UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-02201
Cutwater Select Income Fund
(formerly, Rivus Bond Fund)
(Exact name of registrant as specified in charter)
113 King Street
Armonk, NY 10504
(Address of principal executive offices) (Zip code)
Clifford D. Corso
113 King Street
Armonk, NY 10504
(Name and address of agent for service)
Registrant’s telephone number, including area code: 914-273-4545
Date of fiscal year end: March 31
Date of reporting period: March 31, 2012
Item 1. | Reports to Stockholders. |
The Report to Shareholders is attached herewith.
CUTWATER SELECT INCOME FUND SHAREHOLDER LETTER
April 19, 2012
DEAR SHAREHOLDERS:
The past six months were characterized by a strong improvement in investor sentiment as the markets moved from risk aversion to embracing risk, resulting in a strong rally across asset classes. During the first half of 2011, investors’ attention had been focused on a possible “double dip” recession in the US and subsequently turned to the European sovereign debt crisis. In the second half of 2011, concerns over sovereign issues turned to the US with the downgrade of the US government debt rating to AA+ by Standard & Poor’s and then returned to Europe as political and financial leaders seemed incapable of finding consensus on solutions. In the fourth quarter of 2011, the European sovereign debt crisis worsened as concerns over Greece and Portugal spread to the larger economies of Spain and Italy, and sovereign bond yields soared to unsustainable levels. Leaders in the European Union (EU) and the European Central Bank (ECB), in conjunction with the International Monetary Fund (IMF) and the US Federal Reserve, struggled to take actions to calm markets. The Prime Minster of Italy stepped down in November and was replaced by a technocrat, Mario Monti, who announced a number of austerity measures and political reforms in order to address long standing issues. In December, the ECB started a new program of providing three year loans to European banks (Long Term Refinancing Operation or LTRO) to address immediate liquidity concerns. The market’s initial reaction to the LTRO was muted but investors subsequently recognized the meaningful impact the program had on improving European banks’ liquidity positions, and secondarily, on reducing sovereign bond yields. Investor confidence returned as the markets saw progress in implementation of policies aimed at preventing further deterioration of the European debt crisis. Fast forward to today, there is now a return of the concerns over the ability of European leaders to act given the political realities in the region, the complexity of the issues, and the long time frame needed to rectify the fiscal and economic imbalances. Europe will remain a focus of the markets and confidence is still fragile.
Fundamental economic data in the US has generally supported improving investor sentiment. At present, the unemployment rate has declined to 8.1 percent for April, corporate fundamentals are solid and business investment has continued to advance. Retail sales are showing steady improvement and manufacturing sector capacity utilization is rising. Although these data points are constructive, significant headwinds persist from a housing market which remains soft despite record low mortgage rates. The Federal Reserve’s announcement in January that it would leave rates low until late 2014 has helped push investors into riskier assets given the expectation of extended low short term rates and an accommodative monetary policy. We continue to expect positive but below trend gross domestic product (“GDP”) growth in a “checkmark” shaped recovery, a view we have held for the last several quarters.
The change in risk appetite over this six month period was evident as the S&P 500 Index rose over 24 percent and high yield bonds posted a positive 12.1 percent return in the six month period ended March 31, 2012. Investment grade corporate credit rallied in the first quarter of 2012 and outperformed US Treasuries by over 3.6 percent. At the other end of the risk spectrum, US Treasuries fell as rates rose during the period. The ten-year treasury rose from 1.92 percent at the end of September to 2.21 percent by the end of March. Corporate sector fundamentals remain strong with earnings and cash flows improving, balance sheets are relatively healthy, and the outlook for defaults remains modest. Moody’s is forecasting that the global speculative-grade default rate will increase only modestly from 2.3 percent in March 2012 to 2.8 percent in March 2013, remaining substantially below the long term average.
GDP growth in the fourth quarter of 2011 accelerated to 3.0 percent from 1.8 percent in the third quarter, due to increased consumer spending and private investment. Budget pressures faced by state and local governments were a drag on economic growth and will likely continue to be a drag in the near term. Full-year 2012 GDP growth is forecast to be around 2.0 percent. European growth is expected to slow even further with many countries experiencing recession, given increased austerity measures. A slowdown in China is also contributing to worries and lowering global growth expectations. Oil prices remain a wild card, given the uncertainty of potential action by Israel over Iran’s
1
nuclear program. In the US, concerns remain over a growing Federal deficit, the potential for increased inflation, and the issue of how the Federal deficit will be addressed over the longer term. These concerns may contribute to future periods of market volatility.
As of March 31, 2012, the Fund had a net asset value (“NAV”) of $20.39 per share. This represents a 2.2 percent increase from $19.95 per share at September 30, 2011. On March 31, 2012, the Fund’s closing price on the New York Stock Exchange was $19.74 per share, representing a 3.19 percent discount to NAV per share, compared with a 8.37 percent discount as of September 30, 2011. The market trading discount was at 2.51 percent as of market close on April 18, 2012.
One of the primary objectives of the Fund is to maintain a high level of income. On March 7, 2012, the Board of Trustees declared a dividend payment of $0.2875 per share payable May 1, 2012 to shareholders of record on April 4, 2012. On an annualized basis, including the pending dividend, the Fund has paid a total of $1.15 per share in dividends, representing a 5.82 percent dividend yield based on the market price on April 18, 2012 of $19.77 per share. The dividend is evaluated on a quarterly basis, including consideration of the current low interest rate environment, and is based on the income generation capability of the portfolio.
Total Return-Percentage Change (Annualized for periods longer than 1 year)
In Net Asset Value Per Share with All Distributions Reinvested
6 Months | 1 Year | 3 Years | 5 Years | 10 Years | ||||||||||||||||
to | to | to | to | to | ||||||||||||||||
03/31/12 | 03/31/12 | 03/31/12 | 03/31/12 | 03/31/12 | ||||||||||||||||
Cutwater Select Income Fund | 5.28 | % | 8.25 | % | 16.64 | % | 7.29 | % | 6.46 | %1 | ||||||||||
Barclays Credit Index2 | 3.77 | % | 9.58 | % | 12.31 | % | 6.91 | % | 6.59 | % |
This is historical information and should not be construed as indicative of any likely future performance nor does it reflect deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares.
1 | – Source: Lipper Inc. |
2 | – Comprised primarily of US investment-grade corporate bonds (Fund’s Benchmark). |
The Fund’s performance for the 3-, 5-, and 10-year historical periods (shown above) reflects the 4.79 percent dilution of net asset value resulting from the rights offering during the third quarter of 2009. In addition to the impact from the September 2009 rights offering, the 10-year performance was also reduced by the 4.5 percent dilution of net asset value resulting from the rights offering during the fourth quarter of 2003. After adjusting for the impact of both rights offerings, we estimate the three-year annualized return to be 18.52 percent, 5-year annualized return to be 8.33 percent and the 10-year annualized return to be 7.59 percent. The returns noted in the table above are actual returns as calculated by Lipper and BNY Mellon and do not adjust for dilution from the rights offerings.
The Fund’s returns for the period were positively impacted by the re-pricing of risk assets outperforming the benchmark by 1.51 percent. General spread tightening for investment grade corporate bonds was the principal factor in the stronger performance as well as the Fund’s high-yield exposure. We believe high-yield spreads, although narrower than in the recent past, are still attractive given the expectation of low defaults and continued, albeit modest, economic growth. In our view, the returns look strong across the time periods, particularly after adjusting for the dilutive impact of the rights offerings noted above.
2
Yield represents the major component of return in fixed income portfolios. Given the Fund’s emphasis on generating income, we typically will not have material exposure to low-yielding US Treasuries and will maintain meaningful exposure to corporate bonds. We try to look through periods of volatility and focus on an investment’s long term creditworthiness to assess whether it will provide an attractive yield to the Fund over time.
The Fund’s performance will continue to be subject to trends in longer term interest rates and relative yield spreads on corporate bonds. Consistent with our investment discipline, we continue to emphasize diversity and risk management within the bounds of income stability. The pie chart below summarizes the portfolio quality of the Fund’s long-term invested assets as of March 31, 2012:
We would like to remind shareholders of the opportunities presented by the Fund’s dividend reinvestment plan as detailed in the Fund’s prospectus and referred to in the Shareholder Information section of this report. The dividend reinvestment plan affords shareholders a price advantage by allowing them to purchase shares at NAV or market price, whichever is lower. This means that the reinvestment price is at market price when the Fund is trading at a discount to NAV, as is currently the situation, or at NAV per share when market trading is at a premium to that value. To participate in the plan, please contact BNY Mellon Investment Servicing (US) Inc., the Fund’s Transfer Agent and Dividend Paying Agent, at 1-866-333-6635. The Fund’s investment adviser, Cutwater Investor Services Corp., may be reached at 866-766-3030.
Cliff Corso
President
Mr. Corso’s comments reflect the investment adviser’s views generally regarding the market and the economy, and are compiled from the investment adviser’s research. These comments reflect opinions as of the date written and are subject to change at any time.
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE CUTWATER SELECT INCOME FUND
We have audited the accompanying statement of assets and liabilities of the Cutwater Select Income Fund (formerly known as Rivus Bond Fund), including the schedule of investments, as of March 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. 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 audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we 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 includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 2012 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 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 the Cutwater Select Income Fund as of March 31, 2012, the results of its operations 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 five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
May 11, 2012
4
SCHEDULE OF INVESTMENTS
March 31, 2012
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
CORPORATE DEBT SECURITIES (82.89%) | ||||||||||
AUTOMOTIVE (1.73%) | ||||||||||
Ford Holdings Co. Gty., 9.30%, 03/01/30 | Ba2/BB+ | $ | 1,000 | $ | 1,290,000 | |||||
Ford Motor Co., Sr. Unsec. Notes, 8.90%, 01/15/32 | Ba2/BB+ | 500 | 615,000 | |||||||
Ford Motor Credit Co. LLC, Sr. Unsec. Notes, 7.00%, 10/01/13 | Ba1/BB+ | 1,000 | 1,066,275 | |||||||
Ford Motor Credit Co. LLC, Sr. Unsec. Notes, 5.875%, 08/02/21 | Ba1/BB+ | 750 | 808,943 | |||||||
|
| |||||||||
3,780,218 | ||||||||||
|
| |||||||||
CHEMICALS (2.94%) | ||||||||||
Braskem Finance, Ltd., Co. Gty., 7.00%, 05/07/20, 144A | Baa3/BBB- | 500 | 562,000 | |||||||
Dow Chemical Co., Sr. Unsec. Notes, 8.55%, 05/15/19 | Baa3/BBB | 500 | �� | 655,259 | ||||||
Grupo Petrotemex SA de CV, Sr. Unsec. Notes, 9.50%, 08/19/14, 144A | NA/BB+ | 500 | 551,250 | |||||||
Incitec Pivot Finance LLC, Co. Gty., 6.00%, 12/10/19, 144A | Baa3/BBB | 405 | 430,595 | |||||||
Sinochem Overseas Capital Co., Ltd., Co. Gty., 4.50%, 11/12/20, 144A | Baa1/BBB | 500 | 477,009 | |||||||
Sinochem Overseas Capital Co., Ltd., Co. Gty., 6.30%, 11/12/40, 144A | Baa1/BBB | 1,500 | 1,416,105 | |||||||
Union Carbide Corp., Sr. Unsec. Notes, 7.75%, 10/01/96 | Baa3/BBB | 2,000 | 2,076,732 | |||||||
Westlake Chemicals Corp., Co. Gty., 6.625%, 01/15/16(b) | Baa3/BBB- | 250 | 254,375 | |||||||
|
| |||||||||
6,423,325 | ||||||||||
|
| |||||||||
DIVERSIFIED FINANCIAL SERVICES (12.20%) | ||||||||||
Akbank TAS, Sr. Unsec. Notes, 6.50%, 03/09/18, 144A | Ba1/N/A | 1,000 | 1,026,500 | |||||||
Ally Financial, Inc., Co. Gty., 7.50%, 09/15/20 | B1/B+ | 315 | 340,200 | |||||||
Bank of America Corp., Sr. Unsec. Notes, 5.625%, 07/01/20 | Baa1/A- | 190 | 198,081 | |||||||
Bank of America Corp., Sr. Unsec. Notes, 5.875%, 01/05/21 | Baa1/A- | 500 | 528,920 | |||||||
BNP Paribas SA, Jr. Sub. Notes, 5.186%, 06/29/15, 144A(c),(d) | Baa3/BBB+ | 1,000 | 865,000 | |||||||
Capital One Capital V, Ltd. Gtd., 10.25%, 08/15/39 | Baa3/BB+ | 1,500 | 1,541,250 | |||||||
CDP Financial, Inc., Co. Gtd., 4.40%, 11/25/19, 144A | Aaa/AAA | 400 | 431,791 | |||||||
Chase Capital II, Ltd. Gtd., Series B, 1.047%, 02/01/27(b),(c) | A2/BBB | 70 | 53,476 | |||||||
Citigroup, Inc., Sr. Unsec. Notes, 6.375%, 08/12/14 | A3/A- | 151 | 163,835 | |||||||
Citigroup, Inc., Sr. Unsec. Notes, 6.01%, 01/15/15 | A3/A- | 1,000 | 1,086,504 | |||||||
Citigroup, Inc., Sr. Unsec. Notes, 8.125%, 07/15/39 | A3/A- | 125 | 161,999 | |||||||
Citigroup, Inc., Unsec. Notes, 8.50%, 05/22/19 | A3/A- | 595 | 733,562 | |||||||
CoBank ACB, Sub. Notes, 7.875%, 04/16/18, 144A | NA/A | 500 | 597,852 | |||||||
Corp. Andina de Fomento, Sr. Unsec. Notes, 3.75%, 01/15/16 | A1/A+ | 95 | 98,483 | |||||||
Discover Financial Services, Sr. Unsec. Notes, 10.25%, 07/15/19 | Ba1/BBB- | 200 | 262,560 | |||||||
Export-Import Bank of Korea, Sr. Unsec. Notes, 8.125%, 01/21/14 | A1/A | 500 | 552,104 | |||||||
Export-Import Bank of Korea, Sr. Unsec. Notes, 5.00%, 04/11/22 | A1/A | 1,250 | 1,318,748 | |||||||
General Electric Capital Corp., Sr. Unsec. Notes, 5.625%, 05/01/18 | Aa2/AA+ | 230 | 266,590 | |||||||
General Electric Capital Corp., Sr. Unsec. Notes, 6.875%, 01/10/39 | Aa2/AA+ | 1,000 | 1,234,940 | |||||||
HSBC Finance Corp., Sr. Unsec. Notes, 7.00%, 05/15/12 | A3/A | 500 | 503,612 | |||||||
HSBC USA Capital Funding LP, Ltd. Gtd., 10.176%, 06/30/30, 144A(c),(d) | A3/BBB+ | 1,500 | 1,980,000 | |||||||
HSBC USA Trust II, Bank Gtd., 8.38%, 05/15/27, 144A(b) | NA/BBB+ | 2,500 | 2,534,645 | |||||||
JPMorgan Chase & Co., Sr. Unsec. Notes, 4.40%, 07/22/20 | Aa3/A | 175 | 181,547 | |||||||
JPMorgan Chase & Co., Sr. Unsec. Notes, 4.35%, 08/15/21 | Aa3/A | 105 | 107,282 | |||||||
JPMorgan Chase Bank NA, Sub. Notes, 6.00%, 10/01/17 | Aa2/A | 1,000 | 1,144,211 | |||||||
JPMorgan Chase Capital XXII, Ltd. Gtd., Series V, 6.45%, 01/15/87 | A2/BBB | 1,000 | 1,000,000 | |||||||
JPMorgan Chase Capital XXV, Ltd. Gtd., Series Y, 6.80%, 10/01/37 | A2/BBB | 850 | 854,760 | |||||||
Landesbank Baden-Wuerttemberg NY, Sub. Notes, 6.35%, 04/01/12 | WR/NR | 500 | 500,000 | |||||||
Lloyds TSB Bank PLC, Bank Gtd., 6.375%, 01/21/21 | A1/A | 2,000 | 2,146,802 | |||||||
Merrill Lynch & Co., Inc., Sr. Unsec. Notes, 6.875%, 04/25/18 | Baa1/A- | 1,000 | 1,111,699 | |||||||
Morgan Stanley, Sr. Unsec. Notes, 6.25%, 08/28/17 | A2/A- | 300 | 315,915 | |||||||
National Agricultural Cooperative Federation, Sr. Notes, 5.00%, 09/30/14, 144A | A1/A | 500 | 531,500 | |||||||
Santander US Debt SA Unipersonal, Bank Gtd., 3.724%, 01/20/15, 144A | Aa3/A+ | 100 | 97,629 | |||||||
UBS AG Stamford CT, Bank Notes, 4.875%, 08/04/20 | Aa3/A | 250 | 259,823 |
The accompanying notes are an integral part of these financial statements.
5
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
DIVERSIFIED FINANCIAL SERVICES (Continued) | ||||||||||
UBS Preferred Funding Trust V, Jr. Sub. Notes, Series 1, 6.243%, 05/15/16(c),(d) | Baa3/BBB- | $ | 500 | $ | 483,750 | |||||
Wachovia Capital Trust III, Ltd. Gtd., 5.57%, 04/30/12(c),(d) | Baa3/BBB+ | 1,500 | 1,417,500 | |||||||
|
| |||||||||
26,633,070 | ||||||||||
|
| |||||||||
ENERGY (13.71%) | ||||||||||
Apache Corp., Sr. Unsec. Notes, 7.70%, 03/15/26 | A3/A- | 500 | 685,348 | |||||||
Burlington Resources, Inc., Co. Gty., 9.125%, 10/01/21 | A2/A | 850 | 1,198,847 | |||||||
Citgo Petroleum Corp., Sr. Sec. Notes, 11.50%, 07/01/17, 144A(b) | Ba2/BB+ | 900 | 1,008,000 | |||||||
CMS Panhandle Holding Co., Sr. Unsec. Notes, 7.00%, 07/15/29 | Baa3/BBB- | 1,000 | 1,068,237 | |||||||
EL Paso Corp., Sr. Unsec. Notes, 8.05%, 10/15/30 | Ba3/BB- | 1,000 | 1,154,527 | |||||||
Enterprise Products Operating LLC, Co. Gty., Series B, 7.034%, 01/15/68(b),(c) | Baa3/BB+ | 1,000 | 1,075,000 | |||||||
EQT Corp., Sr. Unsec. Notes, 4.875%, 11/15/21 | Baa2/BBB | 1,455 | 1,472,412 | |||||||
Florida Gas Transmission Co. LLC, Sr. Unsec. Notes, 9.19%, 11/01/24, 144A | Baa2/BBB | 130 | 166,495 | |||||||
Gaz Capital SA, Sr. Unsec. Notes, 8.125%, 07/31/14, 144A | Baa1/BBB | 500 | 552,770 | |||||||
IFM US Colonial Pipeline 2 LLC, Sr. Sec. Notes, 6.45%, 05/01/21, 144A(b) | NA/BBB- | 1,000 | 1,073,162 | |||||||
KazMunayGas National Co., Sr. Unsec. Notes, 11.75%, 01/23/15, 144A | Baa3/BBB- | 500 | 610,135 | |||||||
KazMunayGas National Co., Sr. Unsec. Notes, 6.375%, 04/09/21, 144A | Baa3/BBB- | 500 | 552,275 | |||||||
Linn Energy LLC/Linn Energy Finance Corp., Co. Gty., 6.25%, 11/01/19, 144A(b) | B2/B | 500 | 485,000 | |||||||
Lukoil International Finance BV, Co. Gty., 6.125%, 11/09/20, 144A | Baa2/BBB- | 1,000 | 1,060,000 | |||||||
Motiva Enterprises LLC, Notes, 5.75%, 01/15/20, 144A | A2/A | 64 | 73,646 | |||||||
Motiva Enterprises LLC, Sr. Unsec. Notes, 6.85%, 01/15/40, 144A | A2/A | 124 | 154,030 | |||||||
Nabors Industries, Inc., Co. Gty., 9.25%, 01/15/19 | Baa2/BBB | 625 | 802,331 | |||||||
NRG Energy, Inc., Co. Gty., 8.25%, 09/01/20(b) | B1/BB- | 500 | 492,500 | |||||||
Pemex Project Funding Master Trust, Co. Gty., 6.625%, 06/15/35 | Baa1/BBB | 105 | 119,700 | |||||||
Petroleos Mexicanos, Co. Gty., 8.00%, 05/03/19 | Baa1/BBB | 250 | 316,250 | |||||||
Petroleos Mexicanos, Co. Gty., 6.00%, 03/05/20 | Baa1/BBB | 750 | 853,875 | |||||||
Petroleum Co. of Trinidad & Tobago, Ltd., Sr. Unsec. Notes, 9.75%, 08/14/19, 144A | Baa3/BBB | 500 | 616,500 | |||||||
Pride International, Inc., Co. Gty., 8.50%, 06/15/19 | Baa1/BBB+ | 500 | 657,504 | |||||||
Pride International, Inc., Co. Gty., 6.875%, 08/15/20 | Baa1/BBB+ | 500 | 609,733 | |||||||
Reliance Holdings USA, Inc., Co. Gty., 5.40%, 02/14/22, 144A | Baa2/BBB | 1,250 | 1,243,496 | |||||||
Samson Investment Co., Sr. Unsec. Notes, 9.75%, 02/15/20, 144A(b) | B1/B | 1,000 | 1,012,500 | |||||||
SEACOR Holdings, Inc., Sr. Unsec. Notes, 7.375%, 10/01/19 | Ba1/BB+ | 1,000 | 1,056,211 | |||||||
Shell International Finance BV, Co. Gty., 4.30%, 09/22/19 | Aa1/AA | 1,000 | 1,133,700 | |||||||
Transocean, Inc., Co. Gty., 7.50%, 04/15/31 | Baa3/BBB- | 500 | 567,595 | |||||||
Valero Energy Corp., Co. Gty., 9.375%, 03/15/19 | Baa2/BBB | 124 | 162,419 | |||||||
Valero Energy Corp., Co. Gty., 8.75%, 06/15/30 | Baa2/BBB | 1,000 | 1,222,858 | |||||||
Valero Energy Corp., Co. Gty., 10.50%, 03/15/39 | Baa2/BBB | 500 | 744,666 | |||||||
Weatherford International, Ltd. Bermuda, Co. Gty., 6.75%, 09/15/40 | Baa2/BBB | 2,000 | 2,229,060 | |||||||
Western Atlas, Inc., Sr. Unsec. Notes, 8.55%, 06/15/24 | A2/A | 2,539 | 3,585,121 | |||||||
Williams Cos., Inc., Sr. Unsec. Notes, 8.75%, 03/15/32 | Baa3/BBB- | 81 | 106,784 | |||||||
|
| |||||||||
29,922,687 | ||||||||||
|
| |||||||||
FOOD AND BEVERAGE (0.94%) | ||||||||||
Anheuser-Busch InBev Worldwide, Inc., Co. Gty., 7.75%, 01/15/19 | A3/A- | 325 | 423,986 | |||||||
Anheuser-Busch InBev Worldwide, Inc., Co. Gty., 8.20%, 01/15/39 | A3/A- | 27 | 40,957 | |||||||
Bunge Ltd. Finance Corp., Co. Gty., 8.50%, 06/15/19 | Baa2/BBB- | 125 | 152,699 | |||||||
Delhaize Group SA, Co. Gty., 5.70%, 10/01/40 | Baa3/BBB- | 709 | 655,376 | |||||||
Kraft Foods, Inc., Sr. Unsec. Notes, 5.375%, 02/10/20 | Baa2/BBB- | 241 | 278,606 | |||||||
Smithfield Foods, Inc., Sr. Sec. Notes., 10.00%, 07/15/14 | Ba2/BBB- | 290 | 339,300 | |||||||
WM Wrigley Jr. Co., Sr. Sec. Notes, 3.70%, 06/30/14, 144A | Baa1/N/A | 165 | 171,115 | |||||||
|
| |||||||||
2,062,039 | ||||||||||
|
|
The accompanying notes are an integral part of these financial statements.
6
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
GAMING, LODGING & LEISURE (0.50%) | ||||||||||
FireKeepers Development Authority, Sr. Sec. Notes, 13.875%, 05/01/15, 144A(b) | B2/B+ | $ | 750 | $ | 834,375 | |||||
Royal Caribbean Cruises, Ltd., Sr. Unsec. Notes, 7.00%, 06/15/13 | Ba1/BB | 250 | 261,250 | |||||||
|
| |||||||||
1,095,625 | ||||||||||
|
| |||||||||
HEALTHCARE (1.03%) | ||||||||||
Fresenius Medical Care US Finance, Inc., Co. Gty., 5.75%, 02/15/21, 144A | Ba2/BB+ | 750 | 776,250 | |||||||
Fresenius US Finance II, Inc., Co. Gty., 9.00%, 07/15/15, 144A | Ba1/BB+ | 250 | 288,125 | |||||||
Monsanto Co. (Pharmacia Corp.), Sr. Unsec. Notes, 6.50%, 12/01/18 | A1/AA | 500 | 622,925 | |||||||
Mylan, Inc., Co. Gty., 7.875%, 07/15/20, 144A(b) | Ba3/BB | 500 | 557,500 | |||||||
|
| |||||||||
2,244,800 | ||||||||||
|
| |||||||||
INDUSTRIAL (5.02%) | ||||||||||
Affinion Group, Inc., Co. Gty., 11.50%, 10/15/15(b) | Caa1/CCC+ | 460 | 433,550 | |||||||
Alcoa, Inc., Sr. Unsec. Notes, 6.15%, 08/15/20 | Baa3/BBB- | 640 | 688,945 | |||||||
Alcoa, Inc., Sr. Unsec. Notes, 5.95%, 02/01/37 | Baa3/BBB- | 244 | 237,411 | |||||||
Altria Group, Inc., Co. Gty., 9.70%, 11/10/18 | Baa1/BBB | 317 | 430,748 | |||||||
Altria Group, Inc., Co. Gty., 10.20%, 02/06/39 | Baa1/BBB | 29 | 44,962 | |||||||
ArcelorMittal, Sr. Unsec. Notes, 6.25%, 02/25/22 | Baa3/BBB- | 1,200 | 1,213,303 | |||||||
ArcelorMittal, Sr. Unsec. Notes, 7.00%, 10/15/39 | Baa3/BBB- | 405 | 386,830 | |||||||
Arrow Electronics, Inc., Sr. Unsec. Notes, 6.00%, 04/01/20 | Baa3/BBB- | 500 | 544,000 | |||||||
Belden, Inc., Co. Gty., 7.00%, 03/15/17(b) | Ba2/B+ | 250 | 257,813 | |||||||
Gerdau Trade, Inc., Co. Gty., 5.75%, 01/30/21, 144A | NR/BBB- | 500 | 529,650 | |||||||
GXS Worldwide, Inc., Sr. Sec. Notes, 9.75%, 06/15/15(b) | B2/B | 65 | 63,213 | |||||||
Holcim US Finance Sarl & Cie SCS, Co. Gty., 6.00%, 12/30/19, 144A | Baa2/BBB | 1,000 | 1,033,105 | |||||||
Ingersoll-Rand Global Holding Co., Ltd., Co. Gty., 6.875%, 08/15/18 | Baa1/BBB+ | 185 | 225,977 | |||||||
L-3 Communications Corp., Co. Gty., 6.375%, 10/15/15(b) | Ba1/BB+ | 700 | 716,625 | |||||||
Meccanica Holdings USA, Inc., Co. Gty., 6.25%, 07/15/19, 144A | Baa2/BBB- | 129 | 115,275 | |||||||
Northrop Grumman Space & Mission Systems Corp., Co. Gty., 7.75%, 06/01/29 | Baa1/BBB+ | 500 | 650,738 | |||||||
Sealed Air Corp., Sr. Unsec. Notes, 7.875%, 06/15/17(b) | B1/BB | 500 | 539,170 | |||||||
Tyco International Finance SA, Co. Gty., 8.50%, 01/15/19 | A3/A- | 93 | 120,531 | |||||||
Tyco International Ltd./Tyco International Finance SA, Co. Gty., 7.00%, 12/15/19 | A3/A- | 1,250 | 1,534,174 | |||||||
Waste Management, Inc., Sr. Unsec. Notes, 7.125%, 12/15/17 | Baa3/BBB | 500 | 592,225 | |||||||
Worthington Industries, Inc., Sr. Unsec. Notes, 6.50%, 04/15/20 | Baa2/BBB | 500 | 538,209 | |||||||
XM Satellite Radio, Inc., Co. Gty., 13.00%, 08/01/14, 144A | B2/BB | 57 | 64,481 | |||||||
|
| |||||||||
10,960,935 | ||||||||||
|
| |||||||||
INSURANCE (6.08%) | ||||||||||
AIG SunAmerica, Inc., Sr. Unsec. Notes, 8.125%, 04/28/23 | Baa1/A- | 750 | 859,914 | |||||||
American International Group, Inc., Jr. Sub. Debs., 8.175%, 05/15/68(b),(c) | Baa2/BBB | 2,000 | 2,117,000 | |||||||
Farmers Exchange Capital, Sub. Notes, 7.20%, 07/15/48, 144A | Baa2/BBB+ | 3,000 | 3,045,384 | |||||||
Guardian Life Insurance Co. of America, Sub. Notes, 7.375%, 09/30/39, 144A | A1/AA- | 108 | 133,088 | |||||||
Liberty Mutual Group, Inc., Bonds, 7.00%, 03/15/34, 144A | Baa2/BBB- | 250 | 272,437 | |||||||
Liberty Mutual Group, Inc., Co. Gty., 10.75%, 06/15/88, 144A(b),(c) | Baa3/BB | 1,000 | 1,337,500 | |||||||
Lincoln National Corp., Jr. Sub. Notes, 6.05%, 04/20/67(b),(c) | Ba1/BBB | 500 | 466,250 | |||||||
Manulife Financial Corp., Sr. Unsec. Notes, 4.90%, 09/17/20 | NA/A- | 250 | 256,643 | |||||||
Massachusetts Mutual Life Insurance Co., Sub. Notes, 8.875%, 06/01/39, 144A | A1/AA- | 500 | 709,534 | |||||||
MetLife Capital Trust X, Jr. Sub. Notes, 9.25%, 04/08/68, 144A(b) | Baa2/BBB | 500 | 602,500 | |||||||
MetLife, Inc., Jr. Sub. Notes, 10.75%, 08/01/69(b) | Baa2/BBB | 1,000 | 1,372,500 | |||||||
Nationwide Mutual Insurance Co., Sub. Notes, 9.375%, 08/15/39, 144A | A3/A- | 215 | 272,303 | |||||||
New York Life Insurance Co., Sub. Notes, 6.75%, 11/15/39, 144A | Aa2/AA- | 103 | 129,044 | |||||||
Prudential Financial, Inc., Jr. Sub. Notes, 8.875%, 06/15/68(b),(c) | Baa3/BBB+ | 1,000 | 1,180,000 | |||||||
Travelers Cos., Inc., Jr. Sub. Notes, 6.25%, 03/15/67(b),(c) | A3/NR | 500 | 520,000 | |||||||
|
| |||||||||
13,274,097 | ||||||||||
|
|
The accompanying notes are an integral part of these financial statements.
7
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
MEDIA (7.82%) | ||||||||||
CBS Corp., Co. Gty., 8.875%, 05/15/19 | Baa2/BBB | $ | 350 | $ | 459,841 | |||||
Cengage Learning Acquisitions, Inc., Co. Gty., 13.25%, 07/15/15, 144A(b),(e) | Caa2/CCC | 500 | 360,000 | |||||||
Comcast Corp., Co. Gty., 7.05%, 03/15/33 | Baa1/BBB+ | 2,000 | 2,447,358 | |||||||
COX Communications, Inc., Sr. Unsec. Notes, 6.80%, 08/01/28 | Baa2/BBB | 1,500 | 1,649,562 | |||||||
Cox Enterprises, Inc., Sr. Unsec. Notes, 7.375%, 07/15/27, 144A | Baa2/BBB | 500 | 585,011 | |||||||
Grupo Televisa SAB, Sr. Unsec. Notes, 6.625%, 01/15/40 | Baa1/BBB+ | 159 | 179,539 | |||||||
Harcourt General, Inc., Sr. Unsec. Notes, 8.875%, 06/01/22 | WR/BBB+ | 2,000 | 2,570,824 | |||||||
Interpublic Group of Cos., Inc., Sr. Unsec. Notes, 10.00%, 07/15/17(b) | Baa3/BB+ | 500 | 572,500 | |||||||
Myriad International Holding BV, Co. Gty., 6.375%, 07/28/17, 144A | Baa3/N/A | 100 | 109,500 | |||||||
NBC Universal Media LLC, Inc., Sr. Unsec. Notes, 5.15%, 04/30/20 | Baa2/BBB+ | 175 | 198,066 | |||||||
NBC Universal Media LLC, Inc., Sr. Unsec. Notes, 5.95%, 04/01/41 | Baa2/BBB+ | 95 | 109,332 | |||||||
News America Holdings, Inc., Co. Gty., 7.90%, 12/01/95 | Baa1/BBB+ | 1,400 | 1,600,844 | |||||||
Time Warner Entertainment Co., LP, Co. Gty., 8.375%, 07/15/33 | Baa2/BBB | 1,360 | 1,816,768 | |||||||
Time Warner, Inc., Co. Gty., 9.15%, 02/01/23 | Baa2/BBB | 3,000 | 4,085,913 | |||||||
Viacom, Inc., Co. Gty., 7.875%, 07/30/30 | Baa2/BBB | 250 | 323,357 | |||||||
|
| |||||||||
17,068,415 | ||||||||||
|
| |||||||||
MINING (4.89%) | ||||||||||
Anglo American Capital PLC, Co. Gty., 9.375%, 04/08/14, 144A | Baa1/BBB+ | 339 | 390,167 | |||||||
Anglo American Capital PLC, Co. Gty., 9.375%, 04/08/19, 144A | Baa1/BBB+ | 500 | 656,971 | |||||||
AngloGold Ashanti Holdings PLC, Co. Gty., 5.375%, 04/15/20 | Baa2/BBB- | 310 | 319,093 | |||||||
Barrick North America Finance LLC, Co. Gty., 6.80%, 09/15/18 | Baa1/A- | 500 | 610,879 | |||||||
Corp. Nacional del Cobre de Chile, Sr. Unsec. Notes, 3.875%, 11/03/21, 144A | A1/A | 1,500 | 1,531,919 | |||||||
FMG Resources August 2006 Property Ltd., Sr. Unsec. Notes, 6.875%, 04/01/22, 144A(b) | B1/BB- | 1,200 | 1,170,000 | |||||||
Freeport-McMoran Corp., Co. Gty., 9.50%, 06/01/31 | Baa2/BBB | 250 | 354,524 | |||||||
Newcrest Finance Property, Ltd., 4.45%, 11/15/21, 144A | Baa2/BBB+ | 1,500 | 1,515,383 | |||||||
Rio Tinto Finance USA, Ltd., Co. Gty., 9.00%, 05/01/19 | A3/A- | 85 | 114,846 | |||||||
Teck Resources, Ltd., Co. Gty., 6.00%, 08/15/40(b) | Baa2/BBB | 1,000 | 1,053,056 | |||||||
Teck Resources, Ltd., Co. Gty., 5.20%, 03/01/42 | Baa2/BBB | 1,415 | 1,342,442 | |||||||
Vale Overseas, Ltd., Co. Gty., 6.25%, 01/23/17 | Baa2/A- | 500 | 576,213 | |||||||
Xstrata Canada Financial Corp., Co. Gty., 4.95%, 11/15/21, 144A | Baa2/BBB+ | 1,000 | 1,047,644 | |||||||
|
| |||||||||
10,683,137 | ||||||||||
|
| |||||||||
PAPER (2.27%) | ||||||||||
Celulosa Arauco y Constitucion SA, Sr. Unsec. Notes, 4.75%, 01/11/22, 144A | Baa2/BBB | 1,085 | 1,110,665 | |||||||
Georgia-Pacific LLC, Co. Gty., 5.40%, 11/01/20, 144A | Baa3/A- | 670 | 747,908 | |||||||
Smurfit Kappa Treasury Funding, Ltd., Co. Gty., 7.50%, 11/20/25 | Ba1/BB+ | 2,000 | 1,980,000 | |||||||
Westvaco Corp., Co. Gty., 8.20%, 01/15/30 | Ba1/BBB | 1,000 | 1,107,464 | |||||||
|
| |||||||||
4,946,037 | ||||||||||
|
| |||||||||
REAL ESTATE INVESTMENT TRUST (REIT) (4.66%) | ||||||||||
Biomed Realty LP, Co. Gty., 6.125%, 04/15/20 | Baa3/BBB- | 350 | 390,017 | |||||||
Duke Realty LP, Sr. Unsec. Notes, 6.50%, 01/15/18 | Baa2/BBB- | 500 | 572,728 | |||||||
Duke Realty LP, Sr. Unsec. Notes, 8.25%, 08/15/19 | Baa2/BBB- | 500 | 617,512 | |||||||
Federal Realty Investment Trust, Sr. Unsec. Notes, 5.40%, 12/01/13 | Baa1/BBB+ | 750 | 789,252 | |||||||
Federal Realty Investment Trust, Sr. Unsec. Notes, 6.20%, 01/15/17 | Baa1/BBB+ | 290 | 324,961 | |||||||
Goodman Funding Property, Ltd., Sr. Unsec. Notes, 6.375%, 04/15/21, 144A | Baa2/BBB | 1,050 | 1,086,881 | |||||||
Health Care REIT, Inc., Sr. Unsec. Notes, 5.25%, 01/15/22(b) | Baa2/BBB- | 1,500 | 1,569,014 | |||||||
Host Hotels & Resorts LP, Co. Gty., 6.00%, 11/01/20(b) | Ba1/BB+ | 1,000 | 1,060,000 | |||||||
Liberty Property LP, Sr. Unsec. Notes, 7.50%, 01/15/18 | Baa1/BBB | 1,000 | 1,172,211 | |||||||
Nationwide Health Properties, Inc., Sr. Unsec. Notes, 6.00%, 05/20/15 | Baa2/BBB | 500 | 540,465 | |||||||
Simon Property Group LP, Sr. Unsec. Notes, 6.125%, 05/30/18 | A3/A- | 750 | 883,019 |
The accompanying notes are an integral part of these financial statements.
8
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
REAL ESTATE INVESTMENT TRUST (REIT) (Continued) | ||||||||||
WEA Finance, LLC, Co. Gty., 7.125%, 04/15/18, 144A | A2/A- | $ | 500 | $ | 589,078 | |||||
WEA Finance, LLC, Co. Gty., 6.75%, 09/02/19, 144A | A2/A- | 500 | 578,114 | |||||||
|
| |||||||||
10,173,252 | ||||||||||
|
| |||||||||
RETAIL & RESTAURANT (0.58%) | ||||||||||
Darden Restaurants, Inc., Sr. Unsec. Notes, 7.125%, 02/01/16 | Baa2/BBB | 500 | 570,037 | |||||||
Levi Strauss & Co., Sr. Unsec. Notes, 8.875%, 04/01/16(b) | B2/B+ | 500 | 516,255 | |||||||
Limited Brands, Inc., Co. Gty., 8.50%, 06/15/19 | Ba1/BB+ | 150 | 177,375 | |||||||
|
| |||||||||
1,263,667 | ||||||||||
|
| |||||||||
TECHNOLOGY (0.08%) | ||||||||||
Corning, Inc., Sr. Unsec. Notes, 5.75%, 08/15/40 | A3/BBB+ | 60 | 66,359 | |||||||
Mantech International Corp., Co. Gty., 7.25%, 04/15/18(b) | Ba2/BB+ | 100 | 106,500 | |||||||
|
| |||||||||
172,859 | ||||||||||
|
| |||||||||
TELECOMMUNICATIONS (10.07%) | ||||||||||
AT&T, Inc., Sr. Unsec. Notes, 5.35%, 09/01/40 | A2/A- | 2,548 | 2,709,314 | |||||||
Cellco Partnership/Verizon Wireless Capital LLC, Sr. Unsec. Notes, 8.50%, 11/15/18 | A2/A- | 229 | 314,422 | |||||||
Centel Capital Corp., Co. Gty., 9.00%, 10/15/19 | Baa2/BBB- | 1,000 | 1,161,980 | |||||||
Deutsche Telekom International Finance BV, Co. Gtd., 8.75%, 06/15/30 | Baa1/BBB+ | 2,000 | 2,748,936 | |||||||
Frontier Communications Corp., Sr. Unsec. Notes, 8.125%, 10/01/18 | Ba2/BB | 500 | 528,750 | |||||||
Frontier Communications Corp., Sr. Unsec. Notes, 9.00%, 08/15/31 | Ba2/BB | 500 | 485,000 | |||||||
GTE Corp., Co. Gty., 6.94%, 04/15/28 | Baa1/A- | 1,500 | 1,819,574 | |||||||
Hearst-Argyle Television, Inc., Sr. Unsec. Notes, 7.00%, 01/15/18 | WR/NR | 1,000 | 754,091 | |||||||
Level 3 Financing, Inc., Co, Gty., 10.00%, 02/01/18(b) | B3/CCC | 610 | 667,950 | |||||||
NII Capital Corp., Co. Gty., 10.00%, 08/15/16(b) | B2/B+ | 500 | 566,250 | |||||||
NII Capital Corp., Co. Gty., 7.625%, 04/01/21(b) | B2/B+ | 950 | 928,625 | |||||||
Qwest Corp., Sr. Unsec. Notes, 7.20%, 11/10/26(b) | Baa3/BBB- | 1,000 | 1,007,500 | |||||||
Qwest Corp., Sr. Unsec. Notes, 6.875%, 09/15/33(b) | Baa3/BBB- | 1,100 | 1,089,000 | |||||||
Qwest Corp., Sr. Unsec. Notes, 7.25%, 10/15/35(b) | Baa3/BBB- | 500 | 510,000 | |||||||
Sprint Capital Corp., Co. Gty., 6.875%, 11/15/28 | B3/B+ | 1,500 | 1,147,500 | |||||||
Sprint Capital Corp., Co. Gty., 8.75%, 03/15/32 | B3/B+ | 1,000 | 857,500 | |||||||
Telecom Italia Capital SA, Co. Gty., 6.999%, 06/04/18 | Baa2/BBB | 1,000 | 1,065,000 | |||||||
Telecom Italia Capital SA, Co. Gty., 7.20%, 07/18/36 | Baa2/BBB | 250 | 242,500 | |||||||
Trilogy International Partners LLC/Trilogy International Finance, Inc., Sr. Sec. | ||||||||||
Notes, 10.25%, 08/15/16, 144A(b) | Caa1/CCC+ | 100 | 87,250 | |||||||
Verizon Communications, Inc., Sr. Unsec. Notes, 8.75%, 11/01/18 | A3/A- | 292 | 396,252 | |||||||
Verizon Global Funding Corp., Sr. Unsec. Notes, 7.75%, 12/01/30 | A3/A- | 1,646 | 2,229,268 | |||||||
Virgin Media Finance PLC, Co. Gty., 8.375%, 10/15/19(b) | Ba2/BB- | 600 | 672,000 | |||||||
|
| |||||||||
21,988,662 | ||||||||||
|
| |||||||||
TRANSPORTATION (3.86%) | ||||||||||
BNSF Funding Trust I, Co. Gty., 6.613%, 12/15/55(b),(c) | Baa2/BBB | 250 | 260,000 | |||||||
Continental Airlines, Pass Through Certs., Series 1999-1, Class B, 6.795%, 02/02/20 | Ba1/BB | 444 | 434,961 | |||||||
Continental Airlines, Pass Through Certs., Series 2000-1, Class A1, 8.048%, 05/01/22 | Baa2/BBB | 867 | 969,369 | |||||||
Continental Airlines, Pass Through Certs., Series 2000-2, Class A1, 7.707%, 10/02/22 | Baa2/BBB | 1,239 | 1,339,646 | |||||||
Delta Air Lines, Pass Through Certs, Series 1993, Class A2, 10.50%, 04/30/16 | WR/NR | 345 | 125,069 | |||||||
ERAC USA Finance, Co., Co. Gty., 7.00%, 10/15/37, 144A | Baa1/BBB+ | 1,500 | 1,711,250 | |||||||
Federal Express Corp., Pass Through Certs, Series 1996, Class B2, 7.84%, 01/30/18(b) | A3/BBB | 1,000 | 1,099,560 | |||||||
Federal Express Corp., Sr. Unsec. Notes, 9.65%, 06/15/12 | Baa1/BBB | 1,750 | 1,780,322 | |||||||
Norfolk Southern Corp., Sr. Unsec. Notes, 5.75%, 04/01/18 | Baa1/BBB+ | 170 | 200,857 | |||||||
Stena AB, Sr. Unsec. Notes, 7.00%, 12/01/16(b) | Ba3/BB+ | 500 | 500,000 | |||||||
|
| |||||||||
8,421,034 | ||||||||||
|
|
The accompanying notes are an integral part of these financial statements.
9
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
UTILITIES (4.51%) | ||||||||||
Avista Corp., 5.95%, 06/01/18 | A3/A- | $ | 500 | $ | 598,757 | |||||
Avista Corp., 5.125%, 04/01/22 | A3/A- | 500 | 580,920 | |||||||
Dominion Resources, Inc., Sr. Unsec. Notes, Series 07-A, 6.00%, 11/30/17 | Baa2/A- | 500 | 599,856 | |||||||
DPL, Inc., Sr. Unsec. Notes, 7.25%, 10/15/21, 144A(b) | Ba1/BB+ | 1,000 | 1,110,000 | |||||||
Duquesne Light Holdings, Inc., Sr. Unsec. Notes, 6.40%, 09/15/20, 144A | Ba1/BBB- | 1,000 | 1,105,039 | |||||||
Georgia Power Co., Sr. Unsec. Notes, 5.40%, 06/01/40 | A3/A | 110 | 125,844 | |||||||
Hydro-Quebec, 8.25%, 04/15/26 | Aa2/A+ | 1,550 | 2,256,068 | |||||||
MidAmerican Funding LLC, Sr. Sec. Notes, 6.927%, 03/01/29 | A3/BBB+ | 500 | 612,762 | |||||||
NextEra Energy Capital Holding, Inc., Jr. Sub. Notes., Series D, 7.30%, 09/01/67(b),(c) | Baa2/BBB | 500 | 527,500 | |||||||
Ohio Power Co., Sr. Unsec. Notes, 6.00%, 06/01/16 | Baa1/BBB | 500 | 571,410 | |||||||
Ohio Power Co., Sr. Unsec. Notes, 5.375%, 10/01/21 | Baa1/BBB | 1,000 | 1,147,010 | |||||||
Toledo Edison Co., 7.25%, 05/01/20 | Baa1/BBB | 500 | 618,260 | |||||||
|
| |||||||||
9,853,426 | ||||||||||
|
| |||||||||
TOTAL CORPORATE DEBT SECURITIES (Cost of $161,632,844) | 180,967,285 | |||||||||
|
| |||||||||
ASSET BACKED SECURITIES (1.51%) | ||||||||||
Credit-Based Asset Servicing and Securitization LLC, Series 2006-SC1, Class A, 0.512%, 05/25/36, 144A(c) | A3/AAA | 58 | 43,036 | |||||||
Dominos Pizza Master Issuer LLC, Series 2012-1A, Class A2, 5.216%, 01/25/42, 144A(b) | Baa1/BBB+ | 1,500 | 1,536,230 | |||||||
Option One Mortgage Loan Trust, Series 2007-FXD2, Class 2A1, 5.90%, 03/25/37(e) | Aa3/AA- | 178 | 169,648 | |||||||
Renaissance Home Equity Loan Trust, Series 2006-3, Class AF2, 5.58%, 11/25/36(e) | B3/CCC | 164 | 87,986 | |||||||
Small Business Administration Participation Certificates, Series 2010-20F, Class 1, 3.88%, 06/01/30 | Aaa/AA+ | 300 | 321,552 | |||||||
Sonic Capital LLC, Series 2011-1A, Class A2, 5.438%, 05/20/41, 144A | Baa2/BBB | 1,097 | 1,142,869 | |||||||
|
| |||||||||
TOTAL ASSET BACKED SECURITIES (Cost of $3,284,345) | 3,301,321 | |||||||||
|
| |||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES (6.20%) | ||||||||||
American Tower Trust, Series 2007-1A, Class AFX, 5.42%, 04/15/37, 144A | Aaa/AAA | 700 | 745,217 | |||||||
Banc of America Merrill Lynch Commercial Mortgage, Inc, Series 2006-2, Class AJ, 5.766%, 05/10/45(c) | NA/BBB- | 1,000 | 902,255 | |||||||
Banc of America Merrill Lynch Commercial Mortgage, Inc., Series 2006-2, Class AM, 5.766%, 05/10/45(c) | NA/A | 1,440 | 1,556,037 | |||||||
Citigroup/Deutsche Bank Commercial Mortgage Trust, Series 2007-CD4, Class A4, 5.322%, 12/11/49 | Aa3/A- | 285 | 311,744 | |||||||
Credit Suisse Mortgage Capital Certificates, Series 2006-C5, Class AM, 5.343%, 12/15/39 | A1/BBB | 100 | 99,317 | |||||||
CW Capital Cobalt, Ltd., Series 2007-C2, Class A3, 5.484%, 04/15/47(c) | Aaa/N/A | 500 | 547,647 | |||||||
Developers Diversified Realty Corp., Series 2009-DDR1, Class C, 6.223%, 10/14/22, 144A | A1/AA+ | 500 | 538,107 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP5, Class AJ, 5.326%, 12/15/44(c) | Aa3/A | 60 | 61,436 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2006-CB16, Class A4, 5.552%, 05/12/45 | Aaa/AAA | 1,000 | 1,118,765 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2006-CB17, Class AM, 5.464%, 12/12/43 | A1/N/A | 100 | 98,859 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2007-CB20, Class A4, 5.794%, 02/12/51(c) | Aaa/A+ | 880 | 1,006,927 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., Series 2007-LDPX, Class A3, 5.42%, 01/15/49 | Aaa/N/A | 160 | 177,310 |
The accompanying notes are an integral part of these financial statements.
10
SCHEDULE OF INVESTMENTS — continued
Moody’s/ Standard & Poor’s Rating(a) | Principal Amount (000’s) | Value (Note 1) | ||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES (Continued) | ||||||||||
LB-UBS Commercial Mortgage Trust, Series 2006-C4, Class AM, 5.886%, 06/15/38(c) | Aa3/BBB+ | $ | 2,000 | $ | 2,121,966 | |||||
LB-UBS Commercial Mortgage Trust, Series 2007-C1, Class A4, 5.424%, 02/15/40 | NA/A+ | 970 | 1,087,423 | |||||||
LB-UBS Commercial Mortgage Trust, Series 2007-C2, Class A3, 5.43%, 02/15/40 | NA/A- | 1,375 | 1,520,364 | |||||||
Merrill Lynch Mortgage Trust, Series 2005-CIP1, Class AM, 5. 107%, 07/12/38(c) | Aaa/N/A | 30 | 31,736 | |||||||
Morgan Stanley Capital I, Series 2007-IQ16, Class A4, 5.809%, 12/12/49 | NA/A+ | 750 | 858,305 | |||||||
Morgan Stanley Reremic Trust, Series 2009-GG10, Class A4B, 5.788%, 08/12/45, 144A(c) | A3/N/A | 210 | 216,482 | |||||||
Wachovia Bank Commercial Mortgage Trust, Series 2006-C28, Class A3, 5.679%, 10/15/48 | Aaa/AAA | 500 | 540,461 | |||||||
|
| |||||||||
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES | 13,540,358 | |||||||||
|
| |||||||||
RESIDENTIAL MORTGAGE-BACKED SECURITIES (2.16%) | ||||||||||
FHLMC Pool # 170128, 11.50%, 06/01/15 | Aaa/AA+ | 2 | 1,911 | |||||||
FHLMC Pool # 360019, 10.50%, 12/01/17 | Aaa/AA+ | 3 | 3,584 | |||||||
FHLMC Pool # A15675, 6.00%, 11/01/33 | Aaa/AA+ | 578 | 646,059 | |||||||
FHLMC Pool # B11892, 4.50%, 01/01/19 | Aaa/AA+ | 424 | 463,546 | |||||||
FHLMC Pool # G00182, 9.00%, 09/01/22 | Aaa/AA+ | 5 | 6,378 | |||||||
FNMA Pool # 124012, 12.50%, 10/01/15 | Aaa/AA+ | 3 | 3,494 | |||||||
FNMA Pool # 303022, 8.00%, 09/01/24 | Aaa/AA+ | 20 | 23,174 | |||||||
FNMA Pool # 303136, 8.00%, 01/01/25 | Aaa/AA+ | 11 | 13,538 | |||||||
FNMA Pool # 55192, 10.50%, 09/01/17 | Aaa/AA+ | 6 | 7,078 | |||||||
FNMA Pool # 58991, 11.00%, 02/01/18 | Aaa/AA+ | 4 | 3,914 | |||||||
FNMA Pool # 754791, 6.50%, 12/01/33 | Aaa/AA+ | 652 | 743,293 | |||||||
FNMA Pool # 763852, 5.50%, 02/01/34 | Aaa/AA+ | 878 | 963,783 | |||||||
FNMA Pool # 889554, 6.00%, 04/01/38 | Aaa/AA+ | 294 | 323,550 | |||||||
FNMA Pool # AH9793, 4.50%, 05/01/41 | Aaa/AA+ | 1,310 | 1,395,409 | |||||||
GNSF Pool # 194228, 9.50%, 11/15/20 | Aaa/AA+ | 33 | 37,779 | |||||||
GNSF Pool # 307527, 9.00%, 06/15/21 | Aaa/AA+ | 28 | 32,982 | |||||||
GNSF Pool # 417239, 7.00%, 02/15/26 | Aaa/AA+ | 26 | 30,850 | |||||||
GNSF Pool # 780374, 7.50%, 12/15/23 | Aaa/AA+ | 13 | 14,663 | |||||||
|
| |||||||||
TOTAL RESIDENTIAL MORTGAGE-BACKED SECURITIES | 4,714,985 | |||||||||
|
| |||||||||
MUNICIPAL BONDS (1.77%) | ||||||||||
Municipal Electric Authority of Georgia, Build America Bonds-Taxable-Plant Vogle Units 3&4, Series J, Revenue Bond, 6.637%, 04/01/57 | A2/A+ | 175 | 194,628 | |||||||
San Francisco City & County Public Utilities Commission, Water Revenue, Build America Bonds, 6.00%, 11/01/40 | Aa3/AA- | 145 | 173,192 | |||||||
State of California, Build America Bonds, GO, 7.55%, 04/01/39 | A1/A- | 500 | 648,740 | |||||||
State of California, Build America Bonds, GO, 7.625%, 03/01/40 | A1/A- | 1,500 | 1,953,690 | |||||||
State of Illinois, Build America Bonds, GO, 7.35%, 07/01/35 | A2/A+ | 755 | 883,803 | |||||||
|
| |||||||||
TOTAL MUNICIPAL BONDS (Cost of $3,266,306) | 3,854,053 | |||||||||
|
| |||||||||
U.S. TREASURY SECURITIES (3.49%) | ||||||||||
U.S. Treasury Note, 1.00%, 03/31/12 | Aaa/AA+ | 600 | 600,000 | |||||||
U.S. Treasury Note, 0.375%, 09/30/12 | Aaa/AA+ | 2,600 | 2,602,743 | |||||||
U.S. Treasury Note, 1.00%, 10/31/16 | Aaa/AA+ | 3,075 | 3,082,688 | |||||||
U.S. Treasury Note, 1.375%, 11/30/18 | Aaa/AA+ | 1,000 | 990,547 | |||||||
U.S. Treasury Note, 3.125%, 05/15/21 | Aaa/AA+ | 310 | 337,416 | |||||||
|
| |||||||||
TOTAL U.S. TREASURY SECURITIES (Cost of $7,598,160) | 7,613,394 | |||||||||
|
|
The accompanying notes are an integral part of these financial statements.
11
SCHEDULE OF INVESTMENTS — continued
Shares | Value (Note 1) | |||||||
COMMON STOCK (0.02%) | ||||||||
DIVERSIFIED FINANCIAL SERVICES (0.00%) | ||||||||
Leucadia National Corp. | 191 | $ | 4,985 | |||||
|
| |||||||
MEDIA (0.01%) | ||||||||
Quad Graphics, Inc. | 1,617 | 22,476 | ||||||
|
| |||||||
TRANSPORTATION (0.01%) | ||||||||
Delta Air Lines, Inc. (f) | 2,203 | 21,827 | ||||||
|
| |||||||
TOTAL COMMON STOCK (Cost of $99,935) | 49,288 | |||||||
|
| |||||||
PREFERRED STOCK (0.26%) | ||||||||
Federal Home Loan Mortgage Corp, Series Z, 0.000% (f),(g) | 53,779 | 78,060 | ||||||
US BANCORP, Series A, 3.500% (f) | 615 | 485,850 | ||||||
|
| |||||||
TOTAL PREFERRED STOCK (Cost of $1,783,939) | 563,910 | |||||||
|
| |||||||
RIGHTS (0.00%) | ||||||||
XO Holdings, Inc., Expire 12/31/99 | 13 | — | ||||||
|
| |||||||
TOTAL RIGHTS (Cost of $0) | — | |||||||
|
| |||||||
TOTAL INVESTMENTS (98.30%) (Cost $192,665,932) | 214,604,594 | |||||||
|
| |||||||
OTHER ASSETS AND LIABILITIES (1.70%) | 3,719,159 | |||||||
|
| |||||||
NET ASSETS (100.00%) | $ | 218,323,753 | ||||||
|
|
(a) | Ratings for debt securities are unaudited. All ratings are as of March 31, 2012 and may have changed subsequently. |
(b) | This security is callable. |
(c) | Variable rate security. Rate disclosed is as of March 31, 2012. |
(d) | Security is perpetual. Date shown is next call date. |
(e) | Multi-Step Coupon. Rate disclosed is as of March 31, 2012. |
(f) | Non-income producing security. |
(g) | Dividend was discontinued as of September 7, 2008. |
144A | Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At March 31, 2012, these securities amounted to $50,696,272 or 23.22% of net assets. |
Legend
Certs.—Certificates
Co. Gty.—Company Guaranty
Debs.—Debentures
FHLMC—Federal Home Loan Mortgage Corp.
FNMA—Federal National Mortgage Association
GNSF—Government National Mortgage Association (Single Family)
GO—General Obligation
Gtd.—Guaranteed
Jr.—Junior
LLC—Limited Liability Company
Ltd.—Limited
NA—Not Available
NR—Not Rated
REIT—Real Estate Investment trust
Sec.—Secured
Sr.—Senior
Sub.—Subordinated
Unsec.—Unsecured
WR—Withdrawn Rating
The accompanying notes are an integral part of these financial statements.
12
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2012
Assets: | ||||
Investment in securities, at value (amortized cost $192,665,932) (Note 1) | $ | 214,604,594 | ||
Cash | 404,631 | |||
Receivables for Investments Sold | 158 | |||
Interest receivable | 3,472,086 | |||
Dividend receivable | 5,441 | |||
Prepaid expenses | 28,651 | |||
|
| |||
TOTAL ASSETS | 218,515,561 | |||
|
| |||
Liabilities: | ||||
Payable to Investment Adviser | 82,427 | |||
Accrued expenses payable | 109,381 | |||
|
| |||
TOTAL LIABILITIES | 191,808 | |||
|
| |||
Net assets: (equivalent to $20.39 per share based on 10,708,597 shares of capital stock outstanding) | $ | 218,323,753 | ||
|
| |||
NET ASSETS consisted of: | ||||
Par value | $ | 107,086 | ||
Capital paid-in | 217,372,775 | |||
Accumulated net investment income | 266,040 | |||
Accumulated net realized loss on investments | (21,360,810 | ) | ||
Net unrealized appreciation on investments | 21,938,662 | |||
|
| |||
$ | 218,323,753 | |||
|
|
The accompanying notes are an integral part of these financial statements.
13
STATEMENT OF OPERATIONS
For the year ended March 31, 2012
Investment Income: | ||||
Interest | $ | 13,139,310 | ||
Dividends | 30,381 | |||
Other income | 7,408 | |||
|
| |||
Total Investment Income | 13,177,099 | |||
|
| |||
Expenses: | ||||
Investment advisory fees (Note 4) | $ | 963,553 | ||
Administration fees | 189,691 | |||
Transfer agent fees | 64,958 | |||
Trustees’ fees | 67,120 | |||
Audit fees | 17,483 | |||
Legal fees and expenses | 102,729 | |||
Reports to shareholders | 63,934 | |||
Custodian fees | 19,541 | |||
Insurance | 23,454 | |||
NYSE fee | 20,950 | |||
Miscellaneous | 65,973 | |||
|
| |||
Total Expenses | 1,599,386 | |||
|
| |||
Net Investment Income | 11,577,713 | |||
|
| |||
Realized and unrealized gain (loss) on investments (Note 1): | ||||
Net realized gain from security transactions | 630,879 | |||
|
| |||
Unrealized appreciation (depreciation) of investments: | ||||
Beginning of the year | 17,774,795 | |||
End of the year | 21,938,662 | |||
|
| |||
Change in unrealized appreciation (depreciation) of investments | 4,163,867 | |||
|
| |||
Net realized and unrealized gain on investments | 4,794,746 | |||
|
| |||
Net increase in net assets resulting from operations | $ | 16,372,459 | ||
|
|
The accompanying notes are an integral part of these financial statements.
14
STATEMENTS OF CHANGES IN NET ASSETS
Year ended March 31, 2012 | Year ended March 31, 2011 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 11,577,713 | $ | 9,493,950 | ||||
Net realized gain from security transactions (Note 2) | 630,879 | 574,233 | ||||||
Change in unrealized appreciation of investments and warrants | 4,163,867 | 4,379,990 | ||||||
|
|
|
| |||||
Net increase in net assets resulting from operations | 16,372,459 | 14,448,173 | ||||||
|
|
|
| |||||
Distributions: | ||||||||
Distributions to shareholders from net investment income | (12,314,889 | ) | (8,735,491 | ) | ||||
Capital Share Transactions: | ||||||||
Proceeds from merger (Note 7) | — | 83,300,387 | ||||||
|
|
|
| |||||
Net proceeds | — | 83,300,387 | ||||||
|
|
|
| |||||
Increase in net assets | 4,057,570 | 89,013,069 | ||||||
Net Assets: | ||||||||
Beginning of year | 214,266,183 | 125,253,114 | ||||||
|
|
|
| |||||
End of year | $ | 218,323,753 | $ | 214,266,183 | ||||
|
|
|
| |||||
Accumulated net investment income | $ | 266,040 | $ | 595,489 | ||||
|
|
|
|
The accompanying notes are an integral part of these financial statements.
15
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock outstanding throughout each period presented.
Year ended March 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Per Share Operating Performance | ||||||||||||||||||||
Net asset value, beginning of period | $ | 20.01 | $ | 19.10 | $ | 15.63 | $ | 19.01 | $ | 20.01 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net investment income | 1.08 | 1.14 | (1) | 1.19 | 1.06 | 1.10 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 0.45 | 0.92 | 4.31 | (3.29 | ) | (0.95 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total from investment operations. | 1.53 | 2.06 | 5.50 | (2.23 | ) | 0.15 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Capital share transaction: | ||||||||||||||||||||
Dilution of the net asset value from rights offering (Note 6) | — | — | (0.88 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Less distributions: | ||||||||||||||||||||
Dividends from net investment income. | (1.15 | ) | (1.15 | ) | (1.15 | ) | (1.15 | ) | (1.15 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total distributions. | (1.15 | ) | (1.15 | ) | (1.15 | ) | (1.15 | ) | (1.15 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net asset value, end of period | $ | 20.39 | $ | 20.01 | $ | 19.10 | $ | 15.63 | $ | 19.01 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Per share market price, end of period | $ | 19.74 | $ | 18.03 | $ | 17.12 | $ | 13.77 | $ | 17.14 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Investment Return(2) | ||||||||||||||||||||
Based on market value | 16.37 | % | 12.23 | % | 33.60 | % | (13.62 | )% | (0.10 | )% | ||||||||||
Ratios/Supplemental Data | ||||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 218,324 | $ | 214,266 | $ | 125,253 | $ | 76,720 | $ | 93,282 | ||||||||||
Ratio of expenses to average net assets | 0.74 | % | 0.79 | % | 0.85 | % | 1.21 | % | 0.88 | % | ||||||||||
Ratio of net investment income to average net assets | 5.37 | % | 5.76 | % | 6.16 | % | 6.18 | % | 5.66 | % | ||||||||||
Portfolio turnover rate | 19.60 | % | 19.91 | % | 15.40 | % | 21.46 | % | 17.25 | % | ||||||||||
Number of shares outstanding at the end of the period (in 000’s) | 10,709 | 10,709 | 6,559 | 4,908 | 4,908 |
(1) | The selected per share data was calculated using the average shares outstanding method. |
(2) | Total investment return is calculated assuming a purchase of common shares at the market price on the first day and a sale at the market price on the last day of the period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions. The total investment return, if for less than a full year, is not annualized. Past performance is not a guarantee of future results. |
The accompanying notes are an integral part of these financial statements.
16
NOTES TO FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies – The Cutwater Select Income Fund (the “Fund”), (formerly Rivus Bond Fund), a Delaware statutory trust, is registered under the Investment Company Act of 1940, as amended, as a diversified closed-end, management investment company. The following is a summary of significant accounting policies consistently followed by the Fund in preparation of its financial statements. The policies are in conformity with generally accepted accounting principles within the United States of America (“GAAP”).
A. | Security Valuation – In valuing the Fund’s net assets, all securities for which representative market quotations are available will be valued at the last quoted sales price on the security’s principal exchange on the day of valuation. If there are no sales of the relevant security on such day, the security will be valued at the bid price at the time of computation. Prices for securities traded in the over-the-counter market, including listed debt and preferred securities, whose primary market is believed to be over-the-counter, normally are supplied by independent pricing services. Securities for which market quotations are not readily available will be valued at their respective fair values as determined in good faith by, or under procedures established by the Board of Trustees. At March 31, 2012, there were no securities valued using fair value procedures. |
Fair Value Measurements – The Fund has adopted authoritative fair value accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value, a discussion in changes in valuation techniques and related inputs during the period and expanded disclosure of valuation levels for major security types. These inputs are summarized in the three broad levels listed below:
• Level 1 – | Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. |
• Level 2 – | Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. |
• Level 3 – | Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would used in valuing the asset or liability, and would be based on the best information available. |
17
NOTES TO FINANCIAL STATEMENTS — continued
Following is a description of the valuation techniques applied to the Fund’s major categories of assets measured at fair value on a recurring basis as of March 31, 2012.
Total Market Value at 03/31/12 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
CORPORATE DEBT SECURITIES | $ | 180,967,285 | $ | — | $ | 180,967,285 | $ | — | ||||||||
ASSET BACKED SECURITIES | 3,301,321 | — | 3,301,321 | — | ||||||||||||
COMMERCIAL MORTGAGE-BACKED SECURITIES | 13,540,358 | — | 13,540,358 | — | ||||||||||||
RESIDENTIAL MORTGAGE-BACKED SECURITIES | 4,714,985 | — | 4,714,985 | — | ||||||||||||
MUNICIPAL BOND | 3,854,053 | — | 3,854,053 | — | ||||||||||||
U.S. TREASURY SECURITIES | 7,613,394 | — | 7,613,394 | — | ||||||||||||
COMMON STOCK* | 49,288 | 49,288 | — | — | ||||||||||||
PREFERRED STOCK | 563,910 | 563,910 | — | — | ||||||||||||
TOTAL INVESTMENTS | $ | 214,604,594 | $ | 613,198 | $ | 213,991,396 | $ | — |
* | See Schedule of Investments for industry breakout. |
Following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determined fair value:
Corporate Debt Securities (Market Value) | ||||
Balance as of March 31, 2011 | $ | 358,595 | ||
Accrued discounts/premiums | (12,014 | ) | ||
Realized loss | (89,362 | ) | ||
Change in unrealized appreciation (depreciation) | 80,975 | |||
Sales | (338,194 | ) | ||
Transfer into Level 3 | — | |||
|
| |||
Balance as of March 31, 2012 | $ | — | ||
|
|
At the end of each calendar quarter, management evaluates the Level 1, 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities. Pursuant to Fund policy, transfers between levels are considered to have occurred at the beginning of the reporting period. For the year ended March 31, 2012, there were no transfers between Level 1 and 2 for the Fund.
18
NOTES TO FINANCIAL STATEMENTS — continued
B. | Determination of Gains or Losses on Sale of Securities – Gains or losses on the sale of securities are calculated for financial reporting purposes and for federal tax purposes using the identified cost basis. The identified cost basis for financial reporting purposes differs from that used for federal tax purposes in that the amortized cost of the securities sold is used for financial reporting purposes and the original cost of the securities sold is used for federal tax purposes, except for those instances where tax regulations require the use of amortized cost. |
C. | Federal Income Taxes – It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. |
Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (tax years March 31, 2009-2011) or expected to be taken on the Fund’s 2012 tax return, and has concluded that no provision for federal income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
D. | Other – Security transactions are accounted for on the trade date. Interest income is accrued daily. Premiums and discounts are amortized using the interest method. Paydown gains and losses on mortgage-backed and asset-backed securities are presented as an adjustment to interest income. Dividend income and distributions to shareholders are recorded on the ex-dividend date. |
E. | Distributions to Shareholders and Book/Tax Differences – Distributions of net investment income will be made quarterly. Distributions of any net realized capital gains will be made annually. Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments for amortization of market premium and accretion of market discount and the merger with the Hartford Income Shares Fund. In order to reflect permanent book/tax differences that occurred during the fiscal year ended March 31, 2012, the following capital accounts were adjusted for the following amounts: |
Undistributed Net Investment Income | Net Realized Gain | Accumulated Paid-In Capital | ||||||
$407,727 | $ | 1,115,987 | $ | (1,523,714 | ) |
Distributions during the fiscal years ended March 31, 2012 and 2011 were characterized as follows for tax purposes:
Ordinary Income | Return of Capital | Capital Gain | Total Distribution | |||||||||||||
FY 2012 | $ | 12,314,889 | $ | — | $ | — | $ | 12,314,889 | ||||||||
FY 2011 | $ | 8,735,491 | $ | — | $ | — | $ | 8,735,491 |
19
NOTES TO FINANCIAL STATEMENTS — continued
At March 31, 2012, the components of distributable earnings on a tax basis were as follows:
Total* | Accumulated Ordinary Income | Capital Loss Carryforward and Other | Late Year Losses Deferred | Net Unrealized Appreciation | ||||||||||||
$843,892 | $ | 839,827 | $ | (21,204,513 | ) | $ | (97,983 | ) | $ | 21,306,561 | ||||||
|
|
|
|
|
|
|
|
|
* Temporary differences include book amortization, book accretion, and late year losses deferred, if any, which will be recognized for the tax year ending March 31, 2012.
As of March 31, 2012, the capital loss carryovers available to offset possible future capital gains were as follows:
Amount | Expiration Date | |||||||
$ | 571,125 | 2013 | ||||||
746,582 | 2015 | |||||||
5,234,565 | 2016 | |||||||
11,082,544 | 2017 | |||||||
3,569,697 | 2018 |
On December 22, 2010, The Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed into law. The Modernization Act modifies several of the Federal income and excise tax provisions related to Registered Investment Companies. Under the Modernization Act, new capital losses may now be carried forward indefinitely, and retain the character of the original loss as compared with pre-enactment law where capital losses could be carried forward for eight years, and carried forward as short-term capital losses, irrespective of the character of the original loss.
Capital loss carryforwards are subject to usage limitations. During the year ended March 31, 2012, capital loss carryforwards in the amount of $243,819 were utilized and $1,523,714 were expired off and cannot be used going forward.
At March 31, 2012, the following table shows for federal tax purposes the aggregate cost of investments, the net unrealized appreciation of those investments, the aggregate gross unrealized appreciation of all securities with an excess of market value over tax cost and the aggregate gross unrealized depreciation of all securities with an excess of tax cost over market value:
Aggregate Tax Cost | Net Unrealized Appreciation | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | |||||||||
$193,298,033 | $ | 21,306,561 | $ | 25,171,654 | ($ | 3,865,093 | ) |
The difference between book basis and tax-basis unrealized appreciation is attributable primarily to the differing treatments for wash sales, amortization of market premium and accretion of market discount.
F. | Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. |
20
NOTES TO FINANCIAL STATEMENTS — continued
Note 2 – Portfolio Transactions – The following is a summary of the security transactions, other than short-term investments, for the year ended March 31, 2012:
Cost of Purchases | Proceeds from Sales or Maturities | |||||||
U.S. Government Securities | $ | 8,692,780 | $ | 8,014,154 | ||||
Other Investment Securities | $ | 32,672,198 | $ | 33,734,765 |
Note 3 – Capital Stock – At March 31, 2012, there were an unlimited number of shares of beneficial interest ($0.01 par value) authorized, with 10,708,597 shares issued and outstanding.
Note 4 – Investment Advisory Contract, Accounting and Administration and Trustee Compensation – Cutwater Investor Services Corp. (“Cutwater”) serves as Investment Adviser to the Fund. Cutwater is entitled to a fee at the annual rate of 0.50% on the first $100 million of the Fund’s month end net assets and 0.40% on the Fund’s month-end net assets in excess of $100 million.
BNY Mellon Investment Servicing (US) Inc. (“BNY Mellon”), a member of The Bank of New York Mellon Corporation, provides accounting and administrative services to the Fund.
The Trustees of the Fund receive an annual retainer, meeting fees and out of pocket expenses for meetings attended. The aggregate remuneration paid to the Trustees by the Fund during the year ended March 31, 2012 was $68,000. Certain officers of the Fund are also directors, officers and/or employees of investment adviser. None of the Fund’s officers receives compensation from the Fund. As of March 31, 2012, there were no amounts due to the Trustees.
Note 5 – Dividend and Distribution Reinvestment – In accordance with the terms of the Automatic Dividend Investment Plan (the “Plan”), for shareholders who so elect, dividends and distributions are made in the form of previously unissued Fund shares at the net asset value if on the Friday preceding the payment date (the “Valuation Date”) the closing New York Stock Exchange price per share, plus the brokerage commissions applicable to one such share equals or exceeds the net asset value per share. However, if the net asset value is less than 95% of the market price on the Valuation Date, the shares issued will be valued at 95% of the market price. If the net asset value per share exceeds market price plus commissions, the dividend or distribution proceeds are used to purchase Fund shares on the open market for participants in the Plan. During the year ended March 31, 2012 the Fund issued no shares under this Plan.
Note 6 – Rights Offering – On August 7, 2009 the Fund completed its transferable rights offering. In accordance with the terms of the rights offering described in the Fund’s prospectus an additional 1,650,893 shares were issued at a subscription price of $15.77 per share, making the gross proceeds raised by the offering $26,034,583, before offering-related expenses. Dealer/manager fees of $976,297 and offering costs of approximately $550,332 were deducted from the gross proceeds making the net proceeds available for investment by the Fund $24,507,954. The dilution impact of the offering was $0.88 per share or 4.79% of the $18.34 net asset value per share on August 7, 2009, the expiration and pricing date of the offering.
Note 7 – Reorganization – As of the close of business on October 22, 2010, the reorganization of The Hartford Income Shares Fund, Inc. (“HSF”) into the Fund was completed. The reorganization was effected at an exchange ratio calculated as the net asset value per share of HSF divided by the net asset value per share of the Fund, each determined as of the close of trading on the New York Stock Exchange on October 22, 2010. HSF was credited with
21
NOTES TO FINANCIAL STATEMENTS — continued
4,150,026 shares of beneficial interest of the Fund at $20.07 net asset value per share. As a result of the reorganization, each shareholder of HSF received shares of the Fund with an aggregate net asset value that is equal to the aggregate net asset value of the shares of HSF held by that shareholder as of the close of business on October 22, 2010.
The shares outstanding of HSF immediately before the merger and shares of the Fund issued to HSF shareholders were:
Merged Fund | Shares Exchanged | Acquiring Fund | Shares Issued | Net Asset Value | Conversion Ratio | |||||||||||||||
Hartford Income | Cutwater Select Income Fund | |||||||||||||||||||
Shares Fund, Inc. | 13,066,832 | (formerly, Rivus Bond Fund | ) | 4,150,026 | $ | 20.07 | 0.3176 |
The net assets and net unrealized appreciation/(depreciation) of HSF and the net assets of the Fund immediately before the merger were as follows:
Merged Fund | Net Assets | Unrealized Appreciation/ (Depreciation) | Acquiring Fund | Net Assets | ||||||||||||
Hartford Income | ||||||||||||||||
Shares Fund, Inc. | $ | 83,300,387 | $ | 2,952,824 | Rivus Bond Fund | $ | 131,643,157 |
Assuming the acquisition had been completed on April 1, 2010, the Fund’s results of operations for the six months ended March 31, 2011 would have been as follows:
Net investment income/(loss) | $ | 12,031,298 | ||
Net realized and unrealized gain/(loss) on investments | $ | 7,016,957 | ||
Net increase in assets from operations | $ | 19,048,255 |
Because the combined investment portfolios have been managed as a single portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of HSF that have been included in the Fund’s Statement of Operations since October 22, 2010.
Note 8 – New Accounting Pronouncement – In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to disclose the following information for fair value measurements categorized within Level 3 of the fair value hierarchy: quantitative information about the unobservable inputs used in the fair value measurement, the valuation processes used by the reporting entity and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management is currently evaluating the implications of ASU No. 2011-04 and its impact on the financial statements.
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is
22
NOTES TO FINANCIAL STATEMENTS — continued
effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. The Fund is currently evaluating the impact ASU 2011-11 will have on the financial statement disclosures.
Note 9 – Subsequent Event – Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
23
SHAREHOLDER INFORMATION (Unaudited)
ADDITIONAL INFORMATION REGARDING THE FUND’S TRUSTEES AND OFFICERS
Name, Address and Age | Position Held With Fund | Principal Occupation During | Number of Funds Overseen By Trustee | Term of Office and Length of Time Served | ||||
W. Thacher Brown* 113 King Street Armonk, NY 10504 Born: December 1947 | Trustee | Retired; Former President of MBIA Asset Management LLC, from July 1998 to September 2004; and Former President of 1838 Investment Advisors, LLC from July 1988 to May 2004. | 1 | Shall serve until the next annual meeting or until his successor is qualified. Trustee since 1988 | ||||
Morris Lloyd, Jr. 113 King Street Armonk, NY 10504 Born: September 1937 | Trustee | Retired; former Development Officer, Trinity College from April 1996 to June 2002. | 1 | Shall serve until the next annual meeting or until his successor is qualified. Trustee since 1989 | ||||
Ellen D. Harvey 113 King Street Armonk, NY 10504 Born: February 1954 | Trustee | Consultant with Lindsay Criswell LLC beginning July 2008. Principal with the Vanguard Group from January 2008 to June 2008; and Senior Vice President with Mercantile Safe-Deposit & Trust from February 2003 to October 2007. | 1 | Shall serve until the next annual meeting or until her successor is qualified. Trustee since 2010 | ||||
Suzanne P. Welsh 113 King Street Armonk, NY 10504 Born: March 1953 | Trustee | Vice President for Finance and Treasurer, Swarthmore College since 2002. | 1 | Shall serve until the next annual meeting or until her successor is qualified. Trustee since 2008 | ||||
Clifford D. Corso* Cutwater 113 King Street Armonk, NY 10504 Born: October 1961 | President | Chief Executive Officer and Chief Investment Officer, Cutwater Investor Services Corp.; Managing Director and Chief Investment Officer, MBIA Insurance Corporation; officer of other affiliated entities of Cutwater Investor Services Corp. | N/A | Shall serve until death, resignation, or removal. Officer since 2005 | ||||
Joseph L. Sevely* Cutwater 113 King Street Armonk, NY 10504 Born: January 1960 | Treasurer | Director of Cutwater Investor Services Corp.; Director and officer of other affiliated entities of Cutwater Investor Services Corp. | N/A | Shall serve until death, resignation, or removal. Officer since 2010 | ||||
Thomas E. Stabile* Cutwater 113 King Street Armonk, NY 10504 Born: March 1974 | Assistant Treasurer | Officer of Cutwater Investor Services Corp. | N/A | Shall serve until death, resignation, or removal. Officer since 2010 | ||||
Leonard I. Chubinsky* Cutwater 113 King Street Armonk, NY 10504 Born: December 1948 | Secretary | Senior Corporate Counsel of Cutwater Investor Services Corp. and certain of its affiliates. | N/A | Shall serve until death, resignation, or removal. Officer since 2005 |
24
SHAREHOLDER INFORMATION (Unaudited) – continued
ADDITIONAL INFORMATION REGARDING THE FUND’S TRUSTEES AND OFFICERS
Name, Address and Age | Position Held With Fund | Principal Occupation | Number of Funds Overseen By Trustee | Term of Office and Length of Time Served | ||||
Michelle Houck* Cutwater 113 King Street Armonk, NY 10504 Born: January 1971 | Vice President/Chief Compliance Officer | Assistant General Counsel, Compliance Officer and Principal with Pzena Investment Management. | N/A | Shall serve until death, resignation, or removal. Officer since 2011 | ||||
Robert T. Claiborne* Cutwater 113 King Street Armonk, NY 10504 Born: August 1955 | Vice President | Officer of Cutwater Investor Services Corp. | N/A | Shall serve until death, resignation, or removal. Officer since 2006 | ||||
Gautam Khanna* Cutwater 113 King Street Armonk, NY 10504 Born: October 1969 | Vice President | Officer of Cutwater Investor Services Corp. | N/A | Shall serve until death, resignation, or removal. Officer since 2006 |
* | Denotes a trustee/officer who is an “interested person” of the Fund as defined under the provisions of the Investment Company Act of 1940. Mr. Brown is an “interested person” because he has an interest in MBIA Inc., the parent of the Fund’s Investment Adviser. Messrs. Corso, Sevely, Stabile, Chubinsky, Claiborne, Khanna and Ms. Houck are “interested persons” by virtue of being employees of the Fund’s Investment Adviser. |
HOW TO GET INFORMATION REGARDING PROXIES
The Fund has adopted the Adviser’s proxy voting policies and procedures to govern the voting of proxies relating to the voting securities of the Fund. You may obtain a copy of these proxy voting procedures, without charge, by calling (800) 765-6242 or on the Securities and Exchange Commission website at www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, by calling (800) 765-6242 or on the SEC’s website at www.sec.gov.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the Security and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at www.sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, D.C., information on the operation of the Commission’s Public Reference Room may be obtained by calling 1-800-SEC-0330. Additionally, the Fund makes the information on Form N-Q available to shareholders on its website at http://www.cutwater.com/rivus-bond-fund-characteristics.aspx.
ADDITIONAL TAX INFORMATION
For corporate shareholders, the percentage of investment income (dividend income and short-term gains, if any) for the Fund that qualify for the dividends-received deductions for the year ended March 31, 2012 was 0.22%.
25
SHAREHOLDER INFORMATION (Unaudited) – continued
For the year ended March 31, 2012, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Of the distributions made by the Fund, 0.22% represents the amount of each distribution which may qualify for the 15% dividend income tax rate. Shareholders should not use this tax information to prepare their tax returns. The information will be included with your Form 1099 DIV which will be sent to you separately in January 2013.
DIVIDEND REINVESTMENT PLAN
The Fund has established a plan for the automatic investment of dividends and distributions pursuant to which dividends and capital gain distributions to shareholders will be paid in or reinvested in additional shares of the Fund. All shareholders of record are eligible to join the Plan. BNY Mellon acts as the agent (the “Agent”) for participants under the Plan.
Shareholders whose shares are registered in their own names may elect to participate in the Plan by completing an authorization form and returning it to the Agent. Shareholders whose shares are held in the name of a broker or nominee should contact such broker or nominee to determine whether or how they may participate in the Plan.
Dividends and distributions are reinvested under the Plan as follows. If the market price per share on the Friday before the payment date for the dividend or distribution (the “Valuation Date’’), plus the brokerage commissions applicable to one such share, equals or exceeds the net asset value per share on that date, the Fund will issue new shares to participants valued at the net asset value or, if the net asset value is less than 95% of the market price on the Valuation Date, then valued at 95% of the market price. If net asset value per share on the Valuation Date exceeds the market price per share on that date, plus the brokerage commissions applicable to one such share, the Agent will buy shares on the open market, on the New York Stock Exchange, for the participants’ accounts. If before the Agent has completed its purchases, the market price exceeds the net asset value of shares, the average per share purchase price paid by the Agent may exceed the net asset value of shares, resulting in the acquisition of fewer shares than if the dividend or distribution has been paid in shares issued by the Fund at net asset value.
There is no charge to participants for reinvesting dividends or distributions payable in either shares or cash. The Agent’s fees for handling of reinvestment of such dividends and distributions will be paid by the Fund. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or distributions payable either in shares or cash. However, each participant will be charged by the Agent a pro rata share of brokerage commissions incurred with respect to Agent’s open market purchases in connection with the reinvestment of dividends or distributions payable only in cash.
For purposes of determining the number of shares to be distributed under the Plan, the net asset value is computed on the Valuation Date and compared to the market value of such shares on such date. The Plan may be terminated by a participant by delivery of written notice of termination to the Agent at the address shown below. Upon termination, the Agent will cause a certificate or certificates for the full shares held for a participant under the Plan and a check for any fractional shares to be delivered to the former participant.
Distributions of investment company taxable income that are invested in additional shares generally are taxable to shareholders as ordinary income. A capital gain distribution that is reinvested in shares is taxable to shareholders as long-term capital gain, regardless of the length of time a shareholder has held the shares or whether such gain was realized by the Fund before the shareholder acquired such shares and was reflected in the price paid for the shares.
26
SHAREHOLDER INFORMATION (Unaudited) – continued
Plan information and authorization forms are available from BNY Mellon Investment Servicing (US) Inc., P.O. Box 358035, Pittsburgh, PA 15252-8035.
PRIVACY POLICY
The privacy of your personal financial information is extremely important to us. When you open an account with us, we collect a significant amount of information from you in order to properly invest and administer your account. We take very seriously the obligation to keep that information private and confidential, and we want you to know how we protect that important information.
We collect nonpublic personal information about you from applications or other forms you complete and from your transactions with us or our affiliates. We do not disclose information about you, or our former clients, to our affiliates or to service providers or other third parties, except as permitted by law. We share only the minimum information required to properly administer your accounts, which enables us to send transaction confirmations, monthly or quarterly statements, financials and tax forms. Even within Cutwater and its affiliated entities, only a limited number of people who actually service accounts will ever have access to your personal financial information. Further, we do not share information about our current or former clients with any outside marketing groups or sales entities.
To ensure the highest degree of security and confidentiality, Cutwater and its affiliates maintain various physical, electronic and procedural safeguards to protect your personal information. We also apply special measures for authentication of information you request or submit to us on our Web site—www.cutwater.com.
ANNUAL CERTIFICATION
The Fund’s CEO has submitted to the NYSE the required annual certification, and the Fund also has included the certifications of the Fund’s CEO and CFO required by Section 302 of the Sarbanes-Oxley Act of 2002 in the Fund’s Forms N-CSR filed with the Securities and Exchange Commission for the period of this report.
HOW TO GET ASSISTANCE WITH SHARE TRANSFER OR DIVIDENDS
Contact Your Transfer Agent:
BNY Mellon Investment Servicing (US) Inc.
P.O. Box 358035, Pittsburgh, PA 15252-8035, or call 1-866-333-6635
27
T R U S T E E S
W. THACHER BROWN MORRIS LLOYD, JR. ELLEN D. HARVEY SUZANNE P. WELSH | ![]() | |
O F F I C E R S
CLIFFORD D. CORSO President JOSEPH L. SEVELY Treasurer THOMAS E. STABILE Assistant Treasurer LEONARD CHUBINSKY Secretary MICHELLE HOUCK Vice President/Chief Compliance Officer ROBERT T. CLAIBORNE Vice President GAUTAM KHANNA Vice President | Cutwater Select Income Fund | |
I N V E S T M E N T A D V I S E R
CUTWATER INVESTOR SERVICES CORP. 113 KING STREET ARMONK, NY 10504
| Annual Report March 31, 2012 | |
C U S T O D I A N
THE BANK OF NEW YORK MELLON 2 HANSON PLACE BROOKLYN, NY 11217 | ||
T R A N S F E R A G E N T
BNY MELLON INVESTMENT SERVICING (US) INC. P.O. BOX 358035 Pittsburgh, PA 15252-8035 1-866-333-6635 | ||
C O U N S E L
PEPPER HAMILTON LLP 3000 TWO LOGAN SQUARE EIGHTEENTH & ARCH STREETS PHILADELPHIA, PA 19103 | ||
I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M TAIT, WELLER & BAKER LLP 1818 MARKET STREET SUITE 2400 PHILADELPHIA, PA 19103 |
Item 2. | Code of Ethics. |
The registrant has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (each a “Covered Person”). A copy of the Registrant’s Code of Ethics can be obtained without charge, upon request, by calling the Registrant at 1-800-331-1710. There were no amendments to the Code of Ethics during the reporting period. There were no waivers of a provision of the Code of Ethics granted to a Covered Person during the reporting period.
Item 3. | Audit Committee Financial Expert. |
The Board of Trustees of the registrant has determined that Suzanne P. Welsh, the Chair of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Ms. Welsh as the Audit Committee’s financial expert. Ms. Welsh is an “independent” Trustee pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification.
Item 4. | Principal Accountant Fees and Services. |
Audit Fees
(a) | The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $20,300 and $19,700 for the fiscal years ended March 31, 2012 and March 31, 2011, respectively. |
Audit-Related Fees
(b) | The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are $0 and $2,500 for the fiscal years ended March 31, 2012 and March 31, 2011, respectively. The audit- |
related fees were in connection with the work performed by the auditors related to the registrant’s acquisition of another closed-end fund during the year covered by this report. |
Tax Fees
(c) | The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $3,300 and $3,250 for the fiscal years ended March 31, 2012 and March 31, 2011, respectively. The tax fees relate to the review of the registrant’s tax filings and annual tax related disclosures in the financial statements. |
All Other Fees
(d) | The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 and $0 for the fiscal years ended March 31, 2012 and March 31, 2011, respectively. |
(e)(1) | The registrant’s audit committee has adopted policies and procedures relating to the pre-approval of services provided by the registrant’s principal accountant (the “Pre-Approval Policies”). The Pre-Approval Policies establish a framework intended to assist the audit committee in the proper discharge of its pre-approval responsibilities. As a general matter, the Pre-Approval Policies (i) specify certain types of audit, audit-related, tax, and other services determined to be pre-approved by the audit committee; and (ii) delineate specific procedures governing the mechanics of the pre-approval process, including the approval and monitoring of audit and non-audit service fees. Unless a service is specifically pre-approved under the Pre-Approval Policies, it must be separately pre-approved by the audit committee. |
(e)(2) | None of the services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
(f) | The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than fifty percent. |
(g) | The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $0 and $0 for the fiscal years ended March 31, 2012 and March 31, 2011, respectively. |
(h) | Not applicable. |
Item 5. | Audit Committee of Listed registrants. |
The registrant has a separately designated audit committee consisting of all the independent trustees of the registrant. The members of the audit committee are: Ellen D. Harvey, Morris Lloyd, Jr. and Suzanne P. Welsh.
Item 6. | Investments. |
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
(b) | Not applicable. |
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
The registrant has adopted the proxy voting policies and procedures used by the Investment Adviser. The most current copy of that policy is attached herewith.
PROXY VOTING POLICY
CUTWATER INVESTOR SERVICES CORP.
Introduction
This Proxy Voting Policy (“Policy”) for Cutwater Investor Services Corp. (“CISC”) formerly MBIA Investors Service Corp., reflects our duty as a fiduciary under the Investment Advisers Act of 1940 (the “Advisers Act”) to vote proxies in the best interests of our clients. In addition, the Department of Labor views the fiduciary act of managing ERISA plan assets to include the voting of proxies. Proxy voting decisions must be made solely in the best interests of the pension plan’s participants and beneficiaries. The Department of Labor has interpreted this requirement as prohibiting a fiduciary from subordinating the retirement income interests of participants and beneficiaries to unrelated objectives. The guidelines in this Policy have been formulated to ensure decision-making consistent with these fiduciary responsibilities.
Any general or specific proxy voting guidelines provided by an advisory client or its designated agent in writing will supercede the specific guidelines in this Policy. CISC will disclose to our advisory clients information about this Policy as well as disclose to our clients how they may obtain information on how we voted their proxies. Additionally, CISC will maintain proxy voting records for our advisory clients consistent with the Advisers Act. For those of our clients that are registered investment companies, CISC will disclose this Policy to the shareholders of such funds and make filings with the Securities and Exchange Commission and make available to fund shareholders the specific proxy votes that we cast in shareholder meetings of issuers of portfolio securities in accordance with the rules and regulations under the Investment Company Act of 1940.
Registered investment companies that are advised by CISC as well as certain of our advisory clients: may participate in securities lending programs, which may reduce or eliminate the amount of shares
eligible for voting by CISC in accordance with this Policy if such shares are out on loan and cannot be recalled in time for the vote.
Implicit in the initial decision to retain or invest in the security of a corporation is approval of its existing corporate ownership structure, its management, and its operations. Accordingly, proxy proposals that would change the existing status of a corporation will be reviewed carefully and supported only when it seems clear that the proposed changes are likely to benefit the corporation and its shareholders. Notwithstanding this favorable predisposition, management will be assessed on an ongoing basis both in terms of its business capability and its dedication to the shareholders to ensure that, our continued confidence remains warranted. If it is determined that management is acting on its own behalf instead of for the well being of the corporation, we will vote to support shareholder proposals, unless other mitigating circumstances are present.
Additionally, situations may arise that involve an actual or-perceived conflict of interest. For example, we may manage- assets of a pension plan of a company whose management is soliciting proxies, or a CISC employee may have a close relative who serves as a director or executive of a company that is soliciting proxies. In all cases, the manner in which we vote proxies must be based on our clients’ best interests and not the product of the conflict.
This Policy and its attendant recommendations attempt to generalize a complex subject. It should be clearly understood that specific fact situations, including differing voting practices in jurisdictions outside the United States, might warrant departure from these guidelines. In such instances, the relevant facts will be considered, and if a vote contrary to these guidelines is indicated it will be cast and the reasons therefore recorded in writing.
The provisions of this Policy will be deemed applicable to decisions similar to voting proxies, such as tendering of securities, voting consents to corporate actions, and solicitations with respect to fixed income securities, where CISC may exercise voting authority on behalf of clients.
Section I of the Policy describes proxy proposals that may be characterized as routine and lists examples of the types of proposals we would typically support. Section II of the Policy describes various types of non-routine proposals and provides general voting guidelines. These non-routine proposals are categorized as those involving:
• | Social Issues, |
• | Financial/Corporate Issues, and |
• | Shareholder Rights. |
Finally, Section III of the Policy describes the procedures to be followed casting: a vote pursuant to these guidelines.
Routine Matters
Routine proxy proposals, amendments, or resolutions are typically proposed by management and meet the following criteria:
• | They do not measurably change the structure, management control, or operation of the corporation. |
• | They are consistent with industry standards as well as the corporate laws of the state of incorporation. |
Voting Recommendation
CISC will normally support the following routine proposals:
• | To increase authorized common shares. |
• | To -increase authorized preferred shares as long as there are not disproportionate voting rights per preferred share. |
• | To elect or re-elect Trustees. |
• | To appoint or elect auditors. |
• | To approve indemnification of Trustees and limitation of Trustees’ liability. |
• | To establish compensation levels. |
• | To establish employee stock purchase or ownership plans. |
• | To set time and location of annual meeting. |
Non-Routine Proposals
Social Issues
Proposals in this category involve issues of social conscience. They are typically proposed by shareholders who believe that the corporation’s internally adopted policies are ill advised or misguided.
Voting Recommendation
If we have determined that management is generally socially responsible, we will generally vote against the following shareholder proposals:
• | To enforce restrictive energy policies. |
• | To place arbitrary restrictions on military contracting. |
• | To bar or place arbitrary restrictions on trade with other countries. |
• | To restrict the marketing of controversial products. |
• | To limit corporate political activities. |
• | To bar or restrict charitable contributions. |
• | To enforce a general policy regarding human rights based on arbitrary parameters. |
• | To enforce a general policy regarding employment practices based -on arbitrary parameters. |
• | To enforce a general policy regarding animal rights based on arbitrary parameters. |
• | To place arbitrary restrictions on environmental practices. |
Financial/Corporate Issues
Proposals in this category are usually offered by management and seek to change a corporation’s legal, business or financial structure.
Voting Recommendation
We will generally vote in favor of the following management proposals provided the position of current shareholders is preserved or enhanced:
• | To change the state of incorporation. |
• | To approve mergers, acquisitions or dissolution. |
• | To institute indenture changes. |
• | To change capitalization. |
Shareholder Rights
Proposals in this category are made regularly both by management and shareholders. They can be generalized as involving issues that transfer or realign board or shareholder voting power.
We typically would oppose any proposal aimed solely at thwarting potential takeover offers by requiring, for example, super-majority approval. At the same time, we believe stability and continuity promote profitability. The guidelines in this area seek to find a middle road, and they are no more than guidelines. Individual proposals may have to be carefully assessed in the context of their particular circumstances.
Voting Recommendation
We will generally vote for the following management proposals:
• | To require majority approval of shareholders in acquisitions of a controlling share in the corporation. |
• | To institute staggered board of Trustees. |
• | To require shareholder approval of not more than 66 70% for a proposed amendment to the corporation’s by-laws. |
• | To eliminate cumulative voting. |
• | To adopt anti-greenmail charter or by-law amendments or to otherwise restrict a company’s ability to make greenmail payments. |
• | To create a dividend reinvestment program. |
• | To eliminate preemptive rights. |
• | To eliminate any other plan or procedure designed primarily to discourage a takeover or other similar action (commonly known as a “poison pill”). |
We will generally vote against the following management proposals:
• | To require greater than 66 2/3% shareholder approval for a proposed amendment to the corporation’s by-laws (“super-majority provisions”). |
• | To require that an arbitrary fair price be offered to all shareholders that is derived from a fixed formula (“fair price amendments”). |
• | To authorize a new class of common stock or preferred stock which may have more votes per share than the existing common stock. |
• | To prohibit replacement of existing members of the board of Trustees. |
• | To eliminate shareholder action by written consent without a shareholder meeting. |
• | To allow only the board of Trustees to call a shareholder meeting or to propose amendments to the articles of incorporation. |
• | To implement any other action or procedure designed primarily to discourage a takeover or other similar action (commonly known. as a “poison pill”). |
• | To limit the ability of shareholders to nominate Trustees. |
We will generally vote for the following shareholder proposals:
• | To rescind share purchases rights or require that they be submitted for shareholder approval, but only if the vote required for approval is not more than 66 2/3%. |
• | To opt out of state anti-takeover laws deemed to be detrimental to the shareholder. |
• | To change the state of incorporation for companies operating under the umbrella of anti-shareholder state corporation laws if another state is chosen with favorable laws in this and other areas. |
• | To eliminate any other plan or procedure designed primarily to discourage a takeover or other similar action. |
• | To permit shareholders to participate in formulating management’s proxy and the opportunity to discuss and evaluate management’s director nominees, and/or to nominate shareholder nominees to the board. |
• | To require that the board’s audit, compensation, and/or nominating committees be comprised exclusively of independent Trustees. |
• | To adopt anti-greenmail charter or by-law amendments or otherwise restrict a company’s ability to make greenmail payments. |
• | To create a dividend reinvestment program. |
• | To recommend that votes to “abstain” not be considered votes “cast” at an annual meeting or special meeting, unless required by state law. |
• | To require that “golden parachutes” be submitted for shareholder ratification. |
We will generally vote against the following shareholder proposals:
• | To restore preemptive rights. |
• | To restore cumulative voting. |
• | To require annual election of Trustees or to specify tenure. |
• | To eliminate a staggered board of Trustees. |
• | To require confidential voting. |
• | To require Trustees to own a minimum amount of company stock in order to qualify as a director or to remain on the board. |
• | To dock director pay for failing to attend board meetings. |
Voting Process
CISC will designate a portfolio manager (the Proxy Voting Portfolio Manager), who is responsible for voting proxies for all advisory accounts and who will generally vote proxies in accordance with these guidelines. In circumstances in which 1) the subject matter of the vote is not covered by these guidelines, 2) a material conflict of interest is present or, 3) we believe it may be necessary, in the best interests of shareholders, to vote contrary to our general guidelines, the Proxy Voting Portfolio Manager will discuss the matter with the President and Chief Investment Officer of CISC, who will be responsible for making the definitive determination as to how the proxy matter will be voted. The President/Chief investment officer may consult with the General Counsel, the CCO, or other investment personnel in making this determination.
Any questions regarding this Policy may be directed to the General Counsel of CISC.
Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
(a)(1) | Portfolio Manager: |
Robert T. Claiborne, CFA
Director, Cutwater Asset Management Corp.
January 2000—Present
Responsible for day-to-day management of portfolio
Portfolio Manager:
Gautam Khanna, CPA, CFA
Managing Director, Cutwater Asset Management Corp.
May 2003—Present
Responsible for day-to-day management of portfolio
(a)(2)(i) Robert T. Claiborne, CFA
(ii) | (A) Registered investment companies – 0 as of March 31, 2012 |
(B) Other pooled investment vehicles – 0 as of March 31, 2012
(C) Other Accounts – 0 as of March 31, 2012.
(iii) | None. |
(iv) | N/A. |
(a)(2)(i) | Gautam Khanna, CPA, CFA |
(ii) | (A) Registered investment companies – 1 as of March 31, 2012. Approximately $71.6 million in total assets as of March 31, 2012. |
(B) Other pooled investment vehicles – 2 as of March 31, 2012. Approximately $81.0 million in total assets as of March 31, 2012.
(C) Other Accounts – 1 as of March 31, 2012. Approximately $25.6 million in total assets as of March 31, 2012.
(iii) | None. |
(iv) | No material conflicts of interests are expected to arise with the management of the Rivus Bond Fund and the other accounts. |
(a)(3) | The Portfolio Managers each receive compensation that is composed of an annual cash fixed salary and a variable cash bonus. The cash salary level is adjusted annually. The cash bonus is determined annually and is based on a combination of the overall performance of Cutwater Asset Management Corp. and the individual Portfolio Managers’ contribution to that performance. Compensation is not based on any specific performance criteria of any of the portfolios managed. |
(a)(4) | Share ownership as of March 31, 2012: |
Robert T. Claiborne: $10,001—$50,000
Gautam Khanna: $10,001—$50,000
(b) | N/A. Filing is an annual report. |
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Not applicable.
Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. | Controls and Procedures. |
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as |
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. | Exhibits. |
(a)(1) | Not applicable. |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(a)(3) | Not applicable. |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) | Cutwater Select Income Fund (formerly, Rivus Bond Fund) | |||
By (Signature and Title)* | /s/ Clifford D. Corso | |
Clifford D. Corso, President | ||
(principal executive officer) |
Date | 5/29/12 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* | /s/ Clifford D. Corso | |
Clifford D. Corso, President | ||
(principal executive officer) |
Date | 5/29/12 | |||
By (Signature and Title)* | /s/ Joseph L. Sevely | |
Joseph L. Sevely, Treasurer | ||
(principal financial officer) |
Date | 5/29/12 | |||
* Print the name and title of each signing officer under his or her signature.