Investment Income
Interest income, which reflects the amortization of premiums and includes accretion of discounts for financial reporting purposes, is recorded on an accrual basis. Interest income also reflects paydown gains and losses, if any.
Professional Fees
Professional fees presented on the Statement of Operations consist of legal fees incurred in the normal course of operations, audit fees, tax consulting fees and, in some cases, workout expenditures. Workout expenditures are incurred in an attempt to protect or enhance an investment, or to pursue other claims or legal actions on behalf of Fund shareholders.
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund intends to distribute substantially all of its net investment income and net capital gains to shareholders and to otherwise comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. Therefore, no federal income tax provision is required. Furthermore, each Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from regular federal and designated state income taxes, to retain such tax-exempt status when distributed to shareholders of the Funds. Net realized capital gains and ordinary income distributions paid by the Funds are subject to federal taxation.
For all open tax years and all major taxing jurisdictions, management of the Funds has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore, management of the Funds is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
Dividends and Distributions to Shareholders
Dividends from tax-exempt net investment income are declared monthly. Net realized capital gains and/or market discount from investment transactions, if any, are distributed to shareholders at least annually. Furthermore, capital gains are distributed only to the extent they exceed available capital loss carryforwards.
Distributions to shareholders of tax-exempt net investment income, net realized capital gains and/or market discount, if any, are recorded on the ex-dividend date. The amount and timing of distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP.
Inverse Floating Rate Securities
Each Fund is authorized to invest in inverse floating rate securities. An inverse floating rate security is created by depositing a municipal bond, typically with a fixed interest rate, into a special purpose trust created by a broker-dealer. In turn, this trust (a) issues floating rate certificates, in face amounts equal to some fraction of the deposited bond’s par amount or market value, that typically pay short-term tax-exempt interest rates to third parties, and (b) issues to a long-term investor (such as one of the Funds) an inverse floating rate certificate (sometimes referred to as an “inverse floater”) that represents all remaining or residual interest in the trust. The income received by the inverse floater holder varies inversely with the short-term rate paid to the floating rate certificates’ holders, and in most circumstances the inverse floater holder bears substantially all of the underlying bond’s downside investment risk and also benefits disproportionately from any potential appreciation of the underlying bond’s value. The price of an inverse floating rate security will be more volatile than that of the underlying bond because the interest rate is dependent on not only the fixed coupon rate of the underlying bond but also on the short-term interest paid on the floating rate certificates, and because the inverse floating rate security essentially bears the risk of loss of the greater face value of the underlying bond.
A Fund may purchase an inverse floating rate security in a secondary market transaction without first owning the underlying bond (referred to as an “externally-deposited inverse floater”), or instead by first selling a fixed-rate bond to a broker-dealer for deposit into the special purpose trust and receiving in turn the residual interest in the trust (referred to as a “self-deposited inverse floater”). The inverse floater held by a Fund gives the Fund the right (a) to cause the holders of the floating rate certificates to tender their notes at par, and (b) to have the broker transfer the fixed-rate bond held by the trust to the Fund, thereby collapsing the trust. An investment in an externally-deposited inverse floater is identified in the Portfolio of Investments as “(IF) – Inverse floating rate investment.R 21; An investment in a self-deposited inverse floater is accounted for as a financing transaction. In such instances, a fixed-rate bond deposited into a special purpose trust is identified in the Portfolio of Investments as “(UB) – Underlying bond of an inverse floating rate trust reflected as a financing transaction,” with the Fund accounting for the short-term floating rate certificates issued by the trust as “Floating rate obligations” on the Statement of Assets and Liabilities. In addition, the Fund reflects in “Investment Income” the entire earnings of the underlying bond and recognizes the related interest paid to the holders of the short-term floating rate certificates as “Interest expense on floating rate obligations” on the Statement of Operations.
During the six months ended September 30, 2010, each Fund invested in externally deposited inverse floaters and/or self-deposited inverse floaters.
Each Fund may also enter into shortfall and forbearance agreements (sometimes referred to as a “recourse trust” or “credit recovery swap”) (such agreements referred to herein as “Recourse Trusts”) with a broker-dealer by which a Fund agrees to reimburse the broker-dealer, in certain circumstances, for the difference between the liquidation value of the fixed-rate bond held by the trust and the liquidation value of the floating rate
Nuveen Investments 49
| | | Notes to |
| | | Financial Statements (Unaudited) (continued) |
| | | |
certificates issued by the trust plus any shortfalls in interest cash flows. Under these agreements, a Fund’s potential exposure to losses related to or on inverse floaters may increase beyond the value of a Fund’s inverse floater investments as a Fund may potentially be liable to fulfill all amounts owed to holders of the floating rate certificates. At period end, any such shortfall is recognized as “Unrealized depreciation on Recourse Trusts” on the Statement of Assets and Liabilities.
At September 30, 2010, the Funds were not invested in externally-deposited Recourse Trusts.
| | | Select Tax-Free (NXP | ) | Select Tax-Free 2 (NXQ | ) | Select Tax-Free 3 (NXR | ) | California Select Tax-Free (NXC | ) | New York Select Tax-Free (NXN | ) |
| Maximum exposure to Recourse Trusts | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
The average floating rate obligations outstanding and average annual interest rate and fees related to self-deposited inverse floaters during the six months ended September 30, 2010, for the following Funds were as follows:
| | | | Select Tax-Free 2 (NXQ | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Average floating rate obligations outstanding | | $ | 1,000,000 | | $ | 1,540,000 | | $ | 1,005,000 | |
| Average annual interest rate and fees | | | .80 | % | | .70 | % | | .56 | % |
Derivative Financial Instruments
Each Fund is authorized to invest in futures, options, swaps and other derivative instruments. Although the Funds are authorized to invest in such financial instruments, and may do so in the future, they did not make any such investments during the six months ended September 30, 2010.
Zero Coupon Securities
Each Fund is authorized to invest in zero coupon securities. A zero coupon security does not pay a regular interest coupon to its holders during the life of the security. Tax-exempt income to the holder of the security comes from accretion of the difference between the original purchase price of the security at issuance and the par value of the security at maturity and is effectively paid at maturity. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically.
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian fees and expenses are reduced by net credits earned on each Fund’s cash on deposit with the bank. Such deposit arrangements are an alternative to overnight investments. Credits for cash balances may be offset by charges for any days on which a Fund overdraws its account at the custodian bank.
Indemnifications
Under the Funds’ organizational documents, their officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Funds enter into contracts that provide general indemnifications to other parties. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results may differ from those estimates.
50 Nuveen Investments
2. Fair Value Measurements
In determining the fair value of each Fund��s investments, various inputs are used. These inputs are summarized in the three broad levels listed below:
| | |
| | Level 1 – Quoted prices in active markets for identical securities. |
| | Level 2 – Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). |
| | Level 3 – Significant unobservable inputs (including management’s assumptions in determining the fair value of investments). |
The inputs or methodologies used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of each Fund’s fair value measurements as of September 30, 2010:
| Select Tax-Free (NXP) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 230,641,091 | | $ | — | | $ | 230,641,091 | |
| Common Stocks | | | 2,883 | | | — | | | — | | | 2,883 | |
| Total | | $ | 2,883 | | $ | 230,641,091 | | $ | — | | $ | 230,643,974 | |
| | | | | | | | | | | | | | |
| Select Tax-Free 2 (NXQ) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 238,558,165 | | $ | — | | $ | 238,558,165 | |
| Common Stocks | | | 2,765 | | | — | | | — | | | 2,765 | |
| Total | | $ | 2,765 | | $ | 238,558,165 | | $ | — | | $ | 238,560,930 | |
| | | | | | | | | | | | | | |
| Select Tax-Free 3 (NXR) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 180,620,615 | | $ | — | | $ | 180,620,615 | |
| Common Stocks | | | 803 | | | — | | | — | | | 803 | |
| Total | | $ | 803 | | $ | 180,620,615 | | $ | — | | $ | 180,621,418 | |
| | | | | | | | | | | | | | |
| California Select Tax-Free (NXC) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 90,772,893 | | $ | — | | $ | 90,772,893 | |
| | | | | | | | | | | | | | |
| New York Select Tax-Free (NXN) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 56,067,195 | | $ | — | | $ | 56,067,195 | |
3. Derivative Instruments and Hedging Activities
The Funds record derivative instruments at fair value, with changes in fair value recognized on the Statement of Operations, when applicable. Even though the Funds’ investments in derivatives may represent economic hedges, they are not considered to be hedge transactions for financial reporting purposes. The Funds did not invest in derivative instruments during the six months ended September 30, 2010.
4. Fund Shares
The Funds did not repurchase and retire any of their shares during the six months ended September 30, 2010 or the fiscal year ended March 31, 2010.
Transactions in shares were as follows:
| | | Select Tax-Free (NXP) | | Select Tax-Free 2 (NXQ) | | Select Tax-Free 3 (NXR) | |
| | | Six Months Ended 9/30/10 | | Year Ended 3/31/10 | | Six Months Ended 9/30/10 | | Year Ended 3/31/10 | | Six Months Ended 9/30/10 | | Year Ended 3/31/10 | |
| Shares issued to shareholders due to reinvestment of distributions | | | 21,695 | | | 47,024 | | | 15,728 | | | 34,706 | | | 11,037 | | | 23,083 | |
| | | California Select Tax-Free (NXC) | | New York Select Tax-Free (NXN) | |
| | | Six Months Ended 9/30/10 | | Year Ended 3/31/10 | | Six Months Ended 9/30/10 | | Year Ended 3/31/10 | |
| Shares issued to shareholders due to reinvestment of distributions | | | — | | | — | | | 1,478 | | | 3,021 | |
Nuveen Investments 51
| | | Notes to |
| | | Financial Statements (Unaudited) (continued) |
| | | |
5. Investment Transactions
Purchases and sales (including maturities but excluding short-term investments) during the six months ended September 30, 2010, were as follows:
| | | | Select Tax-Free (NXP | ) | | Select Tax-Free 2 (NXQ | ) | | Select Tax-Free 3 (NXR | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Purchases | | $ | 5,573,971 | | $ | 7,754,418 | | $ | 3,655,543 | | $ | 374,752 | | $ | 735,278 | |
| Sales and maturities | | | 7,977,604 | | | 8,594,204 | | | 5,976,525 | | | 315,984 | | | 1,318,020 | |
6. Income Tax Information
The following information is presented on an income tax basis. Differences between amounts for financial statement and federal income tax purposes are primarily due to timing differences in recognizing taxable market discount, timing differences in recognizing certain gains and losses on investment transactions and the treatment of investments in inverse floating rate securities reflected as financing transactions, if any. To the extent that differences arise that are permanent in nature, such amounts are reclassified within the capital accounts on the Statement of Assets and Liabilities presented in the annual report, based on their federal tax basis treatment; temporary differences do not require reclassification. Temporary and permanent differences do not impact the net asset values of the Funds.
At September 30, 2010, the cost and unrealized appreciation (depreciation) of investments, as determined on a federal income tax basis, were as follows:
| | | Select Tax-Free (NXP | ) | Select Tax-Free 2 (NXQ | ) | Select Tax-Free 3 (NXR | ) | California Select Tax-Free (NXC | ) | New York Select Tax-Free (NXN | ) |
| Cost of investments | | $ | 224,030,300 | | $ | 240,512,778 | | $ | 174,827,400 | | $ | 86,312,770 | | $ | 52,484,537 | |
| Gross unrealized: | | | | | | | | | | | | | | | | |
| Appreciation | | $ | 17,486,874 | | $ | 11,890,164 | | $ | 10,423,070 | | $ | 4,341,960 | | $ | 2,717,680 | |
| Depreciation | | | (10,873,200 | ) | | (14,842,012 | ) | | (4,629,052 | ) | | (1,426,100 | ) | | (137,146 | ) |
| Net unrealized appreciation (depreciation) of investments | | $ | 6,613,674 | | $ | (2,951,848 | ) | $ | 5,794,018 | | $ | 2,915,860 | | $ | 2,580,534 | |
Permanent differences, primarily due to federal taxes paid, taxable market discount and distribution character reclassifications, resulted in reclassifications among the Funds’ components of net assets at March 31, 2010, the Funds’ last tax year end, as follows:
| | | | Select Tax-Free (NXP | ) | | Select Tax-Free 2 (NXQ | ) | | Select Tax-Free 3 (NXR | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Undistributed (Over-distribution of) net investment income | | $ | (1,288 | ) | $ | (13,807 | ) | $ | (1,270 | ) | $ | (234 | ) | $ | — | |
| Accumulated net realized gain (loss) | | | 11,473 | | | 13,783 | | | 1,270 | | | 234 | | | — | |
| Paid-in-surplus | | | (10,185 | ) | | 24 | | | — | | | — | | | — | |
The tax components of undistributed net tax-exempt income, net ordinary income and net long-term capital gains at March 31, 2010, the Funds’ last tax year end, were as follows:
| | | | Select Tax-Free (NXP | ) | | Select Tax-Free 2 (NXQ | ) | | Select Tax-Free 3 (NXR | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Undistributed net tax-exempt income* | | $ | 1,730,150 | | $ | 1,441,934 | | $ | 772,035 | | $ | 378,559 | | $ | 186,791 | |
| Undistributed net ordinary income** | | | 496 | | | 11,261 | | | 19,012 | | | 4,246 | | | — | |
| Undistributed net long-term capital gains | | | — | | | — | | | — | | | — | | | — | |
| * | Undistributed net tax-exempt income (on a tax basis) has not been reduced for the dividend declared on March 2, 2010, paid on April 1, 2010. |
| ** | Net ordinary income consists of taxable market discount income and net short-term capital gains, if any. |
52 Nuveen Investments
The tax character of distributions paid during the Funds’ last tax year ended March 31, 2010, was designated for purposes of the dividends paid deduction as follows:
| | | | Select Tax-Free (NXP | ) | | Select Tax-Free 2 (NXQ | ) | | Select Tax-Free 3 (NXR | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Distributions from net tax-exempt income | | $ | 11,501,182 | | $ | 11,757,723 | | $ | 8,339,231 | | $ | 4,174,015 | | $ | 2,393,829 | |
| Distributions from net ordinary income** | | | 263,468 | | | — | | | 306 | | | — | | | — | |
| Distributions from net long-term capital gains | | | — | | | — | | | 12,690 | | | — | | | — | |
| ** | Net ordinary income consists of taxable market discount income and net short-term capital gains, if any. |
At March 31, 2010, the Funds’ last tax year end, the following Funds had unused capital loss carryforwards available for federal income tax purposes to be applied against future capital gains, if any. If not applied, the carryforwards will expire as follows:
| | | | Select Tax-Free (NXP | ) | | Select Tax-Free 2 (NXQ | ) | | California Select Tax-Free (NXC | ) | | New York Select Tax-Free (NXN | ) |
| Expiration: | | | | | | | | | | | | | |
| March 31, 2015 | | $ | 844,020 | | $ | 1,317,559 | | $ | — | | $ | — | |
| March 31, 2016 | | | — | | | 7,597 | | | 29,942 | | | 40,192 | |
| March 31, 2017 | | | — | | | 400,800 | | | 107,619 | | | 15,314 | |
| March 31, 2018 | | | — | | | — | | | — | | | 9,265 | |
| Total | | $ | 844,020 | | $ | 1,725,956 | | $ | 137,561 | | $ | 64,771 | |
The following Funds have elected to defer net realized losses from investments incurred from November 1, 2009 through March 31, 2010, the Funds’ last tax year end, (“post-October losses”) in accordance with federal income tax regulations. Post-October losses are treated as having arisen on the first day of the current fiscal year:
| | | Select Tax-Free 2 (NXQ | ) | California Select Tax-Free (NXC | ) |
| Post-October capital losses | | $ | 464,302 | | $ | 495,724 | |
7. Management Fees and Other Transactions with Affiliates
Each Fund’s management fee is separated into two components – a fund-level fee, based only on the amount of assets within each individual Fund, and a complex-level fee, based on the aggregate amount of all fund assets managed by the Adviser. This pricing structure enables each Fund’s shareholders to benefit from growth in the assets within their respective Fund as well as from growth in the amount of complex-wide assets managed by the Adviser.
The annual fund-level fee for each Fund, payable monthly, is calculated according to the following schedule:
| | | | | Select Tax-Free 2 (NXQ | ) |
| | | | | Select Tax-Free 3 (NXR | ) |
| | | | | California Select Tax-Free (NXC | ) |
| | | Select Tax-Free (NXP | ) | New York Select Tax-Free (NXN | ) |
| Average Daily Net Assets* | | | Fund-Level Fee Rate | | | Fund-Level Fee Rate | |
| For the first $125 million | | | .0500 | % | | .1000 | % |
| For the next $125 million | | | .0375 | | | .0875 | |
| For the next $250 million | | | .0250 | | | .0750 | |
| For the next $500 million | | | .0125 | | | .0625 | |
Nuveen Investments 53
| | | Notes to |
| | | Financial Statements (Unaudited) (continued) |
| | | |
The annual complex-level fee for each Fund, payable monthly, is calculated according to the following schedule:
| Complex-Level Managed Asset Breakpoint Level* | Effective Rate at Breakpoint Level |
| $55 billion | | | .2000 | % |
| $56 billion | | | .1996 | |
| $57 billion | | | .1989 | |
| $60 billion | | | .1961 | |
| $63 billion | | | .1931 | |
| $66 billion | | | .1900 | |
| $71 billion | | | .1851 | |
| $76 billion | | | .1806 | |
| $80 billion | | | .1773 | |
| $91 billion | | | .1691 | |
| $125 billion | | | .1599 | |
| $200 billion | | | .1505 | |
| $250 billion | | | .1469 | |
| $300 billion | | | .1445 | |
| * | The complex-level fee is calculated based upon the aggregate daily managed assets of all Nuveen funds, with such daily managed assets defined separately for each fund in its management agreement, but excluding assets attributable to investments in other Nuveen funds. Managed assets include closed-end fund assets managed by the Adviser that are attributable to financial leverage. For these purposes, financial leverage includes the funds’ use of preferred stock and borrowings and certain investments in the residual interest certificates (also called inverse floating rate securities) in tender option bond (TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed by the trust’s issuance of floating rate securities, subject to an agreement by the Adviser as to certain funds to limit the amount of su ch assets for determining managed assets in certain circumstances. As of September 30, 2010, the complex-level fee rate was .1822%. |
The management fee compensates the Adviser for overall investment advisory and administrative services and general office facilities. The Funds pay no compensation directly to those of its trustees who are affiliated with the Adviser or to its officers, all of whom receive remuneration for their services to the Funds from the Adviser or its affiliates. The Board of Trustees has adopted a deferred compensation plan for independent trustees that enables trustees to elect to defer receipt of all or a portion of the annual compensation they are entitled to receive from certain Nuveen advised funds. Under the plan, deferred amounts are treated as though equal dollar amounts had been invested in shares of select Nuveen advised funds.
8. New Accounting Standards
Fair Value Measurements
On January 21, 2010, Financial Accounting Standards Board issued changes to the authoritative guidance under U.S. GAAP for fair value measurements. The objective of which is to provide guidance on how investment assets and liabilities are to be valued and disclosed. Specifically, the amendment requires reporting entities disclose Level 3 activity for purchases, sales, issuances and settlements in the Level 3 roll-forward on a gross basis rather than as one net number. The effective date of the amendment is for interim and annual periods beginning after December 15, 2010. At this time, management is evaluating the implications of this guidance and the impact it will have to the footnote disclosures, if any.
54 Nuveen Investments
| | | Financial |
| | | Highlights (Unaudited) |
Nuveen Investments 55
| | | Financial |
| | | Highlights (Unaudited) |
| | | |
| | Selected data for a Common share outstanding throughout each period: |
| | | | | Investment Operations | | Less Distributions | | | | | |
| | | Beginning Net Asset Value | | Net Investment Income | | Net Realized/ Unrealized Gain (Loss | ) | Total | | Net Investment Income | | Capital Gains | | Total | | Ending Net Asset Value | | Ending Market Value | |
| Select Tax-Free (NXP) |
| Year Ended 3/31: |
| 2011(d) | | $ | 14.19 | | $ | .35 | | $ | .12 | | $ | .47 | | $ | (.36 | ) | $ | — | | $ | (.36 | ) | $ | 14.30 | | $ | 15.27 | |
| 2010 | | | 13.52 | | | .73 | | | .66 | | | 1.39 | | | (.72 | ) | | — | | | (.72 | ) | | 14.19 | | | 14.74 | |
| 2009 | | | 14.30 | | | .71 | | | (.81 | ) | | (.10 | ) | | (.68 | ) | | — | | | (.68 | ) | | 13.52 | | | 13.67 | |
| 2008 | | | 14.72 | | | .70 | | | (.44 | ) | | .26 | | | (.68 | ) | | — | | | (.68 | ) | | 14.30 | | | 14.24 | |
| 2007 | | | 14.62 | | | .70 | | | .08 | | | .78 | | | (.68 | ) | | — | | | (.68 | ) | | 14.72 | | | 14.85 | |
| 2006 | | | 14.62 | | | .70 | | | (.02 | ) | | .68 | | | (.68 | ) | | — | | | (.68 | ) | | 14.62 | | | 14.21 | |
| Select Tax-Free 2 (NXQ) |
| Year Ended 3/31: |
| 2011(d) | | | 13.53 | | | .32 | | | .16 | | | .48 | | | (.33 | ) | | — | | | (.33 | ) | | 13.68 | | | 14.20 | |
| 2010 | | | 12.63 | | | .68 | | | .89 | | | 1.57 | | | (.67 | ) | | — | | | (.67 | ) | | 13.53 | | | 13.81 | |
| 2009 | | | 13.93 | | | .67 | | | (1.30 | ) | | (.63 | ) | | (.67 | ) | | — | | | (.67 | ) | | 12.63 | | | 13.14 | |
| 2008 | | | 14.60 | | | .66 | | | (.69 | ) | | (.03 | ) | | (.64 | ) | | — | | | (.64 | ) | | 13.93 | | | 13.79 | |
| 2007 | | | 14.44 | | | .66 | | | .14 | | | .80 | | | (.64 | ) | | — | | | (.64 | ) | | 14.60 | | | 14.07 | |
| 2006 | | | 14.38 | | | .66 | | | .06 | | | .72 | | | (.65 | ) | | (.01 | ) | | (.66 | ) | | 14.44 | | | 13.37 | |
56 Nuveen Investments
| |
| | | | | Ratios/Supplemental Data |
| Total Returns | | | | Ratios to Average Net Assets(b) | | | |
Based on Market Value | (a) | Based on Net Asset Value | (a) | Ending Net Assets (000 | ) | Expenses Including Interest | (c) | Expenses Excluding Interest | | Net Investment Income | | Portfolio Turnover Rate | |
| | | | | | | | | | | | | | |
| 6.18 | % | | 3.32 | % | $ | 236,017 | | | .33 | %* | | .33 | %* | | 4.94 | %* | | 2 | % |
| 13.45 | | | 10.45 | | | 233,869 | | | .32 | | | .32 | | | 5.20 | | | 3 | |
| .89 | | | (.65 | ) | | 222,114 | | | .33 | | | .33 | | | 5.12 | | | 11 | |
| .61 | | | 1.83 | | | 234,494 | | | .32 | | | .32 | | | 4.83 | | | 4 | |
| 9.59 | | | 5.48 | | | 241,074 | | | .31 | | | .31 | | | 4.77 | | | 2 | |
| 10.41 | | | 4.74 | | | 239,406 | | | .32 | | | .32 | | | 4.72 | | | 4 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| 5.35 | | | 3.61 | | | 242,038 | | | .40 | * | | .40 | * | | 4.70 | * | | 3 | |
| 10.45 | | | 12.62 | | | 239,100 | | | .37 | | | .37 | | | 5.12 | | | 4 | |
| .24 | | | (4.63 | ) | | 222,771 | | | .39 | | | .38 | | | 5.08 | | | 6 | |
| 2.69 | | | (.24 | ) | | 245,244 | | | .40 | | | .36 | | | 4.58 | | | 7 | |
| 10.21 | | | 5.62 | | | 257,037 | | | .37 | | | .36 | | | 4.50 | | | 3 | |
| 7.39 | | | 5.12 | | | 254,205 | | | .36 | | | .36 | | | 4.51 | | | 11 | |
| (a) | Total Return Based on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid per share at the time of reinvestment. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price. The actual reinvestment for the last dividend declared in the period may take place over several days, and in some instances may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation. Total returns are not annualized. |
| | Total Return Based on Net Asset Value is the combination of changes in net asset value, reinvested dividend income at net asset value and reinvested capital gains distributions at net asset value, if any. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending net asset value. The actual reinvest price for the last dividend declared in the period may often be based on the Fund’s market price (and not its net asset value), and therefore may be different from the price used in the calculation. Total returns are not annualized. |
| (b) | Ratios do not reflect the effect of custodian fee credits earned on the Fund’s net cash on deposit with the custodian bank, where applicable. |
| (c) | The expense ratios reflect, among other things, the interest expense deemed to have been paid by the Fund on the floating rate certificates issued by the special purpose trusts for the self-deposited inverse floaters held by the Fund, where applicable, as described in Footnote 1 – General Information and Significant Accounting Policies, Inverse Floating Rate Securities. |
| (d) | For the six months ended September 30, 2010. |
| * | Annualized. |
See accompanying notes to financial statements.
Nuveen Investments 57
| | | Financial |
| | | Highlights (Unaudited) (continued) |
| | | |
Selected data for a Common share outstanding throughout each period:
| | | | | | Investment Operations | | Less Distributions | | | | | | | |
| | | Beginning Net Asset Value | | Net Investment Income | | Net Realized/ Unrealized Gain (Loss | ) | Total | | Net Investment Income | | Capital Gains | | Total | | Ending Net Asset Value | | Ending Market Value | |
| Select Tax-Free 3 (NXR) |
| Year Ended 3/31: |
| 2011(d) | | $ | 14.06 | | $ | .33 | | $ | .16 | | $ | .49 | | $ | (.32 | ) | $ | — | | $ | (.32 | ) | $ | 14.23 | | $ | 14.95 | |
| 2010 | | | 13.38 | | | .67 | | | .65 | | | 1.32 | | | (.64 | ) | | — | ** | | (.64 | ) | | 14.06 | | | 14.22 | |
| 2009 | | | 13.98 | | | .66 | | | (.62 | ) | | .04 | | | (.64 | ) | | — | | | (.64 | ) | | 13.38 | | | 13.57 | |
| 2008 | | | 14.42 | | | .64 | | | (.44 | ) | | .20 | | | (.64 | ) | | — | | | (.64 | ) | | 13.98 | | | 13.75 | |
| 2007 | | | 14.29 | | | .64 | | | .13 | | | .77 | | | (.64 | ) | | — | | | (.64 | ) | | 14.42 | | | 14.01 | |
| 2006 | | | 14.22 | | | .65 | | | .06 | | | .71 | | | (.64 | ) | | — | | | (.64 | ) | | 14.29 | | | 13.45 | |
| California Select Tax-Free (NXC) |
| Year Ended 3/31: |
| 2011(d) | | | 13.97 | | | .34 | | | .33 | | | .67 | | | (.33 | ) | | — | | | (.33 | ) | | 14.31 | | | 13.89 | |
| 2010 | | | 13.24 | | | .67 | | | .73 | | | 1.40 | | | (.67 | ) | | — | | | (.67 | ) | | 13.97 | | | 13.08 | |
| 2009 | | | 14.09 | | | .66 | | | (.84 | ) | | (.18 | ) | | (.67 | ) | | — | | | (.67 | ) | | 13.24 | | | 12.00 | |
| 2008 | | | 14.73 | | | .66 | | | (.65 | ) | | .01 | | | (.64 | ) | | (.01 | ) | | (.65 | ) | | 14.09 | | | 14.08 | |
| 2007 | | | 14.57 | | | .64 | | | .18 | | | .82 | | | (.64 | ) | | (.02 | ) | | (.66 | ) | | 14.73 | | | 14.22 | |
| 2006 | | | 14.54 | | | .65 | | | .09 | | | .74 | | | (.65 | ) | | (.06 | ) | | (.71 | ) | | 14.57 | | | 13.56 | |
58 Nuveen Investments
| | | Ratios/Supplemental Data |
| Total Returns | | | | Ratios to Average Net Assets(b) | | | |
Based on Market Value | (a) | Based on Net Asset Value | (a) | Ending Net Assets (000 | ) | Expenses Including Interest | (c) | Expenses Excluding Interest | | Net Investment Income | | Portfolio Turnover Rate | |
| | | | | | | | | | | | | | |
| 7.52 | % | | 3.53 | % | $ | 185,149 | | | .38 | %* | | .38 | %* | | 4.64 | %* | | 2 | % |
| 9.70 | | | 10.05 | | | 182,779 | | | .38 | | | .38 | | | 4.81 | | | 3 | |
| 3.51 | | | .34 | | | 173,678 | | | .39 | | | .39 | | | 4.83 | | | 5 | |
| 2.91 | | | 1.42 | | | 181,288 | | | .38 | | | .36 | | | 4.49 | | | 2 | |
| 9.15 | | | 5.51 | | | 186,969 | | | .38 | | | .37 | | | 4.43 | | | 9 | |
| 10.12 | | | 5.10 | | | 185,233 | | | .37 | | | .37 | | | 4.51 | | | 6 | |
| | | | | | | �� | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| 8.81 | | | 4.86 | | | 89,688 | | | .39 | * | | .38 | * | | 4.76 | * | | — | *** |
| 14.71 | | | 10.71 | | | 87,548 | | | .41 | | | .39 | | | 4.87 | | | 4 | |
| (10.34 | ) | | (1.30 | ) | | 82,953 | | | .43 | | | .41 | | | 4.85 | | | 12 | |
| 3.68 | | | .05 | | | 88,224 | | | .44 | | | .38 | | | 4.52 | | | 8 | |
| 9.89 | | | 5.72 | | | 92,177 | | | .40 | | | .39 | | | 4.37 | | | 16 | |
| 6.52 | | | 5.17 | | | 91,152 | | | .38 | | | .38 | | | 4.42 | | | 8 | |
| (a) | Total Return Based on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid per share at the time of reinvestment. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price. The actual reinvestment for the last dividend declared in the period may take place over several days, and in some instances may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation. Total returns are not annualized. |
| | Total Return Based on Net Asset Value is the combination of changes in net asset value, reinvested dividend income at net asset value and reinvested capital gains distributions at net asset value, if any. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending net asset value. The actual reinvest price for the last dividend declared in the period may often be based on the Fund’s market price (and not its net asset value), and therefore may be different from the price used in the calculation. Total returns are not annualized. |
| (b) | Ratios do not reflect the effect of custodian fee credits earned on the Fund’s net cash on deposit with the custodian bank, where applicable. |
| (c) | The expense ratios reflect, among other things, the interest expense deemed to have been paid by the Fund on the floating rate certificates issued by the special purpose trusts for the self-deposited inverse floaters held by the Fund, where applicable, as described in Footnote 1 – General Information and Significant Accounting Policies, Inverse Floating Rate Securities. |
| (d) | For the six months ended September 30, 2010. |
| * | Annualized. |
| ** | Rounds to less than $.01 per share. |
| *** | Rounds to less than 1%. |
See accompanying notes to financial statements.
Nuveen Investments 59
| | | Financial |
| | | Highlights (Unaudited) (continued) |
| | | |
| | Selected data for a Common share outstanding throughout each period: |
| | | | | Investment Operations | | Less Distributions | | | | | |
| | | Beginning Net Asset Value | | Net Investment Income | | Net Realized/ Unrealized Gain (Loss) | | Total | | Net Investment Income | | Capital Gains | | Total | | Ending Net Asset Value | | Ending Market Value | |
| New York Select Tax-Free (NXN) |
| Year Ended 3/31: |
| 2011(d) | | $ | 14.06 | | $ | .32 | | $ | .31 | | $ | .63 | | $ | (.31 | ) | $ | — | | $ | (.31 | ) | $ | 14.38 | | $ | 14.36 | |
| 2010 | | | 13.37 | | | .62 | | | .68 | | | 1.30 | | | (.61 | ) | | — | | | (.61 | ) | | 14.06 | | | 13.80 | |
| 2009 | | | 13.79 | | | .62 | | | (.43 | ) | | .19 | | | (.61 | ) | | — | | | (.61 | ) | | 13.37 | | | 13.08 | |
| 2008 | | | 14.28 | | | .62 | | | (.49 | ) | | .13 | | | (.61 | ) | | (.01 | ) | | (.62 | ) | | 13.79 | | | 13.79 | |
| 2007 | | | 14.19 | | | .61 | | | .13 | | | .74 | | | (.61 | ) | | (.04 | ) | | (.65 | ) | | 14.28 | | | 14.15 | |
| 2006 | | | 14.28 | | | .62 | | | (.02 | ) | | .60 | | | (.62 | ) | | (.07 | ) | | (.69 | ) | | 14.19 | | | 13.35 | |
60 Nuveen Investments
| | | Ratios/Supplemental Data |
| Total Returns | | | | Ratios to Average Net Assets(b) | | | |
Based on Market Value | (a) | Based on Net Asset Value | (a) | Ending Net Assets (000 | ) | Expenses Including Interest | (c) | Expenses Excluding Interest | | Net Investment Income | | Portfolio Turnover Rate | |
| | | | | | | | | | | | | | |
| 6.32 | % | | 4.49 | % | $ | 56,273 | | | .42 | %* | | .41 | %* | | 4.48 | %* | | 1 | % |
| 10.31 | | | 9.89 | | | 55,007 | | | .44 | | | .42 | | | 4.50 | | | 1 | |
| (.57 | ) | | 1.47 | | | 52,268 | | | .47 | | | .45 | | | 4.57 | | | 1 | |
| 2.06 | | | .94 | | | 53,908 | | | .46 | | | .43 | | | 4.35 | | | 20 | |
| 11.15 | | | 5.30 | | | 55,828 | | | .46 | | | .42 | | | 4.29 | | | 6 | |
| 2.84 | | | 4.19 | | | 55,473 | | | .41 | | | .41 | | | 4.28 | | | 13 | |
| (a) | Total Return Based on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid per share at the time of reinvestment. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price. The actual reinvestment for the last dividend declared in the period may take place over several days, and in some instances may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation. Total returns are not annualized. |
| | Total Return Based on Net Asset Value is the combination of changes in net asset value, reinvested dividend income at net asset value and reinvested capital gains distributions at net asset value, if any. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending net asset value. The actual reinvest price for the last dividend declared in the period may often be based on the Fund’s market price (and not its net asset value), and therefore may be different from the price used in the calculation. Total returns are not annualized. |
| (b) | Ratios do not reflect the effect of custodian fee credits earned on the Fund’s net cash on deposit with the custodian bank, where applicable. |
| (c) | The expense ratios reflect, among other things, the interest expense deemed to have been paid by the Fund on the floating rate certificates issued by the special purpose trusts for the self-deposited inverse floaters held by the Fund, where applicable, as described in Footnote 1 – General Information and Significant Accounting Policies, Inverse Floating Rate Securities. |
| (d) | For the six months ended September 30, 2010. |
| * | Annualized. |
See accompanying notes to financial statements.
Nuveen Investments 61
Annual Investment Management Agreement Approval Process (Unaudited)
The Investment Company Act of 1940, as amended (the “1940 Act”), provides, in substance, that each investment advisory agreement between a fund and its investment adviser will continue in effect from year to year only if its continuance is approved at least annually by the fund’s board members, including by a vote of a majority of the board members who are not parties to the advisory agreement or “interested persons” of any parties (the “Independent Board Members”), cast in person at a meeting called for the purpose of considering such approval. In connection with such approvals, the fund’s board members must request and evaluate, and the investment adviser is required to furnish, such inf ormation as may be reasonably necessary to evaluate the terms of the advisory agreement. Accordingly, at a meeting held on May 25-26, 2010 (the “May Meeting”), the Boards of Trustees or Directors (as the case may be) (each a “Board” and each Trustee or Director, a “Board Member”) of the Funds, including a majority of the Independent Board Members, considered and approved the continuation of the advisory agreements (each an “Advisory Agreement”) between each Fund and Nuveen Asset Management (the “Adviser”) for an additional one-year period. In preparation for their considerations at the May Meeting, the Board also held a separate meeting on April 21-22, 2010 (the “ April Meeting”). Accordingly, the factors considered and determinations made regarding the renewals by the Independent Board Members include those made at the April Meeting.
In addition, in evaluating the Advisory Agreements, the Independent Board Members reviewed a broad range of information relating to the Funds and the Adviser, including absolute and comparative performance, fee and expense information for the Funds (as described in more detail below), the profitability of Nuveen for its advisory activities (which includes its wholly owned subsidiaries), and other information regarding the organization, personnel, and services provided by the Adviser. The Independent Board Members also met quarterly as well as at other times as the need arose during the year and took into account the information provided at such meetings and the knowledge gained therefrom. Prior to approving the renewal of the Advisory Agreements, the Independent Board Members reviewed the foregoing information with their independent legal counsel a nd with management, reviewed materials from independent legal counsel describing applicable law and their duties in reviewing advisory contracts, and met with independent legal counsel in private sessions without management present. The Independent Board Members considered the legal advice provided by independent legal counsel and relied upon their knowledge of the Adviser, its services and the Funds resulting from their meetings and other interactions throughout the year and their own business judgment in determining the factors to be considered in evaluating the Advisory Agreements. Each Board Member may have accorded different weight to the various factors in reaching his or her conclusions with respect to a Fund’s Advisory Agreement. The Independent Board Members did not
62 Nuveen Investments
identify any single factor as all-important or controlling. The Independent Board Members’ considerations were instead based on a comprehensive consideration of all the information presented. The principal factors considered by the Board and its conclusions are described below.
A. Nature, Extent and Quality of Services
In considering renewal of the Advisory Agreements, the Independent Board Members considered the nature, extent and quality of the Adviser’s services, including advisory services and administrative services. The Independent Board Members reviewed materials outlining, among other things, the Adviser’s organization and business; the types of services that the Adviser or its affiliates provide and are expected to provide to the Funds; the performance record of the applicable Fund (as described in further detail below); and any initiatives Nuveen had taken for the applicable fund product line, including continued activities to refinance auction rate preferred securities, manage leverage during periods of market turbulence and implement an enhanced leverage management process, modify investment mandates in light of market conditions and seek shareholder approval as necessary, maintain the fund share repurchase program and maintain shareholder communications to keep shareholders apprised of Nuveen’s efforts in refinancing preferred shares. In addition to the foregoing, the Independent Board Members also noted the additional services that the Adviser or its affiliates provide to closed-end funds, including, in particular, Nuveen’s continued commitment to supporting the secondary market for the common shares of its closed-end funds through a variety of programs designed to raise investor and analyst awareness and understanding of closed-end funds. These efforts include maintaining an investor relations program to provide timely information and education to financial advisers and investors; providing marketing for the closed-end funds; maintaining and enhancing a closed-end fund website; participating in conferences and having direct communications with analysts and financial advisors.
As part of their review, the Independent Board Members also evaluated the background, experience and track record of the Adviser’s investment personnel. In this regard, the Independent Board Members considered any changes in the personnel, and the impact on the level of services provided to the Funds, if any. The Independent Board Members also reviewed information regarding portfolio manager compensation arrangements to evaluate the Adviser’s ability to attract and retain high quality investment personnel, preserve stability, and reward performance but not provide an incentive for taking undue risks.
In addition to advisory services, the Independent Board Members considered the quality of administrative services provided by the Adviser and its affiliates including product management, fund administration, oversight of service providers, shareholder services, administration of Board relations, regulatory and portfolio compliance and legal support. Given the importance of compliance, the Independent Board Members also considered the Adviser’s compliance program, including the report of the chief compliance officer regarding the Funds’ compliance policies and procedures.
Based on their review, the Independent Board Members found that, overall, the nature, extent and quality of services provided (and expected to be provided) to the respective Funds under the Advisory Agreements were satisfactory.
Nuveen Investments 63
Annual Investment Management Agreement
Approval Process (Unaudited) (continued)
B. The Investment Performance of the Funds and the Adviser
The Board considered the performance results of each Fund over various time periods. The Board reviewed, among other things, each Fund’s historic investment performance as well as information comparing the Fund’s performance information with that of other funds (the “Performance Peer Group”) based on data provided by an independent provider of mutual fund data and with recognized and/or customized benchmarks. In this regard, the Board reviewed each Fund’s total return information compared to its Performance Peer Group for the quarter, one-, three- and five-year periods ending December 31, 2009 and for the same periods ending March 31, 2010. In addition, the Board reviewed each Fund’s total return information compared to recognized and/or customized benchmar ks for the quarter, one- and three-year periods ending December 31, 2009 and for the same periods ending March 31, 2010. Moreover, the Board reviewed the peer ranking of the Nuveen municipal funds advised by the Adviser in the aggregate. The Independent Board Members also reviewed historic premium and discount levels. This information supplemented the Fund performance information provided to the Board at each of its quarterly meetings.
In reviewing peer comparison information, the Independent Board Members recognized that the Performance Peer Group of certain funds may not adequately represent the objectives and strategies of the funds, thereby limiting the usefulness of comparing a fund’s performance with that of its Performance Peer Group. In this regard, the Independent Board Members considered that the Performance Peer Groups of certain funds (including the Funds) were classified as having significant differences from such funds based on considerations such as special fund objectives, potential investable universe and the composition of the peer set (e.g., the number and size of competing funds and number of competing managers).
Based on their review, the Independent Board Members determined that each Fund’s investment performance over time had been satisfactory. The Independent Board Members noted that the Funds underperformed the performance of their benchmarks in the three-year period but outperformed the performance of their benchmarks in the one-year period.
C. Fees, Expenses and Profitability
1. Fees and Expenses
The Board evaluated the management fees and expenses of each Fund reviewing, among other things, such Fund’s gross management fees, net management fees and net expense ratios in absolute terms as well as compared to the fee and expenses of a comparable universe of funds based on data provided by an independent fund data provider (the “Peer Universe”) and in certain cases, to a more focused subset of funds in the Peer Universe (the “Peer Group”) and any expense limitations.
The Independent Board Members further reviewed the methodology regarding the construction of the applicable Peer Universe and/or Peer Group. In reviewing the comparisons of fee and expense information, the Independent Board Members took into account that in certain instances various factors such as: the asset level of a fund
64 Nuveen Investments
relative to peers; the limited size and particular composition of the Peer Universe or Peer Group; the investment objectives of the peers; expense anomalies; changes in the funds comprising the Peer Universe or Peer Group from year to year; levels of reimbursement; the timing of information used; the differences in the type and use of leverage; and differences in the states reflected in the Peer Universe or Peer Group (with respect to state municipal funds) may impact the comparative data, thereby limiting the ability to make a meaningful comparison with peers, including for each of the Funds.
In reviewing the fee schedule for a Fund, the Independent Board Members also considered the fund-level and complex-wide breakpoint schedules (described in further detail below) and any fee waivers and reimbursements provided by Nuveen (applicable, in particular, for certain closed-end funds launched since 1999). The Independent Board Members noted that the Funds had net management fees and/or net expense ratios below, at or near (within 5 basis point or less) the peer averages of their Peer Group or Peer Universe.
Based on their review of the fee and expense information provided, the Independent Board Members determined that each Fund’s management fees were reasonable in light of the nature, extent and quality of services provided to the Fund.
2. Comparisons with the Fees of Other Clients
The Independent Board Members further reviewed information regarding the nature of services and fee rates offered by the Adviser to other clients, including municipal separately managed accounts and passively managed municipal bond exchange traded funds (ETFs) that are sub-advised by the Adviser. In evaluating the comparisons of fees, the Independent Board Members noted that the fee rates charged to the Funds and other clients vary, among other things, because of the different services involved and the additional regulatory and compliance requirements associated with registered investment companies, such as the Funds. Accordingly, the Independent Board Members considered the differences in the product types, including, but not limited to, the services provided, the structure and operations, product distribution and costs thereof, portfolio investm ent policies, investor profiles, account sizes and regulatory requirements. The Independent Board Members noted, in particular, that the range of services provided to the Funds (as discussed above) is much more extensive than that provided to separately managed accounts. Given the inherent differences in the products, particularly the extensive services provided to the Funds, the Independent Board Members believe such facts justify the different levels of fees.
3. Profitability of Nuveen
In conjunction with its review of fees, the Independent Board Members also considered the profitability of Nuveen for its advisory activities (which incorporated Nuveen’s wholly-owned affiliated sub-advisers) and its financial condition. The Independent Board Members reviewed the revenues and expenses of Nuveen’s advisory activities for the last two years, the allocation methodology used in preparing the profitability data and an analysis of the key drivers behind the changes in revenues and expenses that impacted profitability in 2009. The Independent Board Members noted this information supplemented the profitability information
Nuveen Investments 65
Annual Investment Management Agreement
Approval Process (Unaudited) (continued)
requested and received during the year to help keep them apprised of developments affecting profitability (such as changes in fee waivers and expense reimbursement commitments). In this regard, the Independent Board Members noted that they had also appointed an Independent Board Member as a point person to review and keep them apprised of changes to the profitability analysis and/or methodologies during the year. The Independent Board Members also considered Nuveen’s revenues for advisory activities, expenses, and profit margin compared to that of various unaffiliated management firms with similar amounts of assets under management and relatively comparable asset composition prepared by Nuveen.
In reviewing profitability, the Independent Board Members recognized the subjective nature of determining profitability which may be affected by numerous factors including the allocation of expenses. Further, the Independent Board Members recognized the difficulties in making comparisons as the profitability of other advisers generally is not publicly available and the profitability information that is available for certain advisers or management firms may not be representative of the industry and may be affected by, among other things, the adviser’s particular business mix, capital costs, types of funds managed and expense allocations. Notwithstanding the foregoing, the Independent Board Members reviewed Nuveen’s methodology and assumptions for allocating expenses across product lines to determine profitability. In reviewing profitabi lity, the Independent Board Members recognized Nuveen’s investment in its fund business. Based on their review, the Independent Board Members concluded that Nuveen’s level of profitability for its advisory activities was reasonable in light of the services provided.
In evaluating the reasonableness of the compensation, the Independent Board Members also considered other amounts paid to the Adviser by the Funds as well as any indirect benefits (such as soft dollar arrangements, if any) the Adviser and its affiliates receive, or are expected to receive, that are directly attributable to the management of the Funds, if any. See Section E below for additional information on indirect benefits the Adviser may receive as a result of its relationship with the Funds. Based on their review of the overall fee arrangements of each Fund, the Independent Board Members determined that the advisory fees and expenses of the respective Fund were reasonable.
D. Economies of Scale and Whether Fee Levels Reflect These Economies of Scale
With respect to economies of scale, the Independent Board Members have recognized the potential benefits resulting from the costs of a fund being spread over a larger asset base, although economies of scale are difficult to measure and predict with precision, particularly on a fund-by-fund basis. One method to help ensure the shareholders share in these benefits is to include breakpoints in the advisory fee schedule. Generally, management fees for funds in the Nuveen complex are comprised of a fund-level component and a complex-level component, subject to certain exceptions. Accordingly, the Independent Board Members reviewed and considered the applicable fund-level breakpoints in the advisory fee schedules that reduce advisory fees as asset levels increase. Further, the Independent Board
66 Nuveen Investments
Members noted that although closed-end funds may from time-to-time make additional share offerings, the growth of their assets will occur primarily through the appreciation of such funds’ investment portfolio.
In addition to fund-level advisory fee breakpoints, the Board also considered the Funds’ complex-wide fee arrangement. Pursuant to the complex-wide fee arrangement, the fees of the funds in the Nuveen complex are generally reduced as the assets in the fund complex reach certain levels. The complex-wide fee arrangement seeks to provide the benefits of economies of scale to fund shareholders when total fund complex assets increase, even if assets of a particular fund are unchanged or have decreased. The approach reflects the notion that some of Nuveen’s costs are attributable to services provided to all its funds in the complex and therefore all funds benefit if these costs are spread over a larger asset base.
Based on their review, the Independent Board Members concluded that the breakpoint schedules and complex-wide fee arrangement were acceptable and reflect economies of scale to be shared with shareholders when assets under management increase.
E. Indirect Benefits
In evaluating fees, the Independent Board Members received and considered information regarding potential “fall out” or ancillary benefits the Adviser or its affiliates may receive as a result of its relationship with each Fund. In this regard, the Independent Board Members considered any revenues received by affiliates of the Adviser for serving as agent at Nuveen’s trading desk and as co-manager in initial public offerings of new closed-end funds.
In addition to the above, the Independent Board Members considered whether the Adviser received any benefits from soft dollar arrangements whereby a portion of the commissions paid by a Fund for brokerage may be used to acquire research that may be useful to the Adviser in managing the assets of the Funds and other clients. The Independent Board Members noted that the Adviser does not currently have any soft dollar arrangements; however, to the extent certain bona fide agency transactions that occur on markets that traditionally trade on a principal basis and riskless principal transactions are considered as generating “commissions,” the Adviser intends to comply with the applicable safe harbor provisions.
Based on their review, the Independent Board Members concluded that any indirect benefits received by the Adviser as a result of its relationship with the Funds were reasonable and within acceptable parameters.
F. Other Considerations
The Independent Board Members did not identify any single factor discussed previously as all-important or controlling. The Board Members, including the Independent Board Members, unanimously concluded that the terms of the Advisory Agreements are fair and reasonable, that the Adviser’s fees are reasonable in light of the services provided to each Fund and that the Advisory Agreements be renewed.
Nuveen Investments 67
Reinvest Automatically
Easily and Conveniently
Nuveen makes reinvesting easy. A phone call is all it takes to set up your reinvestment account.
Nuveen Closed-End Funds Dividend Reinvestment Plan
Your Nuveen Closed-End Fund allows you to conveniently reinvest dividends and/or capital gains distributions in additional Fund shares.
By choosing to reinvest, you’ll be able to invest money regularly and automatically, and watch your investment grow through the power of tax-free compounding. Just like dividends or distributions in cash, there may be times when income or capital gains taxes may be payable on dividends or distributions that are reinvested.
It is important to note that an automatic reinvestment plan does not ensure a profit, nor does it protect you against loss in a declining market.
Easy and convenient
To make recordkeeping easy and convenient, each month you’ll receive a statement showing your total dividends and distributions, the date of investment, the shares acquired and the price per share, and the total number of shares you own.
How shares are purchased
The shares you acquire by reinvesting will either be purchased on the open market or newly issued by the Fund. If the shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at the greater of the net asset value or 95% of the then-current market price. If the shares are trading at less than net asset value, shares for your account will be purchased on the open market. If the Plan Agent begins purchasing Fund shares on the open market while shares are trading below net asset value, but the Fund’s shares subsequently trade at or above their net asset value before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion of the distribution in newly-issued Fund shares at a price equal to the greater of the shares’ ne t asset value or 95% of the shares’ market value on the last business day immediately prior to the purchase date. Dividends and distributions received to purchase shares in the open market will normally be invested shortly after the dividend payment date. No interest will be paid on dividends and distributions awaiting reinvestment. Because the market price of the shares may increase before purchases are completed, the average purchase price
68 Nuveen Investments
per share may exceed the market price at the time of valuation, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. A pro rata portion of any applicable brokerage commissions on open market purchases will be paid by Plan participants. These commissions usually will be lower than those charged on individual transactions.
Flexible
You may change your distribution option or withdraw from the Plan at any time, should your needs or situation change.
You can reinvest whether your shares are registered in your name, or in the name of a brokerage firm, bank, or other nominee. Ask your investment advisor if his or her firm will participate on your behalf. Participants whose shares are registered in the name of one firm may not be able to transfer the shares to another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although the Fund reserves the right to amend the Plan to include a service charge payable by the participants, there is no direct service charge to participants in the Plan at this time.
Call today to start reinvesting dividends and/or distributions
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in or withdraw from the Plan, speak with your financial advisor or call us at (800) 257-8787.
Nuveen Investments 69
Glossary of Terms
Used in this Report
| ■ | Auction Rate Bond: An auction rate bond is a security whose interest payments are adjusted periodically through an auction process, which process typically also serves as a means for buying and selling the bond. Auctions that fail to attract enough buyers for all the shares offered for sale are deemed to have “failed,” with current holders receiving a formula-based interest rate until the next scheduled auction. |
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| ■ | Average Annual Total Return: This is a commonly used method to express an investment’s performance over a particular, usually multi-year time period. It expresses the return that would have been necessary each year to equal the investment’s actual cumulative performance (including change in NAV or market price and reinvested dividends and capital gains distributions, if any) over the time period being considered. |
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| ■ | Average Effective Maturity: The weighted average of the effective maturity dates of the fixed-income securities in the portfolio. A bond’s effective maturity takes into account the possibility that it may be called by the issuer before its stated maturity date. In this case, the bond trades as though it had a shorter maturity than its stated maturity. |
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| ■ | Inverse Floaters: Inverse floating rate securities, also known as inverse floaters, are created by depositing a municipal bond, typically with a fixed interest rate, into a special purpose trust created by a broker-dealer. This trust, in turn, (a) issues floating rate certificates typically paying short-term tax-exempt interest rates to third parties in amounts equal to some fraction of the deposited bond’s par amount or market value, and (b) issues an inverse floating rate certificate (sometimes referred to as an “inverse floater”) to an investor (such as a Fund) interested in gaining investment exposure to a long-term municipal bond. The income received by the holder of the inverse floater varies inversely with the short-term rate paid to the floating ra te certificates’ holders, and in most circumstances the holder of the inverse floater bears substantially all of the underlying bond’s downside investment risk. The holder of the inverse floater typically also benefits disproportionately from any potential appreciation of the underlying bond’s value. Hence, an inverse floater essentially represents an investment in the underlying bond on a leveraged basis. |
70 Nuveen Investments
| | |
| ■ | Leverage-Adjusted Duration: Duration is a measure of the expected period over which a bond’s principal and interest will be paid, and consequently is a measure of the sensitivity of a bond’s or bond Fund’s value to changes when market interest rates change. Generally, the longer a bond’s or Fund’s duration, the more the price of the bond or Fund will change as interest rates change. Leverage-adjusted duration takes into account the leveraging process for a Fund and therefore is longer than the duration of the Fund’s portfolio of bonds. |
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| ■ | Market Yield (also known as Dividend Yield or Current Yield): An investment’s current annualized dividend divided by its current market price. |
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| ■ | Net Asset Value (NAV): A Fund’s NAV per common share is calculated by subtracting the liabilities of the Fund (including any Preferred shares issued in order to leverage the Fund) from its total assets and then dividing the remainder by the number of common shares outstanding. Fund NAVs are calculated at the end of each business day. |
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| ■ | Pre-refunding: Pre-refunding, also known as advanced refundings or refinancings, is a procedure used by state and local governments to refinance municipal bonds to lower interest expenses. The issuer sells new bonds with a lower yield and uses the proceeds to buy U.S. Treasury securities, the interest from which is used to make payments on the higher-yielding bonds. Because of this collateral, pre-refunding generally raises a bond’s credit rating and thus its value. |
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| ■ | Taxable-Equivalent Yield: The yield necessary from a fully taxable investment to equal, on an after-tax basis, the yield of a municipal bond investment. |
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| ■ | Zero Coupon Bond: A zero coupon bond does not pay a regular interest coupon to its holders during the life of the bond. Tax-exempt income to the holder of the bond comes from accretion of the difference between the original purchase price of the bond at issuance and the par value of the bond at maturity and is effectively paid at maturity. The market prices of zero coupon bonds generally are more volatile than the market prices of bonds that pay interest periodically. |
Nuveen Investments 71
Notes
72 Nuveen Investments
Other Useful Information
Board of Trustees
John P. Amboian
Robert P. Bremner
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Judith M. Stockdale
Carole E. Stone
Terence J. Toth
Fund Manager
Nuveen Asset Management
333 West Wacker Drive
Chicago, IL 60606
Custodian
State Street Bank & Trust
Company
Boston, MA
Transfer Agent and
Shareholder Services
State Street Bank & Trust
Company
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
Legal Counsel
Chapman and Cutler LLP
Chicago, IL
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Chicago, IL
Quarterly Portfolio of Investments and Proxy Voting Information
You may obtain (i) each Fund’s quarterly portfolio of investments, (ii) information regarding how the Funds voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, and (iii) a description of the policies and procedures that the Funds used to determine how to vote proxies relating to portfolio securities without charge, upon request, by calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen’s website at www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities and Exchange Commission (“SEC”). The SEC may charge a copying fee for this information. Visit the SEC on-line at http://www.sec.gov or in person at the SEC’s Public Reference Room in Washington, D.C. Call the SEC at (202) 942-8090 for room hours and operation. You may also request Fund information by sending an e-mail request to publicinfo@sec.gov or by writing to the SEC’s Public References Section at 100 F Street NE, Washington, D.C. 20549.
CEO Certification Disclosure
Each Fund’s Chief Executive Officer (CEO) has submitted to the New York Stock Exchange (NYSE) the annual CEO certification as required by Section 303A.12(a) of the NYSE Listed Company Manual.
Each Fund has filed with the SEC the certification of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act.
Common Share Information
Each Fund intends to repurchase shares of its own common stock in the future at such times and in such amounts as is deemed advisable. During the period covered by this report, the Funds repurchased shares of their common stock as shown in the accompanying table.
| | | | |
| Fund | | Common Shares Repurchased | |
| NXP | | | — | |
| NXQ | | | — | |
| NXR | | | — | |
| NXC | | | — | |
| NXN | | | — | |
Any future repurchases will be reported to shareholders in the next annual or semi-annual report.
Nuveen Investments 73
Nuveen Investments:
Serving Investors for Generations
Since 1898, financial advisors and their clients have relied on Nuveen Investments to provide dependable investment solutions through continued adherence to proven, long-term investing principles. Today, we offer a range of high quality equity and fixed-income solutions designed to be integral components of a well-diversified core portfolio.
Focused on meeting investor needs.
Nuveen Investments is a global investment management firm that seeks to help secure the long-term goals of institutions and high net worth investors as well as the consultants and financial advisors who serve them. We market our growing range of specialized investment solutions under the high-quality brands of HydePark, NWQ, Nuveen, Santa Barbara, Symphony, Tradewinds and Winslow Capital. In total, Nuveen Investments managed more than $160 billion of assets on September 30, 2010.
Find out how we can help you.
To learn more about how the products and services of Nuveen Investments may be able to help you meet your financial goals, talk to your financial advisor, or call us at (800) 257-8787. Please read the information provided carefully before you invest. Investors should consider the investment objective and policies, risk considerations, charges and expenses of any investment carefully. Where applicable, be sure to obtain a prospectus, which contains this and other relevant information. To obtain a prospectus, please contact your securities representative or Nuveen Investments, 333 W. Wacker Dr., Chicago, IL 60606. Please read the prospectus carefully before you invest or send money.
Learn more about Nuveen Funds at: www.nuveen.com/cef
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Distributed by
Nuveen Investments, LLC
333 West Wacker Drive
Chicago, IL 60606
www.nuveen.com
ESA-B-0910D
