WASHINGTON, D. C. 20549
The fund's investment objective is to provide a high level of current income exempt from federal income tax.
Closed-end funds, unlike open-end funds, are not continuously offered. There is a one time public offering and once issued, shares of closed-end funds are sold in the open market through a stock exchange. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the fund's shares is determined by a number of factors, several of which are beyond the control of the fund. Therefore, the fund cannot predict whether its shares will trade at, below or above net asset value.
Bond investments are subject to interest-rate, credit, liquidity and market risks to varying degrees. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Leverage results in additional risks and can magnify the effect of any gains or losses. Although the fund seeks income that is exempt from federal income taxes, a portion of the fund’s distributions may be subject to federal, state and local taxes, including the alternative minimum tax.
Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Prices and net asset value fluctuate and are not guaranteed.
Ashton P. Goodfield, CFA, Managing Director
Co-Lead Portfolio Manager of the fund. Began managing the fund in 2014.
Rebecca L. Flinn, Director
Co-Lead Portfolio Manager of the fund. Began managing the fund in 1998.
A. Gene Caponi, CFA, Managing Director
Portfolio Manager of the fund. Began managing the fund in 2014.
Carol L. Flynn, CFA, Managing Director
Portfolio Manager of the fund. Began managing the fund in 2014.
The quality ratings represent the higher of Moody's Investors Service, Inc. ("Moody's"), Fitch Ratings, Inc. ("Fitch") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's, Fitch and S&P represent their opinions as to the quality of the securities they rate. Credit quality measures a bond issuer's ability to repay interest and principal in a timely manner. Ratings are relative and subjective and are not absolute standards of quality. Credit quality does not remove market risk and is subject to change.
Effective maturity is the weighted average of the maturity date of bonds held by the fund taking into consideration any available maturity shortening features.
Modified duration is an approximate measure of a fund's sensitivity to movements in interest rates based on the current interest rate environment.
Leverage results in additional risks and can magnify the effect of any gains or losses to a greater extent than if leverage were not used.
Portfolio holdings and characteristics are subject to change.
For more complete details about the fund's investment portfolio, see page 7. A fact sheet is available on deutschefunds.com or upon request. Please see the Additional Information section on page 42 for contact information.
| | Principal Amount ($) | Value ($) |
| | | | |
| Municipal Bonds and Notes 138.1% |
| Alabama 0.3% |
| Alabama, UAB Medicine Finance Authority Revenue, Series B2, 5.0%, 9/1/2041 | 325,000 | 372,476 |
| Arizona 1.2% |
| Maricopa County, AZ, Pollution Control Corp. Revenue, El Paso Electric Co. Project, Series B, 7.25%, 4/1/2040 | 1,570,000 | 1,728,476 |
| California 16.0% |
| California, Golden State Tobacco Securitization Corp., Tobacco Settlement: | |
| | Series A-1, 5.75%, 6/1/2047 | 470,000 | 473,478 |
| | Series A-1, Prerefunded, 5.75%, 6/1/2047 | 30,000 | 30,000 |
| California, Health Facilities Financing Authority Revenue, Catholic Healthcare West, Series A, Prerefunded, 6.0%, 7/1/2034 | 1,000,000 | 1,105,460 |
| California, M-S-R Energy Authority, Series B, 7.0%, 11/1/2034, GTY: Citigroup, Inc. | 1,310,000 | 1,904,098 |
| California, Morongo Band of Mission Indians, Enterprise Casino Revenue, Series B, 144A, 6.5%, 3/1/2028 | 1,000,000 | 1,031,110 |
| California, South Bayside Waste Management Authority, Solid Waste Enterprise, Shoreway Environmental, Series A, 6.25%, 9/1/2029 | 1,425,000 | 1,586,495 |
| California, State General Obligation: |
| | 5.0%, 11/1/2043 | 1,500,000 | 1,725,810 |
| | 5.25%, 4/1/2035 | 1,230,000 | 1,416,935 |
| | 5.5%, 3/1/2040 | 1,000,000 | 1,111,930 |
| | 5.75%, 4/1/2031 | 1,000,000 | 1,087,690 |
| | 6.0%, 4/1/2038 | 1,000,000 | 1,093,140 |
| | 6.5%, 4/1/2033 | 1,950,000 | 2,149,329 |
| California, State Public Works Board Lease Revenue, Capital Projects, Series I-1, Prerefunded, 6.375%, 11/1/2034 | 1,000,000 | 1,130,920 |
| California, State Public Works Board Lease Revenue, Riverside Campus Project, Series B, 6.125%, 4/1/2028 | 2,000,000 | 2,179,780 |
| California, Statewide Communities Development Authority Revenue, Loma Linda University Medical Center: | |
| | Series A, 5.25%, 12/1/2044 | 195,000 | 211,844 |
| | Series A, 144A, 5.25%, 12/1/2056 | 735,000 | 803,752 |
| | Series A, 5.5%, 12/1/2054 | 195,000 | 213,925 |
| Riverside County, CA, Transportation Commission Toll Revenue Senior Lien, Series A, 5.75%, 6/1/2048 | 1,000,000 | 1,135,170 |
| San Buenaventura, CA, Community Memorial Health Systems, 7.5%, 12/1/2041 | 500,000 | 588,525 |
| San Francisco City & County, CA, Airports Commission, International Airport Revenue, Series A, AMT, 5.0%, 5/1/2044 | 1,000,000 | 1,112,830 |
| San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Revenue, Series A, 5.0%, 1/15/2050 | 445,000 | 489,144 |
| | 22,581,365 |
| Colorado 2.6% |
| Colorado, Park Creek Metropolitan District Revenue, Senior Ltd. Property Tax Supported, Series A, 5.0%, 12/1/2045 | 235,000 | 256,481 |
| Colorado, Public Energy Authority, Natural Gas Purchased Revenue, 6.25%, 11/15/2028, GTY: Merrill Lynch & Co., Inc. | 635,000 | 813,880 |
| Colorado, State Health Facilities Authority Revenue, Covenant Retirement Communities: | |
| | Series A, 5.0%, 12/1/2033 | 440,000 | 470,034 |
| | Series A, 5.0%, 12/1/2035 | 250,000 | 273,595 |
| Colorado, State Health Facilities Authority Revenue, School Health Systems, Series A, 5.5%, 1/1/2035 | 1,000,000 | 1,164,540 |
| Denver, CO, City & County Airport Revenue, Series A, AMT, 5.25%, 11/15/2043 | 600,000 | 667,884 |
| | 3,646,414 |
| Connecticut 1.7% |
| Connecticut, Harbor Point Infrastructure Improvement District, Special Obligation Revenue, Harbor Point Project, Series A, 7.875%, 4/1/2039 | 2,000,000 | 2,236,880 |
| Connecticut, Mashantucket Western Pequot Tribe Bond, 6.05%, 7/1/2031* (PIK) | 2,672,979 | 103,498 |
| | 2,340,378 |
| District of Columbia 0.8% |
| District of Columbia, Metropolitan Airport Authority Systems Revenue: | |
| | Series A, AMT, 5.0%, 10/1/2038 | 200,000 | 223,398 |
| | Series A, AMT, 5.0%, 10/1/2043 | 850,000 | 945,285 |
| | 1,168,683 |
| Florida 9.6% |
| Collier County, FL, Industrial Development Authority, Continuing Care Community Revenue, Arlington of Naples Project, Series A, 8.125%, 5/15/2044 | 500,000 | 576,270 |
| Florida, Capital Region Community Development District, Capital Improvement Revenue, Series A, 7.0%, 5/1/2039 | 455,000 | 456,652 |
| Florida, Middle Village Community Development District, Special Assessment, Series A, 6.0%, 5/1/2035 | 900,000 | 770,814 |
| Florida, Tolomato Community Development District, Special Assessment: | |
| | Series 2015-1, Step-up Coupon, 0% to 11/1/2021, 6.61% to 5/1/2040 | 250,000 | 154,310 |
| | Series 2015-2, Step-up Coupon, 0% to 11/1/2024, 6.61% to 5/1/2040 | 150,000 | 78,114 |
| | Series A-3, Step-up Coupon, 0% to 5/1/2019, 6.61% to 5/1/2040 | 110,000 | 65,848 |
| | Series A-4, Step-up Coupon, 0% to 5/1/2022, 6.61% to 5/1/2040 | 55,000 | 24,376 |
| | 5.4%, 5/1/2037 | 1,390,000 | 1,390,028 |
| | Series 1, 6.55%, 5/1/2027 | 10,000 | 10,051 |
| | Series 3, 6.55%, 5/1/2027* | 130,000 | 1 |
| | Series A-1, 6.55%, 5/1/2027 | 170,000 | 170,070 |
| | Series A-2, 6.61%, 5/1/2039 | 50,000 | 49,999 |
| | Series 2015-3, 6.61%, 5/1/2040* | 165,000 | 2 |
| Florida, Village Community Development District No. 9, Special Assessment Revenue, 5.5%, 5/1/2042 | 150,000 | 166,656 |
| Martin County, FL, Health Facilities Authority, Martin Memorial Medical Center, 5.5%, 11/15/2042 | 335,000 | 369,827 |
| Miami Beach, FL, Health Facilities Authority, Mount Sinai Medical Center, 5.0%, 11/15/2044 | 500,000 | 544,045 |
| Miami-Dade County, FL, Aviation Revenue: |
| | Series A, AMT, 5.0%, 10/1/2031 | 30,000 | 33,437 |
| | Series A, 5.5%, 10/1/2041 | 3,000,000 | 3,276,060 |
| Miami-Dade County, FL, Health Facilities Authority Hospital Revenue, Nicklaus Children's Hospital, 5.0%, 8/1/2047 | 665,000 | 754,449 |
| Orlando & Orange County, FL, Expressway Authority Revenue, Series C, Prerefunded, 5.0%, 7/1/2035 | 830,000 | 928,670 |
| Tallahassee, FL, Health Facilities Revenue, Memorial Healthcare, Inc. Project, Series A, 5.0%, 12/1/2055 | 150,000 | 161,839 |
| Tampa-Hillsborough County, FL, Expressway Authority: |
| | Series A, 5.0%, 7/1/2031 | 1,500,000 | 1,717,230 |
| | Series A, 5.0%, 7/1/2037 | 1,590,000 | 1,797,256 |
| | 13,496,004 |
| Georgia 5.5% |
| Americus-Sumter County, GA, Hospital Authority, Magnolia Manor Obligated Group, Series A, 6.25%, 5/15/2033 | 1,000,000 | 1,103,680 |
| Atlanta, GA, Airport Revenue, Series C, AMT, 5.0%, 1/1/2037 | 375,000 | 406,717 |
| Atlanta, GA, Tax Allocation, Beltline Project, Series B, Prerefunded, 7.375%, 1/1/2031 | 1,000,000 | 1,101,560 |
| Atlanta, GA, Water & Wastewater Revenue, Series A, Prerefunded, 6.25%, 11/1/2034 | 1,000,000 | 1,126,740 |
| DeKalb County, GA, Water & Sewer Revenue, Series A, 5.25%, 10/1/2036 | 1,000,000 | 1,140,150 |
| Gainesville & Hall County, GA, Hospital Authority, Northeast Georgia Health System, Inc. Project: | |
| | Series A, 5.25%, 8/15/2049 | 100,000 | 115,834 |
| | Series A, 5.5%, 8/15/2054 | 180,000 | 213,318 |
| Georgia, Main Street Natural Gas, Inc., Gas Project Revenue, Series A, 5.5%, 9/15/2024, GTY: Merrill Lynch & Co., Inc. | 1,220,000 | 1,456,168 |
| Georgia, Medical Center Hospital Authority Revenue, Anticipation Certificates, Columbus Regional Healthcare System, Prerefunded, 6.5%, 8/1/2038, INS: AGC | 1,000,000 | 1,064,460 |
| | 7,728,627 |
| Guam 1.8% |
| Guam, Government General Obligation, Series A, Prerefunded, 7.0%, 11/15/2039 | 1,000,000 | 1,144,710 |
| Guam, International Airport Authority Revenue, Series C, AMT, 6.375%, 10/1/2043 | 215,000 | 246,280 |
| Guam, Power Authority Revenue, Series A, 5.5%, 10/1/2030 | 1,000,000 | 1,075,240 |
| | 2,466,230 |
| Hawaii 1.8% |
| Gainesville & Hall County, GA, Development Authority Retirement Community Revenue, ACTS Retirement Life Community, Series A-2, Prerefunded, 6.625%, 11/15/2039 | 1,000,000 | 1,136,820 |
| Hawaii, State Airports Systems Revenue, Series A, AMT, 5.0%, 7/1/2041 | 695,000 | 786,107 |
| Hawaii, State Department of Budget & Finance, Special Purpose Revenue, Hawaiian Electric Co., Inc., 6.5%, 7/1/2039 | 500,000 | 541,350 |
| | 2,464,277 |
| Idaho 0.2% |
| Idaho, Health Facilities Authority Revenue, St. Luke's Regional Medical Center, 6.75%, 11/1/2037 | 305,000 | 326,197 |
| Illinois 8.8% |
| Chicago, IL, General Obligation, Series A, 6.0%, 1/1/2038 | 455,000 | 475,539 |
| Chicago, IL, O'Hare International Airport Revenue: |
| | Series C, AMT, 5.0%, 1/1/2046 | 1,000,000 | 1,100,520 |
| | Series B, 6.0%, 1/1/2041 | 2,000,000 | 2,292,440 |
| Illinois, Finance Authority Revenue, Friendship Village of Schaumburg, Series A, 5.625%, 2/15/2037 | 2,000,000 | 2,000,080 |
| Illinois, Finance Authority Revenue, The Admiral at Lake Project, Series A, 8.0%, 5/15/2040 | 1,000,000 | 1,114,660 |
| Illinois, Finance Authority Revenue, Three Crowns Park Plaza, Series A, 5.875%, 2/15/2038 | 1,000,000 | 1,000,850 |
| Illinois, Metropolitan Pier & Exposition Authority Revenue, McCormick Place Project, Series A, 5.0%, 6/15/2042 | 300,000 | 301,452 |
| Illinois, Metropolitan Pier & Exposition Authority, Dedicated State Tax Revenue, Capital Appreciation-McCormick, Series A, Zero Coupon, 6/15/2036, INS: NATL | 3,000,000 | 1,308,720 |
| Illinois, Railsplitter Tobacco Settlement Authority, 6.0%, 6/1/2028 | 365,000 | 418,359 |
| Illinois, State Finance Authority Revenue, OSF Healthcare Systems, Series A, 5.0%, 11/15/2045 | 525,000 | 578,970 |
| Illinois, State Finance Authority Revenue, Park Place of Elmhurst Project, Series C, 2.0%, 5/15/2055*(PIK) | 150,000 | 17,190 |
| Illinois, State Finance Authority Revenue, Trinity Health Corp., Series L, 5.0%, 12/1/2030 | 1,000,000 | 1,120,780 |
| Illinois, State General Obligation, 5.0%, 2/1/2029 | 225,000 | 233,620 |
| Springfield, IL, Electric Revenue, Senior Lien, 5.0%, 3/1/2040, INS: AGMC | 385,000 | 432,216 |
| | 12,395,396 |
| Indiana 4.3% |
| Indiana, Finance Authority Hospital Revenue, Deaconess Hospital Obligation, Series A, Prerefunded, 6.75%, 3/1/2039 | 525,000 | 577,941 |
| Indiana, State Finance Authority Revenue, BHI Senior Living Obligated Group, Series A, 5.25%, 11/15/2046 | 365,000 | 395,832 |
| Indiana, State Finance Authority Revenue, Community Foundation of Northwest Indiana, 5.0%, 3/1/2041 | 1,000,000 | 1,080,520 |
| Indiana, State Finance Authority Revenue, Greencroft Obligation Group, Series A, 7.0%, 11/15/2043 | 460,000 | 522,146 |
| Indiana, State Finance Authority Revenue, Stadium Project, Series A, 5.25%, 2/1/2037 | 1,330,000 | 1,568,482 |
| Valparaiso, IN, Exempt Facilities Revenue, Pratt Paper LLC Project, AMT, 7.0%, 1/1/2044, GTY: Pratt Industries (U.S.A.) | 780,000 | 941,039 |
| Vigo County, IN, Hospital Authority Revenue, Union Hospital, Inc., 144A, Prerefunded, 5.7%, 9/1/2037 | 1,000,000 | 1,012,030 |
| | 6,097,990 |
| Iowa 0.7% |
| Iowa, Finance Authority Retirement Community Revenue, Edgewater LLC Project, Prerefunded, 6.5%, 11/15/2027 | 1,000,000 | 1,025,490 |
| Kansas 0.2% |
| Lenexa, KS, Health Care Facility Revenue, Lakeview Village, Inc. Project, Prerefunded, 7.25%, 5/15/2039 | 300,000 | 335,880 |
| Kentucky 3.3% |
| Kentucky, Economic Development Finance Authority, Hospital Facilities Revenue, Owensboro Medical Health Systems, Series A, Prerefunded, 6.5%, 3/1/2045 | 2,000,000 | 2,320,100 |
| Kentucky, Economic Development Finance Authority, Louisville Arena Project Revenue, Series A-1, 6.0%, 12/1/2033, INS: AGC | 365,000 | 379,136 |
| Kentucky, Public Transportation Infrastructure Authority Toll Revenue, 1st Tier-Downtown Crossing, Series A, 6.0%, 7/1/2053 | 1,440,000 | 1,637,309 |
| Kentucky, State Economic Development Finance Authority, Owensboro Health, Inc. Obligated Group: | |
| | Series A, 5.0%, 6/1/2045 | 130,000 | 142,652 |
| | Series A, 5.25%, 6/1/2041 | 190,000 | 213,923 |
| | 4,693,120 |
| Louisiana 1.7% |
| Louisiana, Local Government Environmental Facilities, Community Development Authority Revenue, 6.75%, 11/1/2032 | 1,000,000 | 1,018,840 |
| Louisiana, New Orleans Aviation Board, General Airport North Terminal, Series B, AMT, 5.0%, 1/1/2048 | 140,000 | 158,430 |
| Louisiana, St. John Baptist Parish Revenue, Marathon Oil Corp., Series A, 5.125%, 6/1/2037 | 950,000 | 952,299 |
| Louisiana, Tobacco Settlement Financing Corp. Revenue, Series A, 5.25%, 5/15/2035 | 180,000 | 196,970 |
| | 2,326,539 |
| Maine 0.8% |
| Maine, Health & Higher Educational Facilities Authority Revenue, Maine General Medical Center, 6.75%, 7/1/2036 | 1,000,000 | 1,104,400 |
| Maryland 4.0% |
| Maryland, Economic Development Corp., Pollution Control Revenue, Potomac Electric Power Co., 6.2%, 9/1/2022 | 1,500,000 | 1,636,155 |
| Maryland, State Health & Higher Educational Facilities Authority Revenue, Adventist Healthcare Obligated Group, Series A, 5.5%, 1/1/2046 | 375,000 | 429,034 |
| Maryland, State Health & Higher Educational Facilities Authority Revenue, Anne Arundel Health Systems, Series A, Prerefunded, 6.75%, 7/1/2039 | 500,000 | 559,455 |
| Maryland, State Health & Higher Educational Facilities Authority Revenue, Meritus Medical Center Obligated Group, 5.0%, 7/1/2040 | 1,000,000 | 1,101,830 |
| Maryland, State Health & Higher Educational Facilities Authority Revenue, Washington County Hospital: | |
| | Prerefunded, 5.75%, 1/1/2033 | 500,000 | 513,835 |
| | Prerefunded, 6.0%, 1/1/2028 | 1,385,000 | 1,425,331 |
| | 5,665,640 |
| Massachusetts 2.2% |
| Massachusetts, State Development Finance Agency Revenue, Linden Ponds, Inc. Facility: | |
| | Series B, 11/15/2056* | 505,485 | 11,955 |
| | Series A-2, 5.5%, 11/15/2046 | 101,629 | 99,166 |
| | Series A-1, 6.25%, 11/15/2039 | 1,903,948 | 1,978,316 |
| Massachusetts, State Health & Educational Facilities Authority Revenue, Milford Regional Medical Center, Series E, 5.0%, 7/15/2037 | 950,000 | 953,296 |
| | 3,042,733 |
| Michigan 5.6% |
| Detroit, MI, Water & Sewerage Department, Sewerage Disposal System Revenue, Series A, 5.25%, 7/1/2039 | 280,000 | 312,287 |
| Detroit, MI, Water Supply Systems Revenue, Series A, 5.75%, 7/1/2037 | 1,000,000 | 1,123,320 |
| Kalamazoo, MI, Economic Development Corp. Revenue, Limited Obligation, Heritage Community, 5.5%, 5/15/2036 | 1,000,000 | 1,000,400 |
| Michigan, State Building Authority Revenue, Facilities Program: | |
| | Series I, 5.0%, 4/15/2038 | 775,000 | 879,765 |
| | Series I-A, 5.5%, 10/15/2045 | 2,000,000 | 2,266,400 |
| Michigan, State Finance Authority Revenue, Detroit Water & Sewer, Series C-3, 5.0%, 7/1/2033, INS: AGMC | 180,000 | 205,403 |
| Michigan, State Finance Authority Revenue, Detroit Water & Sewer Department, Series C, 5.0%, 7/1/2035 | 90,000 | 99,698 |
| Royal Oak, MI, Hospital Finance Authority Revenue, William Beaumont Hospital, Prerefunded, 8.25%, 9/1/2039 | 1,000,000 | 1,091,000 |
| Tawas City, MI, Hospital Finance Authority, St. Joseph Health Services, Series A, ETM, 5.75%, 2/15/2023 | 860,000 | 863,578 |
| | 7,841,851 |
| Minnesota 0.8% |
| Minneapolis, MN, Health Care Systems Revenue, Fairview Health Services, Series A, Prerefunded, 6.75%, 11/15/2032 | 1,000,000 | 1,084,170 |
| Mississippi 1.0% |
| Lowndes County, MS, Solid Waste Disposal & Pollution Control Revenue, Weyerhaeuser Co. Project, Series A, 6.8%, 4/1/2022 | 250,000 | 292,680 |
| Mississippi, Business Finance Corp., Pollution Control Revenue, Systems Energy Resources, Inc. Project, 5.875%, 4/1/2022 | 620,000 | 626,089 |
| Warren County, MS, Gulf Opportunity Zone, International Paper Co., Series A, 6.5%, 9/1/2032 | 435,000 | 461,626 |
| | 1,380,395 |
| Missouri 0.8% |
| Missouri, State Health & Educational Facilities Authority Revenue, Medical Research, Lutheran Senior Services, Series A, 5.0%, 2/1/2046 | 65,000 | 69,915 |
| Missouri, State Health & Educational Facilities Authority, Health Facilities Revenue, Lester E Cox Medical Centers, Series A, 5.0%, 11/15/2048 | 150,000 | 165,042 |
| St. Louis County, MO, Industrial Development Authority, Senior Living Facilities, St. Andrews Resources for Seniors Obligated Group, Series A, 5.125%, 12/1/2045 | 365,000 | 370,782 |
| St. Louis, MO, Lambert-St. Louis International Airport Revenue, Series A-1, 6.625%, 7/1/2034 | 415,000 | 458,143 |
| | 1,063,882 |
| Nebraska 0.4% |
| Douglas County, NE, Hospital Authority No. 2, Health Facilities, Children's Hospital Obligated Group, 5.0%, 11/15/2047 | 535,000 | 609,686 |
| Nevada 3.2% |
| Clark County, NV, School District, Series A, 5.0%, 6/15/2022, INS: NATL | 1,390,000 | 1,436,370 |
| Henderson, NV, Health Care Facility Revenue, Catholic Healthcare West, Series B, Prerefunded, 5.25%, 7/1/2031 | 1,250,000 | 1,254,463 |
| Las Vegas Valley, NV, Water District, Series B, 5.0%, 6/1/2037 | 1,565,000 | 1,785,743 |
| | 4,476,576 |
| New Jersey 7.5% |
| New Jersey, Health Care Facilities Financing Authority Revenue, St. Joseph's Health Care System, Prerefunded, 6.625%, 7/1/2038 | 715,000 | 759,387 |
| New Jersey, State Economic Development Authority Revenue, Series BBB, 5.5%, 6/15/2030 | 895,000 | 981,305 |
| New Jersey, State Economic Development Authority, Continental Airlines, Inc. Project, AMT, 4.875%, 9/15/2019 | 480,000 | 507,168 |
| New Jersey, State Economic Development Authority, Special Facilities Revenue, Continental Airlines, Inc. Project, Series B, AMT, 5.625%, 11/15/2030 | 500,000 | 563,860 |
| New Jersey, State Health Care Facilities Financing Authority Revenue, University Hospital, Series A, 5.0%, 7/1/2046, INS: AGMC | 180,000 | 198,594 |
| New Jersey, State Transportation Trust Fund Authority, Series B, 5.5%, 6/15/2031 | 1,500,000 | 1,587,705 |
| New Jersey, State Turnpike Authority Revenue, Series E, 5.0%, 1/1/2045 | 1,015,000 | 1,144,413 |
| New Jersey, Tobacco Settlement Financing Corp.: |
| | Series 1A, 4.75%, 6/1/2034 | 4,280,000 | 4,273,066 |
| | Series 1A, 5.0%, 6/1/2041 | 500,000 | 499,790 |
| | 10,515,288 |
| New York 8.6% |
| New York, Brooklyn Arena Local Development Corp., Pilot Revenue, Barclays Center Project, Series A, 4.0%, 7/15/2035, INS: AGMC | 45,000 | 48,037 |
| New York, Metropolitan Transportation Authority Revenue: |
| | Series D, 5.0%, 11/15/2038 | 275,000 | 311,542 |
| | Series E, 5.0%, 11/15/2042 | 305,000 | 344,156 |
| New York, State Liberty Development Corp. Revenue, World Trade Center Project, Class 1-3, 5.0%, 11/15/2044 | 500,000 | 537,620 |
| New York, State Transportation Development Corp., Special Facilities Revenue, American Airlines, Inc., John F. Kennedy International Airport Project, AMT, 5.0%, 8/1/2031, GTY: American Airlines Group | 445,000 | 474,775 |
| New York, State Transportation Development Corp., Special Facility Revenue, Laguardia Gateway Partners LLC, Redevelopment Project, Series A, AMT, 5.0%, 7/1/2041 | 1,200,000 | 1,315,968 |
| New York, TSASC, Inc., Series A, 5.0%, 6/1/2041 | 60,000 | 66,386 |
| New York & New Jersey Port Authority, One Hundred Forty-Seventh, AMT, 5.0%, 10/15/2023, INS: NATL | 8,260,000 | 8,266,773 |
| New York & New Jersey Port Authority, Special Obligation Revenue, JFK International Air Terminal LLC, 6.0%, 12/1/2042 | 680,000 | 766,713 |
| | 12,131,970 |
| North Carolina 1.0% |
| North Carolina, Medical Care Commission, Health Care Facilities Revenue, University Health Systems, Series D, Prerefunded, 6.25%, 12/1/2033 | 1,000,000 | 1,078,590 |
| North Carolina, Medical Care Commission, Retirement Facilities Revenue, First Mortgage-Aldersgate, 5.0%, 7/1/2045 | 330,000 | 338,323 |
| | 1,416,913 |
| Ohio 2.0% |
| Centerville, OH, Health Care Revenue, Graceworks Lutheran Services, 5.25%, 11/1/2047 | 220,000 | 231,907 |
| Hamilton County, OH, Health Care Revenue, Life Enriching Communities Project: | |
| | 5.0%, 1/1/2036 | 45,000 | 47,971 |
| | 5.0%, 1/1/2046 | 120,000 | 126,324 |
| Ohio, Akron, Bath & Copley Joint Township Hospital District Revenue, 5.25%, 11/15/2046 | 615,000 | 689,944 |
| Ohio, American Municipal Power, Inc. Revenue, Fremont Energy Center Project, Series B, 5.0%, 2/15/2037 | 1,575,000 | 1,750,203 |
| | 2,846,349 |
| Pennsylvania 6.1% |
| Butler County, PA, Hospital Authority Revenue, Butler Health Systems Project, Prerefunded, 7.25%, 7/1/2039 | 2,000,000 | 2,251,300 |
| Lancaster County, PA, Hospital Authority, Brethren Village Project: | |
| | 5.125%, 7/1/2037 | 100,000 | 107,921 |
| | 5.25%, 7/1/2041 | 100,000 | 108,299 |
| Pennsylvania, Commonwealth Financing Authority, Series A, 5.0%, 6/1/2035 | 315,000 | 352,148 |
| Pennsylvania, Geisinger Authority Health System Revenue, Series A-1, 5.0%, 2/15/2045 | 740,000 | 850,341 |
| Pennsylvania, State Economic Development Financing Authority Revenue, Bridges Finco LP, AMT, 5.0%, 12/31/2038 | 1,000,000 | 1,118,300 |
| Pennsylvania, State Economic Development Financing Authority, Exempt Facilities Revenue, PPL Energy Supply, Series A, 6.4%, 12/1/2038 | 185,000 | 190,600 |
| Pennsylvania, State Turnpike Commission Revenue: |
| | Series A-1, 5.0%, 12/1/2040 | 2,500,000 | 2,817,275 |
| | Series C, 5.0%, 12/1/2044 | 240,000 | 268,265 |
| Philadelphia, PA, Redevelopment Authority Revenue, First Lien Mortgage, Series A, 6.5%, 1/1/2029 | 446,600 | 447,757 |
| | 8,512,206 |
| Puerto Rico 0.5% |
| Puerto Rico, Sales Tax Financing Corp., Sales Tax Revenue: |
| | Series A, 5.5%, 8/1/2042* | 750,000 | 193,125 |
| | Series A, 6.0%, 8/1/2042* | 1,000,000 | 257,500 |
| | Series A, 6.375%, 8/1/2039* | 950,000 | 244,625 |
| | 695,250 |
| Rhode Island 0.1% |
| Rhode Island, Tobacco Settlement Financing Corp., Series A, 5.0%, 6/1/2040 | 155,000 | 167,950 |
| South Carolina 2.2% |
| Hardeeville, SC, Assessment Revenue, Anderson Tract Municipal Improvement District, Series A, 7.75%, 11/1/2039 | 875,000 | 888,974 |
| South Carolina, State Public Service Authority Revenue, Series E, 5.25%, 12/1/2055 | 1,070,000 | 1,195,340 |
| South Carolina, State Public Service Authority Revenue, Santee Cooper, Series A, 5.75%, 12/1/2043 | 890,000 | 1,013,834 |
| | 3,098,148 |
| Tennessee 1.5% |
| Clarksville, TN, Natural Gas Acquisition Corp., Gas Revenue: |
| | 5.0%, 12/15/2017, GTY: Merrill Lynch & Co., Inc. | 500,000 | 510,420 |
| | 5.0%, 12/15/2018, GTY: Merrill Lynch & Co., Inc. | 540,000 | 568,220 |
| Johnson City, TN, Health & Educational Facilities Board Hospital Revenue, Mountain States Health Alliance, Series A, 7.75%, 7/1/2038 | 1,000,000 | 1,081,300 |
| | 2,159,940 |
| Texas 19.4% |
| Brazos River, TX, Harbor Navigation District, Brazoria County Environmental Health, Dow Chemical Co. Project: | |
| | Series B-2, 4.95%, 5/15/2033 | 1,000,000 | 1,022,470 |
| | Series A-3, AMT, 5.125%, 5/15/2033 | 1,000,000 | 1,022,620 |
| Central Texas, Regional Mobility Authority Revenue, Senior Lien: | |
| | Series A, 5.0%, 1/1/2040 | 230,000 | 261,381 |
| | Series A, 5.0%, 1/1/2043 | 1,500,000 | 1,642,635 |
| | Prerefunded, 6.0%, 1/1/2041 | 545,000 | 637,732 |
| Dallas-Fort Worth, International Airport Revenue: |
| | Series F, AMT, 5.0%, 11/1/2035 | 1,000,000 | 1,097,180 |
| | Series D, AMT, 5.0%, 11/1/2038 | 2,000,000 | 2,199,900 |
| Houston, TX, Airport System Revenue, United Airlines, Inc., Terminal E Project, AMT, 4.75%, 7/1/2024 | 615,000 | 669,723 |
| Matagorda County, TX, Navigation District No. 1, Pollution Control Revenue, AEP Texas Central Co. Project, Series A, 4.4%, 5/1/2030, INS: AMBAC | 2,250,000 | 2,531,587 |
| Mission, TX, Economic Development Corp. Revenue, Senior Lien, Natgasoline Project, Series B, AMT, 144A, 5.75%, 10/1/2031 | 250,000 | 262,435 |
| North Texas, Tollway Authority Revenue, Series B, 5.0%, 1/1/2045 | 665,000 | 749,788 |
| North Texas, Tollway Authority Revenue, Toll Second Tier, Series F, Prerefunded, 5.75%, 1/1/2033 | 2,000,000 | 2,057,480 |
| Red River, TX, Health Facilities Development Corp., Retirement Facilities Revenue, MRC Crossings Project, Series A, 8.0%, 11/15/2049 | 285,000 | 329,614 |
| San Antonio, TX, Convention Center Hotel Finance Corp., Contract Revenue, Empowerment Zone, Series A, AMT, 5.0%, 7/15/2039, INS: AMBAC | 1,000,000 | 1,000,590 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp. Revenue, Trinity Terrace Project, The Cumberland Rest, Inc., Series A-1, 5.0%, 10/1/2044 | 175,000 | 186,706 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp., Hospital Revenue, Scott & White Healthcare, 5.0%, 8/15/2043 | 2,100,000 | 2,351,244 |
Tarrant County, TX, Cultural Education Facilities Finance Corp., Retirement Facilities Revenue, Buckner Senior Living Ventana Project: Series A, 6.625%, 11/15/2037 (a) | 315,000 | 322,459 |
| Series A, 6.75%, 11/15/2047 (a) | 250,000 | 256,163 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp., Retirement Facilities Revenue, Mirador Project, Series A, 5.0%, 11/15/2055 | 570,000 | 481,126 |
| Texas, Grand Parkway Transportation Corp., System Toll Revenue, Series B, 5.0%, 4/1/2053 | 500,000 | 573,095 |
| Texas, Love Field Airport Modernization Corp., Special Facilities Revenue, Southwest Airlines Co. Project, 5.25%, 11/1/2040 | 1,055,000 | 1,146,321 |
| Texas, SA Energy Acquisition Public Facility Corp., Gas Supply Revenue, 5.5%, 8/1/2020, GTY: The Goldman Sachs Group, Inc. | 2,000,000 | 2,235,920 |
| Texas, State Municipal Gas Acquisition & Supply Corp. III Gas Supply Revenue: | |
| | 5.0%, 12/15/2030, GTY: Macquarie Group Ltd. | 165,000 | 183,325 |
| | 5.0%, 12/15/2031, GTY: Macquarie Group Ltd. | 1,000,000 | 1,108,350 |
| | 5.0%, 12/15/2032, GTY: Macquarie Group Ltd. | 1,000,000 | 1,104,580 |
| Texas, State Private Activity Bond, Surface Transportation Corp. Revenue, Senior Lien, North Tarrant Express Mobility Partners Segments LLC, AMT, 6.75%, 6/30/2043 | 280,000 | 325,970 |
| Texas, State Transportation Commission, Turnpike Systems Revenue, Series C, 5.0%, 8/15/2034 | 825,000 | 931,738 |
| Travis County, TX, Health Facilities Development Corp. Revenue, Westminster Manor Health, Prerefunded, 7.125%, 11/1/2040 | 510,000 | 611,102 |
| | 27,303,234 |
| Utah 0.5% |
| Salt Lake City, UT, Airport Revenue, Series A, AMT, 5.0%, 7/1/2047 | 595,000 | 685,559 |
| Virginia 1.1% |
| Fairfax County, VA, Economic Development Authority, Residential Care Facility Revenue, Goodwin House, Inc., Series A, 5.0%, 10/1/2042 | 115,000 | 128,486 |
| Washington County, VA, Industrial Development Authority, Hospital Facility Revenue, Mountain States Health Alliance, Series C, 7.75%, 7/1/2038 | 1,370,000 | 1,482,491 |
| | 1,610,977 |
| Washington 4.8% |
| King County, WA, Water Sewer Revenue, Series B, 4.0%, 7/1/2041 | 2,000,000 | 2,115,500 |
| Washington, State Health Care Facilities Authority Revenue, Series C, 5.375%, 8/15/2028, INS: AGC | 595,000 | 598,850 |
| Washington, State Health Care Facilities Authority Revenue, Virginia Mason Medical Center, Series A, 6.125%, 8/15/2037 | 2,000,000 | 2,018,380 |
| Washington, State Health Care Facilities Authority, Catholic Health Initiatives, Series A, 5.0%, 2/1/2041 | 595,000 | 622,304 |
| Washington, State Housing Finance Commission, Presbyterian Retirement Communities Northwest Project, Series A, 144A, 5.0%, 1/1/2046 | 250,000 | 257,630 |
| Washington, State Housing Finance Commission, Rockwood Retirement Communities Project, Series A, 7.375%, 1/1/2044 | 1,000,000 | 1,146,560 |
| | 6,759,224 |
| West Virginia 0.6% |
| West Virginia, State Hospital Finance Authority, State University Health System Obligated Group, Series A, 5.0%, 6/1/2047 | 805,000 | 906,776 |
| Wisconsin 2.9% |
| Wisconsin, Public Finance Authority, Education Revenue, North Carolina Charter Educational Foundation Project, Series A, 5.0%, 6/15/2046 | 470,000 | 442,585 |
| Wisconsin, State Health & Educational Facilities Authority Revenue, Agnesian Healthcare, Inc., Series B, 5.0%, 7/1/2036 | 500,000 | 555,510 |
| Wisconsin, State Health & Educational Facilities Authority Revenue, Prohealth Care, Inc. Obligation Group, Prerefunded, 6.625%, 2/15/2039 | 1,110,000 | 1,216,904 |
| Wisconsin, State Health & Educational Facilities Authority Revenue, Thedacare, Inc., Series A, 5.5%, 12/15/2038 | 1,765,000 | 1,893,104 |
| | 4,108,103 |
| Total Municipal Bonds and Notes (Cost $178,024,057) | 194,380,762 |
| |
| Underlying Municipal Bonds of Inverse Floaters (b) 28.6% |
| California 3.8% |
| University of California, State Revenues, Series K, 4.0%, 5/15/2036 (c) | 5,000,000 | 5,353,550 |
| | Trust: California, State Revenues, Series 2016-XM0347, 144A, 11.74%, 5/15/2024, Leverage Factor at purchase date: 4 to 1 | |
| District of Columbia 4.2% |
| District of Columbia, General Obligation, Series A, 5.0%, 6/1/2041 (c) | 5,000,000 | 5,869,750 |
| | Trust: District of Columbia, General Obligation, Series 2016-XM0326, 144A, 15.77%, 6/1/2024, Leverage Factor at purchase date: 4 to 1 | |
| Florida 4.2% |
| Orange County, FL, School Board Certificates Participation, Series C, 5.0%, 8/1/2034 (c) | 5,000,000 | 5,844,050 |
| | Trust: Orange County, FL, School Board, Series 2016-XM0183, 144A, 15.53%, 2/1/2024, Leverage Factor at purchase date: 4 to 1 | |
| Massachusetts 8.0% |
| Massachusetts, State Development Finance Agency Revenue, Partners Healthcare System, Inc., Series Q, 5.0%, 7/1/2035 (c) | 5,000,000 | 5,807,100 |
| | Trust: Massachusetts, State Development Finance Agency Revenue, Series 2016-XM0136, 144A, 15.77%, 1/1/2024, Leverage Factor at purchase date: 4 to 1 | |
| Massachusetts, State Development Finance Agency Revenue, Harvard University, Series A, 4.0%, 7/15/2036 (c) | 5,000,000 | 5,509,600 |
| | Trust: Massachusetts, State Development Finance Agency Revenue, Series 2016-XM0401, 144A, 7.555%, 7/15/2024, Leverage Factor at purchase date: 4 to 1 | |
| | 11,316,700 |
| Texas 4.2% |
| Texas, State Transportation Commission-Highway Improvement, Series A, 5.0%, 4/1/2038 (c) | 5,000,000 | 5,889,650 |
| | Trust: Texas, State Transportation Commission, Series 2016-XM0405, 144A, 11.555%, 4/1/2024, Leverage Factor at purchase date: 4 to 1 | |
| Washington 4.2% |
| Washington, State General Obligation, Series D, 5.0%, 2/1/2035 (c) | 5,000,000 | 5,967,800 |
| | Trust: Washington, State General Obligation, Series 2017-XM0478, 144A, 11.555%, 8/1/2024, Leverage Factor at purchase date: 4 to 1 | |
| Total Underlying Municipal Bonds of Inverse Floaters (Cost $40,683,703) | 40,241,500 |
* Non-income producing security.
(a) When-issued security.
(b) Securities represent the underlying municipal obligations of inverse floating rate obligations held by the Fund. The Floating Rate Notes represent leverage to the Fund and is the amount owed to the floating rate note holders.
(c) Security forms part of the below inverse floater. The Fund accounts for these inverse floaters as a form of secured borrowing, by reflecting the value of the underlying bond in the investments of the Fund and the amount owed to the floating rate note holder as a liability.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
AGC: Assured Guaranty Corp.
AGMC: Assured Guaranty Municipal Corp.
AMBAC: Ambac Financial Group, Inc.
AMT: Subject to alternative minimum tax.
ETM: Bonds bearing the description ETM (escrow to maturity) are collateralized usually by U.S. Treasury securities which are held in escrow and used to pay principal and interest on bonds so designated.
NATL: National Public Finance Guarantee Corp.
PIK: Denotes that all or a portion of the income is paid in-kind in the form of additional principal.
Prerefunded: Bonds which are prerefunded are collateralized usually by U.S. Treasury securities which are held in escrow and used to pay principal and interest on tax-exempt issues and to retire the bonds in full at the earliest refunding date.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of May 31, 2017 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no transfers between fair value measurement levels during the period ended May 31, 2017.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
Deutsche Strategic Municipal Income Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end, diversified management investment company organized as a Massachusetts business trust.
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. The policies described below are followed consistently by the Fund in the preparation of its financial statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
Municipal debt securities are valued at prices supplied by independent pricing services approved by the Fund's Board, whose valuations are intended to reflect the mean between the bid and asked prices. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. If the pricing services are unable to provide valuations, the securities are valued at the mean of the most recent bid and asked quotations or evaluated prices, as applicable, obtained from one or more broker-dealers. These securities are generally categorized as Level 2.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund's valuation procedures, factors considered in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security's disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company's or issuer's financial statements; an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold; and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities.
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Certain risks may arise upon entering into when-issued or delayed delivery transactions from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.
By holding the inverse floater, the Fund has the right to collapse the TOB Trust by causing the holders of the floating rate instrument to tender their notes at par and have the broker transfer the underlying bond to the Fund. The floating rate note holder can also elect to tender the note for redemption at par at each reset date. The Fund accounts for these transactions as a form of secured borrowing, by reflecting the value of the underlying bond in the investments of the Fund and the amount owed to the floating rate note holder as a liability under the caption "Payable for floating rate notes issued" in the Statement of Assets and Liabilities. Income earned on the underlying bond is included in interest income, and interest paid on the floaters and the expenses of the TOB Trust are included in "Interest expense" in the Statement of Operations. For the six months ended May 31, 2017, interest expense related to floaters amounted to $219,156. The weighted average outstanding daily balance of the floating rate notes issued during the six months ended May 31, 2017 was approximately $25,096,000, with a weighted average interest rate of 1.75%.
The Fund may enter into shortfall and forbearance agreements by which the Fund agrees to reimburse the TOB Trust, in certain circumstances, for the difference between the liquidation value of the underlying bond held by the TOB Trust and the liquidation value of the floating rate notes plus any shortfalls in interest cash flows. This could potentially expose the Fund to losses in excess of the value of the Fund's inverse floater investments. In addition, the value of inverse floaters may decrease significantly when interest rates increase. The market for inverse floaters may be more volatile and less liquid than other municipal bonds of comparable maturity. The TOB Trust could be terminated outside of the Fund's control, resulting in a reduction of leverage and disposal of portfolio investments at inopportune times and prices. Investments in inverse floaters generally involve greater risk than in an investment in fixed-rate bonds.
The final rules implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Volcker Rule") preclude banking entities from sponsoring and/or providing services to TOB Trusts. In response to these rules, investment market participants have developed and are developing new TOB Trust structures that are designed to ensure that banking entities do not sponsor TOB Trusts in violation of the Volcker Rule. As of July 17, 2017, the Volcker Rule's final compliance date, all Fund TOB Trusts were structured to be in compliance with the Volcker Rule Any new TOB Trust structures must currently comply with the Volcker Rule. A Volcker-compliant TOB Trust structure is similar to traditional TOB Trust structures, with certain key differences. The basic features of the new Volcker-compliant TOB Trust structure currently intended to be implemented by the funds are as follows:
The ultimate impact of the new rules on the inverse floater market and the municipal market generally is not yet certain. Such changes could make early unwinds of TOB Trusts more likely, may make the use of TOB Trusts more expensive, and may make it more difficult to use TOB Trusts in general. The new rules may also expose the Fund to additional risks, including, but not limited to, compliance, securities law and operational risks.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At November 30, 2016, the Fund had a net tax basis capital loss carryforward of approximately $3,563,000, including $367,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or November 30, 2019, the expiration date, whichever occurs first; and $3,196,000 of post-enactment losses, which may be applied against realized net taxable capital gains indefinitely, including short-term losses ($1,892,000) and long-term losses ($1,304,000).
The Fund has reviewed the tax positions for the open tax years as of November 30, 2016 and has determined that no provision for income tax and/or uncertain tax provisions is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
The timing and characterization of certain income and capital gain distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to certain securities sold at a loss, reclassification of distributions and accretion of market discount on debt securities. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
As a result of its Series 2018 MTPS issuance and the redemption of the outstanding Series 2015 MTPS and ARPS, the Fund’s leverage attributable to preferred shares remains unchanged.
Under the terms of a purchase agreement between the Fund and the initial purchaser of the Series 2018 MTPS, the Fund is subject to various investment restrictions that are substantially similar to those that were in place with respect to the Series 2015 MTPS. These investment restrictions are, in certain respects, more restrictive than those to which the Fund is otherwise subject in accordance with its investment objective and policies. Such restrictions may limit the investment flexibility that might otherwise be pursued by the Fund if the Series 2018 MTPS were not outstanding. In addition, the Fund is subject to certain restrictions on its investments imposed by guidelines of the rating agencies that rate the Series 2018 MTPS, which guidelines may be changed by the applicable rating agency, in its sole discretion, from time to time. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act. Moreover, the Fund is required to maintain various asset coverage ratios with respect to the Series 2018 MTPS in accordance with the Fund's charter documents and the 1940 Act.
The 1940 Act requires that the preferred shareholders of the Fund, voting as a separate class, have the right to: a) elect at least two trustees at all times, and b) elect a majority of the trustees at any time when dividends on the preferred shares are unpaid for two full years. Unless otherwise required by law or under the terms of the preferred shares, each preferred share is entitled to one vote and preferred shareholders will vote together with common shareholders as a single class.
Leverage involves risks and special considerations for the Fund's common shareholders, including the likelihood of greater volatility of net asset value and market price of, and dividends on, the Fund's common shares than a comparable portfolio without leverage; the risk that fluctuations in interest rates will reduce the return to common shareholders; and the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the Fund's common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Fund's common shares. Changes in the value of the Fund's portfolio will be borne entirely by the common shareholders. If there is a net decrease (or increase) in the value of the Fund's investment portfolio, leverage will decrease (or increase) the net asset value per share to a greater extent than if leverage were not used. It is also possible that the Fund will be required to sell assets at a time when it would otherwise not do so, possibly at a loss, in order to redeem preferred shares to comply with asset coverage or other restrictions imposed by the rating agencies that rate the preferred shares. There is no assurance that the Fund's leveraging strategy will be successful.
During the six months ended May 31, 2017, purchases and sales of investment securities (excluding short-term investments) aggregated $29,979,168 and $23,818,926, respectively.
The Board has authorized the Fund to effect periodic repurchases of its outstanding shares in the open market from time to time when the Fund's shares trade at a discount to their net asset value. During the six months ended May 31, 2017 and the year ended November 30, 2016, the Fund did not repurchase shares in the open market.
On September 21, 2016, the Fund announced that the Fund’s Board of Trustees extended the Fund’s existing open market share repurchase program for an additional 12-month period. The Fund may continue to purchase outstanding shares of common stock in open-market transactions over the period from December 1, 2016 until November 30, 2017, when the Fund’s shares trade at a discount to net asset value. The Board’s authorization of the repurchase program extension follows the previous repurchase program, which commenced on December 1, 2015 and ran until November 30, 2016.
The Board of Trustees of the Fund has established a Dividend Reinvestment and Cash Purchase Plan (the "Plan") for shareholders that elect to have all dividends and distributions automatically reinvested in shares of the Fund (each a "Participant"). DST Systems, Inc. (the "Plan Agent") has been appointed by the Fund’s Board of Trustees to act as agent for each Participant.
A summary of the Plan is set forth below. Shareholders may obtain a copy of the entire Dividend Reinvestment and Cash Purchase Plan by visiting the Fund’s Web site at deutschefunds.com or by calling (800) 294-4366.
If you wish to participate in the Plan and your shares are held in your own name, contact Deutsche AM Service Company (the "Transfer Agent") at P.O. Box 219066, Kansas City, Missouri 64121-9066 or (800) 294-4366 for the appropriate form. Current shareholders may join the Plan by either enrolling their shares with the Transfer Agent or making an initial cash deposit of at least $250 with the Transfer Agent. First-time investors in the Fund may join the Plan by making an initial cash deposit of at least $250 with the Transfer Agent. Initial cash deposits will be invested within approximately 30 days. If your shares are held in the name of a broker or other nominee, you should contact the broker or nominee in whose name your shares are held to determine whether and how you may participate in the Plan.
The Transfer Agent will establish a Dividend Investment Account (the "Account") for each Participant in the Plan. The Transfer Agent will credit to the Account of each Participant any cash dividends and capital gains distributions (collectively, "Distributions") paid on shares of the Fund (the "Shares") and any voluntary cash contributions made pursuant to the Plan. Shares in a Participant’s Account are transferable upon proper written instructions to the Transfer Agent.
If, on the valuation date for a Distribution, Shares are trading at a discount from net asset value per Share, the Plan Agent shall apply the amount of such Distribution payable to a Participant (less a Participant’s pro rata share of brokerage commissions incurred with respect to open-market purchases in connection with the reinvestment of such Distribution) to the purchase on the open market of Shares for a Participant’s Account. If, on the valuation date for a Distribution, Shares are trading at a premium over net asset value per Share, the Fund will issue on the payment date, Shares valued at net asset value per Share on the valuation date to the Transfer Agent in the aggregate amount of the funds credited to a Participant’s Account. The Fund will increase the price at which Shares may be issued under the Plan to 95% of the fair market value of the Shares on the valuation date if the net asset value per Share of the Shares on the valuation date is less than 95% of the fair market value of the Shares on the valuation date. The valuation date will be the payment date for Distributions. Open-market purchases will be made on or shortly after the valuation date for Distributions, and in no event more than 30 days after such date except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities law.
A Participant may from time to time make voluntary cash contributions to his or her Account in a minimum amount of $100 in any month (with a $36,000 annual limit) for the purchase on the open market of Shares for the Participant’s Account. Such voluntary contributions will be invested by the Plan Agent on or shortly after the 15th of each month and in no event more than 30 days after such dates, except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities law. Voluntary cash contributions received from a Participant on or prior to the fifth day preceding the 15th of each month will be applied by the Plan Agent to the purchase of additional Shares as of that investment date. No interest will be paid on voluntary cash contributions held until investment. Consequently, Participants are strongly urged to ensure that their payments are received by the Transfer Agent on or prior to the fifth day preceding the 15th of any month. Voluntary cash contributions should be made in U.S. dollars and be sent by first-class mail, postage prepaid only to the following address (deliveries to any other address do not constitute valid delivery):
Participants may withdraw their entire voluntary cash contribution by written notice received by the Transfer Agent not less than 48 hours before such payment is to be invested.
The cost of Shares acquired for each Participant’s Account in connection with the Plan shall be determined by the average cost per Share, including brokerage commissions, of the Shares acquired. There will be no brokerage charges with respect to Shares issued directly by the Fund as a result of Distributions. However, each Participant will pay a pro rata share of brokerage commissions incurred with respect to open market purchases.
The reinvestment of Distributions does not relieve the Participant of any tax that many be payable on the Distributions. The Transfer Agent will report to each Participant the taxable amount of Distributions credited to his or her Account. Participants will be treated for federal income tax purposes as receiving the amount of the Distributions made by the Fund, which amount generally will be either equal to the amount of the cash distribution the Participant would have received if the Participant had elected to receive cash or, for Shares issued by the Fund, the fair market value of the Shares issued to the Participant.
The Fund may amend the Plan at any time or times but, only by mailing to each Participant appropriate written notice at least 90 days prior to the effective date thereof except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority in which case such amendment shall be effective as soon as practicable. The Plan also may be terminated by the Fund.
Shareholders may withdraw from the Plan at any time by giving the Transfer Agent a written notice. A notice of withdrawal will be effective immediately following receipt of the notice by the Transfer Agent provided the notice is received by the Transfer Agent at least ten calendar days prior to the record date for the Distribution; otherwise such withdrawal will be effective after the investment of the current Distribution. When a Participant withdraws from the Plan, or when the Plan is terminated by the Fund, the Participant will receive a certificate for full Shares in the Account, plus a check for any fractional Shares based on market price; or, if a Participant so desires, the Transfer Agent will notify the Plan Agent to sell his or her Shares in the Plan and send the proceeds to the Participant, less brokerage commissions.
All correspondence and inquiries concerning the Plan, and requests for additional information about the Plan, should be directed to Deutsche AM Service Company at P.O. Box 219066, Kansas City, Missouri 64121-9066 or (800) 294-4366.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
