | 4.500 | % | 07/01/34 | 136,704 | ||||||||||
22,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-2)(b)(c) | 4.536 | % | 07/01/53 | 18,767 | ||||||||||
72,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-1)(b)(c) | 4.550 | % | 07/01/40 | 66,246 | ||||||||||
528,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-1)(b)(c) | 4.750 | % | 07/01/53 | 466,784 | ||||||||||
294,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-2)(b)(c) | 4.784 | % | 07/01/58 | 256,616 | ||||||||||
1,338,000 | Puerto Rico Sales Tax Financing Corp. Sales Tax Revenue - Revenue Bonds (Series Restructured Series A-1)(b)(c) | 5.000 | % | 07/01/58 | 1,210,333 | ||||||||||
Total Puerto Rico Government Instrumentalities Tax Exempt Notes | $ | 4,064,248 | |||||||||||||
(Cost $4,475,955) |
Principal Amount/Description | Rate | Maturity | Value | ||||||||||||
Puerto Rico GNMA Bonds (48.30%)(d) | |||||||||||||||
$ | 193,977 | GNMA Pool 670407 | 5.000 | % | 03/15/38 | $ | 188,924 | ||||||||
599,341 | GNMA Pool 609094 | 5.000 | % | 06/15/38 | 585,245 | ||||||||||
747,969 | GNMA Pool 609096 | 5.000 | % | 06/15/38 | 730,038 | ||||||||||
1,151,785 | GNMA Pool 702983 | 5.000 | % | 02/15/39 | 1,126,302 | ||||||||||
2,343,818 | GNMA Pool 711437(e) | 5.000 | % | 07/15/39 | 2,294,855 | ||||||||||
3,492,966 | GNMA Pool 711455(e) | 5.000 | % | 09/15/39 | 3,394,136 | ||||||||||
2,568,477 | GNMA Pool 711498(e) | 5.000 | % | 03/15/40 | 2,495,797 | ||||||||||
460,731 | GNMA Pool 723741 | 5.000 | % | 04/15/40 | 447,361 | ||||||||||
223,344 | GNMA Pool 572047 | 5.500 | % | 06/15/33 | 220,649 | ||||||||||
1,012,217 | GNMA Pool 694133 | 5.500 | % | 09/15/38 | 1,009,920 | ||||||||||
172,698 | GNMA Pool 528139 | 6.000 | % | 11/15/32 | 172,360 | ||||||||||
Total Puerto Rico GNMA Bonds | $ | 12,665,587 | |||||||||||||
(Cost $12,968,161) |
Principal Amount/Description | Rate | Maturity | Value | ||||||||||||
Puerto Rico Fannie Mae Bonds (40.32%)(f) | |||||||||||||||
1,060,855 | FNMA Pool 695403 | 5.000 | % | 06/01/33 | 1,039,439 | ||||||||||
1,483,608 | FNMA Pool 758527(e) | 5.000 | % | 03/01/34 | 1,441,426 | ||||||||||
2,056,999 | FNMA Pool 849999(e) | 5.000 | % | 01/01/36 | 2,015,215 | ||||||||||
1,022,110 | FNMA Pool 993991(e) | 5.000 | % | 07/01/39 | 999,311 | ||||||||||
1,992,439 | FNMA Pool 994004 | 5.000 | % | 08/01/39 | 1,947,997 | ||||||||||
327,423 | FNMA Pool 932695 | 5.000 | % | 03/01/40 | 315,196 | ||||||||||
302,495 | FNMA Pool AC0850 | 5.000 | % | 03/01/40 | 292,048 | ||||||||||
450,656 | FNMA Pool 909106 | 5.500 | % | 10/01/37 | 449,135 | ||||||||||
376,531 | FNMA Pool 953110 | 5.500 | % | 06/01/38 | 368,815 | ||||||||||
366,851 | FNMA Pool 909239 | 5.500 | % | 10/01/38 | 361,316 | ||||||||||
190,804 | FNMA Pool 909107 | 6.000 | % | 10/01/37 | 188,614 | ||||||||||
888,475 | FNMA Pool 909109 | 6.000 | % | 10/01/37 | 902,275 | ||||||||||
254,790 | FNMA Pool 953093 | 6.000 | % | 12/01/37 | 252,654 | ||||||||||
Total Puerto Rico Fannie Mae Bonds | $ | 10,573,441 | |||||||||||||
(Cost $10,774,035) |
Principal Amount/Description | Rate | Maturity | Value | |||||||||||
Puerto Rico Freddie Mac Bonds (8.59%)(g) | ||||||||||||||
333,506 | FGLMC Pool B70769 | 5.000 | % | 02/01/39 | 327,066 | |||||||||
1,408,769 | FGLMC Pool G05744(e) | 5.500 | % | 01/01/36 | 1,407,694 | |||||||||
520,968 | FGLMC Pool A55971 | 5.500 | % | 11/01/36 | 517,237 | |||||||||
Total Puerto Rico Freddie Mac Bonds | $ | 2,251,997 | ||||||||||||
(Cost $2,263,243) |
Principal Amount/Description | Rate | Maturity | Value | |||||||||||
Corporate Bonds (16.13%) | ||||||||||||||
1,000,000 | Bank of America Corp.(h) | 3.824 | % | 01/20/28 | 928,640 | |||||||||
500,000 | Citigroup, Inc.(h) | 3.887 | % | 01/10/28 | 466,094 | |||||||||
500,000 | Bristol-Myers Squibb Co. | 3.900 | % | 02/20/28 | 472,551 | |||||||||
500,000 | Goldman Sachs Group, Inc.(h) | 4.223 | % | 05/01/29 | 462,515 | |||||||||
1,000,000 | Lloyds Banking Group PLC | 4.375 | % | 03/22/28 | 932,042 | |||||||||
1,000,000 | Constellation Energy Generation LLC | 6.250 | % | 10/01/39 | 968,639 | |||||||||
Total Corporate Bonds | $ | 4,230,481 | ||||||||||||
(Cost $4,479,692) |
Principal Amount/Description | Rate | Maturity | Value | |||||||||||
US Government Sponsored Entities (5.24%) | ||||||||||||||
1,000,000 | Federal Farm Credit Banks Funding Corp. | 3.950 | % | 08/06/37 | 873,546 | |||||||||
515,000 | Federal Farm Credit Banks Funding Corp. | 5.000 | % | 09/22/38 | 500,751 | |||||||||
Total US Government Sponsored Entities | $ | 1,374,297 | ||||||||||||
(Cost $1,717,246) | ||||||||||||||
Total Investments (145.91%) | ||||||||||||||
(Cost $40,046,509) | $ | 38,260,863 | ||||||||||||
Liabilities in Excess of Other Assets (-45.91%) | (12,037,764 | ) | ||||||||||||
NET ASSETS (100.00%) | $ | 26,223,099 |
(a) | Issued with a zero coupon. Income is recognized through the accretion of discount. |
(b) | These securities are the exchanged bonds under the COFINA's Third Amended Plan of Adjustment (the "Plan"). |
(c) | Revenue Bonds - issued by agencies and payable from revenues and other sources of income of the agency as specified in the applicable prospectus. These Bonds are not an obligation of the Commonwealth of Puerto Rico. |
(d) | Puerto Rico GNMA - Represents mortgage-backed obligations guaranteed by the Government National Mortgage Association. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments. As a result, the average life may be substantially less than the original maturity. |
(e) | A portion or all of the security has been pledged as collateral for securities sold under agreements to repurchase. |
(f) | Puerto Rico Fannie Mae Taxable - Represents mortgage-backed obligations guaranteed by the Federal National Mortgage Association. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments. As a result, the average life may be substantially less than the original maturity. |
(g) | Puerto Rico Freddie Mac - Represents mortgage-backed obligations guaranteed by the Federal Home Loan Mortgage Corporation. They are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments. As a result, the average life may be substantially less than the original maturity. |
(h) | Variable rate investment. Interest rates reset periodically. Interest rate shown reflects the rate in effect at September 30, 2023. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
Reverse Repo Agreements
Counterparty | Interest Rate | Acquisition Date | Maturity Date | Amount | ||||||||
J.P.Morgan Chase & Co. | 5.72 | % | 09/05/2023 | 10/03/2023 | $ | 4,024,000 | ||||||
Goldman Sachs | 5.68 | % | 09/05/2023 | 10/05/2023 | 3,573,000 | |||||||
South Street Securities | 5.80 | % | 09/29/2023 | 10/02/2023 | 4,450,000 | |||||||
$ | 12,047,000 |
All agreements can be terminated by either party on demand at value plus accrued interest.
Popular Income Plus Fund, Inc.
Notes to Quarterly Schedule of Investments
September 30, 2022 (Unaudited)
NOTE 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES
Popular Income Plus Fund, Inc. (the "Fund") is a non-diversified, open-end investment company. The Fund is a corporation organized under the laws of the Commonwealth of Puerto Rico and is registered as an investment company under the Puerto Rico Investment Companies Act. The Fund was incorporated on May 21, 2007 and started operations on June 27, 2007.
The Fund’s investment objective is to seek to provide a high level of current income that is consistent with the tax advantages offered by Puerto Rico investment companies. There can be no assurance that the Fund will achieve its objectives.
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Pub. L. No. 115-174) was signed into law and amended the 1940 Act, to repeal the exemption from its registration of investment companies created under the laws of Puerto Rico, the U.S. Virgin Islands, or any other U.S. possession under Section 6(a)(1) thereof. The repeal of the exemption took effect on May 24, 2021. The Fund registered as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), by filing the corresponding Notification of Registration on Form N-8A on May 21, 2021.
Accounting Policies: The Fund is an investment company that applies the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services – Investment Companies (“ASC 946”). The financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements:
(a) | Valuation of Investments – All securities are presented at fair value, which is determined by ALPS Fund Services, Inc. ("Fund Administrator”), with the assistance of the Investment Adviser, Popular Asset Management (refer to Note 3 for details on investment agreements), on the basis of valuations provided by dealers or by pricing services approved by the Fund's management and Board of Directors. See Note 2 for further discussions regarding fair |
(b) | Other – Security transactions are accounted for on the trade date (the date the order to buy or sell is executed). Realized gains and losses on security transactions are determined on the identified cost method. Premiums and discounts on securities purchased are amortized over the life or the expected life of the respective securities using the effective interest method. Interest and dividend income on preferred equity securities are accrued daily except when collection is not expected. For other equity securities, dividend income is recorded on the ex-dividend date. Certain dividends from U.S. sources are subject to a 10% U.S. income tax withholding. Such income is reflected in the Statement of Operations net of the applicable withholdings. |
NOTE 2. FAIR VALUE MEASUREMENTS
Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
Popular Income Plus Fund, Inc.
Notes to Quarterly Schedule of Investments
September 30, 2022 (Unaudited)
GAAP establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for the fair value measurement are observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Fund’s estimates about assumptions that market participants would use in pricing the asset or liability based on the best information available.
The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – | Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Valuation of these instruments does not need a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market. |
Level 2 – | Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument. |
Level 3 – | Unobservable inputs are significant to the fair value measurement. Unobservable inputs reflect the Fund’s own assumptions about assumptions that market participants would use in pricing the asset or liability. |
The Fund maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Fund employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, constraints on liquidity, and unobservable parameters that are applied consistently.
The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. Therefore, the estimated fair value may materially differ from the value that could actually be realized on a sale.
On August 4, 2022, the Board of Directors of the Fund appointed Popular Asset Management LLC, a subsidiary of Popular, Inc., as the Fund’s Valuation Designee. The Valuation Designee is responsible for overseeing and implementing the procedures and functions related to the valuation of portfolio securities for the purpose of determining the Net Asset Value of the Fund. In addition, the Valuation Designee is responsible for determining:
● | The fair valuation of all securities for which no price or value is available at the time the Fund’s Net Asset Value is calculated on a particular day. |
● | The fair valuation of portfolio instruments for which the prices or values available do not, in the judgement of the Investment Adviser, represent the fair valuation of such portfolio instruments. |
Following is a description of the Fund’s valuation methodologies used for assets measured at fair value:
Popular Income Plus Fund, Inc.
Notes to Quarterly Schedule of Investments
September 30, 2022 (Unaudited)
Mortgage and other asset-backed securities: Certain agency mortgage and other asset-backed securities (“MBS”) are priced based on a bond’s theoretical value derived from the prices of similar bonds; “similar” being defined by credit quality and market sector. Their fair value is obtained from third-party pricing services which incorporates an option adjusted spread. The agency MBS are classified as Level 2. The pricing models for these securities usually consider tranche-level attributes, current market data, estimated cash flows and market-based yield spreads for each tranche, and incorporate deal collateral performance, as available.
Obligations of Puerto Rico and political subdivisions: Fair value of Puerto Rico obligations and political subdivisions are obtained from third-party pricing service providers. They are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, and discount and capital rates. These bonds are classified as Level 2.
Obligations of U.S. Government sponsored entities and U.S. Agency Securities: The fair value of Obligations of U.S. Government sponsored entities is obtained from third-party pricing service providers that use a pricing methodology based on an active exchange market and based on quoted market prices for similar securities. Agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value incorporates an option adjusted spread in deriving their fair value. These securities are classified as Level 2.
U.S. Corporate Bonds: The fair value of corporate bonds is obtained from third-party pricing service providers that use a pricing methodology based on an active exchange market and based on quoted market prices for similar securities for which the fair value incorporates a credit spread in deriving their fair value. These securities are classified as Level 2.
The following is a summary of the levels within the fair value hierarchy in which the Fund invests based on inputs used to determine the fair value of such securities: | ||||||||||||||||
Investments in Securities at Value* | Level 1 - Prices | Level 2 - Other Significant Observable Inputs | Level 3 - Unobservable Inputs | Total | ||||||||||||
Puerto Rico Government General Obligations | $ | – | $ | 3,100,812 | $ | – | $ | 3,100,812 | ||||||||
Puerto Rico Government Instrumentalities Tax Exempt Notes | – | 4,064,248 | – | 4,064,248 | ||||||||||||
Puerto Rico GNMA Bonds | – | 12,665,587 | – | $ | 12,665,587 | |||||||||||
Puerto Rico Fannie Mae Bonds | – | 10,573,441 | – | 10,573,441 | ||||||||||||
Puerto Rico Freddie Mac Bonds | – | 2,251,997 | – | 2,251,997 | ||||||||||||
Corporate Bonds | – | 4,230,481 | – | 4,230,481 | ||||||||||||
US Government Sponsored Entities | – | 1,374,297 | – | 1,374,297 | ||||||||||||
Total | $ | – | $ | 38,260,863 | $ | – | $ | 38,260,863 | ||||||||
* | Refer to the Fund's Schedule of Investments for a listing of securities by type. |
NOTE 3. INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these agreements is unknown. However, the Fund has not paid prior claims or losses pursuant to these contracts and expects the risk of losses to be remote.
Popular Income Plus Fund, Inc.
Notes to Quarterly Schedule of Investments
September 30, 2022 (Unaudited)
NOTE 4. RISKS AND UNCERTAINTIES
An investment in the Fund is subject to certain risks that may result in a loss of all or a portion of your investment. The Fund’s share price and total return may fluctuate within a wide range over short or long periods of time. As with any mutual fund, you could lose money on your investment in the Fund. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any government agency. The Fund's prospectus and statement of additional information provide details of the risks the Fund is subject to. The below is a summary of certain risks which could affect the Fund’s performance.
Market Risk. Market risk is the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. There is a risk that you could lose all or a portion of your investment in the Fund and that the income you receive from your investment may vary. The value of your investment in the Fund will go up and down with the prices of the securities in which the Fund invests. The value of a security or other asset may decline due to changes in general market conditions, economic trends or events that are not specifically related to the issuer of the security or other asset, or factors that affect a particular issuer or issuers, exchange, country, group of countries, region, market, industry, group of industries, sector or asset class. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues like pandemics or epidemics, recessions, or other events could have a significant impact on the Fund and its investments. The prices of equity securities change in response to many factors including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. The values of debt securities and other fixed-income securities in which the Fund may invest also will be affected by market interest rates and the risk that the issuer may default on interest, principal or dividend payments. Specifically, since these types of securities pay fixed interest and dividends, their value may fall if market interest rates rise and rise if market interest rates fall.
Credit Risk. Credit risk is the risk that debt securities in the Fund’s portfolio will decline in price or fail to make dividend or interest payments when due because the issuer of the security experiences a decline in its financial condition. The risk is greater in the case of securities rated below investment grade or rated in the lowest investment grade category.
Interest Rate Risk. Interest rate risk is the risk that interest rates will rise so that the value of the Fund’s investments will fall. Current low long-term rates present the risk that interest rates may rise and that as a result the Fund’s investments will decline in value. Also, the Fund’s yield will tend to lag behind changes in prevailing short-term interest rates. In addition, during periods of rising interest rates, the average life of certain types of securities may be extended because of the right of the issuer to defer payments or make slower than expected principal payments. This may lock-in a below market interest rate, increase the security’s duration (the estimated period until the security is paid in full), and reduce the value of the security. This is known as extension risk, which the Fund is also subject to. Conversely, during periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled in order to refinance at lower interest rates, forcing the Fund to reinvest in lower yielding securities. This is known as prepayment risk, which the Fund is also subject to.
Mortgage- and Asset-Backed Securities Risks. Mortgage-backed securities and asset-backed securities represent interests in “pools” of mortgages or other assets. Mortgage-backed and asset-backed securities, like traditional fixed- income securities, are subject to credit, interest rate, prepayment and extension risks. Mortgage-backed securities, in general, differ from investments in traditional debt securities in that, among other things, principal may be prepaid at any time due to prepayments by the obligors on the underlying obligations. Since a portion of the assets of the Fund is expected to be invested in mortgage-backed securities, the potential for increasing the Fund’s exposure to these and other risks related to such securities might cause the market value of the Fund’s investments to fluctuate more than otherwise would be the case.