Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07142
HIGHLAND FUNDS II
(formerly, Pyxis Funds II)
(Exact name of registrant as specified in charter)
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices)(Zip code)
Highland Capital Management Fund Advisors, L.P.
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Name and Address of Agent for Service)
Registrant’s telephone number, including area code: (877) 665-1287
Date of fiscal year end: September 30
Date of reporting period: March 31, 2014
Table of Contents
Item 1: Reports to Stockholders.
A copy of the Report to Shareholders transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is attached herewith.
Table of Contents
Highland Funds II
Highland Global Allocation Fund
Highland Dividend Equity Fund
Highland Premier Growth Equity Fund
Highland Small-Cap Equity Fund
Highland Total Return Fund
Highland Tax-Exempt Fund
Highland Fixed Income Fund
Semi-Annual Report
March 31, 2014
Table of Contents
Highland Funds II
Highland Global Allocation Fund
Highland Dividend Equity Fund
Highland Premier Growth Equity Fund
Highland Small-Cap Equity Fund
Highland Total Return Fund
Highland Tax-Exempt Fund
Highland Fixed Income Fund
1 | ||||
8 | ||||
9 | ||||
42 | ||||
46 | ||||
48 | ||||
Statements of Changes in Net Assets - Capital Stock Activity - Shares | 52 | |||
56 | ||||
66 | ||||
82 | ||||
84 |
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.
Table of Contents
Highland Global Allocation Fund |
Objective
Highland Global Allocation Fund seeks to provide long-term growth of capital and future income.
Net Assets as of March 31, 2014
$374.4 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of Highland Global Allocation Fund at the end of the reporting period. Highland Global Allocation Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Asset Classifications as of 03/31/2014 (%)(1) | ||||
U.S. Equity | 25.6 | |||
Non-U.S. Equity | 25.2 | |||
Non-U.S. Asset-Backed Securities | 7.6 | |||
Non-U.S. Senior Loans | 5.7 | |||
Non-U.S. Exchange-Traded Funds | 3.7 | |||
Non-U.S. Corporate Bonds & Notes | 3.3 | |||
U.S. Rights | 2.3 | |||
U.S. Senior Loans | 2.2 | |||
U.S. Corporate Bonds & Notes | 0.9 | |||
U.S. Exchange-Traded Funds | 0.6 | |||
U.S. Convertible Bonds | 0.3 | |||
Other Investments and Assets & Liabilities(2) | 22.6 |
Top 10 Holdings as of 03/31/2014 (%)(1)(3) | ||||
Staples, Inc. (Non-U.S. Equity) | 3.1 | |||
Spirit Realty Capital, Inc., REIT (U.S. Equity) | 2.9 | |||
Fresh Market, Inc. (The) (U.S. Equity) | 2.9 | |||
American Airlines Group, Inc. (U.S. Equity) | 2.5 | |||
American Airlines Group, Inc. (U.S. Rights) | 2.3 | |||
Corrections Corp. of America, REIT (U.S. Equity) | 2.0 | |||
NRG Energy, Inc. (U.S. Equity) | 1.8 | |||
Canon, Inc. ADR (Non-U.S. Equity) | 1.8 | |||
Bayerische Motoren Werke AG (Non-U.S. Equity) | 1.5 | |||
CBS Corp., Class B (U.S. Equity) | 1.5 |
(1) | Asset classifications and holdings are calculated as a percentage of total net assets. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $75,650,084. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
Semi-Annual Report | 1 |
Table of Contents
FUND PROFILE (unaudited)
Highland Dividend Equity Fund |
Objective
Highland Dividend Equity Fund seeks to provide above average dividend yields with the potential for long-term capital appreciation.
Net Assets as of March 31, 2014
$23.3 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of Highland Dividend Equity Fund at the end of the reporting period. Highland Dividend Equity Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Industry Classifications as of 03/31/2014 (%)(1) | ||||
Food, Beverage & Tobacco | 11.5 | |||
Pharmaceuticals, Biotechnology & Life Sciences | 10.2 | |||
Materials | 8.7 | |||
Banks | 7.7 | |||
Energy | 7.7 | |||
Capital Goods | 6.3 | |||
Utilities | 5.2 | |||
Diversified Financials | 3.9 | |||
Semiconductors & Semiconductor Equipment | 3.8 | |||
Software & Services | 3.8 | |||
Other Investments and Assets & Liabilities(2) | 31.2 |
Top 10 Holdings as of 03/31/2014 (%)(1)(3) | ||||
Johnson & Johnson (Common Stocks) | 3.9 | |||
JPMorgan Chase & Co. (Common Stocks) | 3.9 | |||
Chevron Corp. (Common Stocks) | 3.9 | |||
Novartis AG, ADR (Common Stocks) | 3.9 | |||
Packaging Corp. of America (Common Stocks) | 3.8 | |||
Microchip Technology, Inc. (Common Stocks) | 3.8 | |||
Royal Dutch Shell PLC, ADR (Common Stocks) | 3.8 | |||
Paychex, Inc. (Common Stocks) | 3.8 | |||
General Electric Co. (Common Stocks) | 3.8 | |||
Kellogg Co. (Common Stocks) | 3.7 |
(1) | Industries and holdings are calculated as a percentage of total net assets. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $6,577,052. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
2 | Semi-Annual Report |
Table of Contents
FUND PROFILE (unaudited)
Highland Premier Growth Equity Fund |
Objective
Highland Premier Growth Equity Fund seeks long-term growth of capital and future income rather than current income.
Net Assets as of March 31, 2014
$199.6 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of Highland Premier Growth Equity Fund at the end of the reporting period. Highland Premier Growth Equity Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Industry Classifications as of 03/31/2014 (%)(1) | ||||
Software & Services | 15.0 | |||
Healthcare Equipment & Services | 11.9 | |||
Technology Hardware & Equipment | 11.5 | |||
Diversified Financials | 11.2 | |||
Media | 9.9 | |||
Retailing | 8.1 | |||
Pharmaceuticals, Biotechnology & Life Sciences | 7.9 | |||
Energy | 5.3 | |||
Materials | 3.8 | |||
Food, Beverage & Tobacco | 3.2 | |||
Other Investments and Assets & Liabilities(2) | 12.2 |
Top 10 Holdings as of 03/31/2014 (%)(1)(3) | ||||
Express Scripts Holding Co. (Common Stocks) | 4.7 | |||
QUALCOMM, Inc. (Common Stocks) | 4.5 | |||
Schlumberger, Ltd. (Common Stocks) | 4.2 | |||
Gilead Sciences, Inc. (Common Stocks) | 4.0 | |||
Covidien PLC (Common Stocks) | 3.9 | |||
Monsanto Co. (Common Stocks) | 3.8 | |||
Lowe’s Cos., Inc. (Common Stocks) | 3.8 | |||
CME Group, Inc. (Common Stocks) | 3.7 | |||
EMC Corp. (Common Stocks) | 3.5 | |||
Apple, Inc. (Common Stocks) | 3.4 |
(1) | Industries and holdings are calculated as a percentage of total net assets. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $1,393,326. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
Semi-Annual Report | 3 |
Table of Contents
FUND PROFILE (unaudited)
Highland Small-Cap Equity Fund |
Objective
Highland Small-Cap Equity Fund seeks long-term growth of capital.
Net Assets as of March 31, 2014
$42.6 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of Highland Small-Cap Equity Fund at the end of the reporting period. Highland Small-Cap Equity Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Industry Classifications as of 03/31/2014 (%)(1) | ||||
Software & Services | 11.7 | |||
Healthcare Equipment & Services | 10.7 | |||
Capital Goods | 9.0 | |||
Banks | 8.3 | |||
Materials | 6.9 | |||
Energy | 5.8 | |||
Real Estate | 5.5 | |||
Retailing | 5.1 | |||
Pharmaceuticals, Biotechnology & Life Sciences | 4.9 | |||
Transportation | 4.7 | |||
Other Investments and Assets & Liabilities(2) | 27.4 |
Top 10 Holdings as of 03/31/2014 (%)(1)(3) | ||||
Packaging Corp. of America (Common Stocks) | 2.5 | |||
Raymond James Financial, Inc. (Common Stocks) | 2.5 | |||
Jarden Corp. (Common Stocks) | 2.4 | |||
Old Dominion Freight Line, Inc. (Common Stocks) | 2.4 | |||
MEDNAX, Inc. (Common Stocks) | 2.3 | |||
Genesee & Wyoming, Inc., Class A (Common Stocks) | 2.3 | |||
LKQ Corp. (Common Stocks) | 2.2 | |||
MICROS Systems, Inc. (Common Stocks) | 2.2 | |||
PTC, Inc. (Common Stocks) | 2.0 | |||
HCC Insurance Holdings, Inc. (Common Stocks) | 1.9 |
(1) | Industries and holdings are calculated as a percentage of total net assets. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $12,005,885. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
4 | Semi-Annual Report |
Table of Contents
FUND PROFILE (unaudited)
Highland Total Return Fund |
Objective
Highland Total Return Fund seeks maximum total return, which includes both income and capital appreciation.
Net Assets as of March 31, 2014
$77.8 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot Highland Total Return Fund at the end of the reporting period. Highland Total Return Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Quality Breakdown as of 03/31/2014 (%)(1)(2) | ||||
AAA | 3.5 | |||
AA | 62.1 | |||
A | 12.2 | |||
BBB | 13.3 | |||
BB | 3.3 | |||
B | 2.7 | |||
D | 0.0 | † | ||
Not Rated | 2.9 |
Sector Classifications as of 03/31/2014 (%)(1) | ||||
Common Stocks | 55.8 | |||
U.S. Treasuries | 9.0 | |||
Agency Mortgage-Backed Securities | 8.1 | |||
Corporate Bonds & Notes | 7.1 | |||
Exchange-Traded Funds | 3.5 | |||
Foreign Corporate Bonds & Notes | 2.7 | |||
Non-Agency Collateralized Mortgage-Backed Securities | 1.5 | |||
Preferred Stocks | 0.4 | |||
Sovereign Bonds | 0.3 | |||
Municipal Bonds & Notes | 0.2 | |||
Non-Agency Collateralized Mortgage Obligations | 0.2 | |||
Agency Collateralized Mortgage Obligations | 0.1 | |||
Asset-Backed Securities | 0.0 | † | ||
Other Investments and Assets & Liabilities(3) | 11.1 |
Top 10 Holdings as of 03/31/2014 (%)(1)(2) | ||||
U.S. Treasury Notes 0.75%, 01/15/17 (U.S. Treasuries) | 3.9 | |||
Vanguard FTSE Emerging Markets, ETF (Exchange-Traded Funds) | 3.1 | |||
U.S. Treasury Bonds 4.50%, 02/15/36 (U.S. Treasuries) | 1.8 | |||
U.S. Treasury Notes 1.50%, 02/28/19 (U.S. Treasuries) | 1.4 | |||
QUALCOMM, Inc. (Common Stocks) | 1.2 | |||
Federal National Mortgage Assoc. 4.50%, 04/01/41 (Agency Mortgage-Backed Securities) | 1.2 | |||
Federal National Mortgage Assoc. 3.00%, 04/01/44 (Agency Mortgage-Backed Securities) | 1.0 | |||
Schlumberger, Ltd. (Common Stocks) | 1.0 | |||
PepsiCo, Inc. (Common Stocks) | 1.0 | |||
Apple, Inc. (Common Stocks) | 0.9 |
(1) | Quality is calculated as a percentage of total bonds & notes. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Quality Ratings are subject to change. |
(2) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
(3) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $15,614,184. |
† | Less than 0.05%. |
Semi-Annual Report | 5 |
Table of Contents
FUND PROFILE (unaudited)
Highland Tax-Exempt Fund |
Objective
Highland Tax-Exempt Fund seeks as high a level of income exempt from federal income taxation as is consistent with the preservation of capital.
Net Assets as of March 31, 2014
$29.0 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of Highland Tax-Exempt Fund at the end of the reporting period. Highland Tax-Exempt Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Quality Breakdown as of 03/31/2014 (%)(1) | ||||
AAA | 19.9 | |||
AA | 45.1 | |||
A | 24.4 | |||
BBB | 5.3 | |||
Not Rated | 5.3 |
Sector Classifications as of 03/31/2014 (%)(1) | ||||
Municipal Bonds & Notes | 100.0 | |||
Other Investments and Assets & Liabilities | 0.0 | † |
Top 10 Holdings as of 03/31/2014 (%)(1) | ||||
Missouri Highway & Transportation Commission 5.00%, 05/01/21 (Municipal Bonds & Notes) | 6.0 | |||
Los Angeles, CA Harbor Department 5.00%, 08/01/26 (Municipal Bonds & Notes) | 4.5 | |||
State of Hawaii Airports System 5.25%, 07/01/24 (Municipal Bonds & Notes) | 4.5 | |||
California State Department of Water Resources 5.00%, 12/01/21 (Municipal Bonds & Notes) | 4.1 | |||
Town of Fairfield, CT 5.00%, 01/01/21 (Municipal Bonds & Notes) | 4.1 | |||
New York State Urban Development Corp. 5.50%, 01/01/19 (Municipal Bonds & Notes) | 4.0 | |||
Municipal Electric Authority of Georgia 5.25%, 01/01/19 (Municipal Bonds & Notes) | 4.0 | |||
State of Texas 5.00%, 04/01/28 (Municipal Bonds & Notes) | 2.8 | |||
Virginia Commonwealth Transportation Board 5.00%, 03/15/23 (Municipal Bonds & Notes) | 2.4 | |||
City of Atlanta, GA Water & Wastewater 5.75%, 11/01/30 (Municipal Bonds & Notes) | 2.1 |
(1) | Quality is calculated as a percentage of total bonds & notes. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Quality Ratings are subject to change. |
† | Less than 0.05%. |
A portion of the Tax-Exempt Fund’s income may be subject to state, federal and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax.
6 | Semi-Annual Report |
Table of Contents
FUND PROFILE (unaudited)
Highland Fixed Income Fund |
Objective
Highland Fixed Income Fund seeks maximum income consistent with prudent investment management and the preservation of capital.
Net Assets as of March 31, 2014
$155.4 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot Highland Fixed Income Fund at the end of the reporting period. Highland Fixed Income Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Quality Breakdown as of 03/31/2014 (%)(1)(2) | ||||
AAA | 3.1 | |||
AA | 61.7 | |||
A | 11.2 | |||
BBB | 14.1 | |||
BB | 2.6 | |||
B | 3.1 | |||
D | 0.0 | † | ||
Not Rated | 4.2 |
Sector Classifications as of 03/31/2014 (%)(1) | ||||
U.S. Treasuries | 28.2 | |||
Agency Mortgage-Backed Securities | 28.2 | |||
Corporate Bonds & Notes | 23.0 | |||
Foreign Corporate Bonds & Notes | 9.1 | |||
Non-Agency Collateralized Mortgage-Backed Securities | 4.8 | |||
Sovereign Bonds | 1.9 | |||
Asset-Backed Securities | 1.3 | |||
Non-Agency Collateralized Mortgage Obligations | 0.7 | |||
Municipal Bonds & Notes | 0.6 | |||
Agency Collateralized Mortgage Obligations | 0.5 | |||
Preferred Stocks | 0.1 | |||
Other Investments and Assets & Liabilities(3) | 1.6 |
Top 10 Holdings as of 03/31/2014 (%)(1)(2) | ||||
U.S. Treasury Notes 0.75%, 01/15/17 (U.S. Treasuries) | 13.1 | |||
U.S. Treasury Bonds 4.50%, 02/15/36 (U.S. Treasuries) | 4.7 | |||
U.S. Treasury Notes 1.50%, 02/28/19 (U.S. Treasuries) | 4.3 | |||
Federal National Mortgage Assoc. 3.00%, 04/01/44 (Agency Mortgage-Backed Securities) | 2.9 | |||
Federal National Mortgage Assoc. 4.50%, 04/01/44 (Agency Mortgage-Backed Securities) | 2.8 | |||
U.S. Treasury Notes 2.50%, 08/15/23 (U.S. Treasuries) | 2.3 | |||
Government National Mortgage Assoc. 4.00%, 01/20/41 (Agency Mortgage-Backed Securities) | 2.0 | |||
Government National Mortgage Assoc. 3.50%, 05/20/43 (Agency Mortgage-Backed Securities) | 2.0 | |||
U.S. Treasury Notes 0.25%, 02/29/16 (U.S. Treasuries) | 1.8 | |||
Federal National Mortgage Assoc. 5.00%, 04/01/44 (Agency Mortgage-Backed Securities) | 1.7 |
(1) | Quality is calculated as a percentage of total bonds & notes. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Quality Ratings are subject to change. |
(2) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending. |
(3) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $13,844,728. |
† | Less than 0.05%. |
Semi-Annual Report | 7 |
Table of Contents
March 31, 2014 |
A guide to understanding each Fund’s financial statements
Investment Portfolio | The Investment Portfolio details each of the Fund’s holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. | |
Statement of Assets and Liabilities | This statement details each Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of a Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period. | |
Statement of Operations | This statement reports income earned by each Fund and the expenses incurred by each Fund during the reporting period. The Statement of Operations also shows any net gain or loss a Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents a Fund’s net increase or decrease in net assets from operations. | |
Statement of Changes in Net Assets | This statement details how each Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding. | |
Financial Highlights | The Financial Highlights demonstrate how each Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets). | |
Notes to Financial Statements | These notes disclose the organizational background of the Funds, certain of their significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. |
8 | Semi-Annual Report |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| U.S. Senior Loans (a) - 2.2% |
| ||||||
ENERGY - 0.1% | ||||||||
469,035 | Fieldwood Energy LLC | 489,702 | ||||||
|
| |||||||
FOOD & TOBACCO - 0.1% | ||||||||
461,538 | Del Monte Foods, Inc. | 460,385 | ||||||
|
| |||||||
HEALTHCARE - 1.4% | ||||||||
2,000,000 | Accellent Inc. | 1,990,010 | ||||||
769,231 | Akorn, Inc. | 778,365 | ||||||
1,090,909 | Medpace Inc. | 1,099,091 | ||||||
1,575,000 | Surgery Center Holdings, Inc. | 1,563,188 | ||||||
|
| |||||||
5,430,654 | ||||||||
|
| |||||||
INFORMATION TECHNOLOGY - 0.3% | ||||||||
997,500 | RP Crown Parent, LLC | 995,734 | ||||||
|
| |||||||
SERVICE - 0.3% | ||||||||
1,023,810 | Travelport LLC | 1,060,923 | ||||||
|
| |||||||
Total U.S. Senior Loans (Cost $8,353,264) | 8,437,398 | |||||||
|
| |||||||
| Non-U.S. Senior Loans (a)(c) - 5.7% |
| ||||||
BROADCASTING - 0.8% | ||||||||
1,000,000 | Clear Channel Communications, Inc. Tranche B Term Loan | 989,775 | ||||||
1,928,571 | Tranche D Term Loan | 1,892,131 | ||||||
|
| |||||||
2,881,906 | ||||||||
|
| |||||||
ENERGY - 0.5% | ||||||||
972,359 | FTS International, Inc. | 991,315 | ||||||
994,913 | MEG Energy Corp. | 1,000,589 | ||||||
|
| |||||||
1,991,904 | ||||||||
|
| |||||||
GAMING & LEISURE - 0.2% | ||||||||
1,000,000 | Caesars Entertainment Operating Co. | 944,445 | ||||||
|
|
Principal Amount ($) | Value ($) | |||||||
HEALTHCARE - 1.8% | ||||||||
1,979,695 | Alere, Inc. | 1,989,604 | ||||||
650,000 | Catalent Pharma Solutions, Inc. | 659,750 | ||||||
3,890,572 | Onex Carestream Finance LP | 3,984,607 | ||||||
|
| |||||||
6,633,961 | ||||||||
|
| |||||||
INFORMATION TECHNOLOGY - 0.5% | ||||||||
2,000,000 | IPC Systems, Inc. | 1,980,000 | ||||||
|
| |||||||
MANUFACTURING - 0.7% | ||||||||
2,000,000 | Doncasters U.S. Finance LLC | 2,037,500 | ||||||
250,000 | Flint Group Holdings SA | 252,395 | ||||||
250,000 | Tranche C-7 Dollar Term Loan | 252,395 | ||||||
|
| |||||||
2,542,290 | ||||||||
|
| |||||||
SERVICE - 0.9% | ||||||||
1,037,406 | EnergySolutions LLC | 1,042,158 | ||||||
544,141 | Pacific Industrial Services US Finco LLC | 552,558 | ||||||
829,843 | Second Lien Initial Term Loan | 851,626 | ||||||
992,500 | Travelport LLC | 1,017,159 | ||||||
|
| |||||||
3,463,501 | ||||||||
|
| |||||||
TRANSPORTATION - 0.3% | ||||||||
997,500 | Ship Luxco 3 SA | 1,004,986 | ||||||
|
| |||||||
Total Non-U.S. Senior Loans | 21,442,993 | |||||||
|
| |||||||
| Non-U.S. Asset-Backed Securities (c)(d) - 7.6% |
| ||||||
500,000 | ARES XI CLO, Ltd. | 501,875 | ||||||
1,000,000 | Avenue CLO VI, Ltd. | 935,000 | ||||||
2,000,000 | BNPP IP CLO, Ltd. | 1,880,000 | ||||||
1,000,000 | CFIP CLO, Ltd. | 895,000 |
See accompanying Notes to Financial Statements. | 9 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| Non-U.S. Asset-Backed Securities (continued) |
| ||||||
500,000 | Duane Street CLO II, Ltd. | 485,863 | ||||||
2,000,000 | Duchess V CLO BV | 2,453,284 | ||||||
750,000 | Fraser Sullivan CLO II, Ltd. | 708,412 | ||||||
750,000 | Gannett Peak CLO, Ltd. | 723,356 | ||||||
1,500,000 | Series 2006-1A, Class D1 | 1,447,500 | ||||||
500,000 | Halcyon Loan Investors CLO I, Inc. | 473,750 | ||||||
750,000 | HarbourView CLO 2006-1 | 708,750 | ||||||
844,008 | Highland Park CDO, Ltd. | 751,167 | ||||||
153,026 | Hillmark Funding | 139,284 | ||||||
1,000,000 | Jersey Street CLO, Ltd. | 953,760 | ||||||
1,500,000 | Katonah IX CLO, Ltd. | 1,400,700 | ||||||
1,000,000 | Landmark VIII CDO, Ltd. | 932,500 | ||||||
438,217 | Mayport CLO, Ltd. | 412,560 | ||||||
459,038 | Mountain Capital Clo VI, Ltd. | 418,872 | ||||||
944,878 | Primus Clo II, Ltd. | 862,792 | ||||||
1,500,000 | Red River CLO, Ltd. | 1,376,250 | ||||||
836,261 | Series 1A, Class E | 746,363 | ||||||
500,000 | Rockwall CDO II, Ltd. | 392,500 | ||||||
900,000 | Series 2007-1A, Class A1LB | 774,000 | ||||||
1,000,000 | Stone Tower CLO VI, Ltd. | 934,500 | ||||||
978,452 | Stratford CLO, Ltd. | 874,492 |
Principal Amount ($) | Value ($) | |||||||
1,000,000 | Westbrook CLO, Ltd. | 952,500 | ||||||
2,000,000 | Wood Street CLO II BV | 2,347,159 | ||||||
2,500,000 | Wood Street CLO V BV | 2,937,394 | ||||||
|
| |||||||
Total Non-U.S. Asset-Backed Securities (Cost $28,003,578) | 28,419,583 | |||||||
|
| |||||||
| U.S. Convertible Bonds (f) - 0.3% |
| ||||||
TELECOMMUNICATIONS - 0.3% | ||||||||
1,000,000 | Nuance Communications, Inc. | 1,006,875 | ||||||
|
| |||||||
Total U.S. Convertible Bonds | 1,006,875 | |||||||
|
| |||||||
| U.S. Corporate Bonds & Notes - 0.9% |
| ||||||
CONSUMER DURABLES & APPAREL - 0.3% | ||||||||
1,239,000 | JC Penney Corp., Inc. | 1,025,273 | ||||||
|
| |||||||
UTILITIES - 0.6% | ||||||||
3,000,000 | Texas Competitive Electric Holdings Co. LLC 11.50%, 10/01/2020 (e) | 2,317,500 | ||||||
|
| |||||||
Total U.S. Corporate Bonds & Notes | 3,342,773 | |||||||
|
| |||||||
| Non-U.S. Corporate Bonds & Notes (c) - 3.3% |
| ||||||
ENVIRONMENTAL CONTROL - 0.5% | ||||||||
2,000,000 | Tervita Corp. | 2,030,000 | ||||||
|
| |||||||
FINANCIAL - 0.1% | ||||||||
500,000 | Leveraged Finance Europe Capital II BV 2.38%, 03/02/2020 (d)(e) | 596,093 | ||||||
|
| |||||||
GAMING & LEISURE - 0.4% | ||||||||
1,110,000 | Caesars Entertainment Operating Co., Inc. | 491,175 | ||||||
1,000,000 | 11.25%, 06/01/2017 | 965,000 | ||||||
|
| |||||||
1,456,175 | ||||||||
|
| |||||||
MATERIALS - 0.6% | ||||||||
500,000 | INEOS Group Holdings SA | 520,625 | ||||||
1,085,000 | 6.50%, 08/15/2018 (e) | 1,574,029 | ||||||
|
| |||||||
2,094,654 | ||||||||
|
| |||||||
TELECOMMUNICATIONS - 1.7% | ||||||||
4,500,000 | Avaya, Inc. | 4,196,250 | ||||||
2,000,000 | Nokia OYJ | 2,115,000 | ||||||
|
| |||||||
6,311,250 | ||||||||
|
| |||||||
Total Non-U.S. Corporate Bonds & Notes | 12,488,172 | |||||||
|
|
10 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Global Allocation Fund |
Shares | Value ($) | |||||||
| U.S. Equity - 25.6% |
| ||||||
CAPITAL GOODS - 0.8% | ||||||||
20,000 | Generac Holdings, Inc. (f) | 1,179,400 | ||||||
150,000 | PGT, Inc. (g) | 1,726,500 | ||||||
|
| |||||||
2,905,900 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.2% | ||||||||
30,000 | Covanta Holding Corp. (f) | 541,500 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.9% | ||||||||
153,350 | K12, Inc. (f)(g) | 3,473,377 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.6% | ||||||||
89,444 | E*TRADE Financial Corp. (g) | 2,059,001 | ||||||
|
| |||||||
ENERGY - 0.8% | ||||||||
35,000 | Marathon Petroleum Corp. | 3,046,400 | ||||||
|
| |||||||
FOOD & STAPLES RETAILING - 2.9% | ||||||||
326,150 | Fresh Market, Inc. (The) (f)(g) | 10,958,640 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 2.7% | ||||||||
30,000 | Cardinal Health, Inc. | 2,099,400 | ||||||
25,623 | Express Scripts Holding Co. (g) | 1,924,031 | ||||||
30,000 | Globus Medical, Inc., Class A (g) | 797,700 | ||||||
15,000 | HCA Holdings, Inc. (g) | 787,500 | ||||||
14,000 | Medtronic, Inc. | 861,560 | ||||||
20,000 | St Jude Medical, Inc. | 1,307,800 | ||||||
27,000 | UnitedHealth Group, Inc. (f) | 2,213,730 | ||||||
|
| |||||||
9,991,721 | ||||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.1% | ||||||||
5,500 | Spectrum Brands Holdings, Inc. | 438,350 | ||||||
|
| |||||||
INSURANCE - 1.1% | ||||||||
132,149 | Fidelity National Financial, Inc., Class A (f) | 4,154,765 | ||||||
|
| |||||||
MEDIA - 1.6% | ||||||||
90,766 | CBS Corp., Class B (f) | 5,609,339 | ||||||
4,670 | CBS Outdoor Americas, Inc. (g) | 136,597 | ||||||
3,800 | Tribune Co. (f)(g) | 302,670 | ||||||
|
| |||||||
6,048,606 | ||||||||
|
| |||||||
REAL ESTATE INVESTMENT TRUST - 5.0% | ||||||||
242,850 | Corrections Corp. of America, REIT (f) | 7,606,062 | ||||||
1,001,549 | Spirit Realty Capital, Inc., REIT | 10,997,008 | ||||||
|
| |||||||
18,603,070 | ||||||||
|
| |||||||
RETAILING - 0.6% | ||||||||
6,000 | Dick’s Sporting Goods, Inc. | 327,660 | ||||||
43,370 | GNC Holdings, Inc., Class A | 1,909,147 | ||||||
|
| |||||||
2,236,807 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.2% | ||||||||
15,000 | Synaptics, Inc. (g) | 900,300 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 2.1% | ||||||||
119,750 | Fortinet, Inc. (g) | 2,638,092 | ||||||
95,700 | Microsoft Corp. | 3,922,743 | ||||||
41,375 | Rackspace Hosting, Inc. (f)(g) | 1,357,928 | ||||||
|
| |||||||
7,918,763 | ||||||||
|
|
Shares | Value ($) | |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 0.9% | ||||||||
60,000 | ARRIS Group, Inc. (g) | 1,690,800 | ||||||
75,000 | InvenSense, Inc. (f)(g) | 1,775,250 | ||||||
|
| |||||||
3,466,050 | ||||||||
|
| |||||||
TRANSPORTATION - 3.3% | ||||||||
252,771 | American Airlines Group, Inc. (f)(g) | 9,251,419 | ||||||
345,000 | JetBlue Airways Corp. (f)(g) | 2,998,050 | ||||||
|
| |||||||
12,249,469 | ||||||||
|
| |||||||
UTILITIES - 1.8% | ||||||||
216,707 | NRG Energy, Inc. | 6,891,283 | ||||||
|
| |||||||
Total U.S. Equity | 95,884,002 | |||||||
|
| |||||||
| Non-U.S. Equity (c) - 25.2% |
| ||||||
AUTOMOBILES & COMPONENTS - 1.6% | ||||||||
45,700 | Bayerische Motoren Werke AG | 5,770,778 | ||||||
|
| |||||||
BANKS - 0.2% | ||||||||
467 | Standard Chartered PLC | 9,759 | ||||||
20,700 | Sumitomo Mitsui Financial Group, Inc. | 886,210 | ||||||
|
| |||||||
895,969 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.4% | ||||||||
4,000 | MTU Aero Engines AG | 371,907 | ||||||
16,000 | Safran SA | 1,108,994 | ||||||
|
| |||||||
1,480,901 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 1.1% | ||||||||
212,050 | Sony Corp. ADR (f) | 4,054,396 | ||||||
|
| |||||||
CONSUMER SERVICES - 1.4% | ||||||||
36,540 | DeVry Education Group, Inc. (f) | 1,548,931 | ||||||
94,359 | Melco Crown Entertainment, Ltd. ADR (g) | 3,646,975 | ||||||
|
| |||||||
5,195,906 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 1.4% | ||||||||
86,265 | Legg Mason, Inc. (f) | 4,230,436 | ||||||
59,000 | ORIX Corp. | 832,422 | ||||||
|
| |||||||
5,062,858 | ||||||||
|
| |||||||
ENERGY - 0.9% | ||||||||
25,000 | Ocean Rig UDW, Inc. (g) | 444,750 | ||||||
16,004 | Pioneer Natural Resources Co. (f) | 2,994,989 | ||||||
71 | Royal Dutch Shell PLC, Class A | 2,593 | ||||||
|
| |||||||
3,442,332 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 1.0% | ||||||||
48,820 | Nestle SA | 3,678,011 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 1.1% | ||||||||
30,000 | Anika Therapeutics, Inc. (f)(g) | 1,233,000 | ||||||
40,000 | Catamaran Corp. (g) | 1,790,400 | ||||||
29,400 | Sysmex Corp. | 939,224 | ||||||
|
| |||||||
3,962,624 | ||||||||
|
| |||||||
INSURANCE - 0.7% | ||||||||
32,000 | Aon PLC | 2,696,960 | ||||||
|
|
See accompanying Notes to Financial Statements. | 11 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Global Allocation Fund |
Shares | Value ($) | |||||||
| Non-U.S. Equity (continued) |
| ||||||
MATERIALS - 0.1% | ||||||||
4,270 | WR Grace & Co. (g) | 423,456 | ||||||
|
| |||||||
MEDIA - 1.2% | ||||||||
250,149 | News Corp., Class A (f)(g) | 4,307,566 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 4.3% | ||||||||
7,500 | AbbVie, Inc. | 385,500 | ||||||
5,000 | Actavis PLC (g) | 1,029,250 | ||||||
198,000 | Astellas Pharma, Inc. | 2,353,275 | ||||||
3,980 | Eurofins Scientific | 1,191,710 | ||||||
50,000 | Gilead Sciences, Inc. (f)(g) | 3,543,000 | ||||||
39,500 | GlaxoSmithKline PLC | 1,048,041 | ||||||
51,000 | ICON PLC (g) | 2,425,050 | ||||||
16,000 | Merck & Co., Inc. | 908,320 | ||||||
97,000 | Shionogi & Co., Ltd. (f) | 1,801,826 | ||||||
35,000 | Stada Arzneimittel AG | 1,498,536 | ||||||
|
| |||||||
16,184,508 | ||||||||
|
| |||||||
REAL ESTATE INVESTMENT TRUST - 0.5% | ||||||||
635,000 | CapitaMall Trust, REIT (f) | 954,356 | ||||||
434,000 | Global Logistic Properties, Ltd. | 914,556 | ||||||
|
| |||||||
1,868,912 | ||||||||
|
| |||||||
RETAILING - 3.1% | ||||||||
1,029,650 | Staples, Inc. (f) | 11,676,231 | ||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.1% | ||||||||
8,700 | NXP Semiconductor NV (g) | 511,647 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 2.6% | ||||||||
16,763 | Alliance Data Systems Corp. (f)(g) | 4,567,079 | ||||||
30,000 | Autohome, Inc. ADR (g) | 1,152,300 | ||||||
134,500 | Compuware Corp. | 1,412,250 | ||||||
44,500 | Facebook, Inc., Class A (g) | 2,680,680 | ||||||
|
| |||||||
9,812,309 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 1.8% | ||||||||
219,150 | Canon, Inc. ADR (f) | 6,806,799 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 1.7% | ||||||||
47,255 | SBA Communications Corp., | 4,298,315 | ||||||
28,000 | Softbank Corp. | 2,120,697 | ||||||
|
| |||||||
6,419,012 | ||||||||
|
| |||||||
Total Non-U.S. Equity | 94,251,175 | |||||||
|
| |||||||
| U.S. Exchange-Traded Funds - 0.6% |
| ||||||
40,000 | ProShares UltraShort QQQ, ETF | 2,344,400 | ||||||
|
| |||||||
Total U.S. Exchange-Traded Funds | 2,344,400 | |||||||
|
| |||||||
| Non-U.S. Exchange-Traded Funds (c) - 3.7% |
| ||||||
85,000 | Guggenheim Solar, ETF (f) | 3,757,850 | ||||||
38,945 | ProShares Ultra Gold, ETF (g) | 1,804,711 | ||||||
41,000 | ProShares Ultra Short DJ-UBS Crude Oil, ETF (g) | 1,170,140 |
Shares | Value ($) | |||||||
56,735 | ProShares Ultra Silver, ETF (g) | 3,634,444 | ||||||
70,000 | WisdomTree Japan Hedged Equity Fund, ETF (f) | 3,313,800 | ||||||
|
| |||||||
Total Non-U.S. Exchange-Traded Funds (Cost $16,468,070) | 13,680,945 | |||||||
|
| |||||||
Units | ||||||||
| U.S. Rights (g) - 2.3% |
| ||||||
TRANSPORTATION - 2.3% | ||||||||
115,540 | American Airlines Group, Inc. | 8,456,408 | ||||||
|
| |||||||
Total U.S. Rights | 8,456,408 | |||||||
|
| |||||||
Shares | ||||||||
| Investment Companies (h) - 20.2% |
| ||||||
75,650,084 | State Street Navigator Prime Securities Lending Portfolio | 75,650,084 | ||||||
|
| |||||||
Total Investment Companies | 75,650,084 | |||||||
|
| |||||||
| Total Investments - 97.6% | 365,404,808 | ||||||
|
| |||||||
| (Cost $347,819,202) | |||||||
| Other Assets & Liabilities, Net - 2.4% | 8,997,538 | ||||||
|
| |||||||
| Net Assets - 100.0% | 374,402,346 | ||||||
|
|
(a) | Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at March 31, 2014. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. |
(b) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
(c) | As described in the Fund’s prospectus, a company is considered to be a non-U.S. issuer if the company’s securities principally trade on a market outside of the United States, the company derives a majority of its revenues or profits outside of the United States, the company is not organized in the United States, or the company is significantly exposed to the economic fortunes and risks of regions outside the United States. |
(d) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2014. |
(e) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At March 31, 2014, these securities amounted to $35,800,096 or 9.6% of net assets. |
12 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Global Allocation Fund |
(f) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $78,609,260. The loaned securities were secured with cash and securities collateral of $79,694,706. Collateral is calculated based on prior day’s prices. See Note 4. |
(g) | Non-income producing security. |
(h) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ADR | American Depositary Receipt | |
CDO | Collateralized Debt Obligation | |
CLO | Collateralized Loan Obligation | |
ETF | Exchange-Traded Fund | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust |
See accompanying Notes to Financial Statements. | 13 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Dividend Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks - 96.5% |
| ||||||
BANKS - 7.7% | ||||||||
6,990 | PNC Financial Services Group, Inc. | 608,130 | ||||||
13,730 | U.S. Bancorp (a) | 588,468 | ||||||
12,125 | Wells Fargo & Co. (a) | 603,097 | ||||||
|
| |||||||
1,799,695 | ||||||||
|
| |||||||
CAPITAL GOODS - 6.3% | ||||||||
33,920 | General Electric Co. (a) | 878,189 | ||||||
4,930 | Hubbell, Inc., Class B (a) | 590,959 | ||||||
|
| |||||||
1,469,148 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 2.6% | ||||||||
36,180 | Ennis, Inc. (a) | 599,503 | ||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 2.6% | ||||||||
7,185 | Tupperware Brands Corp. (a) | 601,816 | ||||||
|
| |||||||
CONSUMER SERVICES - 3.8% | ||||||||
8,900 | McDonald’s Corp. | 872,467 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 3.9% | ||||||||
15,025 | JPMorgan Chase & Co. (a) | 912,168 | ||||||
|
| |||||||
ENERGY - 7.7% | ||||||||
7,590 | Chevron Corp. | 902,527 | ||||||
11,376 | Royal Dutch Shell PLC, ADR (a) | 888,579 | ||||||
|
| |||||||
1,791,106 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 11.5% | ||||||||
4,855 | Diageo PLC, ADR (a) | 604,884 | ||||||
13,930 | Kellogg Co. (a) | 873,550 | ||||||
7,085 | PepsiCo, Inc. | 591,598 | ||||||
14,975 | Unilever NV (a) | 615,772 | ||||||
|
| |||||||
2,685,804 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 2.4% | ||||||||
14,660 | Abbott Laboratories | 564,557 | ||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 2.5% | ||||||||
7,315 | Procter & Gamble Co. (The) | 589,589 | ||||||
|
| |||||||
INSURANCE - 2.6% | ||||||||
12,415 | Arthur J. Gallagher & Co. (a) | 590,706 | ||||||
|
| |||||||
MATERIALS - 8.7% | ||||||||
12,705 | Packaging Corp. of America | 894,051 | ||||||
14,055 | Sonoco Products Co. | 576,536 | ||||||
14,410 | Worthington Industries, Inc. | 551,182 | ||||||
|
| |||||||
2,021,769 | ||||||||
|
| |||||||
MEDIA - 2.4% | ||||||||
9,135 | CBS Corp., Class B | 564,543 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 10.2% | ||||||||
10,610 | GlaxoSmithKline PLC, ADR (a) | 566,892 | ||||||
9,315 | Johnson & Johnson | 915,013 | ||||||
10,595 | Novartis AG, ADR | 900,787 | ||||||
|
| |||||||
2,382,692 | ||||||||
|
|
Shares | Value ($) | |||||||
RETAILING - 2.5% | ||||||||
7,340 | Home Depot, Inc. (The) (a) | 580,814 | ||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.8% | ||||||||
18,660 | Microchip Technology, Inc. (a) | 891,202 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 3.8% | ||||||||
20,655 | Paychex, Inc. (a) | 879,903 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 2.6% | ||||||||
8,930 | AT&T, Inc. (a) | 313,175 | ||||||
6,305 | Verizon Communications, Inc. (a) | 299,929 | ||||||
|
| |||||||
613,104 | ||||||||
|
| |||||||
TRANSPORTATION - 3.7% | ||||||||
8,930 | United Parcel Service, Inc., Class B (a) | 869,603 | ||||||
|
| |||||||
UTILITIES - 5.2% | ||||||||
17,175 | ITC Holdings Corp. (a) | 641,486 | ||||||
3,980 | National Fuel Gas Co. (a) | 278,759 | ||||||
6,715 | Southern Co. (The) (a) | 295,057 | ||||||
|
| |||||||
1,215,302 | ||||||||
|
| |||||||
Total Common Stocks (Cost $18,245,138) | 22,495,491 | |||||||
|
| |||||||
| Exchange-Traded Funds (a) - 2.5% |
| ||||||
8,490 | iShares Dow Jones U.S. Real Estate Index Fund, ETF | 574,518 | ||||||
|
| |||||||
Total Exchange-Traded Funds (Cost $527,127) | 574,518 | |||||||
|
| |||||||
| Investment Companies (b) - 28.2% |
| ||||||
6,577,052 | State Street Navigator Prime Securities Lending Portfolio | 6,577,052 | ||||||
|
| |||||||
Total Investment Companies (Cost $6,577,052) | 6,577,052 | |||||||
|
| |||||||
| Total Investments - 127.2% | 29,647,061 | ||||||
|
| |||||||
| (Cost $25,349,317) | |||||||
| Other Assets & Liabilities, Net - (27.2)% | (6,337,032 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 23,310,029 | ||||||
|
|
(a) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $6,499,023. The loaned securities were secured with cash collateral of $6,577,052. Collateral is calculated based on prior day’s prices. See Note 4. |
(b) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ADR | American Depositary Receipt | |
ETF | Exchange-Traded Fund | |
PLC | Public Limited Company |
14 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Premier Growth Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks - 97.7% |
| ||||||
CAPITAL GOODS - 2.3% | ||||||||
57,074 | Dover Corp. | 4,665,800 | ||||||
|
| |||||||
CONSUMER SERVICES - 2.3% | ||||||||
57,076 | Las Vegas Sands Corp. | 4,610,599 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 11.2% | ||||||||
95,130 | Charles Schwab Corp. (The) | 2,599,903 | ||||||
99,565 | CME Group, Inc. | 7,368,806 | ||||||
13,316 | Goldman Sachs Group, Inc. (The) | 2,181,827 | ||||||
45,662 | McGraw Hill Financial, Inc. | 3,484,010 | ||||||
97,028 | State Street Corp. | 6,748,297 | ||||||
|
| |||||||
22,382,843 | ||||||||
|
| |||||||
ENERGY - 5.3% | ||||||||
27,269 | Anadarko Petroleum Corp. | 2,311,320 | ||||||
85,613 | Schlumberger, Ltd. | 8,347,268 | ||||||
|
| |||||||
10,658,588 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 3.2% | ||||||||
77,369 | PepsiCo, Inc. | 6,460,311 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 11.9% | ||||||||
88,785 | Abbott Laboratories | 3,419,110 | ||||||
104,638 | Covidien PLC | 7,707,635 | ||||||
72,931 | DENTSPLY International, Inc. | 3,357,743 | ||||||
123,663 | Express Scripts Holding Co. (a) | 9,285,855 | ||||||
|
| |||||||
23,770,343 | ||||||||
|
| |||||||
MATERIALS - 3.8% | ||||||||
66,589 | Monsanto Co. | 7,575,831 | ||||||
|
| |||||||
MEDIA - 9.9% | ||||||||
106,540 | Comcast Corp., Special Class A | 5,194,891 | ||||||
48,828 | Discovery Communications, Inc., Class C (a) | 3,762,686 | ||||||
164,882 | Liberty Global PLC, Series C (a) | 6,712,346 | ||||||
50,734 | Walt Disney Co. (The) | 4,062,271 | ||||||
|
| |||||||
19,732,194 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 7.9% | ||||||||
17,758 | Alexion Pharmaceuticals, Inc. (a) | 2,701,524 | ||||||
41,223 | Amgen, Inc. | 5,084,445 | ||||||
112,246 | Gilead Sciences, Inc. (a) | 7,953,752 | ||||||
|
| |||||||
15,739,721 | ||||||||
|
| |||||||
REAL ESTATE - 2.9% | ||||||||
69,760 | American Tower Corp., REIT | 5,711,251 | ||||||
|
| |||||||
RETAILING - 8.1% | ||||||||
9,512 | Amazon.com, Inc. (a) | 3,200,978 | ||||||
98,297 | Dick’s Sporting Goods, Inc. (b) | 5,367,999 | ||||||
154,104 | Lowe’s Cos., Inc. | 7,535,686 | ||||||
|
| |||||||
16,104,663 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 15.0% | ||||||||
42,489 | Baidu, Inc., ADR (a) | 6,474,474 | ||||||
106,540 | eBay, Inc. (a) | 5,885,269 | ||||||
5,708 | Google, Inc., Class A (a) | 6,361,623 |
Shares | Value ($) | |||||||
SOFTWARE & SERVICES (continued) | ||||||||
65,955 | Intuit, Inc. | 5,126,682 | ||||||
28,537 | Visa, Inc., Class A | 6,159,997 | ||||||
|
| |||||||
30,008,045 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 11.5% | ||||||||
12,684 | Apple, Inc. | 6,808,010 | ||||||
256,846 | EMC Corp. | 7,040,149 | ||||||
114,150 | QUALCOMM, Inc. | 9,001,869 | ||||||
|
| |||||||
22,850,028 | ||||||||
|
| |||||||
TRANSPORTATION - 2.4% | ||||||||
48,197 | United Parcel Service, Inc., Class B | 4,693,424 | ||||||
|
| |||||||
Total Common Stocks | 194,963,641 | |||||||
|
| |||||||
| Investment Companies (c) - 0.7% |
| ||||||
1,393,326 | State Street Navigator Prime | 1,393,326 | ||||||
|
| |||||||
Total Investment Companies | 1,393,326 | |||||||
|
| |||||||
| Total Investments - 98.4% | 196,356,967 | ||||||
|
| |||||||
| (Cost $122,855,702) | |||||||
| Other Assets & Liabilities, Net - 1.6% | 3,279,919 | ||||||
|
| |||||||
| Net Assets - 100.0% | 199,636,886 | ||||||
|
|
(a) | Non-income producing security. |
(b) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $1,340,785. The loaned securities were secured with cash collateral of $1,393,326. Collateral is calculated based on prior day’s prices. See Note 4. |
(c) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ADR | American Depositary Receipt | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust |
The Fund had the following futures contracts, brokered by Royal Bank of Scotland, for which $130,000 was pledged as collateral, open at March 31, 2014:
Description | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation (Depreciation) | ||||||||||||
Long Future: | ||||||||||||||||
S&P 500 Emini Index | June 2014 | 23 | $ | 2,144,290 | $ | 16,240 | ||||||||||
|
|
See accompanying Notes to Financial Statements. | 15 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Small-Cap Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks - 99.3% | |||||||
BANKS - 8.3% | ||||||||
7,740 | Cullen/Frost Bankers, Inc. (a) | 600,082 | ||||||
30,457 | Fulton Financial Corp. | 383,149 | ||||||
7,675 | Iberiabank Corp. (a) | 538,401 | ||||||
11,640 | Prosperity Bancshares, Inc. (a) | 769,986 | ||||||
6,709 | Renasant Corp. (a) | 194,897 | ||||||
4,935 | SVB Financial Group (b) | 635,529 | ||||||
7,280 | Westamerica Bancorp. (a) | 393,703 | ||||||
|
| |||||||
3,515,747 | ||||||||
|
| |||||||
CAPITAL GOODS - 9.0% | ||||||||
16,080 | Applied Industrial Technologies, Inc. | 775,699 | ||||||
8,135 | ESCO Technologies, Inc. (a) | 286,271 | ||||||
11,495 | Luxfer Holdings PLC, ADR (a) | 225,072 | ||||||
15,820 | Mueller Industries, Inc. | 474,442 | ||||||
6,525 | Polypore International, Inc. (a)(b) | 223,220 | ||||||
2,675 | Primoris Services Corp. (a) | 80,196 | ||||||
15,140 | Quanta Services, Inc. (a)(b) | 558,666 | ||||||
7,590 | Teledyne Technologies, Inc. (b) | 738,735 | ||||||
11,440 | Woodward, Inc. (a) | 475,103 | ||||||
|
| |||||||
3,837,404 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 3.5% | ||||||||
20,390 | Healthcare Services Group, Inc. (a) | 592,533 | ||||||
13,519 | Herman Miller, Inc. (a) | 434,366 | ||||||
20,765 | Resources Connection, Inc. (a) | 292,579 | ||||||
7,100 | Ritchie Bros Auctioneers, Inc. | 171,323 | ||||||
|
| |||||||
1,490,801 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 3.4% | ||||||||
5,165 | Deckers Outdoor Corp. (a)(b) | 411,805 | ||||||
17,407 | Jarden Corp. (b) | 1,041,461 | ||||||
|
| |||||||
1,453,266 | ||||||||
|
| |||||||
CONSUMER SERVICES - 2.9% | ||||||||
4,525 | Cracker Barrel Old Country Store, Inc. (a) | 440,011 | ||||||
1,430 | Interval Leisure Group, Inc. | 37,380 | ||||||
11,338 | K12, Inc. (a)(b) | 256,806 | ||||||
19,885 | Texas Roadhouse, Inc. (a) | 518,601 | ||||||
|
| |||||||
1,252,798 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 2.5% | ||||||||
18,765 | Raymond James Financial, Inc. (a) | 1,049,526 | ||||||
|
| |||||||
ENERGY - 5.8% | ||||||||
3,885 | Dril-Quip, Inc. (a)(b) | 435,509 | ||||||
3,540 | Oil States International, Inc. (a)(b) | 349,044 | ||||||
37,805 | Pioneer Energy Services Corp. (b) | 489,575 | ||||||
13,230 | Sanchez Energy Corp. (a)(b) | 392,005 | ||||||
11,060 | SM Energy Co. | 788,467 | ||||||
|
| |||||||
2,454,600 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 1.1% | ||||||||
20,455 | Spartan Stores, Inc. (a) | 474,761 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 10.7% | ||||||||
7,550 | Air Methods Corp. (a)(b) | 403,397 | ||||||
15,475 | Bio-Reference Labs, Inc. (a)(b) | 428,348 |
Shares | Value ($) | |||||||
HEALTHCARE EQUIPMENT & SERVICES (continued) | ||||||||
24,907 | Endologix, Inc. (a)(b) | 320,553 | ||||||
7,900 | Hanger, Inc. (b) | 266,072 | ||||||
22,165 | HMS Holdings Corp. (a)(b) | 422,243 | ||||||
5,300 | IPC The Hospitalist Co., Inc. (a)(b) | 260,124 | ||||||
15,730 | MEDNAX, Inc. (a)(b) | 974,946 | ||||||
14,945 | Molina Healthcare, Inc. (a)(b) | 561,334 | ||||||
17,100 | Owens & Minor, Inc. (a) | 599,013 | ||||||
8,930 | Thoratec Corp. (b) | 319,783 | ||||||
|
| |||||||
4,555,813 | ||||||||
|
| |||||||
INSURANCE - 2.2% | ||||||||
17,955 | HCC Insurance Holdings, Inc. (a) | 816,773 | ||||||
2,600 | RLI Corp. | 115,024 | ||||||
|
| |||||||
931,797 | ||||||||
|
| |||||||
MATERIALS - 6.9% | ||||||||
21,840 | Commercial Metals Co. | 412,339 | ||||||
3,690 | Compass Minerals International, Inc. (a) | 304,499 | ||||||
14,915 | Packaging Corp. of America | 1,049,569 | ||||||
15,165 | PolyOne Corp. (a) | 555,949 | ||||||
10,625 | Sensient Technologies Corp. | 599,356 | ||||||
|
| |||||||
2,921,712 | ||||||||
|
| |||||||
MEDIA - 1.3% | ||||||||
9,850 | John Wiley & Sons, Inc., Class A (a) | 567,754 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 4.9% | ||||||||
33,880 | Bruker Corp. (a)(b) | 772,125 | ||||||
7,885 | Cubist Pharmaceuticals, Inc. (a)(b) | 576,788 | ||||||
15,585 | ICON PLC (b) | 741,067 | ||||||
|
| |||||||
2,089,980 | ||||||||
|
| |||||||
REAL ESTATE - 5.5% | ||||||||
39,555 | BioMed Realty Trust, Inc., REIT | 810,482 | ||||||
6,910 | Coresite Realty Corp., REIT (a) | 214,210 | ||||||
36,045 | Education Realty Trust, Inc., REIT (a) | 355,764 | ||||||
16,715 | Omega Healthcare Investors, Inc., REIT | 560,287 | ||||||
14,905 | Sabra Health Care REIT, Inc. (a) | 415,700 | ||||||
|
| |||||||
2,356,443 | ||||||||
|
| |||||||
RETAILING - 5.1% | ||||||||
10,320 | American Eagle Outfitters, Inc. (a) | 126,317 | ||||||
11,960 | Buckle, Inc. (The) (a) | 547,768 | ||||||
5,060 | Genesco, Inc. (a)(b) | 377,324 | ||||||
1,600 | Group 1 Automotive, Inc. | 105,056 | ||||||
34,885 | LKQ Corp. (b) | 919,220 | ||||||
1,761 | Monro Muffler Brake, Inc. (a) | 100,165 | ||||||
|
| |||||||
2,175,850 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.7% | ||||||||
27,580 | Microsemi Corp. (a)(b) | 690,327 | ||||||
42,140 | Rudolph Technologies, Inc. (a)(b) | 480,817 | ||||||
15,611 | Semtech Corp. (b) | 395,583 | ||||||
|
| |||||||
1,566,727 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 11.7% | ||||||||
7,260 | ACI Worldwide, Inc. (a)(b) | 429,719 | ||||||
19,050 | Blackbaud, Inc. (a) | 596,265 | ||||||
50,920 | Global Cash Access Holdings, Inc. (b) | 349,311 |
16 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Small-Cap Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks (continued) | |||||||
SOFTWARE & SERVICES (continued) | ||||||||
27,525 | Jive Software, Inc. (a)(b) | 220,475 | ||||||
17,335 | MICROS Systems, Inc. (a)(b) | 917,542 | ||||||
24,089 | PTC, Inc. (b) | 853,473 | ||||||
18,095 | RealPage, Inc. (a)(b) | 328,605 | ||||||
9,110 | Solera Holdings, Inc. (a) | 577,028 | ||||||
18,157 | SS&C Technologies Holdings, Inc. (b) | 726,643 | ||||||
|
| |||||||
4,999,061 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 3.1% | ||||||||
9,995 | ADTRAN, Inc. (a) | 243,978 | ||||||
3,375 | Littelfuse, Inc. | 316,035 | ||||||
10,820 | Zebra Technologies Corp., Class A (b) | 751,016 | ||||||
|
| |||||||
1,311,029 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 1.3% | ||||||||
23,295 | West Corp. (a) | 557,449 | ||||||
|
| |||||||
TRANSPORTATION - 4.7% | ||||||||
9,960 | Genesee & Wyoming, Inc., Class A (a)(b) | 969,307 | ||||||
18,116 | Old Dominion Freight Line, Inc. (a)(b) | 1,027,902 | ||||||
|
| |||||||
1,997,209 | ||||||||
|
| |||||||
UTILITIES - 1.7% | ||||||||
13,310 | IDACORP, Inc. (a) | 738,306 | ||||||
|
| |||||||
Total Common Stocks | 42,298,033 | |||||||
|
| |||||||
| Investment Companies (c) - 28.2% |
| ||||||
12,005,885 | State Street Navigator Prime Securities Lending Portfolio | 12,005,885 | ||||||
|
| |||||||
Total Investment Companies | 12,005,885 | |||||||
|
| |||||||
| Total Investments - 127.5% | 54,303,918 | ||||||
|
| |||||||
| (Cost $43,798,575) | |||||||
| Other Assets & Liabilities, Net - (27.5)% | (11,708,155 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 42,595,763 | ||||||
|
|
(a) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $11,870,205. The loaned securities were secured with cash collateral of $12,005,885. Collateral is calculated based on prior day’s prices. See Note 4. |
(b) | Non-income producing security. |
(c) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ADR | American Depositary Receipt | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust |
See accompanying Notes to Financial Statements. | 17 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes - 29.2% |
| ||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.1% | ||||||||
55,337 | Federal Home Loan Mortgage Corp. REMIC | 5,121 | ||||||
67,054 | Series 3983, Class EI | 8,960 | ||||||
1,112 | Series 2645, Class BI | 5 | ||||||
6,807 | Series 2643, Class IM | 241 | ||||||
1,783 | Series 2781, Class IC | 14 | ||||||
6,349 | Series 2763, Class JI | 234 | ||||||
11,706 | Series 2631, Class DI | 2,244 | ||||||
64,323 | Series 3806, Class DS | 8,738 | ||||||
3,904 | Series 1980, Class IO | 833 | ||||||
93 | Series 33, Class D | 100 | ||||||
360 | Federal Home Loan Mortgage Corp. STRIPS | 330 | ||||||
636 | Series 147, Class IO | 109 | ||||||
801 | Series 171, Class IO | 233 | ||||||
187,650 | Federal Home Loan Mortgage Corp. | 1,720 | ||||||
504 | Federal National Mortgage Assoc. REMIC | 492 | ||||||
74,320 | Series 2003-89, Class IO | 2,487 | ||||||
2,420 | Series 2003-61, Class IJ | 25 | ||||||
96,349 | Series 2010-98, Class DI | 11,244 | ||||||
19,943 | Series 2008-61, Class SB | 2,898 | ||||||
3 | Federal National Mortgage Assoc. STRIPS | 76 | ||||||
12,787 | Series 354, Class 1 | 11,690 | ||||||
14,982 | Series 362, Class 2 | 2,387 | ||||||
13,730 | Series 378, Class 1 | 2,109 | ||||||
12,904 | Series 387, Class 2 | 2,586 | ||||||
9,168 | Series 387, Class 1 | 1,359 | ||||||
3,827 | Series 346, Class 2 | 759 |
Principal Amount ($) | Value ($) | |||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (continued) | ||||||||
9,403 | Series 252, Class 2 | 1,558 | ||||||
497 | Series 237, Class 2 | 130 | ||||||
2,406 | Series 264, Class 2 | 400 | ||||||
76 | Series 12, Class 2 | 8 | ||||||
184 | Series 7, Class 2 | 21 | ||||||
27 | Series 28, Class 2 | 3 | ||||||
289 | Series 150, Class 2 | 75 | ||||||
251 | Series 163, Class 2 | 24 | ||||||
472 | Series 137, Class 2 | 105 | ||||||
58,005 | Government National Mortgage Assoc. | 5,756 | ||||||
57,359 | Series 2010-101, Class GI | 6,577 | ||||||
58,569 | Series 2010-130, Class PI | 8,475 | ||||||
29,641 | Series 2010-75, Class KI | 1,448 | ||||||
36,541 | Series 2010-42, Class IA | 3,365 | ||||||
50,057 | Series 2010-26, Class QS | 9,500 | ||||||
|
| |||||||
Total Agency Collateralized Mortgage Obligations | 104,439 | |||||||
|
| |||||||
AGENCY MORTGAGE-BACKED SECURITIES - 8.1% | ||||||||
4,565 | Federal Home Loan Mortgage Corp. | 4,886 | ||||||
151,729 | 5.00%, 07/01/2035 - 06/01/2041 (d) | 167,349 | ||||||
61,699 | 5.50%, 05/01/2020 - 04/01/2039 (d) | 68,151 | ||||||
121,490 | 6.00%, 04/01/2017 - 11/01/2037 (d) | 136,434 | ||||||
1,750 | 6.50%, 06/01/2029 | 1,968 | ||||||
18,422 | 7.00%, 10/01/2016 - 08/01/2036 (d) | 20,739 | ||||||
824 | 7.50%, 09/01/2033 | 889 | ||||||
2,175 | 8.00%, 04/01/2030 - 11/01/2030 (d) | 2,487 | ||||||
586 | 9.00%, 04/01/2016 - 06/01/2021 (d) | 627 | ||||||
298 | Federal National Mortgage Assoc. | 311 | ||||||
595,577 | 3.00%, 05/01/2043 - 06/01/2043 (d) | 575,942 | ||||||
820,000 | 3.00%, TBA (e) | 791,684 | ||||||
351,427 | 3.50%, 11/01/2042 - 02/01/2043 (d) | 354,252 | ||||||
510,000 | 3.50%, TBA (e) | 513,187 | ||||||
613,430 | 4.00%, 05/01/2019 - 03/01/2044 (d) | 639,099 | ||||||
869,662 | 4.50%, 05/01/2018 - 04/01/2041 (d) | 929,708 | ||||||
287,384 | 5.00%, 07/01/2020 - 06/01/2041 (d) | 317,038 | ||||||
140,000 | 5.00%, TBA (e) | 152,655 | ||||||
261,518 | 5.50%, 03/01/2014 - 01/01/2039 (d) | 289,304 | ||||||
200,166 | 6.00%, 07/01/2014 - 08/01/2035 (d) | 225,515 | ||||||
27,672 | 6.50%, 01/01/2015 - 08/01/2034 (d) | 30,260 | ||||||
3,130 | 7.00%, 10/01/2016 - 12/01/2033 (d) | 3,338 | ||||||
14,329 | 7.50%, 05/01/2015 - 12/01/2033 (d) | 15,837 |
18 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
AGENCY MORTGAGE-BACKED SECURITIES (continued) | ||||||||
2,142 | 8.00%, 12/01/2015 - 01/01/2033 (d) | 2,446 | ||||||
2,514 | 9.00%, 12/01/2017 - 12/01/2022 (d) | 2,757 | ||||||
101,417 | Government National Mortgage Assoc. | 100,021 | ||||||
270,095 | 3.50%, 05/20/2043 | 276,110 | ||||||
353,980 | 4.00%, 01/20/2041 - 04/20/2043 (d) | 372,690 | ||||||
193,200 | 4.50%, 08/15/2033 - 03/20/2041 (d) | 209,019 | ||||||
11,155 | 5.00%, 08/15/2033 | 12,329 | ||||||
16,593 | 6.00%, 07/15/2033 - 09/15/2036 (d) | 19,033 | ||||||
32,345 | 6.50%, 02/15/2024 - 07/15/2036 (d) | 36,565 | ||||||
7,005 | 7.00%, 04/15/2028 - 09/15/2036 (d) | 7,647 | ||||||
187 | 8.00%, 09/15/2029 - 06/15/2030 (d) | 192 | ||||||
7,577 | 8.50%, 10/15/2017 | 8,233 | ||||||
10,982 | 9.00%, 11/15/2016 - 12/15/2021 (d) | 11,783 | ||||||
|
| |||||||
Total Agency Mortgage-Backed Securities | 6,300,485 | |||||||
|
| |||||||
ASSET-BACKED SECURITIES - 0.0% | ||||||||
3 | Bear Stearns Asset-Backed Securities Trust | 2 | ||||||
10,000 | Ford Credit Auto Lease Trust | 10,032 | ||||||
|
| |||||||
Total Asset-Backed Securities | 10,034 | |||||||
|
| |||||||
CORPORATE BONDS & NOTES - 7.1% | ||||||||
AUTOMOBILES & COMPONENTS - 0.1% | ||||||||
19,000 | American Axle & Manufacturing, Inc. | 20,330 | ||||||
6,000 | 7.75%, 11/15/2019 | 6,960 | ||||||
18,000 | General Motors Co. | 18,540 | ||||||
|
| |||||||
45,830 | ||||||||
|
| |||||||
BANKS - 0.5% | ||||||||
27,000 | Bank of America Corp. | 27,137 | ||||||
27,000 | 4.10%, 07/24/2023 | 27,439 | ||||||
102,000 | Bank of America Corp., MTN | 101,901 | ||||||
31,000 | 2.65%, 04/01/2019 | 31,135 | ||||||
17,000 | 3.30%, 01/11/2023 (g) | 16,420 | ||||||
16,000 | 4.00%, 04/01/2024 (h) | 16,014 | ||||||
25,000 | 4.13%, 01/22/2024 | 25,333 | ||||||
25,000 | 5.00%, 01/21/2044 (g) | 25,622 | ||||||
33,000 | SunTrust Banks, Inc. | 33,047 | ||||||
44,000 | U.S. Bancorp | 45,951 | ||||||
26,000 | Wells Fargo & Co. | 25,283 | ||||||
16,000 | 4.13%, 08/15/2023 | 16,218 | ||||||
|
| |||||||
391,500 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.3% | ||||||||
26,000 | ABB Finance USA, Inc. | 26,197 |
Principal Amount ($) | Value ($) | |||||||
CAPITAL GOODS (continued) | ||||||||
25,000 | Cargill, Inc. | 28,594 | ||||||
17,000 | Case New Holland, Inc. | 20,018 | ||||||
27,000 | DigitalGlobe, Inc. | 26,797 | ||||||
28,000 | Eaton Corp. | 26,556 | ||||||
31,000 | Illinois Tool Works, Inc. | 30,949 | ||||||
8,000 | JB Poindexter & Co., Inc. | 8,600 | ||||||
26,000 | Rockwell Collins, Inc. | 26,416 | ||||||
23,000 | Textron, Inc. | 24,149 | ||||||
|
| |||||||
218,276 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.1% | ||||||||
10,000 | Catholic Health Initiatives | 10,016 | ||||||
14,000 | 2.95%, 11/01/2022 | 13,238 | ||||||
10,000 | 4.20%, 08/01/2023 | 10,160 | ||||||
9,000 | 4.35%, 11/01/2042 | 8,267 | ||||||
22,000 | Pitney Bowes, Inc. | 21,887 | ||||||
27,000 | United Rentals North America, Inc. | 29,025 | ||||||
|
| |||||||
92,593 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.0% | ||||||||
27,000 | RSI Home Products, Inc. | 29,093 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.1% | ||||||||
36,000 | Vail Resorts, Inc. | 37,912 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.9% | ||||||||
78,000 | Citigroup, Inc. | 76,708 | ||||||
8,000 | 3.50%, 05/15/2023 (g) | 7,562 | ||||||
24,000 | 5.00%, 09/15/2014 | 24,467 | ||||||
13,000 | 5.50%, 09/13/2025 (g) | 13,877 | ||||||
27,000 | 6.68%, 09/13/2043 | 31,728 | ||||||
16,000 | CNH Capital LLC | 16,520 | ||||||
22,000 | Goldman Sachs Capital I | 22,843 | ||||||
33,000 | Goldman Sachs Group, Inc. (The) | 33,249 | ||||||
48,000 | 2.63%, 01/31/2019 | 47,931 | ||||||
21,000 | 2.90%, 07/19/2018 | 21,437 | ||||||
37,000 | 4.00%, 03/03/2024 (g) | 36,911 | ||||||
16,000 | 6.75%, 10/01/2037 | 18,386 | ||||||
26,000 | Hyundai Capital America | 26,247 | ||||||
13,000 | 2.13%, 10/02/2017 (f) | 13,106 | ||||||
33,000 | IntercontinentalExchange Group, Inc. | 34,302 |
See accompanying Notes to Financial Statements. | 19 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
DIVERSIFIED FINANCIALS (continued) | ||||||||
59,000 | Jefferies Group LLC | 62,120 | ||||||
10,000 | 6.50%, 01/20/2043 | 10,509 | ||||||
92,000 | Morgan Stanley | 91,887 | ||||||
19,000 | 4.75%, 03/22/2017 | 20,750 | ||||||
28,000 | 4.88%, 11/01/2022 (g) | 29,474 | ||||||
32,000 | 5.00%, 11/24/2025 | 32,998 | ||||||
29,000 | NYSE Euronext | 29,499 | ||||||
|
| |||||||
702,511 | ||||||||
|
| |||||||
ENERGY - 0.7% | ||||||||
31,000 | Anadarko Petroleum Corp. | 36,019 | ||||||
16,000 | Chesapeake Energy Corp. | 16,200 | ||||||
32,000 | Continental Resources, Inc. | 33,202 | ||||||
9,000 | DCP Midstream Operating L.P. | 8,989 | ||||||
16,000 | 5.60%, 04/01/2044 (g) | 16,763 | ||||||
27,000 | Denbury Resources, Inc. | 28,957 | ||||||
22,000 | Energy Transfer Partners LP | 25,018 | ||||||
17,000 | Enterprise Products Operating LLC | 16,021 | ||||||
33,000 | Kerr-McGee Corp. | 40,092 | ||||||
36,000 | Kinder Morgan Energy Partners LP | 34,058 | ||||||
26,000 | Linn Energy LLC | 27,235 | ||||||
15,000 | 8.63%, 04/15/2020 | 16,369 | ||||||
10,000 | Newfield Exploration Co. | 10,425 | ||||||
30,000 | 5.75%, 01/30/2022 (g) | 32,025 | ||||||
14,000 | Plains Exploration & Production Co. | 15,487 | ||||||
22,000 | Range Resources Corp. | 23,677 | ||||||
23,000 | Rowan Cos., Inc. | 23,318 | ||||||
6,000 | 5.85%, 01/15/2044 | 6,117 | ||||||
16,000 | Sunoco Logistics Partners LP | 15,964 | ||||||
27,000 | Unit Corp. | 28,755 | ||||||
37,000 | Williams Partners L.P. | 37,239 | ||||||
27,000 | WPX Energy, Inc. | 29,025 | ||||||
|
| |||||||
520,955 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.2% | ||||||||
75,000 | American Seafoods Group LLC | 77,906 |
Principal Amount ($) | Value ($) | |||||||
FOOD & STAPLES RETAILING (continued) | ||||||||
16,000 | CVS Caremark Corp. | 17,730 | ||||||
19,000 | Ingles Markets, Inc. | 19,095 | ||||||
16,000 | WM Wrigley Jr Co. | 16,053 | ||||||
33,000 | 2.90%, 10/21/2019 (f)(g) | 33,339 | ||||||
|
| |||||||
164,123 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.3% | ||||||||
14,000 | Altria Group, Inc. | 12,951 | ||||||
14,000 | 4.50%, 05/02/2043 (g) | 12,910 | ||||||
16,000 | 5.38%, 01/31/2044 | 16,790 | ||||||
12,000 | Anheuser-Busch InBev Finance, Inc. | 11,299 | ||||||
55,000 | Anheuser-Busch InBev Worldwide, Inc. | 52,026 | ||||||
17,000 | Archer-Daniels-Midland Co. | 15,906 | ||||||
13,000 | Coca-Cola Co. (The) | 13,380 | ||||||
27,000 | Constellation Brands, Inc. | 30,577 | ||||||
17,000 | Diageo Investment Corp. | 16,526 | ||||||
14,000 | Philip Morris International, Inc. | 12,919 | ||||||
|
| |||||||
195,284 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 0.4% | ||||||||
23,000 | Ascension Health, Inc. | 23,671 | ||||||
18,000 | CHS/Community Health Systems, Inc. | 19,553 | ||||||
27,000 | Cigna Corp. | 28,149 | ||||||
24,000 | 4.00%, 02/15/2022 (g) | 24,927 | ||||||
12,000 | Express Scripts Holding Co. | 12,419 | ||||||
66,000 | 3.13%, 05/15/2016 (g) | 68,795 | ||||||
14,000 | Fresenius Medical Care U.S. Finance, Inc. | 14,963 | ||||||
38,000 | HCA, Inc. | 42,655 | ||||||
11,000 | Medtronic, Inc. | 11,348 | ||||||
10,000 | Memorial Sloan-Kettering Cancer Center | 8,933 | ||||||
50,000 | Tenet Healthcare Corp. | 50,625 | ||||||
32,000 | WellPoint, Inc. | 30,745 | ||||||
|
| |||||||
336,783 | ||||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.1% | ||||||||
50,000 | Revlon Consumer Products Corp. | 50,500 | ||||||
|
|
20 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
INSURANCE - 0.4% | ||||||||
18,000 | Allstate Corp. (The) | 18,934 | ||||||
13,000 | American International Group, Inc. | 13,291 | ||||||
39,000 | Berkshire Hathaway Finance Corp. | 39,589 | ||||||
28,000 | Berkshire Hathaway, Inc. | 27,899 | ||||||
66,000 | 4.50%, 02/11/2043 | 65,668 | ||||||
21,000 | CNA Financial Corp. | 24,138 | ||||||
16,000 | Genworth Holdings, Inc. | 16,677 | ||||||
13,000 | 7.70%, 06/15/2020 | 15,879 | ||||||
24,000 | ING U.S., Inc. | 26,967 | ||||||
16,000 | 5.70%, 07/15/2043 (g) | 18,165 | ||||||
31,000 | Liberty Mutual Group, Inc. | 31,520 | ||||||
9,000 | Prudential Financial, Inc. | 9,225 | ||||||
|
| |||||||
307,952 | ||||||||
|
| |||||||
MATERIALS - 0.1% | ||||||||
24,000 | CF Industries, Inc. | 25,116 | ||||||
24,000 | Freeport-McMoRan Copper & Gold, Inc. | 23,686 | ||||||
15,000 | Hexion U.S. Finance Corp. | 15,600 | ||||||
27,000 | Huntsman International LLC | 27,304 | ||||||
|
| |||||||
91,706 | ||||||||
|
| |||||||
MEDIA - 0.4% | ||||||||
12,000 | 21st Century Fox America, Inc. | 14,704 | ||||||
27,000 | Cequel Communications Holdings I LLC | 26,865 | ||||||
25,000 | Comcast Corp. | 25,188 | ||||||
15,000 | 4.75%, 03/01/2044 (g) | 15,287 | ||||||
6,000 | COX Communications, Inc. | 5,365 | ||||||
47,000 | DIRECTV Holdings LLC | 47,227 | ||||||
19,000 | 5.15%, 03/15/2042 (g) | 18,027 | ||||||
44,000 | Interpublic Group of Cos., Inc. (The) | 43,917 | ||||||
16,000 | McClatchy Co. (The) | 18,700 | ||||||
24,000 | Omnicom Group, Inc. | 23,876 | ||||||
36,000 | Time Warner Cable, Inc. | 39,144 | ||||||
9,000 | 6.55%, 05/01/2037 | 10,486 | ||||||
29,000 | Time Warner, Inc. | 31,024 | ||||||
|
| |||||||
319,810 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.4% | ||||||||
25,000 | AbbVie, Inc. | 25,101 | ||||||
31,000 | 2.00%, 11/06/2018 (g) | 30,775 | ||||||
16,000 | 2.90%, 11/06/2022 (g) | 15,432 | ||||||
20,000 | Agilent Technologies, Inc. | 21,333 | ||||||
32,000 | Gilead Sciences, Inc. | 32,080 | ||||||
24,000 | 4.80%, 04/01/2044 (g) | 24,804 | ||||||
10,000 | Mylan, Inc. | 11,213 | ||||||
31,000 | Novartis Capital Corp. | 29,352 | ||||||
36,000 | 4.40%, 05/06/2044 (g) | 36,476 | ||||||
22,000 | Thermo Fisher Scientific, Inc. | 21,933 | ||||||
35,000 | 4.15%, 02/01/2024 | 36,082 | ||||||
27,000 | Valeant Pharmaceuticals International | 29,295 | ||||||
24,000 | Zoetis, Inc. | 23,193 | ||||||
|
| |||||||
337,069 | ||||||||
|
| |||||||
REAL ESTATE - 0.3% | ||||||||
49,000 | American Tower Corp. | 50,268 | ||||||
13,000 | 3.50%, 01/31/2023 (g) | 12,316 | ||||||
26,000 | 5.00%, 02/15/2024 | 27,132 | ||||||
32,000 | ARC Properties Operating Partnership LP/Clark Acquisition LLC | 32,032 | ||||||
32,000 | 3.00%, 02/06/2019 (f) | 31,890 | ||||||
70,000 | Corporate Office Properties LP | 64,836 | ||||||
16,000 | Realty Income Corp. | 16,773 | ||||||
|
| |||||||
235,247 | ||||||||
|
| |||||||
RETAILING - 0.2% | ||||||||
41,000 | Glencore Funding LLC | 39,635 | ||||||
65,000 | 4.13%, 05/30/2023 (f)(g) | 62,197 | ||||||
16,000 | Lowe’s Cos., Inc. | 17,042 | ||||||
20,000 | Tops Holding Corp. | 21,950 | ||||||
|
| |||||||
140,824 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.0% | ||||||||
16,000 | Xilinx, Inc. | 15,828 | ||||||
22,000 | 3.00%, 03/15/2021 | 21,850 | ||||||
|
| |||||||
37,678 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 0.2% | ||||||||
38,000 | eBay, Inc. | 36,140 | ||||||
16,000 | 4.00%, 07/15/2042 (g) | 14,208 | ||||||
24,000 | MasterCard, Inc. | 24,011 |
See accompanying Notes to Financial Statements. | 21 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
SOFTWARE & SERVICES (continued) | ||||||||
56,000 | Microsoft Corp. | 52,387 | ||||||
42,000 | Oracle Corp. | 41,706 | ||||||
22,000 | 3.63%, 07/15/2023 | 22,321 | ||||||
|
| |||||||
190,773 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 0.2% | ||||||||
6,000 | Brocade Communications Systems, Inc. | 5,760 | ||||||
29,000 | EMC Corp. | 29,010 | ||||||
80,000 | Hewlett-Packard Co. | 80,619 | ||||||
27,000 | iGATE Corp. | 28,451 | ||||||
16,000 | Viasystems, Inc. | 17,320 | ||||||
|
| |||||||
161,160 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.5% | ||||||||
45,000 | AT&T, Inc. | 45,273 | ||||||
40,000 | 4.35%, 06/15/2045 (g) | 35,445 | ||||||
33,000 | Frontier Communications Corp. | 36,712 | ||||||
19,000 | Hughes Satellite Systems Corp. | 20,947 | ||||||
18,000 | Sprint Corp. | 19,688 | ||||||
20,000 | T-Mobile USA, Inc. | 21,225 | ||||||
12,000 | tw telecom holdings, Inc. | 12,870 | ||||||
33,000 | Verizon Communications, Inc. | 30,130 | ||||||
47,000 | 3.45%, 03/15/2021 | 47,717 | ||||||
9,000 | 5.05%, 03/15/2034 | 9,262 | ||||||
65,000 | 5.15%, 09/15/2023 | 71,265 | ||||||
23,000 | 6.55%, 09/15/2043 | 28,091 | ||||||
27,000 | Windstream Corp. | 26,460 | ||||||
|
| |||||||
405,085 | ||||||||
|
| |||||||
UTILITIES - 0.7% | ||||||||
15,000 | Arizona Public Service Co. | 16,805 | ||||||
15,000 | CMS Energy Corp. | 15,229 | ||||||
15,000 | 4.88%, 03/01/2044 | 15,343 | ||||||
24,000 | Dominion Resources, Inc. | 24,467 | ||||||
44,000 | DPL, Inc. | 45,650 | ||||||
27,000 | Duke Energy Corp. | 27,080 | ||||||
47,000 | 3.05%, 08/15/2022 (g) | 45,812 |
Principal Amount ($) | Value ($) | |||||||
UTILITIES (continued) | ||||||||
34,000 | Exelon Corp. | 35,579 | ||||||
18,000 | Florida Power & Light Co. | 17,403 | ||||||
37,000 | Great Plains Energy, Inc. | 40,018 | ||||||
40,000 | MidAmerican Energy Holdings Co. | 48,003 | ||||||
43,000 | NextEra Energy Capital Holdings, Inc. | 44,050 | ||||||
29,000 | Northeast Utilities | 28,171 | ||||||
17,000 | PacifiCorp | 21,548 | ||||||
19,000 | PPL Capital Funding, Inc. | 19,323 | ||||||
42,000 | Public Service Electric & Gas Co., MTN | 38,870 | ||||||
40,000 | Southern Co. (The) | 40,609 | ||||||
|
| |||||||
523,960 | ||||||||
|
| |||||||
Total Corporate Bonds & Notes | 5,536,624 | |||||||
|
| |||||||
FOREIGN CORPORATE BONDS & NOTES - 2.7% | ||||||||
BANKS - 0.9% | ||||||||
200,000 | Barclays Bank PLC | 205,914 | ||||||
40,000 | Central American Bank for Economic Integration | 40,832 | ||||||
26,000 | Corp. Andina de Fomento | 26,906 | ||||||
125,000 | European Investment Bank | 125,642 | ||||||
115,000 | KFW | 108,212 | ||||||
15,000 | 4.50%, 07/16/2018 | 16,800 | ||||||
100,000 | National Agricultural Cooperative Federation | 105,823 | ||||||
46,000 | Royal Bank of Canada | 45,717 | ||||||
|
| |||||||
675,846 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.1% | ||||||||
61,000 | Bombardier, Inc. | 68,625 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.0% | ||||||||
15,000 | NCL Corp., Ltd. | 15,638 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.1% | ||||||||
38,000 | Invesco Finance PLC | 36,861 | ||||||
|
| |||||||
ENERGY - 0.9% | ||||||||
42,000 | BP Capital Markets PLC | 41,155 |
22 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
FOREIGN CORPORATE BONDS & NOTES (continued) | ||||||||
ENERGY (continued) | ||||||||
32,000 | 3.81%, 02/10/2024 (g) | 32,352 | ||||||
100,000 | Korea National Oil Corp. | 102,924 | ||||||
15,000 | Nexen, Inc. | 17,313 | ||||||
12,000 | Petrobras Global Finance BV | 11,371 | ||||||
7,000 | 6.25%, 03/17/2024 (g) | 7,229 | ||||||
7,000 | 7.25%, 03/17/2044 (g) | 7,221 | ||||||
28,000 | Petrobras International Finance Co. | 28,372 | ||||||
17,000 | 3.88%, 01/27/2016 | 17,500 | ||||||
56,000 | Petroleos Mexicanos | 58,240 | ||||||
30,000 | 3.50%, 01/30/2023 (g) | 28,305 | ||||||
31,000 | 5.50%, 01/21/2021 (g) | 34,023 | ||||||
49,000 | Shell International Finance BV | 49,196 | ||||||
48,000 | Statoil ASA | 49,002 | ||||||
16,000 | 4.80%, 11/08/2043 | 17,161 | ||||||
12,000 | Talisman Energy, Inc. | 11,929 | ||||||
24,000 | 6.25%, 02/01/2038 | 25,736 | ||||||
47,000 | Total Capital International SA | 47,500 | ||||||
32,000 | Transocean, Inc. | 35,983 | ||||||
Weatherford International, Ltd. | ||||||||
19,000 | 4.50%, 04/15/2022 (g) | 19,929 | ||||||
34,000 | 5.95%, 04/15/2042 (g) | 36,761 | ||||||
7,000 | 6.75%, 09/15/2040 (g) | 8,178 | ||||||
|
| |||||||
687,380 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.0% | ||||||||
28,000 | Diageo Capital PLC | 27,254 | ||||||
|
| |||||||
INSURANCE - 0.0% | ||||||||
17,000 | AXIS Specialty Finance PLC | 17,181 | ||||||
15,000 | XLIT, Ltd. | 15,959 | ||||||
|
| |||||||
33,140 | ||||||||
|
| |||||||
MATERIALS - 0.3% | ||||||||
63,000 | Agrium, Inc. | 61,312 | ||||||
15,000 | 4.90%, 06/01/2043 (g) | 14,881 | ||||||
16,000 | BHP Billiton Finance USA, Ltd. | 16,424 | ||||||
16,000 | 5.00%, 09/30/2043 | 16,998 | ||||||
6,000 | Corp. Nacional del Cobre de Chile | 6,272 | ||||||
16,000 | Kinross Gold Corp. | 16,059 | ||||||
10,000 | 6.88%, 09/01/2041 | 9,635 | ||||||
21,000 | LYB International Finance BV | 21,044 |
Principal Amount ($) | Value ($) | |||||||
MATERIALS (continued) | ||||||||
14,000 | Teck Resources, Ltd. | 13,236 | ||||||
25,000 | Xstrata Finance Canada, Ltd. | 25,324 | ||||||
|
| |||||||
201,185 | ||||||||
|
| |||||||
MEDIA - 0.0% | ||||||||
27,000 | Cogeco Cable, Inc. | 26,966 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.0% | ||||||||
28,000 | Sanofi | 27,420 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.3% | ||||||||
200,000 | America Movil SAB de CV | 206,800 | ||||||
|
| |||||||
UTILITIES - 0.1% | ||||||||
20,000 | AES Panama SA | 21,200 | ||||||
64,000 | Electricite de France | 63,748 | ||||||
|
| |||||||
84,948 | ||||||||
|
| |||||||
Total Foreign Corporate Bonds & Notes | 2,092,063 | |||||||
|
| |||||||
MUNICIPAL BONDS & NOTES - 0.2% | ||||||||
15,000 | American Municipal Power, Inc. OH | 17,084 | ||||||
25,000 | Denver City & County School District No 1, CO | 23,493 | ||||||
28,000 | Municipal Electric Authority of Georgia | 31,739 | ||||||
10,000 | New Jersey Transportation Trust Fund Authority | 11,071 | ||||||
35,000 | Port Authority of New York & New Jersey | 32,816 | ||||||
20,000 | South Carolina State Public Service Authority | 23,446 | ||||||
25,000 | State of California | 29,223 | ||||||
|
| |||||||
Total Municipal Bonds & Notes | 168,872 | |||||||
|
| |||||||
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.2% | ||||||||
43,000 | American Tower Trust I | 42,062 | ||||||
273 | Collateralized Mortgage Obligation Trust | 272 | ||||||
18,619 | Credit Suisse First Boston Mortgage Securities Corp. | — |
See accompanying Notes to Financial Statements. | 23 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (continued) | ||||||||
10,000 | GS Mortgage Securities Corp. II | 10,167 | ||||||
15,000 | GS Mortgage Securities Trust | 15,450 | ||||||
11,641 | MASTR Alternative Loan Trust | 975 | ||||||
55,000 | Morgan Stanley Capital I Trust | 56,286 | ||||||
1,633 | Wells Fargo Mortgage-Backed Securities Trust | 12 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage Obligations | 125,224 | |||||||
|
| |||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES - 1.5% | | ||||||
55,000 | Banc of America Commercial Mortgage Trust | 57,921 | ||||||
10,000 | Series 2006-4, Class AM | 10,924 | ||||||
20,000 | Series 2008-1, Class A4 | 22,788 | ||||||
40,000 | Banc of America Merrill Lynch Commercial Mortgage, Inc. | 42,243 | ||||||
30,000 | Series 2005-1, Class AJ | 31,075 | ||||||
30,651 | Bear Stearns Commercial Mortgage Securities Trust | 31,523 | ||||||
25,000 | Series 2006-T22, Class AJ | 26,923 | ||||||
30,000 | Series 2007-PW18, Class AMA | 33,586 | ||||||
20,000 | Commercial Mortgage Pass-Through Certificates | 21,160 | ||||||
20,000 | Series 2005-LP5, Class A4 | 20,640 | ||||||
55,000 | Credit Suisse Commercial Mortgage Trust Series | 58,577 | ||||||
30,000 | GS Mortgage Securities Trust | 31,214 | ||||||
10,000 | Series 2011-GC5, Class B | 11,089 |
Principal Amount ($) | Value ($) | |||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES (continued) | | ||||||
29,652 | JP Morgan Chase Commercial Mortgage Securities Corp. | 30,574 | ||||||
60,000 | JP Morgan Chase Commercial Mortgage Securities Trust | 65,930 | ||||||
15,000 | JPMBB Commercial Mortgage Securities Trust | 15,416 | ||||||
20,000 | Series 2014-C18, Class C | 20,442 | ||||||
60,000 | Series 2013-C17, Class C | 61,945 | ||||||
15,000 | Series 2013-C15, Class C | 15,817 | ||||||
19,441 | JPMCC Commercial Mortgage Pass-Through Certificates | 19,858 | ||||||
289,041 | LB-UBS Commercial Mortgage Trust | 830 | ||||||
20,781 | Series 2005-C5, Class A4 | 21,622 | ||||||
40,000 | Series 2006-C1, Class A4 | 42,508 | ||||||
9,816 | Series 2006-C4, Class A4 | 10,705 | ||||||
40,000 | Series 2007-C6, Class AMFL | 44,264 | ||||||
35,000 | Series 2007-C6, Class AM | 38,788 | ||||||
55,000 | ML-CFC Commercial Mortgage Trust | 59,806 | ||||||
29,000 | Morgan Stanley Bank of America Merrill Lynch Trust | 28,175 | ||||||
20,000 | Morgan Stanley Capital I Trust | 21,196 | ||||||
25,000 | Series 2006-T21, Class AJ | 26,634 | ||||||
20,000 | Series 2006-IQ11, Class B | 18,533 | ||||||
20,000 | Series 2006-T23, Class A4 | 21,809 | ||||||
30,000 | Series 2007-IQ16, Class AMA | 33,675 | ||||||
20,000 | WF-RBS Commercial Mortgage Trust | 20,755 | ||||||
40,000 | Series 2014-LC14, Class AS | 41,578 |
24 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES (continued) | | ||||||
12,000 | Series 2013-C15, Class D | 10,790 | ||||||
20,000 | Series 2014-C19, Class B | 20,599 | ||||||
20,000 | Series 2013-C16, Class D | 19,140 | ||||||
25,000 | Series 2011-C4, Class D | 26,290 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage-Backed Securities | 1,137,342 | |||||||
|
| |||||||
SOVEREIGN BONDS—0.3% | ||||||||
10,000 | Chile Government International Bond | 8,325 | ||||||
6,000 | Mexico Government International Bond | 5,925 | ||||||
42,000 | Mexico Government International Bond, MTN | 40,110 | ||||||
6,000 | Panama Government International Bond | 7,080 | ||||||
11,000 | Peruvian Government International Bond | 13,282 | ||||||
16,000 | Poland Government International Bond | 15,000 | ||||||
37,000 | 5.00%, 03/23/2022 | 40,469 | ||||||
60,000 | Turkey Government International Bond | 65,265 | ||||||
|
| |||||||
Total Sovereign Bonds | 195,456 | |||||||
|
| |||||||
U.S. TREASURIES - 9.0% | ||||||||
399,500 | U.S. Treasury Bonds | 404,431 | ||||||
1,224,000 | 4.50%, 02/15/2036 | 1,437,052 | ||||||
238,000 | U.S. Treasury Notes | 237,387 | ||||||
3,037,000 | 0.75%, 01/15/2017 | 3,032,730 | ||||||
1,079,300 | 1.50%, 02/28/2019 | 1,068,591 | ||||||
593,800 | 2.50%, 08/15/2023 | 585,380 | ||||||
226,000 | 2.75%, 02/15/2024 | 226,512 | ||||||
|
| |||||||
Total U.S. Treasuries | 6,992,083 | |||||||
|
| |||||||
Total Bonds & Notes | 22,662,622 | |||||||
|
| |||||||
Shares | ||||||||
| Domestic Equity - 31.4% |
| ||||||
COMMON STOCKS - 31.4% | ||||||||
AUTOMOBILES & COMPONENTS - 0.4% | ||||||||
11,419 | Ford Motor Co. (g) | 178,136 | ||||||
1,880 | TRW Automotive Holdings Corp. (i) | 153,446 | ||||||
|
| |||||||
331,582 | ||||||||
|
|
Shares | Value ($) | |||||||
BANKS - 1.1% | ||||||||
11,707 | Bank of America Corp. | 201,361 | ||||||
16,711 | Regions Financial Corp. | 185,659 | ||||||
8,949 | Wells Fargo & Co. (g) | 445,123 | ||||||
|
| |||||||
832,143 | ||||||||
|
| |||||||
CAPITAL GOODS - 1.1% | ||||||||
1,184 | Boeing Co. (The) | 148,580 | ||||||
2,820 | Dover Corp. (g) | 230,535 | ||||||
1,283 | General Dynamics Corp. | 139,745 | ||||||
3,958 | Honeywell International, Inc. | 367,144 | ||||||
|
| |||||||
886,004 | ||||||||
|
| |||||||
CONSUMER SERVICES - 0.4% | ||||||||
2,820 | Las Vegas Sands Corp. | 227,800 | ||||||
836 | McDonald’s Corp. | 81,953 | ||||||
|
| |||||||
309,753 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 3.2% | ||||||||
3,312 | American Express Co. | 298,179 | ||||||
2,671 | Ameriprise Financial, Inc. | 293,997 | ||||||
4,700 | Charles Schwab Corp. (The) (g) | 128,451 | ||||||
4,504 | Citigroup, Inc. (g) | 214,390 | ||||||
6,284 | CME Group, Inc. (g) | 465,079 | ||||||
658 | Goldman Sachs Group, Inc. (The) (g) | 107,813 | ||||||
7,869 | JPMorgan Chase & Co. (g) | 477,727 | ||||||
2,256 | McGraw Hill Financial, Inc. (g) | 172,133 | ||||||
4,794 | State Street Corp. | 333,423 | ||||||
|
| |||||||
2,491,192 | ||||||||
|
| |||||||
ENERGY - 2.4% | ||||||||
2,391 | Anadarko Petroleum Corp. | 202,661 | ||||||
2,298 | Cameron International Corp. (i) | 141,947 | ||||||
2,150 | Chevron Corp. | 255,657 | ||||||
2,118 | Exxon Mobil Corp. (g) | 206,886 | ||||||
3,899 | Halliburton Co. | 229,612 | ||||||
3,384 | Hess Corp. | 280,466 | ||||||
7,063 | Marathon Oil Corp. (g) | 250,878 | ||||||
3,110 | Occidental Petroleum Corp. | 296,352 | ||||||
|
| |||||||
1,864,459 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.4% | ||||||||
4,350 | CVS Caremark Corp. | 325,641 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 2.0% | ||||||||
1,138 | Altria Group, Inc. | 42,595 | ||||||
5,915 | Archer-Daniels-Midland Co. | 256,652 | ||||||
2,855 | Coca-Cola Enterprises, Inc. | 136,355 | ||||||
774 | Kraft Foods Group, Inc. (g) | 43,421 | ||||||
6,062 | Mondelez International, Inc., Class A | 209,442 | ||||||
8,913 | PepsiCo, Inc. | 744,236 | ||||||
1,260 | Philip Morris International, Inc. | 103,156 | ||||||
|
| |||||||
1,535,857 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 1.7% | ||||||||
4,387 | Abbott Laboratories | 168,944 | ||||||
956 | Aetna, Inc. (g) | 71,671 | ||||||
2,918 | Boston Scientific Corp. (i) | 39,451 | ||||||
1,532 | Cardinal Health, Inc. | 107,210 | ||||||
3,603 | DENTSPLY International, Inc. (g) | 165,882 |
See accompanying Notes to Financial Statements. | 25 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Shares | Value ($) | |||||||
| Domestic Equity (continued) |
| ||||||
COMMON STOCKS (continued) | ||||||||
HEALTHCARE EQUIPMENT & SERVICES (continued) | ||||||||
7,391 | Express Scripts Holding Co. (g)(i) | 554,990 | ||||||
1,974 | Stryker Corp. (g) | 160,822 | ||||||
695 | UnitedHealth Group, Inc. (g) | 56,983 | ||||||
|
| |||||||
1,325,953 | ||||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.4% | ||||||||
1,265 | Clorox Co. (The) (g) | 111,333 | ||||||
696 | Energizer Holdings, Inc. (g) | 70,115 | ||||||
948 | Kimberly-Clark Corp. (g) | 104,517 | ||||||
|
| |||||||
285,965 | ||||||||
|
| |||||||
INSURANCE - 1.0% | ||||||||
4,568 | American International Group, | 228,446 | ||||||
4,874 | Genworth Financial, Inc., | 86,416 | ||||||
8,094 | Hartford Financial Services Group, | 285,475 | ||||||
1,775 | MetLife, Inc. | 93,720 | ||||||
835 | Prudential Financial, Inc. | 70,683 | ||||||
|
| |||||||
764,740 | ||||||||
|
| |||||||
MATERIALS - 0.8% | ||||||||
3,290 | Monsanto Co. (g) | 374,303 | ||||||
415 | PPG Industries, Inc. (g) | 80,286 | ||||||
637 | Praxair, Inc. (g) | 83,428 | ||||||
696 | Rockwood Holdings, Inc. | 51,782 | ||||||
|
| |||||||
589,799 | ||||||||
|
| |||||||
MEDIA - 1.5% | ||||||||
1,393 | CBS Corp., Class B | 86,087 | ||||||
2,924 | Comcast Corp., Class A | 146,258 | ||||||
5,264 | Comcast Corp., Special | 256,673 | ||||||
2,413 | Discovery Communications, Inc., Class C (g)(i) | 185,946 | ||||||
4,869 | Time Warner, Inc. | 318,092 | ||||||
2,507 | Walt Disney Co. (The) | 200,736 | ||||||
|
| |||||||
1,193,792 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 3.5% | ||||||||
877 | Alexion Pharmaceuticals, Inc. (i) | 133,418 | ||||||
4,672 | Amgen, Inc. | 576,244 | ||||||
5,546 | Gilead Sciences, Inc. (g)(i) | 392,990 | ||||||
5,754 | Johnson & Johnson | 565,215 | ||||||
7,726 | Merck & Co., Inc. | 438,605 | ||||||
1,601 | PerkinElmer, Inc. (g) | 72,141 | ||||||
17,224 | Pfizer, Inc. | 553,235 | ||||||
|
| |||||||
2,731,848 | ||||||||
|
| |||||||
REAL ESTATE - 0.8% | ||||||||
5,954 | American Tower Corp., REIT | 487,454 | ||||||
1,138 | HCP, Inc., REIT | 44,143 | ||||||
813 | Rayonier, Inc., REIT | 37,325 | ||||||
418 | Simon Property Group, Inc., | 68,552 | ||||||
|
| |||||||
637,474 | ||||||||
|
| |||||||
RETAILING - 1.9% | ||||||||
470 | Amazon.com, Inc. (i) | 158,164 | ||||||
278 | AutoZone, Inc. (i) | 149,314 |
Shares | Value ($) | |||||||
RETAILING (continued) | ||||||||
4,857 | Dick’s Sporting Goods, Inc. (g) | 265,241 | ||||||
2,646 | Dollar General Corp. (i) | 146,800 | ||||||
1,024 | Home Depot, Inc. (The) (g) | 81,029 | ||||||
10,399 | Lowe’s Cos., Inc. | 508,511 | ||||||
2,158 | Macy’s, Inc. (g) | 127,948 | ||||||
819 | Wal-Mart Stores, Inc. | 62,596 | ||||||
|
| |||||||
1,499,603 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.6% | ||||||||
1,727 | Analog Devices, Inc. (g) | 91,773 | ||||||
5,570 | Applied Materials, Inc. (g) | 113,739 | ||||||
3,367 | Intel Corp. | 86,902 | ||||||
2,366 | Microchip Technology, Inc. (g) | 113,000 | ||||||
1,183 | Texas Instruments, Inc. (g) | 55,779 | ||||||
|
| |||||||
461,193 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 2.3% | ||||||||
5,264 | eBay, Inc. (i) | 290,783 | ||||||
483 | Google, Inc., Class A (i) | 538,308 | ||||||
410 | International Business Machines Corp. (g) | 78,921 | ||||||
3,259 | Intuit, Inc. (g) | 253,322 | ||||||
1,629 | Microsoft Corp. | 66,773 | ||||||
5,891 | Oracle Corp. | 241,001 | ||||||
1,138 | Paychex, Inc. (g) | 48,479 | ||||||
1,410 | Visa, Inc., Class A (g) | 304,363 | ||||||
|
| |||||||
1,821,950 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 3.6% | ||||||||
1,373 | Apple, Inc. | 736,944 | ||||||
17,611 | Cisco Systems, Inc. (g) | 394,663 | ||||||
21,330 | EMC Corp. (g) | 584,655 | ||||||
4,323 | Hewlett-Packard Co. (g) | 139,892 | ||||||
11,954 | QUALCOMM, Inc. (g) | 942,692 | ||||||
|
| |||||||
2,798,846 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.7% | ||||||||
3,458 | AT&T, Inc. | 121,272 | ||||||
9,096 | Verizon Communications, Inc. | 432,708 | ||||||
|
| |||||||
553,980 | ||||||||
|
| |||||||
TRANSPORTATION - 0.8% | ||||||||
7,614 | CSX Corp. | 220,578 | ||||||
2,785 | Delta Air Lines, Inc. | 96,500 | ||||||
3,200 | United Parcel Service, Inc., | 311,616 | ||||||
|
| |||||||
628,694 | ||||||||
|
| |||||||
UTILITIES - 0.8% | ||||||||
6,406 | AES Corp. | 91,478 | ||||||
994 | American Water Works Co., Inc. (g) | 45,128 | ||||||
2,228 | Calpine Corp. (i) | 46,587 | ||||||
3,276 | CMS Energy Corp. | 95,921 | ||||||
1,547 | Dominion Resources, Inc. (g) | 109,821 | ||||||
1,253 | NextEra Energy, Inc. (g) | 119,812 | ||||||
2,785 | NRG Energy, Inc. (g) | 88,563 | ||||||
|
| |||||||
597,310 | ||||||||
|
| |||||||
Total Common Stocks | 24,467,778 | |||||||
|
|
26 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Shares | Value ($) | |||||||
| Domestic Equity (continued) |
| ||||||
PREFERRED STOCKS - 0.0% | ||||||||
BANKS - 0.0% | ||||||||
946 | Wells Fargo & Co. | 23,586 | ||||||
|
| |||||||
Total Preferred Stocks | 23,586 | |||||||
|
| |||||||
Total Domestic Equity | 24,491,364 | |||||||
|
| |||||||
| Foreign Equity - 24.8% |
| ||||||
COMMON STOCKS - 24.4% | ||||||||
AUTOMOBILES & COMPONENTS - 0.8% | ||||||||
2,400 | Denso Corp. | 115,310 | ||||||
20,000 | Mazda Motor Corp. (g) | 88,945 | ||||||
8,106 | Toyota Motor Corp. | 458,567 | ||||||
|
| |||||||
662,822 | ||||||||
|
| |||||||
BANKS - 2.5% | ||||||||
71,471 | Barclays PLC | 278,103 | ||||||
4,986 | BNP Paribas SA (g) | 384,761 | ||||||
5,980 | Credit Agricole SA (i) | 94,329 | ||||||
23,429 | HSBC Holdings PLC | 237,288 | ||||||
5,338 | ICICI Bank, Ltd., ADR (g) | 233,804 | ||||||
95,170 | Intesa Sanpaolo SpA | 322,673 | ||||||
40,100 | Mitsubishi UFJ Financial Group, Inc. | 220,777 | ||||||
5,000 | Sumitomo Mitsui Financial Group, Inc. | 214,060 | ||||||
|
| |||||||
1,985,795 | ||||||||
|
| |||||||
CAPITAL GOODS - 2.6% | ||||||||
6,392 | ABB, Ltd. | 164,983 | ||||||
3,398 | Assa Abloy AB, Class B | 180,603 | ||||||
4,399 | Eaton Corp. PLC (g) | 330,453 | ||||||
3,200 | European Aeronautic Defence and Space Co. NV | 229,297 | ||||||
1,400 | FANUC Corp. | 247,483 | ||||||
8,407 | Larsen & Toubro, Ltd., GDR | 179,069 | ||||||
6,000 | Mitsubishi Heavy Industries, Ltd. | 34,782 | ||||||
5,472 | Safran SA | 379,276 | ||||||
2,072 | Schneider Electric SA (g) | 183,766 | ||||||
2,134 | Vallourec SA | 115,897 | ||||||
|
| |||||||
2,045,609 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.5% | ||||||||
4,238 | Brambles, Ltd. | 36,373 | ||||||
8,810 | Capita PLC | 160,976 | ||||||
6,438 | Experian PLC | 116,025 | ||||||
1,671 | Nielsen Holdings NV | 74,577 | ||||||
|
| |||||||
387,951 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.5% | ||||||||
2,568 | Luxottica Group SpA (g) | 148,582 | ||||||
4,247 | Persimmon PLC | 95,302 | ||||||
265 | Swatch Group AG (The) | 166,197 | ||||||
|
| |||||||
410,081 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.5% | ||||||||
2,147 | Deutsche Bank AG | 96,097 | ||||||
8,666 | Invesco, Ltd. (g) | 320,642 | ||||||
|
| |||||||
416,739 | ||||||||
|
|
Shares | Value ($) | |||||||
ENERGY - 2.2% | ||||||||
6,665 | Cameco Corp. (g) | 152,835 | ||||||
4,815 | Cenovus Energy, Inc. (g) | 139,466 | ||||||
8,101 | Schlumberger, Ltd. (g) | 789,848 | ||||||
8,761 | Subsea 7 SA (g) | 162,868 | ||||||
2,170 | Technip SA | 224,041 | ||||||
3,381 | Total SA | 221,809 | ||||||
|
| |||||||
1,690,867 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.9% | ||||||||
1,441 | Anheuser-Busch InBev NV | 151,139 | ||||||
8,733 | Diageo PLC | 270,947 | ||||||
555 | Diageo PLC, ADR (g) | 69,147 | ||||||
2,829 | Nestle SA | 213,132 | ||||||
|
| |||||||
704,365 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 1.0% | ||||||||
824 | Cie Generale d’Optique Essilor International SA | 83,132 | ||||||
6,589 | Covidien PLC | 485,346 | ||||||
1,169 | Fresenius SE & Co. KGaA | 183,029 | ||||||
|
| |||||||
751,507 | ||||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.6% | ||||||||
5,986 | Svenska Cellulosa AB, Class B | 175,881 | ||||||
5,000 | Unicharm Corp. (g) | 267,660 | ||||||
|
| |||||||
443,541 | ||||||||
|
| |||||||
INSURANCE - 1.8% | ||||||||
516 | ACE, Ltd. (g) | 51,115 | ||||||
75,659 | AIA Group, Ltd. | 358,931 | ||||||
8,700 | AXA SA | 226,206 | ||||||
20,686 | ING Groep NV (i) | 292,945 | ||||||
10,905 | Prudential PLC | 230,617 | ||||||
9,200 | Tokio Marine Holdings, Inc. | 276,755 | ||||||
|
| |||||||
1,436,569 | ||||||||
|
| |||||||
MATERIALS - 1.9% | ||||||||
7,383 | BHP Billiton PLC | 226,970 | ||||||
60 | Givaudan SA | 92,851 | ||||||
2,869 | HeidelbergCement AG | 245,991 | ||||||
1,703 | Johnson Matthey PLC | 92,869 | ||||||
1,584 | Linde AG | 316,993 | ||||||
4,102 | LyondellBasell Industries NV, Class A | 364,832 | ||||||
1,829 | Rio Tinto PLC | 101,767 | ||||||
|
| |||||||
1,442,273 | ||||||||
|
| |||||||
MEDIA - 0.7% | ||||||||
8,147 | Liberty Global PLC, Series C (g)(i) | 331,664 | ||||||
8,563 | WPP PLC | 176,592 | ||||||
|
| |||||||
508,256 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 2.3% | ||||||||
348 | Actavis PLC (g)(i) | 71,636 | ||||||
7,405 | Astellas Pharma, Inc. | 88,010 | ||||||
1,979 | Bayer AG | 267,791 | ||||||
2,103 | CSL, Ltd. | 135,584 | ||||||
13,044 | GlaxoSmithKline PLC | 346,093 | ||||||
3,834 | GlaxoSmithKline PLC ADR (g) | 204,851 | ||||||
1 | Mallinckrodt PLC (g)(i) | 63 |
See accompanying Notes to Financial Statements. | 27 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Shares | Value ($) | |||||||
| Foreign Equity (continued) |
| ||||||
COMMON STOCKS (continued) | ||||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES (continued) | ||||||||
1,288 | Roche Holding AG | 386,393 | ||||||
2,587 | Sanofi | 269,839 | ||||||
|
| |||||||
1,770,260 | ||||||||
|
| |||||||
REAL ESTATE - 0.7% | ||||||||
1,983 | Brookfield Asset Management, Inc., Class A | 80,901 | ||||||
8,000 | Mitsubishi Estate Co., Ltd. | 190,008 | ||||||
9,330 | Mitsui Fudosan Co., Ltd. | 285,286 | ||||||
|
| |||||||
556,195 | ||||||||
|
| |||||||
RETAILING - 0.6% | ||||||||
278 | Fast Retailing Co., Ltd. (g) | 101,053 | ||||||
17,611 | Kingfisher PLC | 123,724 | ||||||
19,700 | Rakuten, Inc. (g) | 263,406 | ||||||
|
| |||||||
488,183 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.8% | ||||||||
2,385 | ASML Holding NV | 220,993 | ||||||
86 | Samsung Electronics Co., Ltd. | 108,505 | ||||||
13,879 | Taiwan Semiconductor Manufacturing Co., Ltd., ADR | 277,858 | ||||||
|
| |||||||
607,356 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 1.2% | ||||||||
3,805 | Baidu, Inc., ADR (i) | 579,806 | ||||||
841 | Cap Gemini SA | 63,693 | ||||||
3,547 | SAP AG | 287,257 | ||||||
|
| |||||||
930,756 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 1.1% | ||||||||
3,016 | Hexagon AB, Class B | 102,292 | ||||||
77 | Keyence Corp. | 31,829 | ||||||
3,700 | Murata Manufacturing Co., Ltd. | 349,755 | ||||||
29,287 | Telefonaktiebolaget LM Ericsson, Class B | 389,376 | ||||||
|
| |||||||
873,252 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.7% | ||||||||
4,900 | Softbank Corp. | 371,122 | ||||||
42,853 | Vodafone Group PLC | 157,388 | ||||||
|
| |||||||
528,510 | ||||||||
|
| |||||||
TRANSPORTATION - 0.3% | ||||||||
1,400 | East Japan Railway Co. | 103,397 | ||||||
20,365 | International Consolidated Airlines Group SA (i) | 141,646 | ||||||
|
| |||||||
245,043 | ||||||||
|
| |||||||
UTILITIES - 0.2% | ||||||||
9,547 | National Grid PLC | 130,832 | ||||||
|
| |||||||
Total Common Stocks | 19,016,762 | |||||||
|
|
Shares | Value ($) | |||||||
PREFERRED STOCKS - 0.4% | ||||||||
AUTOMOBILES & COMPONENTS - 0.4% | ||||||||
1,226 | Volkswagen AG | 317,839 | ||||||
|
| |||||||
Total Preferred Stocks | 317,839 | |||||||
|
| |||||||
Total Foreign Equity | 19,334,601 | |||||||
|
| |||||||
| Exchange-Traded Funds - 3.5% |
| ||||||
2,540 | Financial Select Sector SPDR Fund, ETF (g) | 56,744 | ||||||
4,327 | Industrial Select Sector SPDR Fund, ETF (g) | 226,432 | ||||||
60,199 | Vanguard FTSE Emerging Markets, ETF (g) | 2,442,875 | ||||||
|
| |||||||
Total Exchange-Traded Funds | 2,726,051 | |||||||
|
| |||||||
| Investment Companies (j) - 20.1% |
| ||||||
15,614,184 | State Street Navigator Prime Securities Lending Portfolio | 15,614,184 | ||||||
|
| |||||||
Total Investment Companies | 15,614,184 | |||||||
|
| |||||||
| Total Investments - 109.0% | 84,828,822 | ||||||
|
| |||||||
| (Cost $75,607,418) | |||||||
| Other Assets & Liabilities, Net - (9.0)% | (7,014,439 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 77,814,383 | ||||||
|
|
(a) | Interest only security (“IO”). These types of securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the “interest only” holding. |
(b) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2014. |
(c) | Principal only security (“PO”). These types of securities represent the right to receive the monthly principal payments on an underlying pool of mortgages. No payments of interest on the pool are passed through to the “principal only” holder. |
(d) | Securities are grouped by coupon and represent a range of maturities. |
(e) | Settlement is on a delayed delivery or when-issued basis with final maturity to be announced (TBA) in the future. |
(f) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At March 31, 2014, these securities amounted to $1,454,775 or 1.9% of net assets. |
(g) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $16,595,918. The loaned securities were secured with cash and securities collateral of $16,932,766. Collateral is calculated based on prior day’s prices. See Note 4. |
(h) | Security purchased on a when-issued basis. As of March 31, 2014, assets with a total aggregate market value of $16,014, or 0.0% of net assets, were purchased on a when-issued basis. |
(i) | Non-income producing security. |
(j) | Represents investments of cash collateral received in connection with securities lending. |
28 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Total Return Fund |
Glossary:
ADR | American Depositary Receipt | |
ARM | Adjustable Rate Mortgage | |
ETF | Exchange-Traded Fund | |
GDR | Global Depositary Receipt | |
MTN | Medium-Term Note | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust | |
REMIC | Real Estate Mortgage Investment Conduit | |
SPDR | Standard & Poor’s Depositary Receipt | |
STRIPS | Separate Trading of Registered Interest and Principal of Security |
The Fund had the following futures contracts, brokered by Royal Bank of Scotland, for which $246,000 was pledged as collateral, open at March 31, 2014:
Description | Expiration Date | Number of Contracts | Notional Value | Unrealized (Depreciation) | ||||||||||||
Long Futures: | ||||||||||||||||
2 Yr. U.S. Treasury Notes | June 2014 | 17 | $ | 3,732,562 | $ | (3,117 | ) | |||||||||
5 Yr. U.S. Treasury Notes | June 2014 | 12 | 1,427,438 | (1,566 | ) | |||||||||||
Euro STOXX 50 Index | June 2014 | 1 | 42,726 | 1,678 | ||||||||||||
FTSE 100 Index | June 2014 | 1 | 109,090 | 697 | ||||||||||||
S&P 500 Emini Index | June 2014 | 12 | 1,118,760 | 6,464 | ||||||||||||
S&P MidCap 400 Emini Index | June 2014 | 16 | 2,199,840 | 5,875 | ||||||||||||
TOPIX Index | June 2014 | 1 | 116,813 | (2,049 | ) | |||||||||||
|
| |||||||||||||||
7,982 | ||||||||||||||||
|
| |||||||||||||||
Short Futures: | ||||||||||||||||
10 Yr. U.S. Treasury Notes | June 2014 | 25 | 3,087,500 | 21,162 | ||||||||||||
U.S. Long Treasury Bonds | June 2014 | 11 | 1,465,406 | (7,877 | ) | |||||||||||
Ultra Long U.S. Treasury Bonds | June 2014 | 3 | 433,407 | (7,530 | ) | |||||||||||
|
| |||||||||||||||
5,755 | ||||||||||||||||
|
| |||||||||||||||
$ | 13,737 | |||||||||||||||
|
|
The Fund invested in the following countries as of March 31, 2014:
Country | Percentage (based on Total Investments) | |||
United States | 74.5 | % | ||
United Kingdom | 4.4 | % | ||
Japan | 4.4 | % | ||
France | 2.8 | % | ||
Germany | 2.2 | % | ||
Netherlands | 1.5 | % | ||
Other (each less than 1.49%) | 10.2 | % | ||
|
| |||
100.0 | % | |||
|
|
Industry | Domestic | Foreign | Percentage (based on Total Investments) | |||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 3.7 | % | 2.1 | % | 5.8 | % | ||||||
Energy | 2.9 | % | 2.8 | % | 5.7 | % | ||||||
Banks | 1.5 | % | 3.2 | % | 4.7 | % | ||||||
Technology Hardware & Equipment | 3.5 | % | 1.0 | % | 4.5 | % | ||||||
Diversified Financials | 3.8 | % | 0.5 | % | 4.3 | % | ||||||
Capital Goods | 1.3 | % | 2.5 | % | 3.8 | % | ||||||
Software & Services | 2.4 | % | 1.1 | % | 3.5 | % | ||||||
Insurance | 1.3 | % | 1.7 | % | 3.0 | % | ||||||
Food, Beverage & Tobacco | 2.0 | % | �� | 0.9 | % | 2.9 | % | |||||
Healthcare Equipment & Services | 2.0 | % | 0.9 | % | 2.9 | % | ||||||
Materials | 0.8 | % | 1.9 | % | 2.7 | % | ||||||
Retailing | 1.9 | % | 0.6 | % | 2.5 | % | ||||||
Media | 1.8 | % | 0.6 | % | 2.4 | % | ||||||
Telecommunication Services | 1.1 | % | 0.9 | % | 2.0 | % | ||||||
Real Estate | 1.0 | % | 0.7 | % | 1.7 | % | ||||||
Automobiles & Components | 0.4 | % | 1.2 | % | 1.6 | % | ||||||
Utilities | 1.3 | % | 0.3 | % | 1.6 | % | ||||||
Semiconductors & Semiconductor Equipment | 0.6 | % | 0.7 | % | 1.3 | % | ||||||
Transportation | 0.7 | % | 0.3 | % | 1.0 | % | ||||||
Household & Personal Products | 0.4 | % | 0.5 | % | 0.9 | % | ||||||
Food & Staples Retailing | 0.6 | % | 0.0 | % | 0.6 | % | ||||||
Commercial & Professional Services | 0.1 | % | 0.5 | % | 0.6 | % | ||||||
Consumer Durables & Apparel | 0.0 | % | 0.5 | % | 0.5 | % | ||||||
Consumer Services | 0.4 | % | 0.0 | % | 0.4 | % | ||||||
|
| |||||||||||
60.9 | % | |||||||||||
|
| |||||||||||
Sector | ||||||||||||
U.S. Treasuries | 8.2 | % | ||||||||||
Agency Mortgage-Backed Securities | 7.4 | % | ||||||||||
Non-Agency Collateralized Mortgage-Backed Securities | 1.3 | % | ||||||||||
Other (each less than 1.0%) | 0.6 | % | ||||||||||
|
| |||||||||||
17.5 | % | |||||||||||
|
| |||||||||||
Exchange-Traded Funds | 3.2 | % | ||||||||||
Investment Companies | 18.4 | % | ||||||||||
|
| |||||||||||
21.6 | % | |||||||||||
|
| |||||||||||
100.0 | % | |||||||||||
|
|
See accompanying Notes to Financial Statements. | 29 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Tax-Exempt Fund |
Principal Amount ($) | Value ($) | |||||||
| Municipal Bonds & Notes - 100.0% |
| ||||||
ALASKA - 1.9% | ||||||||
500,000 | Alaska Housing Finance Corp. | 556,200 | ||||||
|
| |||||||
CALIFORNIA - 9.7% | ||||||||
1,000,000 | California State Department of Water Resources | 1,204,990 | ||||||
1,160,000 | Los Angeles, CA Harbor Department | 1,312,436 | ||||||
28,000 | Sacramento, CA Municipal Utility District | 32,699 | ||||||
250,000 | State of California | 275,152 | ||||||
|
| |||||||
2,825,277 | ||||||||
|
| |||||||
COLORADO - 2.0% | ||||||||
500,000 | Regional Transportation District, CO | 566,630 | ||||||
|
| |||||||
CONNECTICUT - 9.0% | ||||||||
500,000 | South Central Connecticut Regional Water Authority Insured: GO OF AUTH | 547,320 | ||||||
500,000 | State of Connecticut | 584,215 | ||||||
250,000 | State of Connecticut Special Tax Revenue | 284,838 | ||||||
1,000,000 | Town of Fairfield, CT | 1,186,980 | ||||||
|
| |||||||
2,603,353 | ||||||||
|
| |||||||
DISTRICT OF COLUMBIA - 3.6% | ||||||||
500,000 | District of Columbia | 563,680 | ||||||
500,000 | 5.00%, 10/01/2030 | 485,245 | ||||||
|
| |||||||
1,048,925 | ||||||||
|
| |||||||
FLORIDA - 1.3% | ||||||||
30,000 | City of Gainesville, FL Utilities System | 31,175 | ||||||
250,000 | City of Tampa, FL | 282,082 | ||||||
50,000 | State of Florida | 51,190 | ||||||
|
| |||||||
364,447 | ||||||||
|
| |||||||
GEORGIA - 9.9% | ||||||||
500,000 | City of Atlanta Department of Aviation | 544,625 | ||||||
500,000 | City of Atlanta, GA Water & Wastewater Insured: AGM | 619,095 | ||||||
1,000,000 | Municipal Electric Authority of Georgia | 1,164,110 | ||||||
500,000 | State of Georgia | 547,745 | ||||||
|
| |||||||
2,875,575 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
HAWAII - 4.5% | ||||||||
1,135,000 | State of Hawaii Airports System | 1,295,341 | ||||||
|
| |||||||
INDIANA - 2.4% | ||||||||
500,000 | Indiana Municipal Power Agency | 561,695 | ||||||
130,000 | Indiana Toll Road Commission | 138,475 | ||||||
|
| |||||||
700,170 | ||||||||
|
| |||||||
KENTUCKY - 1.9% | ||||||||
500,000 | Kentucky State Property & Building Commission Insured: AGC | 559,735 | ||||||
|
| |||||||
MAINE - 2.0% | ||||||||
500,000 | Maine Health & Higher Educational Facilities Authority Insured: | 577,145 | ||||||
|
| |||||||
MASSACHUSETTS - 1.9% | ||||||||
500,000 | Massachusetts Water Resources Authority | 563,890 | ||||||
|
| |||||||
MICHIGAN - 1.9% | ||||||||
500,000 | Lansing Board of Water & Light, MI | 540,290 | ||||||
|
| |||||||
MINNESOTA - 2.2% | ||||||||
500,000 | St Paul Port Authority | 591,660 | ||||||
35,000 | Western Minnesota Municipal Power Agency | 36,568 | ||||||
|
| |||||||
628,228 | ||||||||
|
| |||||||
MISSOURI - 7.8% | ||||||||
1,500,000 | Missouri Highway & Transportation Commission | 1,752,555 | ||||||
500,000 | Missouri Joint Municipal Electric Utility Commission | 519,620 | ||||||
|
| |||||||
2,272,175 | ||||||||
|
| |||||||
NEW JERSEY - 0.8% | ||||||||
100,000 | Atlantic County Improvement Authority Insured: NATL-RE | 105,401 | ||||||
20,000 | New Jersey State Turnpike Authority Insured: AMBAC-TCRS | 22,100 | ||||||
20,000 | Insured: AMBAC-TCRS | 22,041 | ||||||
15,000 | Insured: AMBAC-TCRS | 16,589 | ||||||
65,000 | Insured: AMBAC-TCRS-BNY | 68,313 | ||||||
|
| |||||||
234,444 | ||||||||
|
|
30 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Tax-Exempt Fund |
Principal Amount ($) | Value ($) | |||||||
| Municipal Bonds & Notes (continued) |
| ||||||
NEW MEXICO - 2.0% | ||||||||
500,000 | New Mexico Finance Authority | 579,145 | ||||||
|
| |||||||
NEW YORK - 8.6% | ||||||||
500,000 | Brooklyn Arena Local Development Corp., NY | 536,465 | ||||||
255,000 | New York State Dormitory Authority | 277,124 | ||||||
1,000,000 | New York State Urban Development Corp. | 1,173,480 | ||||||
500,000 | Westchester County Healthcare Corp., NY | 518,160 | ||||||
|
| |||||||
2,505,229 | ||||||||
|
| |||||||
NORTH CAROLINA - 2.0% | ||||||||
500,000 | City of Charlotte, NC | 581,180 | ||||||
|
| |||||||
OHIO - 1.8% | ||||||||
500,000 | City of Cleveland, OH Airport System | 511,235 | ||||||
|
| |||||||
OKLAHOMA - 1.9% | ||||||||
500,000 | Oklahoma State Capital Improvement Authority | 566,380 | ||||||
|
| |||||||
PENNSYLVANIA - 4.9% | ||||||||
250,000 | City of Philadelphia, PA Gas Works Insured: NATL-RE | 296,320 | ||||||
500,000 | Pennsylvania Turnpike Commission | 502,075 | ||||||
500,000 | 5.00%, 12/01/2032 | 527,955 | ||||||
105,000 | Pittsburgh, PA Water & Sewer Authority Insured: FGIC | 108,085 | ||||||
|
| |||||||
1,434,435 | ||||||||
|
| |||||||
RHODE ISLAND - 2.0% | ||||||||
500,000 | Rhode Island Health & Educational Building Corp. | 573,270 | ||||||
|
| |||||||
SOUTH CAROLINA - 3.9% | ||||||||
500,000 | Georgetown County School District, SC Insured: SCSDE | 573,410 | ||||||
500,000 | Piedmont Municipal Power Agency, SC Insured: AGC | 563,570 | ||||||
|
| |||||||
1,136,980 | ||||||||
|
| |||||||
TENNESSEE - 2.0% | ||||||||
500,000 | County of Shelby, TN | 584,135 | ||||||
|
|
Principal Amount ($) | Value ($) | |||||||
TEXAS - 5.7% | ||||||||
500,000 | City of Houston, TX Utility System | 562,255 | ||||||
750,000 | State of Texas | 801,540 | ||||||
250,000 | Texas Transportation Commission State Highway Fund | 302,078 | ||||||
|
| |||||||
1,665,873 | ||||||||
|
| |||||||
VIRGINIA - 2.4% | ||||||||
575,000 | Virginia Commonwealth Transportation Board | 685,061 | ||||||
|
| |||||||
Total Municipal Bonds & Notes | 29,034,748 | |||||||
|
| |||||||
| Total Investments - 100.0% | 29,034,748 | ||||||
|
| |||||||
| (Cost $27,194,886) | |||||||
| Other Assets & Liabilities, Net - 0.0% | 13,189 | ||||||
|
| |||||||
| Net Assets - 100.0% | 29,047,937 | ||||||
|
|
(a) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2014. |
(b) | Convertible Capital Appreciation Bonds initially pay no interest but accrete in value from the date of issuance through the conversion date, at which time the bonds start to accrue and pay interest on a semi-annual basis until final maturity. |
Glossary:
AGC | Assured Guaranty Corp. | |
AGM | Assured Guaranty Municipal Corp. | |
AMBAC | American Municipal Bond Assurance Corp. | |
BNY | The Bank of New York Mellon Corp. | |
FGIC | Financial Guaranty Insurance Corp. | |
GO OF AUTH | General Obligation of Authority | |
NATL-RE | National Public Finance Guarantee Corp. | |
SCSDE | South Carolina School State Department of Education | |
ST RES FD GTY | State Resource Fund Guaranty | |
TCRS | Temporary Custodial Receipts |
See accompanying Notes to Financial Statements. | 31 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes - 98.3% |
| ||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.5% | ||||||||
101,048 | Federal Home Loan Mortgage Corp. REMIC | 103,742 | ||||||
61,517 | Series 3862, Class MI | 4,479 | ||||||
181,102 | Series 3977, Class AI | 16,759 | ||||||
169,404 | Series 3983, Class EI | 22,637 | ||||||
1,074 | Series 2645, Class BI | 5 | ||||||
31,716 | Series 2643, Class IM | 1,123 | ||||||
5,020 | Series 2781, Class IC | 39 | ||||||
24,587 | Series 2763, Class JI | 905 | ||||||
12,835 | Series 3536, Class IP | 789 | ||||||
55,531 | Series 2631, Class DI | 10,644 | ||||||
175,364 | Series 3806, Class DS | 23,822 | ||||||
1,222 | Series 1980, Class IO | 261 | ||||||
246 | Series 33, Class D | 264 | ||||||
828 | Federal Home Loan Mortgage Corp. STRIPS | 759 | ||||||
1,406 | Series 147, Class IO | 242 | ||||||
1,770 | Series 171, Class IO | 515 | ||||||
831,444 | Federal Home Loan Mortgage Corp. | 7,622 | ||||||
1,050 | Federal National Mortgage Assoc. REMIC | 1,025 | ||||||
2,423,339 | Series 2003-35, Class QA | 3,430 | ||||||
167,887 | Series 2003-89, Class IO | 5,618 | ||||||
2,589 | Series 2012-145, Class JI | 505 | ||||||
304,846 | Series 2010-16, Class PA | 322,225 | ||||||
9,352 | Series 2003-61, Class IJ | 98 | ||||||
5,364 | Series 2010-16, Class PI | 811 | ||||||
20,295 | Series 2010-21, Class PI | 3,078 | ||||||
259,112 | Series 2010-98, Class DI | 30,238 |
Principal Amount ($) | Value ($) | |||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (continued) | ||||||||
55,081 | Series 2008-61, Class SB | 8,004 | ||||||
5 | Federal National Mortgage Assoc. STRIPS | 138 | ||||||
64,160 | Series 354, Class 1 | 58,660 | ||||||
56,813 | Series 362, Class 2 | 9,050 | ||||||
52,564 | Series 378, Class 1 | 8,072 | ||||||
37,924 | Series 387, Class | 7,600 | ||||||
28,236 | Series 387, Class 1 | 4,187 | ||||||
14,264 | Series 346, Class 2 | 2,828 | ||||||
18,085 | Series 356, Class 17 | 3,303 | ||||||
22,792 | Series 356, Class 21 | 4,121 | ||||||
11,150 | Series 252, Class 2 | 1,847 | ||||||
843 | Series 237, Class 2 | 220 | ||||||
5,338 | Series 264, Class 2 | 887 | ||||||
236 | Series 12, Class 2 | 26 | ||||||
573 | Series 7, Class 2 | 65 | ||||||
85 | Series 28, Class 2 | 10 | ||||||
821 | Series 150, Class 2 | 213 | ||||||
718 | Series 163, Class 2 | 69 | ||||||
983 | Series 137, Class 2 | 219 | ||||||
146,687 | Government National Mortgage Assoc. | 14,555 | ||||||
144,102 | Series 2010-101, Class GI | 16,522 | ||||||
74,821 | Series 2009-118, Class YI | 7,730 | ||||||
163,135 | Series 2010-130, Class PI | 23,607 | ||||||
75,585 | Series 2010-75, Class KI | 3,692 | ||||||
107,795 | Series 2010-42, Class IA | 9,928 | ||||||
87,399 | Series 2010-2, Class QI | 8,678 | ||||||
92,172 | Series 2009-103, Class IT | 12,154 | ||||||
260,295 | Series 2010-26, Class QS | 49,400 | ||||||
|
| |||||||
Total Agency Collateralized Mortgage Obligations | 817,420 | |||||||
|
|
32 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
AGENCY MORTGAGE-BACKED SECURITIES - 28.2% | ||||||||
15,875 | Federal Home Loan Mortgage Corp. | 16,984 | ||||||
512,075 | 5.00%, 07/01/2035 - 06/01/2041 (d) | 564,793 | ||||||
244,308 | 5.50%, 05/01/2020 - 04/01/2039 (d) | 269,702 | ||||||
467,670 | 6.00%, 04/01/2017 - 11/01/2037 (d) | 525,127 | ||||||
3,765 | 6.50%, 07/01/2029 - 04/01/2031 (d) | 4,228 | ||||||
118,768 | 7.00%, 10/01/2016 - 08/01/2036 (d) | 132,505 | ||||||
96,175 | 7.50%, 01/01/2027 - 09/01/2033 (d) | 102,364 | ||||||
12,410 | 8.00%, 11/01/2030 | 14,154 | ||||||
40,090 | 8.50%, 05/01/2020 - 04/01/2030 (d) | 42,708 | ||||||
1,472 | 9.00%, 12/01/2016 | 1,564 | ||||||
117 | 9.50%, 04/01/2021 | 132 | ||||||
123,107 | Federal National Mortgage Assoc. | 128,408 | ||||||
10,046 | 2.01%, ARM (a) | 10,528 | ||||||
105,579 | 2.04%, ARM (a) | 111,692 | ||||||
81,592 | 2.28%, ARM (a) | 87,862 | ||||||
31,689 | 2.31%, ARM (a) | 33,557 | ||||||
1,133 | 2.35%, ARM (a) | 1,183 | ||||||
19,475 | 2.40%, ARM (a) | 20,061 | ||||||
21,403 | 2.42%, ARM (a) | 22,899 | ||||||
685 | 2.52%, ARM (a) | 698 | ||||||
4,756,934 | 3.00%, 05/01/2043 - 06/01/2043 (d) | 4,600,104 | ||||||
4,680,000 | 3.00%, TBA (e) | 4,518,394 | ||||||
3,674,833 | 3.50%, 11/01/2042 - 02/01/2043 (d) | 3,703,565 | ||||||
800,000 | 3.50%, TBA (e) | 805,000 | ||||||
3,392,329 | 4.00%, 05/01/2019 - 03/01/2044 (d) | 3,534,140 | ||||||
1,660,000 | 4.00%, TBA (e) | 1,725,881 | ||||||
2,480,931 | 4.50%, 05/01/2018 - 04/01/2041 (d) | 2,652,321 | ||||||
4,055,000 | 4.50%, TBA (e) | 4,326,812 | ||||||
914,653 | 5.00%, 07/01/2020 - 06/01/2041 (d) | 1,009,263 | ||||||
2,426,000 | 5.00%, TBA (e) | 2,645,288 | ||||||
863,772 | 5.50%, 06/01/2014 - 01/01/2039 (d) | 955,297 | ||||||
841,493 | 6.00%, 11/01/2014 - 07/01/2035 (d) | 947,258 | ||||||
645,000 | 6.00%, TBA (e) | 718,948 | ||||||
122,074 | 6.50%, 08/01/2017 - 08/01/2036 (d) | 135,782 | ||||||
395,549 | 7.00%, 03/01/2015 - 04/01/2036 (d) | 433,592 | ||||||
340,503 | 7.50%, 02/01/2015 - 05/01/2034 (d) | 375,450 | ||||||
130,519 | 8.00%, 12/01/2015 - 11/01/2033 (d) | 136,112 | ||||||
113,028 | 8.50%, 02/01/2018 - 07/01/2031 (d) | 120,398 | ||||||
23,610 | 9.00%, 12/01/2017 - 12/01/2024 (d) | 24,625 | ||||||
9,131 | 9.50%, 09/01/2021 | 9,353 | ||||||
53,781 | 9.75%, 02/01/2021 | 60,090 | ||||||
3,031,696 | Government National Mortgage Assoc. | 3,099,216 | ||||||
3,568,324 | 4.00%, 01/20/2041 - 04/20/2043 (d) | 3,757,546 | ||||||
705,998 | 4.50%, 08/15/2033 - 03/20/2041 (d) | 764,279 | ||||||
111,986 | 6.00%, 04/15/2027 - 09/15/2036 (d) | 127,939 | ||||||
103,839 | 6.50%, 04/15/2019 - 08/15/2036 (d) | 117,200 | ||||||
141,053 | 7.00%, 12/15/2018 - 10/15/2036 (d) | 155,675 | ||||||
144,943 | 7.50%, 12/15/2018 - 11/15/2031 (d) | 151,263 | ||||||
30,118 | 8.00%, 07/15/2017 - 02/15/2030 (d) | 30,739 | ||||||
942 | 8.50%, 10/15/2022 | 948 | ||||||
16,733 | 9.00%, 11/15/2016 - 12/15/2021 (d) | 18,014 | ||||||
|
| |||||||
Total Agency Mortgage-Backed Securities | 43,751,641 | |||||||
|
|
Principal Amount ($) | Value ($) | |||||||
ASSET-BACKED SECURITIES - 1.3% | ||||||||
150,000 | Ford Credit Auto Lease Trust | 150,476 | ||||||
150,000 | Ford Credit Auto Owner Trust | 154,510 | ||||||
1,575,000 | Hertz Vehicle Financing LLC | 1,631,108 | ||||||
|
| |||||||
Total Asset-Backed Securities | 1,936,094 | |||||||
|
| |||||||
CORPORATE BONDS & NOTES - 23.0% | ||||||||
AUTOMOBILES & COMPONENTS - 0.2% | ||||||||
147,000 | American Axle & Manufacturing, Inc. | 157,290 | ||||||
43,000 | 7.75%, 11/15/2019 | 49,880 | ||||||
115,000 | General Motors Co. | 118,450 | ||||||
|
| |||||||
325,620 | ||||||||
|
| |||||||
BANKS - 1.7% | ||||||||
495,000 | Bank of America Corp. | 494,519 | ||||||
73,000 | 2.60%, 01/15/2019 | 73,370 | ||||||
208,000 | 2.65%, 04/01/2019 | 208,906 | ||||||
128,000 | 4.10%, 07/24/2023 | 130,083 | ||||||
179,000 | Bank of America Corp., MTN | 172,897 | ||||||
104,000 | 4.00%, 04/01/2024 (g) | 104,090 | ||||||
162,000 | 4.13%, 01/22/2024 | 164,154 | ||||||
162,000 | 5.00%, 01/21/2044 | 166,029 | ||||||
213,000 | SunTrust Banks, Inc. | 213,306 | ||||||
349,000 | U.S. Bancorp | 364,475 | ||||||
215,000 | Union Bank NA | 219,296 | ||||||
216,000 | Wells Fargo & Co. | 210,043 | ||||||
104,000 | 4.13%, 08/15/2023 | 105,414 | ||||||
|
| |||||||
2,626,582 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.8% | ||||||||
198,000 | ABB Finance USA, Inc. | 199,502 | ||||||
96,000 | Cargill, Inc. | 109,799 | ||||||
58,000 | Case New Holland, Inc. | 68,295 | ||||||
213,000 | DigitalGlobe, Inc. | 211,402 | ||||||
228,000 | Eaton Corp. | 216,240 | ||||||
206,000 | Illinois Tool Works, Inc. | 205,662 | ||||||
62,000 | JB Poindexter & Co., Inc. | 66,650 |
See accompanying Notes to Financial Statements. | 33 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
CAPITAL GOODS (continued) | ||||||||
167,000 | Rockwell Collins, Inc. | 169,675 | ||||||
81,000 | Textron, Inc. | 85,047 | ||||||
|
| |||||||
1,332,272 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.4% | ||||||||
65,000 | Catholic Health Initiatives | 65,104 | ||||||
112,000 | 2.95%, 11/01/2022 | 105,903 | ||||||
55,000 | 4.20%, 08/01/2023 | 55,880 | ||||||
71,000 | 4.35%, 11/01/2042 | 65,215 | ||||||
147,000 | Pitney Bowes, Inc. | 146,250 | ||||||
210,000 | United Rentals North America, Inc. | 225,750 | ||||||
|
| |||||||
664,102 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.1% | ||||||||
211,000 | RSI Home Products, Inc. | 227,353 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.1% | ||||||||
116,000 | Vail Resorts, Inc. | 122,163 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 2.7% | ||||||||
217,000 | Citigroup, Inc. | 213,406 | ||||||
239,000 | 3.50%, 05/15/2023 | 225,918 | ||||||
88,000 | 5.00%, 09/15/2014 | 89,714 | ||||||
83,000 | 5.50%, 09/13/2025 | 88,600 | ||||||
176,000 | 6.68%, 09/13/2043 | 206,819 | ||||||
128,000 | CNH Capital LLC | 132,160 | ||||||
150,000 | Daimler Finance North America LLC | 151,531 | ||||||
200,000 | Ford Motor Credit Co. LLC | 230,476 | ||||||
59,000 | Goldman Sachs Capital I | 61,262 | ||||||
267,000 | Goldman Sachs Group, Inc. (The) | 269,017 | ||||||
311,000 | 2.63%, 01/31/2019 | 310,553 | ||||||
104,000 | 2.90%, 07/19/2018 | 106,165 | ||||||
247,000 | 4.00%, 03/03/2024 | 246,404 | ||||||
87,000 | 6.75%, 10/01/2037 | 99,972 | ||||||
92,000 | Hyundai Capital America | 92,873 | ||||||
219,000 | 2.13%, 10/02/2017 (f) | 220,779 | ||||||
213,000 | IntercontinentalExchange Group, Inc. | 221,403 | ||||||
93,000 | Jefferies Group LLC | 97,918 | ||||||
75,000 | 6.50%, 01/20/2043 | 78,816 | ||||||
208,000 | Morgan Stanley | 207,745 |
Principal Amount ($) | Value ($) | |||||||
DIVERSIFIED FINANCIALS (continued) | ||||||||
147,000 | 4.75%, 03/22/2017 (h) | 160,537 | ||||||
224,000 | 4.88%, 11/01/2022 | 235,789 | ||||||
212,000 | 5.00%, 11/24/2025 | 218,612 | ||||||
213,000 | NYSE Euronext | 216,669 | ||||||
|
| |||||||
4,183,138 | ||||||||
|
| |||||||
ENERGY - 2.4% | ||||||||
178,000 | Anadarko Petroleum Corp. | 206,816 | ||||||
125,000 | Chesapeake Energy Corp. | 126,562 | ||||||
208,000 | Continental Resources, Inc. | 215,810 | ||||||
63,000 | DCP Midstream Operating L.P. | 62,921 | ||||||
104,000 | 5.60%, 04/01/2044 (h) | 108,958 | ||||||
83,000 | Denbury Resources, Inc. | 89,018 | ||||||
259,000 | Energy Transfer Partners LP | 294,531 | ||||||
143,000 | Enterprise Products Operating LLC | 134,769 | ||||||
213,000 | Kerr-McGee Corp. | 258,774 | ||||||
265,000 | Kinder Morgan Energy Partners LP | 250,707 | ||||||
514,000 | Linn Energy LLC | 538,415 | ||||||
46,000 | 8.63%, 04/15/2020 | 50,198 | ||||||
10,000 | Newfield Exploration Co. | 10,425 | ||||||
96,000 | 5.75%, 01/30/2022 | 102,480 | ||||||
112,000 | Plains Exploration & Production Co. | 123,900 | ||||||
69,000 | Range Resources Corp. | 74,261 | ||||||
146,000 | Rowan Cos., Inc. | 148,016 | ||||||
42,000 | 5.85%, 01/15/2044 | 42,821 | ||||||
120,000 | Sabine Pass Liquefaction LLC | 124,350 | ||||||
104,000 | Sunoco Logistics Partners LP | 103,765 | ||||||
214,000 | Unit Corp. | 227,910 | ||||||
243,000 | Williams Partners L.P. | 244,567 | ||||||
211,000 | WPX Energy, Inc. | 226,825 | ||||||
|
| |||||||
3,766,799 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.6% | ||||||||
190,000 | American Seafoods Group LLC | 197,362 | ||||||
105,000 | CVS Caremark Corp. | 116,351 | ||||||
279,000 | Ingles Markets, Inc. | 280,395 |
34 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
FOOD & STAPLES RETAILING (continued) | ||||||||
106,000 | WM Wrigley Jr Co. | 106,348 | ||||||
213,000 | 2.90%, 10/21/2019 (f) | 215,190 | ||||||
|
| |||||||
915,646 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.8% | ||||||||
108,000 | Altria Group, Inc. | 99,907 | ||||||
108,000 | 4.50%, 05/02/2043 | 99,593 | ||||||
106,000 | 5.38%, 01/31/2044 | 111,232 | ||||||
143,000 | Anheuser-Busch InBev Finance, Inc. | 134,643 | ||||||
199,000 | Anheuser-Busch InBev Worldwide, Inc. | 188,241 | ||||||
64,000 | Archer-Daniels-Midland Co. | 59,882 | ||||||
119,000 | Coca-Cola Co. (The) | 122,477 | ||||||
210,000 | Constellation Brands, Inc. | 237,825 | ||||||
142,000 | Diageo Investment Corp. | 138,038 | ||||||
111,000 | Philip Morris International, Inc. | 102,427 | ||||||
|
| |||||||
1,294,265 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 1.1% | ||||||||
166,000 | Ascension Health, Inc. | 170,843 | ||||||
116,000 | CHS/Community Health Systems, Inc. | 126,005 | ||||||
92,000 | Cigna Corp. | 95,916 | ||||||
196,000 | 4.00%, 02/15/2022 | 203,574 | ||||||
234,000 | Express Scripts Holding Co. | 242,163 | ||||||
193,000 | 3.13%, 05/15/2016 | 201,174 | ||||||
51,000 | Fresenius Medical Care U.S. Finance, Inc. | 54,506 | ||||||
114,000 | HCA, Inc. | 127,965 | ||||||
72,000 | Medtronic, Inc. | �� | 74,280 | |||||
90,000 | Memorial Sloan-Kettering Cancer Center | 80,394 | ||||||
80,000 | Tenet Healthcare Corp. | 81,000 | ||||||
207,000 | WellPoint, Inc. | 198,884 | ||||||
|
| |||||||
1,656,704 | ||||||||
|
| |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.1% | ||||||||
83,000 | Revlon Consumer Products Corp. | 83,830 | ||||||
|
|
Principal Amount ($) | Value ($) | |||||||
INSURANCE - 1.3% | ||||||||
119,000 | Allstate Corp. (The) | 125,173 | ||||||
167,000 | American International Group, Inc. | 170,732 | ||||||
256,000 | Berkshire Hathaway Finance Corp. | 259,869 | ||||||
59,000 | 3.00%, 05/15/2022 (h) | 58,917 | ||||||
224,000 | Berkshire Hathaway, Inc. | 223,195 | ||||||
224,000 | 4.50%, 02/11/2043 (h) | 222,875 | ||||||
79,000 | CNA Financial Corp. | 90,805 | ||||||
103,000 | Genworth Holdings, Inc. | 107,358 | ||||||
101,000 | 7.70%, 06/15/2020 (h) | 123,370 | ||||||
161,000 | ING U.S., Inc. | 180,900 | ||||||
111,000 | 5.70%, 07/15/2043 (h) | 126,022 | ||||||
221,000 | Liberty Mutual Group, Inc. | 224,706 | ||||||
76,000 | Prudential Financial, Inc. | 77,900 | ||||||
|
| |||||||
1,991,822 | ||||||||
|
| |||||||
MATERIALS - 0.5% | ||||||||
162,000 | CF Industries, Inc. | 169,536 | ||||||
187,000 | Freeport-McMoRan Copper & Gold, Inc. | 184,552 | ||||||
257,000 | Hexion U.S. Finance Corp. | 267,280 | ||||||
208,000 | Huntsman International LLC | 210,340 | ||||||
|
| |||||||
831,708 | ||||||||
|
| |||||||
MEDIA - 1.6% | ||||||||
65,000 | 21st Century Fox America, Inc. | 79,649 | ||||||
205,000 | Cequel Communications Holdings I LLC | 203,975 | ||||||
165,000 | Comcast Corp. | 166,237 | ||||||
103,000 | 4.75%, 03/01/2044 | 104,968 | ||||||
50,000 | COX Communications, Inc. | 44,712 | ||||||
313,000 | DIRECTV Holdings LLC | 314,512 | ||||||
336,000 | 5.15%, 03/15/2042 | 318,794 | ||||||
291,000 | Interpublic Group of Cos., Inc. (The) | 290,453 | ||||||
77,000 | McClatchy Co. (The) | 89,994 | ||||||
238,000 | Omnicom Group, Inc. | 236,768 | ||||||
240,000 | Time Warner Cable, Inc. | 260,960 | ||||||
61,000 | 6.55%, 05/01/2037 | 71,072 | ||||||
231,000 | Time Warner, Inc. | 247,119 | ||||||
|
| |||||||
2,429,213 | ||||||||
|
|
See accompanying Notes to Financial Statements. | 35 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 1.6% | ||||||||
203,000 | AbbVie, Inc. | 203,818 | ||||||
247,000 | 2.00%, 11/06/2018 | 245,210 | ||||||
128,000 | 2.90%, 11/06/2022 | 123,455 | ||||||
76,000 | Agilent Technologies, Inc. | 81,066 | ||||||
209,000 | Gilead Sciences, Inc. | 209,522 | ||||||
157,000 | 4.80%, 04/01/2044 | 162,260 | ||||||
124,000 | Mylan, Inc. | 139,044 | ||||||
360,000 | Novartis Capital Corp. | 340,858 | ||||||
237,000 | 4.40%, 05/06/2044 | 240,137 | ||||||
147,000 | Thermo Fisher Scientific, Inc. | 146,551 | ||||||
230,000 | 4.15%, 02/01/2024 | 237,108 | ||||||
124,000 | Valeant Pharmaceuticals International | 134,540 | ||||||
187,000 | Zoetis, Inc. | 180,714 | ||||||
|
| |||||||
2,444,283 | ||||||||
|
| |||||||
REAL ESTATE - 0.8% | ||||||||
220,000 | American Tower Corp. | 225,694 | ||||||
109,000 | 3.50%, 01/31/2023 (h) | 103,267 | ||||||
167,000 | 5.00%, 02/15/2024 | 174,270 | ||||||
207,000 | ARC Properties Operating Partnership LP/Clark Acquisition LLC | 207,204 | ||||||
207,000 | 3.00%, 02/06/2019 (f) | 206,288 | ||||||
213,000 | Corporate Office Properties LP | 197,285 | ||||||
110,000 | Realty Income Corp. | 115,317 | ||||||
|
| |||||||
1,229,325 | ||||||||
|
| |||||||
RETAILING - 0.9% | ||||||||
311,000 | Glencore Funding LLC | 300,649 | ||||||
323,000 | 4.13%, 05/30/2023 (f)(h) | 309,072 | ||||||
108,000 | Lowe’s Cos., Inc. | 115,032 | ||||||
595,000 | Tops Holding Corp. | 653,012 | ||||||
|
| |||||||
1,377,765 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.1% | ||||||||
105,000 | Xilinx, Inc. | 103,870 | ||||||
147,000 | 3.00%, 03/15/2021 | 146,000 | ||||||
|
| |||||||
249,870 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 1.1% | ||||||||
296,000 | eBay, Inc. | 281,509 |
Principal Amount ($) | Value ($) | |||||||
SOFTWARE & SERVICES (continued) | ||||||||
55,000 | 4.00%, 07/15/2042 | 48,841 | ||||||
310,000 | International Business Machines Corp. | 313,213 | ||||||
162,000 | MasterCard, Inc. | 162,076 | ||||||
435,000 | Microsoft Corp. | 406,935 | ||||||
337,000 | Oracle Corp. | 334,639 | ||||||
154,000 | 3.63%, 07/15/2023 | 156,249 | ||||||
|
| �� | ||||||
1,703,462 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 0.8% | ||||||||
96,000 | Brocade Communications Systems, Inc. | 92,160 | ||||||
214,000 | EMC Corp. | 214,071 | ||||||
520,000 | Hewlett-Packard Co. | 524,022 | ||||||
211,000 | iGATE Corp. | 222,341 | ||||||
128,000 | Viasystems, Inc. | 138,560 | ||||||
|
| |||||||
1,191,154 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 1.7% | ||||||||
262,000 | AT&T, Inc. | 263,590 | ||||||
201,000 | 4.35%, 06/15/2045 | 178,111 | ||||||
96,000 | Frontier Communications Corp. | 106,800 | ||||||
314,000 | Hughes Satellite Systems Corp. | 346,185 | ||||||
119,000 | Sprint Corp. | 130,156 | ||||||
50,000 | T-Mobile USA, Inc. | 53,063 | ||||||
80,000 | tw telecom holdings, Inc. | 85,800 | ||||||
215,000 | Verizon Communications, Inc. | 196,300 | ||||||
313,000 | 3.45%, 03/15/2021 | 317,773 | ||||||
63,000 | 5.05%, 03/15/2034 | 64,834 | ||||||
422,000 | 5.15%, 09/15/2023 | 462,675 | ||||||
150,000 | 6.55%, 09/15/2043 | 183,201 | ||||||
215,000 | Windstream Corp. | 210,700 | ||||||
|
| |||||||
2,599,188 | ||||||||
|
| |||||||
UTILITIES - 1.6% | ||||||||
70,000 | Arizona Public Service Co. | 78,425 | ||||||
103,000 | CMS Energy Corp. | 104,572 | ||||||
103,000 | 4.88%, 03/01/2044 | 105,355 | ||||||
276,000 | Dominion Resources, Inc. | 281,366 | ||||||
38,000 | DPL, Inc. | 39,425 |
36 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
UTILITIES (continued) | ||||||||
92,000 | Duke Energy Corp. | 92,274 | ||||||
141,000 | 3.05%, 08/15/2022 | 137,435 | ||||||
117,000 | Exelon Corp. | 122,435 | ||||||
58,000 | Florida Power & Light Co. | 56,075 | ||||||
111,000 | Great Plains Energy, Inc. | 120,053 | ||||||
9,000 | MidAmerican Energy Holdings Co. | 10,801 | ||||||
167,000 | NextEra Energy Capital Holdings, Inc. | 171,078 | ||||||
215,000 | Northeast Utilities | 208,853 | ||||||
142,000 | PacifiCorp | 179,994 | ||||||
112,000 | Potomac Edison Co. (The) | 115,402 | ||||||
126,000 | PPL Capital Funding, Inc. | 128,141 | ||||||
324,000 | Public Service Electric & Gas Co., MTN | 299,852 | ||||||
259,000 | Southern Co. (The) | 262,945 | ||||||
|
| |||||||
2,514,481 | ||||||||
|
| |||||||
Total Corporate Bonds & Notes | 35,760,745 | |||||||
|
| |||||||
FOREIGN CORPORATE BONDS & NOTES - 9.1% | ||||||||
BANKS - 3.3% | ||||||||
100,000 | Banco do Nordeste do Brasil SA | 101,875 | ||||||
200,000 | Bank of Tokyo-Mitsubishi UFJ, Ltd. (The) | 199,567 | ||||||
548,000 | Barclays Bank PLC | 564,204 | ||||||
140,000 | Central American Bank for Economic Integration | 142,914 | ||||||
294,000 | Commonwealth Bank of Australia | 294,427 | ||||||
342,000 | Corp. Andina de Fomento | 353,925 | ||||||
250,000 | Dexia Credit Local SA | 248,675 | ||||||
735,000 | European Investment Bank | 738,775 | ||||||
200,000 | 4.88%, 01/17/2017 | 221,704 | ||||||
200,000 | HSBC Holdings PLC | 200,650 | ||||||
200,000 | 5.25%, 03/14/2044 | 202,997 | ||||||
729,000 | KFW | 685,971 | ||||||
31,000 | 4.50%, 07/16/2018 | 34,719 |
Principal Amount ($) | Value ($) | |||||||
BANKS (continued) | ||||||||
372,000 | Korea Development Bank (The) | 389,116 | ||||||
38,000 | National Agricultural Cooperative Federation | 40,213 | ||||||
441,000 | Royal Bank of Canada | 438,283 | ||||||
240,000 | Standard Chartered PLC | 238,200 | ||||||
|
| |||||||
5,096,215 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.1% | ||||||||
88,000 | Bombardier, Inc. | 99,000 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.1% | ||||||||
117,000 | NCL Corp., Ltd. | 121,973 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.4% | ||||||||
400,000 | Credit Suisse AG | 415,445 | ||||||
304,000 | Invesco Finance PLC | 294,888 | ||||||
|
| |||||||
710,333 | ||||||||
|
| |||||||
ENERGY - 3.2% | ||||||||
324,000 | BP Capital Markets PLC | 317,485 | ||||||
207,000 | 3.81%, 02/10/2024 (h) | 209,278 | ||||||
100,000 | Empresa Nacional del Petroleo | 103,447 | ||||||
137,000 | Korea National Oil Corp. | 141,006 | ||||||
138,000 | Nexen, Inc. | 159,277 | ||||||
250,000 | Petrobras Global Finance BV | 236,890 | ||||||
48,000 | 6.25%, 03/17/2024 | 49,572 | ||||||
48,000 | 7.25%, 03/17/2044 | 49,513 | ||||||
286,000 | Petrobras International Finance Co. | 289,804 | ||||||
45,000 | 3.88%, 01/27/2016 | 46,325 | ||||||
95,000 | Petroleos Mexicanos | 98,800 | ||||||
210,000 | 3.50%, 01/30/2023 | 198,135 | ||||||
113,000 | 4.88%, 01/18/2024 | 116,955 | ||||||
191,000 | 5.50%, 01/21/2021 (h) | 209,622 | ||||||
200,000 | 6.00%, 03/05/2020 | 226,250 | ||||||
19,000 | 6.50%, 06/02/2041 | 20,900 | ||||||
141,667 | Petroleum Co. of Trinidad & Tobago, Ltd. | 152,823 | ||||||
325,000 | Shell International Finance BV | 326,303 | ||||||
83,000 | Sinopec Capital 2013, Ltd. | 76,076 | ||||||
319,000 | Statoil ASA | 325,656 | ||||||
106,000 | 4.80%, 11/08/2043 | 113,689 |
See accompanying Notes to Financial Statements. | 37 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
FOREIGN CORPORATE BONDS & NOTES (continued) | ||||||||
ENERGY (continued) | ||||||||
81,000 | Talisman Energy, Inc. | 80,523 | ||||||
187,000 | 6.25%, 02/01/2038 | 200,525 | ||||||
497,000 | Total Capital International SA | 502,283 | ||||||
207,000 | Transocean, Inc. | 232,762 | ||||||
95,000 | Weatherford International, Ltd. | 99,647 | ||||||
132,000 | 5.95%, 04/15/2042 (h) | 142,720 | ||||||
56,000 | 6.75%, 09/15/2040 | 65,424 | ||||||
200,000 | Zhaikmunai LP | 208,500 | ||||||
|
| |||||||
5,000,190 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.1% | ||||||||
217,000 | Diageo Capital PLC | 211,218 | ||||||
|
| |||||||
INSURANCE - 0.1% | ||||||||
113,000 | AXIS Specialty Finance PLC | 114,202 | ||||||
100,000 | XLIT, Ltd. | 106,396 | ||||||
|
| |||||||
220,598 | ||||||||
|
| |||||||
MATERIALS - 0.9% | ||||||||
104,000 | Agrium, Inc. | 101,213 | ||||||
205,000 | 4.90%, 06/01/2043 | 203,381 | ||||||
107,000 | BHP Billiton Finance USA, Ltd. | 109,833 | ||||||
107,000 | 5.00%, 09/30/2043 | 113,672 | ||||||
200,000 | Corp. Nacional del Cobre de Chile | 202,180 | ||||||
22,000 | 5.63%, 09/21/2035 (f) | 22,998 | ||||||
103,000 | Kinross Gold Corp. | 103,380 | ||||||
58,000 | 6.88%, 09/01/2041 | 55,880 | ||||||
139,000 | LYB International Finance BV | 139,294 | ||||||
109,000 | Teck Resources, Ltd. | 103,050 | ||||||
180,000 | Xstrata Finance Canada, Ltd. | 182,332 | ||||||
|
| |||||||
1,337,213 | ||||||||
|
| |||||||
MEDIA - 0.1% | ||||||||
208,000 | Cogeco Cable, Inc. | 207,740 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.3% | ||||||||
213,000 | Perrigo Co. LLC | 210,916 | ||||||
220,000 | Sanofi | 215,442 | ||||||
|
| |||||||
426,358 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
TELECOMMUNICATION SERVICES - 0.2% | ||||||||
250,000 | America Movil SAB de CV | 258,500 | ||||||
|
| |||||||
UTILITIES - 0.3% | ||||||||
96,000 | AES Panama SA | 101,760 | ||||||
416,000 | Electricite de France | 414,364 | ||||||
|
| |||||||
516,124 | ||||||||
|
| |||||||
Total Foreign Corporate Bonds & Notes | 14,205,462 | |||||||
|
| |||||||
MUNICIPAL BONDS & NOTES - 0.6% | ||||||||
45,000 | American Municipal Power, Inc. OH | 51,251 | ||||||
195,000 | Denver City & County School District No 1, CO | 183,243 | ||||||
111,000 | Municipal Electric Authority of Georgia | 125,824 | ||||||
50,000 | New Jersey Transportation Trust Fund Authority | 55,357 | ||||||
320,000 | Port Authority of New York & New Jersey | 300,029 | ||||||
55,000 | South Carolina State Public Service Authority | 64,478 | ||||||
75,000 | State of California | 87,669 | ||||||
|
| |||||||
Total Municipal Bonds & Notes | 867,851 | |||||||
|
| |||||||
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.7% | ||||||||
332,000 | American Tower Trust I | 324,756 | ||||||
849 | Collateralized Mortgage Obligation Trust | 846 | ||||||
48,866 | Credit Suisse First Boston Mortgage Securities Corp. | — | ||||||
110,000 | GS Mortgage Securities Corp. II | 111,831 | ||||||
205,000 | GS Mortgage Securities Trust | 199,498 | ||||||
105,000 | 4.26%, 04/10/2047 | 108,150 | ||||||
30,902 | MASTR Alternative Loan Trust | 2,589 | ||||||
320,000 | Morgan Stanley Capital I Trust | 327,482 | ||||||
1,521 | Wells Fargo Mortgage-Backed Securities Trust | 11 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage Obligations | 1,075,163 | |||||||
|
|
38 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES - 4.8% | ||||||||
465,000 | Banc of America Commercial Mortgage Trust | 489,692 | ||||||
300,000 | Series 2006-4, Class AM | 327,732 | ||||||
39,723 | Series 2007-4, Class A4 | 44,232 | ||||||
50,000 | Series 2008-1, Class A4 | 56,971 | ||||||
110,000 | Banc of America Merrill Lynch Commercial Mortgage, Inc. | 116,167 | ||||||
200,000 | Series 2005-1, Class AJ | 207,166 | ||||||
100,711 | Bear Stearns Commercial Mortgage Securities Trust | 103,576 | ||||||
110,000 | Series 2006-T22, Class AJ | 118,460 | ||||||
230,000 | Series 2007-PW18, Class AMA | 257,494 | ||||||
120,000 | Commercial Mortgage Pass-Through Certificates | 126,962 | ||||||
100,000 | Series 2013-LC13, Class AM | 106,203 | ||||||
60,000 | Series 2005-LP5, Class A4 | 61,920 | ||||||
355,000 | Credit Suisse Commercial Mortgage Trust | 378,090 | ||||||
110,000 | GS Mortgage Securities Trust | 114,450 | ||||||
30,000 | Series 2011-GC5, Class B 5.31%, 08/10/2044 (a)(f) | 33,268 | ||||||
991,119 | JP Morgan Chase Commercial Mortgage Securities Corp. | 101,224 | ||||||
227,334 | Series 2005-CB11, Class A4 | 234,404 | ||||||
100,000 | JP Morgan Chase Commercial Mortgage Securities Trust | 109,247 | ||||||
220,000 | Series 2007-CB18, Class A4 | 241,742 | ||||||
65,000 | JPMBB Commercial Mortgage Securities Trust | 66,802 | ||||||
100,000 | Series 2014-C18, Class C | 102,211 | ||||||
153,000 | Series 2013-C17, Class C | 157,959 |
Principal Amount ($) | Value ($) | |||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES (continued) | | ||||||
85,000 | Series 2013-C15, Class C | 89,630 | ||||||
48,604 | JPMCC Commercial Mortgage Pass-Through Certificates | 49,645 | ||||||
187,031 | LB-UBS Commercial Mortgage Trust | 194,601 | ||||||
120,000 | Series 2006-C1, Class A4 | 127,523 | ||||||
49,082 | Series 2006-C4, Class A4 | 53,526 | ||||||
250,000 | Series 2007-C6, Class AMFL | 276,648 | ||||||
220,000 | Series 2007-C6, Class AM | 243,811 | ||||||
300,000 | ML-CFC Commercial Mortgage Trust | 326,216 | ||||||
210,000 | Morgan Stanley Bank of America Merrill Lynch Trust | 216,364 | ||||||
191,000 | Series 2013-C10, Class C | 185,563 | ||||||
100,000 | Series 2014-C14, Class D | 90,627 | ||||||
271,845 | Morgan Stanley Capital I Trust | 276,347 | ||||||
150,000 | Series 2006-T21, Class A4 | 158,967 | ||||||
100,000 | Series 2012-C4, Class B | 109,351 | ||||||
170,000 | Series 2006-T21, Class AJ | 181,109 | ||||||
100,000 | Series 2006-IQ11, Class B | 92,666 | ||||||
50,000 | Series 2006-T23, Class A4 | 54,523 | ||||||
230,000 | Series 2007-IQ16, Class AMA | 258,177 | ||||||
70,000 | Series 2008-T29, Class AM | 80,633 | ||||||
115,000 | WF-RBS Commercial Mortgage Trust | 119,342 | ||||||
263,000 | Series 2014-LC14, Class AS | 273,374 | ||||||
88,000 | Series 2013-C15, Class D | 79,126 | ||||||
140,000 | Series 2014-C19, Class B | 144,192 | ||||||
145,000 | Series 2013-C16, Class D | 138,764 | ||||||
110,000 | Series 2011-C4, Class D | 115,678 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage-Backed Securities | 7,492,375 | |||||||
|
|
See accompanying Notes to Financial Statements. | 39 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
SOVEREIGN BONDS - 1.9% | ||||||||
200,000 | Brazilian Government International Bond | 193,750 | ||||||
226,000 | Chile Government International Bond | 188,145 | ||||||
200,000 | Colombia Government International Bond | 180,500 | ||||||
200,000 | 4.38%, 07/12/2021 | 208,500 | ||||||
20,000 | Mexico Government International Bond | 19,750 | ||||||
38,000 | 6.05%, 01/11/2040 (h) | 43,415 | ||||||
210,000 | Mexico Government International Bond, MTN | 200,550 | ||||||
50,000 | Panama Government International Bond | 59,000 | ||||||
156,000 | Peruvian Government International Bond | 188,370 | ||||||
320,000 | Philippine Government International Bond | 391,600 | ||||||
95,000 | Poland Government International Bond | 89,063 | ||||||
239,000 | 5.00%, 03/23/2022 | 261,406 | ||||||
48,000 | 5.13%, 04/21/2021 | 53,124 | ||||||
200,000 | South Africa Government International Bond | 220,540 | ||||||
133,000 | Turkey Government International Bond | 116,807 | ||||||
200,000 | 6.63%, 02/17/2045 | 211,750 | ||||||
249,000 | 6.88%, 03/17/2036 | 270,850 | ||||||
100,000 | Uruguay Government International Bond | 102,750 | ||||||
|
| |||||||
Total Sovereign Bonds | 2,999,870 | |||||||
|
| |||||||
U.S. TREASURIES - 28.2% | ||||||||
1,648,100 | U.S. Treasury Bonds | 1,668,444 | ||||||
6,170,100 | 4.50%, 02/15/2036 | 7,244,080 | ||||||
2,819,000 | U.S. Treasury Notes | 2,811,732 | ||||||
20,333,000 | 0.75%, 01/15/2017 | 20,304,412 | ||||||
6,733,200 | 1.50%, 02/28/2019 (h) | 6,666,393 | ||||||
145,000 | 2.13%, 08/15/2021 | 142,525 | ||||||
3,646,900 | 2.50%, 08/15/2023 | 3,595,187 | ||||||
1,372,000 | 2.75%, 02/15/2024 | 1,375,109 | ||||||
|
| |||||||
Total U.S. Treasuries | 43,807,882 | |||||||
|
| |||||||
Total Bonds & Notes | 152,714,503 | |||||||
|
|
Shares | Value ($) | |||||||
| Domestic Equity - 0.1% |
| ||||||
PREFERRED STOCKS - 0.1% | ||||||||
BANKS - 0.1% | ||||||||
6,572 | Wells Fargo & Co. | 163,856 | ||||||
|
| |||||||
Total Preferred Stocks | 163,856 | |||||||
|
| |||||||
Total Domestic Equity | 163,856 | |||||||
|
| |||||||
| Investment Companies (j) - 8.9% |
| ||||||
13,844,728 | State Street Navigator Prime Securities Lending Portfolio | 13,844,728 | ||||||
|
| |||||||
Total Investment Companies | 13,844,728 | |||||||
|
| |||||||
| Total Investments - 107.3% | 166,723,087 | ||||||
|
| |||||||
| (Cost $166,306,732) | |||||||
| Other Assets & Liabilities, Net - (7.3)% | (11,323,903 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 155,399,184 | ||||||
|
|
(a) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2014. |
(b) | Interest only security (“IO”). These types of securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the “interest only” holding. |
(c) | Principal only security (“PO”). These types of securities represent the right to receive the monthly principal payments on an underlying pool of mortgages. No payments of interest on the pool are passed through to the “principal only” holder. |
(d) | Securities are grouped by coupon and represent a range of maturities. |
(e) | Settlement is on a delayed delivery or when-issued basis with final maturity to be announced (TBA) in the future. |
(f) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At March 31, 2014, these securities amounted to $11,566,901 or 7.4% of net assets. |
(g) | Security purchased on a when-issued basis. As of March 31, 2014, assets with a total aggregate market value of $104,090, or 0.1% of net assets, were purchased on a when-issued basis. |
(h) | Securities (or a portion of securities) on loan. As of March 31, 2014, the market value of securities loaned was $14,941,045. The loaned securities were secured with cash and securities collateral of $15,247,688. Collateral is calculated based on prior day’s prices. See Note 4. |
(i) | Step coupon bond. The interest rate shown reflects the rate in effect March 31, 2014 and will reset at a future date. |
(j) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ARM | Adjustable Rate Mortgage | |
MTN | Medium-Term Note | |
PLC | Public Limited Company | |
REMIC | Real Estate Mortgage Investment Conduit | |
STRIPS | Separate Trading of Registered Interest and Principal of Security |
40 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2014 | Highland Fixed Income Fund |
The Fund had the following futures contracts, brokered by Royal Bank of Scotland, for which $400,000 was pledged as collateral, open at March 31, 2014:
Description | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation (Depreciation) | ||||||||||||
Long Futures: | ||||||||||||||||
2 Yr. U.S. Treasury Notes | June 2014 | 102 | $ | 22,395,375 | $ | (15,669 | ) | |||||||||
5 Yr. U.S. Treasury Notes | June 2014 | 53 | 6,304,515 | (2,714 | ) | |||||||||||
|
| |||||||||||||||
(18,383 | ) | |||||||||||||||
|
| |||||||||||||||
Short Futures: | ||||||||||||||||
10 Yr. U.S. Treasury Notes | June 2014 | 127 | 15,684,500 | 109,509 | ||||||||||||
Ultra Long U.S. Treasury Bonds | June 2014 | 9 | 1,300,219 | (22,591 | ) | |||||||||||
U.S. Long Treasury Bonds | June 2014 | 82 | 10,923,937 | (38,616 | ) | |||||||||||
|
| |||||||||||||||
48,302 | ||||||||||||||||
|
| |||||||||||||||
$ | 29,919 | |||||||||||||||
|
|
See accompanying Notes to Financial Statements. | 41 |
Table of Contents
STATEMENTS OF ASSETS AND LIABILITIES
As of March 31, 2014 (unaudited) |
Highland Global Allocation Fund ($) | Highland Dividend Equity Fund ($) | Highland Premier Growth Equity Fund ($) | ||||||||||
Assets | ||||||||||||
Investments, at value(a) | 365,404,808 | 29,647,061 | 196,356,967 | |||||||||
Cash | 39,288,075 | 148,410 | 4,891,707 | |||||||||
Cash at prime broker (Note 2) | 3,356,862 | — | — | |||||||||
Restricted Cash — Futures (Note 3) | — | — | 130,000 | |||||||||
Foreign currency | 45,596,818 | — | — | |||||||||
Receivable for: | ||||||||||||
Investments sold | 15,685,301 | — | 206,381 | |||||||||
Dividend and interest | 1,356,529 | 70,263 | 114,041 | |||||||||
Fund shares sold | 6,771,514 | 48,463 | 201,349 | |||||||||
Prepaid expenses and other assets | 100,803 | 12,002 | 47,146 | |||||||||
Variation margin | — | — | 16,330 | |||||||||
|
|
|
|
|
| |||||||
Total assets | 477,560,710 | 29,926,199 | 201,963,921 | |||||||||
|
|
|
|
|
| |||||||
Liabilities | ||||||||||||
Payable for: | ||||||||||||
Upon receipt of securities loaned (Note 4) | 75,650,084 | 6,577,052 | 1,393,326 | |||||||||
Distributions to shareholders | 133,664 | 10,877 | — | |||||||||
Investments purchased | 26,694,176 | — | 588,999 | |||||||||
Fund shares redeemed | 413,739 | 10,226 | 131,952 | |||||||||
Investment advisory and administration fees (Note 7) | 110,543 | 11,344 | 102,045 | |||||||||
Trustees’ fees | 8,986 | 616 | 6,928 | |||||||||
Distribution and shareholder service fees (Note 7) | 20,354 | 1,035 | 11,745 | |||||||||
Transfer agent fees | 34,537 | — | 24,954 | |||||||||
Commitment fee payable (Note 6) | 424 | 27 | 370 | |||||||||
Accrued expenses and other liabilities | 91,857 | 4,993 | 66,716 | |||||||||
|
|
|
|
|
| |||||||
Total liabilities | 103,158,364 | 6,616,170 | 2,327,035 | |||||||||
|
|
|
|
|
| |||||||
Net Assets | 374,402,346 | 23,310,029 | 199,636,886 | |||||||||
|
|
|
|
|
| |||||||
Net Assets Consist of: | ||||||||||||
Par value (Note 1) | 35,956 | 1,623 | 6,250 | |||||||||
Paid-in capital | 345,942,316 | 18,886,590 | 122,601,694 | |||||||||
Accumulated net investment income (loss) | 100,514 | (681 | ) | (203 | ) | |||||||
Accumulated net realized gain (loss) from investments, securities sold short, futures contracts and foreign currency transactions | 10,692,314 | 124,753 | 3,511,640 | |||||||||
Net unrealized appreciation (depreciation) on investments, futures contracts and foreign currency translations | 17,631,246 | 4,297,744 | 73,517,505 | |||||||||
|
|
|
|
|
| |||||||
Net Assets | 374,402,346 | 23,310,029 | 199,636,886 | |||||||||
|
|
|
|
|
| |||||||
Investments, at cost | 347,819,202 | 25,349,317 | 122,855,702 | |||||||||
Foreign currency, at cost | 45,596,489 | — | — | |||||||||
(a) Includes market value of securities on loan: | 78,609,260 | 6,499,023 | 1,340,785 |
42 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Small-Cap Equity Fund ($) | Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | |||||||||||
54,303,918 | 84,828,822 | 29,034,748 | 166,723,087 | |||||||||||
221,922 | 9,463,851 | 540,914 | 17,164,364 | |||||||||||
— | — | — | — | |||||||||||
— | 246,000 | — | 400,000 | |||||||||||
— | 3,548 | — | — | |||||||||||
260,265 | 1,844,495 | 565,809 | 13,801,266 | |||||||||||
46,102 | 238,811 | 357,020 | 760,259 | |||||||||||
10,772 | 33,145 | 933 | 10,335 | |||||||||||
15,096 | 22,145 | 12,168 | 37,455 | |||||||||||
— | 52,095 | — | 49,814 | |||||||||||
|
|
|
|
|
|
|
| |||||||
54,858,075 | 96,732,912 | 30,511,592 | 198,946,580 | |||||||||||
|
|
|
|
|
|
|
| |||||||
12,005,885 | 15,614,184 | — | 13,844,728 | |||||||||||
— | — | 22,804 | 37,301 | |||||||||||
192,003 | 3,104,647 | 1,401,283 | 29,376,527 | |||||||||||
618 | 105,628 | 9,261 | 124,801 | |||||||||||
34,655 | 33,010 | 8,634 | 39,720 | |||||||||||
1,606 | 3,189 | 1,338 | 7,041 | |||||||||||
2,798 | 5,190 | 1,730 | 8,953 | |||||||||||
8,046 | 13,734 | 2,606 | 24,736 | |||||||||||
89 | 183 | 79 | 424 | |||||||||||
16,612 | 38,764 | 15,920 | 83,165 | |||||||||||
|
|
|
|
|
|
|
| |||||||
12,262,312 | 18,918,529 | 1,463,655 | 43,547,396 | |||||||||||
|
|
|
|
|
|
|
| |||||||
42,595,763 | 77,814,383 | 29,047,937 | 155,399,184 | |||||||||||
|
|
|
|
|
|
|
| |||||||
2,862 | 3,256 | 2,459 | 12,200 | |||||||||||
30,600,494 | 68,985,416 | 27,605,008 | 159,368,978 | |||||||||||
(196,530 | ) | 407,924 | 51,640 | (131,404 | ) | |||||||||
| 1,683,594 |
| (818,028 | ) | (451,032 | ) | (4,296,864 | ) | ||||||
| 10,505,343 |
| 9,235,815 | 1,839,862 | 446,274 | |||||||||
|
|
|
|
|
|
|
| |||||||
42,595,763 | 77,814,383 | 29,047,937 | 155,399,184 | |||||||||||
|
|
|
|
|
|
|
| |||||||
43,798,575 | 75,607,418 | 27,194,886 | 166,306,732 | |||||||||||
— | 3,538 | — | — | |||||||||||
11,870,205 | 16,595,918 | — | 14,941,045 |
See accompanying Notes to Financial Statements. | 43 |
Table of Contents
STATEMENTS OF ASSETS AND LIABILITIES (continued)
As of March 31, 2014 (unaudited) |
Highland Global Allocation Fund ($) | Highland Dividend Equity Fund ($) | Highland Premier Growth Equity Fund ($) | ||||||||||
Class A: | ||||||||||||
Net assets | 292,628,955 | 5,481,032 | 154,990,823 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 28,491,249 | 367,060 | 4,805,347 | |||||||||
|
|
|
|
|
| |||||||
Net asset value per share(a)(b) | 10.27 | 14.93 | 32.25 | |||||||||
|
|
|
|
|
| |||||||
Maximum offering price per share(c) | 10.90 | 15.84 | 34.22 | |||||||||
|
|
|
|
|
| |||||||
Class C: | ||||||||||||
Net assets | 24,064,340 | 2,793,108 | 14,784,622 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 2,594,099 | 196,926 | 540,358 | |||||||||
|
|
|
|
|
| |||||||
Net asset value and offering price per share(a) | 9.28 | 14.18 | 27.36 | |||||||||
|
|
|
|
|
| |||||||
Class R: | ||||||||||||
Net assets | 5,455 | — | 473,386 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 523 | — | 14,858 | |||||||||
|
|
|
|
|
| |||||||
Net asset value, offering and redemption price per share | 10.43 | — | 31.86 | |||||||||
|
|
|
|
|
| |||||||
Class Y: | ||||||||||||
Net assets | 57,703,596 | 15,035,889 | 29,388,055 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 4,870,389 | 1,059,335 | 889,527 | |||||||||
|
|
|
|
|
| |||||||
Net asset value, offering and redemption price per share | 11.85 | 14.19 | 33.04 | |||||||||
|
|
|
|
|
|
(a) | Redemption price per share is equal to net asset value per share less any applicable contingent deferred sales charge (“CDSC”). |
(b) | Purchases of $1,000,000 or more are subject to a 0.50% CDSC if redeemed within one year of purchase. |
(c) | The sales charge is 5.75% for all Funds except for the Tax-Exempt Fund and Fixed Income Fund, which is 4.25%. On sales of $1,000,000 or more, there is no sales charge and therefore the offering will be lower. |
44 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Small-Cap Equity Fund ($) | Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | |||||||||||
37,340,704 | 71,484,774 | 27,957,749 | 152,521,032 | |||||||||||
2,466,711 | 2,972,727 | 2,367,513 | 11,974,597 | |||||||||||
|
|
|
|
|
|
|
| |||||||
15.14 | 24.05 | 11.81 | 12.74 | |||||||||||
|
|
|
|
|
|
|
| |||||||
16.06 | 25.52 | 12.33 | 13.31 | |||||||||||
|
|
|
|
|
|
|
| |||||||
3,530,572 | 5,977,893 | 922,667 | 2,723,896 | |||||||||||
287,160 | 268,949 | 78,169 | 213,582 | |||||||||||
|
|
|
|
|
|
|
| |||||||
12.29 | 22.23 | 11.80 | 12.75 | |||||||||||
|
|
|
|
|
|
|
| |||||||
1,479 | 1,207 | — | 2,129 | |||||||||||
99 | 50 | — | 167 | |||||||||||
|
|
|
|
|
|
|
| |||||||
14.98 | 24.17 | — | 12.74 | |||||||||||
|
|
|
|
|
|
|
| |||||||
1,723,008 | 350,509 | 167,521 | 152,127 | |||||||||||
107,562 | 14,418 | 13,118 | 11,952 | |||||||||||
|
|
|
|
|
|
|
| |||||||
16.02 | 24.31 | 12.77 | 12.73 | |||||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 45 |
Table of Contents
For the six months ended March 31, 2014 (unaudited) |
Highland Global Allocation Fund ($) | Highland Dividend Equity Fund ($) | Highland Premier Growth Equity Fund ($) | ||||||||||
Investment Income | ||||||||||||
Income: | ||||||||||||
Dividends | 1,167,762 | 323,128 | 1,407,895 | |||||||||
Less: Foreign taxes withheld | (11,879 | ) | (5,528 | ) | — | |||||||
Interest | 2,233,107 | 136 | 1,534 | |||||||||
Securities lending income (Note 4) | 110,529 | 5,330 | 12,026 | |||||||||
|
|
|
|
|
| |||||||
Total Income | 3,499,519 | 323,066 | 1,421,455 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
Investment advisory and administration fees (Note 7) | 516,773 | 125,880 | 580,327 | |||||||||
Distribution and shareholder service fees: (Note 7) | ||||||||||||
Class A | 296,351 | 8,022 | 187,327 | |||||||||
Class B(a) | 50 | — | 273 | |||||||||
Class C | 46,405 | 12,699 | 72,228 | |||||||||
Class R | 13 | — | 1,051 | |||||||||
Transfer agent fees | 95,645 | 4,678 | 62,779 | |||||||||
Trustees fees (Note 7) | 16,138 | 1,375 | 13,259 | |||||||||
Accounting services fees | 90,764 | 3,329 | 32,384 | |||||||||
Audit fees | 64,467 | 5,457 | 52,278 | |||||||||
Legal fees | 82,354 | 5,843 | 64,340 | |||||||||
Registration fees | 12,017 | 9,400 | 13,541 | |||||||||
Insurance | 23,798 | 2,009 | 19,728 | |||||||||
Reports to shareholders | 67,834 | 5,036 | 37,311 | |||||||||
Commitment fees-credit agreement (Note 6) | 1,585 | 126 | 1,273 | |||||||||
Dividends and fees on securities sold short (Note 2) | 220 | — | — | |||||||||
Other | 3,509 | 1,015 | 1,424 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses before waiver and reimbursement (Note 7) | 1,317,923 | 184,869 | 1,139,523 | |||||||||
Less: Expenses waived or borne by the adviser and administrator | — | (59,248 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net operating expenses | 1,317,923 | 125,621 | 1,139,523 | |||||||||
|
|
|
|
|
| |||||||
Net investment income (loss) | 2,181,596 | 197,445 | 281,932 | |||||||||
|
|
|
|
|
| |||||||
Net Realized and Unrealized Gain (Loss) on Investments | ||||||||||||
Realized gain (loss) on: | ||||||||||||
Investments | 23,978,180 | 126,324 | 5,564,933 | |||||||||
Securities sold short (Note 2) | 63,738 | — | — | |||||||||
Futures contracts (Note 3) | — | — | 131,303 | |||||||||
Foreign currency related transactions | 144,435 | — | — | |||||||||
Change in unrealized appreciation (depreciation) on: | ||||||||||||
Investments | 14,453,634 | 1,580,855 | 11,656,789 | |||||||||
Futures contracts (Note 3) | — | — | 39,952 | |||||||||
Foreign currency related translations | 36,839 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net realized and unrealized gain on investments | 38,676,826 | 1,707,179 | 17,392,977 | |||||||||
|
|
|
|
|
| |||||||
Total increase in net assets resulting from operations | 40,858,422 | 1,904,624 | 17,674,909 | |||||||||
|
|
|
|
|
|
(a) | Class B Shares liquidated on January 31, 2014. |
46 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Small-Cap Equity Fund ($) | Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | |||||||||||
245,246 | 547,745 | — | 5,607 | |||||||||||
— | (6,701 | ) | — | — | ||||||||||
308 | 386,806 | 582,897 | 2,380,686 | |||||||||||
16,795 | 13,595 | — | 14,932 | |||||||||||
|
|
|
|
|
|
|
| |||||||
262,349 | 941,445 | 582,897 | 2,401,225 | |||||||||||
|
|
|
|
|
|
|
| |||||||
201,094 | 195,027 | 53,175 | 238,679 | |||||||||||
46,383 | 89,546 | 36,535 | 195,019 | |||||||||||
368 | 382 | — | 177 | |||||||||||
17,440 | 29,818 | 4,760 | 14,605 | |||||||||||
4 | 4 | — | 5 | |||||||||||
19,583 | 32,867 | 5,978 | 58,292 | |||||||||||
2,981 | 5,606 | 2,198 | 11,561 | |||||||||||
8,565 | 88,992 | 5,709 | 52,423 | |||||||||||
11,685 | 22,760 | 8,729 | 45,464 | |||||||||||
14,893 | 29,289 | 12,223 | 64,492 | |||||||||||
8,991 | 9,260 | 7,711 | 8,966 | |||||||||||
4,467 | 8,419 | 3,350 | 17,302 | |||||||||||
9,428 | 19,607 | 8,214 | 41,374 | |||||||||||
290 | 553 | 222 | 1,169 | |||||||||||
— | — | — | — | |||||||||||
1,324 | 1,383 | 1,063 | 4,451 | |||||||||||
|
|
|
|
|
|
|
| |||||||
347,496 | 533,513 | 149,867 | 753,979 | |||||||||||
— | — | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||
347,496 | 533,513 | 149,867 | 753,979 | |||||||||||
|
|
|
|
|
|
|
| |||||||
(85,147 | ) | 407,932 | 433,030 | 1,647,246 | ||||||||||
|
|
|
|
|
|
|
| |||||||
1,905,880 | 2,305,864 | 61,105 | (579,781 | ) | ||||||||||
— | — | — | — | |||||||||||
— | 294,097 | — | (401,793 | ) | ||||||||||
— | (4,140 | ) | — | — | ||||||||||
1,677,457 | 1,388,310 | 394,091 | 2,410,491 | |||||||||||
— | 40,692 | — | 267,041 | |||||||||||
— | (490 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||
3,583,337 | 4,024,333 | 455,196 | 1,695,958 | |||||||||||
|
|
|
|
|
|
|
| |||||||
3,498,190 | 4,432,265 | 888,226 | 3,343,204 | |||||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 47 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS
Highland Global Allocation Fund | Highland Dividend Equity Fund | |||||||||||||||
Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | |||||||||||||
Increase (Decrease) in Net Assets | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | 2,181,596 | 2,550,614 | 197,445 | 245,914 | ||||||||||||
Net realized gain on investments, securities sold short, futures contracts and foreign currency transactions | 24,186,353 | 52,241,435 | 126,324 | 293,086 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency translations | 14,490,473 | (28,196,056 | ) | 1,580,855 | 1,603,349 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase from operations | 40,858,422 | 26,595,993 | 1,904,624 | 2,142,349 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Distributions to shareholders from: | ||||||||||||||||
Net investment income | ||||||||||||||||
Class A | (2,152,018 | ) | (2,440,188 | ) | (36,718 | ) | (19,777 | ) | ||||||||
Class B(a) | (84 | ) | — | — | — | |||||||||||
Class C | (82,541 | ) | (23,213 | ) | (12,810 | ) | (14,926 | ) | ||||||||
Class R | (37 | ) | (23 | ) | — | — | ||||||||||
Class Y | (152,381 | ) | (29,166 | ) | (137,741 | ) | (226,534 | ) | ||||||||
Net realized gains | ||||||||||||||||
Class A | (7,861,250 | ) | (42,090,724 | ) | (63,397 | ) | (253 | ) | ||||||||
Class B(a) | (620 | ) | (1,975 | ) | — | — | ||||||||||
Class C | (270,296 | ) | (1,008,429 | ) | (36,581 | ) | (634 | ) | ||||||||
Class R | (170 | ) | (557 | ) | — | — | ||||||||||
Class Y | (73,810 | ) | (314,032 | ) | (193,027 | ) | (5,856 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total distributions | (10,593,207 | ) | (45,908,307 | ) | (480,274 | ) | (267,980 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Increase (decrease) in net assets from operations and distributions | 30,265,215 | (19,312,314 | ) | 1,424,350 | 1,874,369 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Share transactions: | ||||||||||||||||
Proceeds from sale of shares | ||||||||||||||||
Class A | 57,349,548 | 7,432,768 | 2,145,849 | 3,009,351 | ||||||||||||
Class B(a) | — | — | — | — | ||||||||||||
Class C | 19,455,212 | 1,595,170 | 788,739 | 1,093,993 | ||||||||||||
Class R | — | — | — | — | ||||||||||||
Class Y | 56,512,985 | 1,140,119 | 2,171,074 | 3,355,856 | ||||||||||||
Value of distributions reinvested | ||||||||||||||||
Class A | 9,418,256 | 42,110,520 | 60,662 | 14,577 | ||||||||||||
Class B(a) | 704 | 1,891 | — | — | ||||||||||||
Class C | 263,041 | 753,385 | 46,751 | 14,997 | ||||||||||||
Class R | 207 | 581 | — | — | ||||||||||||
Class Y | 126,537 | 259,100 | 223,886 | 50,131 | ||||||||||||
Cost of shares redeemed | ||||||||||||||||
Class A | (18,091,605 | ) | (45,421,877 | ) | (501,768 | ) | (91,966 | ) | ||||||||
Class B(a) | (17,813 | ) | (58,000 | ) | — | — | ||||||||||
Class C | (1,323,943 | ) | (1,154,764 | ) | (196,895 | ) | (105,177 | ) | ||||||||
Class R | — | — | — | — | ||||||||||||
Class Y | (498,132 | ) | (3,124,105 | ) | (960,289 | ) | (2,225,948 | ) | ||||||||
Reorganization (Note 10) | ||||||||||||||||
Class A | — | 34,446,774 | — | — | ||||||||||||
Class B(a) | — | 11,345 | — | — | ||||||||||||
Class C | — | 821,843 | — | — | ||||||||||||
Class R | — | 2,157 | — | — | ||||||||||||
Class Y | — | 28,668 | — | — | ||||||||||||
Redemption fees (Note 2) | — | — | 170 | 11,216 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) from shares transactions | 123,194,997 | 38,845,575 | 3,778,179 | 5,127,030 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total increase (decrease) in net assets | 153,460,212 | 19,533,261 | 5,202,529 | 7,001,399 | ||||||||||||
Net Assets | ||||||||||||||||
Beginning of period | 220,942,134 | 201,408,873 | 18,107,500 | 11,106,101 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
End of period | 374,402,346 | 220,942,134 | 23,310,029 | 18,107,500 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated net investment income (loss) | 100,514 | 305,979 | (681 | ) | (10,857 | ) | ||||||||||
|
|
|
|
|
|
|
|
(a) | Class B Shares liquidated on January 31, 2014. |
48 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Premier Growth Equity Fund | Highland Small-Cap Equity Fund | Highland Total Return Fund | ||||||||||||||||||||
Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | |||||||||||||||||
281,932 | 623,405 | (85,147 | ) | (243,486 | ) | 407,932 | 680,907 | |||||||||||||||
| 5,696,236 |
| 12,850,299 | 1,905,880 | 3,697,037 | 2,595,821 | 5,063,668 | |||||||||||||||
| 11,696,741 |
| 17,076,307 | 1,677,457 | 5,214,748 | 1,428,512 | 2,524,356 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
17,674,909 | 30,550,011 | 3,498,190 | 8,668,299 | 4,432,265 | 8,268,931 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(183,218 | ) | (644,361 | ) | — | — | (657,649 | ) | (729,626 | ) | |||||||||||||
— | — | — | — | (537 | ) | — | ||||||||||||||||
— | — | — | — | (24,485 | ) | (17,913 | ) | |||||||||||||||
— | (701 | ) | — | — | (9 | ) | (8 | ) | ||||||||||||||
(97,961 | ) | (180,681 | ) | — | — | (3,726 | ) | (4,116 | ) | |||||||||||||
(8,779,848 | ) | — | (2,500,608 | ) | (2,434,687 | ) | — | — | ||||||||||||||
(6,218 | ) | — | (10,091 | ) | (11,985 | ) | — | — | ||||||||||||||
(983,653 | ) | — | (277,003 | ) | (252,014 | ) | — | — | ||||||||||||||
(23,611 | ) | — | (97 | ) | (82 | ) | — | — | ||||||||||||||
(1,670,489 | ) | — | (106,727 | ) | (32,700 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(11,744,998 | ) | (825,743 | ) | (2,894,526 | ) | (2,731,468 | ) | (686,406 | ) | (751,663 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| 5,929,911 |
| 29,724,268 | 603,664 | 5,936,831 | 3,745,859 | 7,517,268 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
10,927,448 | 12,255,486 | 605,876 | 973,287 | 1,680,244 | 864,332 | |||||||||||||||||
— | — | 58 | 718 | — | — | |||||||||||||||||
1,192,990 | 3,720,346 | 156,505 | 433,328 | 199,963 | 310,250 | |||||||||||||||||
87,535 | 126,024 | — | — | — | — | |||||||||||||||||
2,313,344 | 4,008,564 | 196,869 | 1,212,701 | 48,391 | 111,487 | |||||||||||||||||
8,476,522 | 595,594 | 2,408,084 | 2,306,485 | 580,742 | 647,468 | |||||||||||||||||
6,218 | — | 6,025 | 7,196 | 419 | — | |||||||||||||||||
898,201 | — | 257,874 | 231,119 | 13,112 | 11,221 | |||||||||||||||||
23,611 | 702 | 97 | 82 | 9 | 8 | |||||||||||||||||
1,513,069 | 144,768 | 94,104 | 32,700 | 2,305 | 2,669 | |||||||||||||||||
(10,098,816 | ) | (22,180,485 | ) | (2,127,647 | ) | (6,331,207 | ) | (5,712,385 | ) | (12,105,362 | ) | |||||||||||
(96,612 | ) | (35,665 | ) | (124,315 | ) | (56,868 | ) | (135,238 | ) | (21,868 | ) | |||||||||||
(1,184,490 | ) | (2,604,447 | ) | (363,430 | ) | (563,505 | ) | (546,729 | ) | (1,860,595 | ) | |||||||||||
(16,827 | ) | (49,241 | ) | — | — | — | — | |||||||||||||||
(2,130,427 | ) | (6,876,478 | ) | (139,145 | ) | (422,298 | ) | (42,115 | ) | (34,431 | ) | |||||||||||
— | — | — | — | — | — | |||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
11,911,766 | (10,894,832 | ) | 970,955 | (2,176,262 | ) | (3,911,282 | ) | (12,074,821 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
17,841,677 | 18,829,436 | 1,574,619 | 3,760,569 | (165,423 | ) | (4,557,553 | ) | |||||||||||||||
181,795,209 | 162,965,773 | 41,021,144 | 37,260,575 | 77,979,806 | 82,537,359 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
199,636,886 | 181,795,209 | 42,595,763 | 41,021,144 | 77,814,383 | 77,979,806 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(203 | ) | (956 | ) | (196,530 | ) | (111,383 | ) | 407,924 | 686,398 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 49 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
Highland Tax-Exempt Fund | Highland Fixed Income Fund | |||||||||||||||
Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | |||||||||||||
Increase (Decrease) in Net Assets | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income | 433,030 | 852,091 | 1,647,246 | 2,419,193 | ||||||||||||
Net realized gain (loss) on investments and futures contracts | 61,105 | 45,981 | (981,574 | ) | 72,890 | |||||||||||
Net change in unrealized appreciation (depreciation) on investments and futures contracts | 394,091 | (2,032,081 | ) | 2,677,532 | (6,016,127 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) from operations | 888,226 | (1,134,009 | ) | 3,343,204 | (3,524,044 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Distributions to shareholders from: | ||||||||||||||||
Net investment income | ||||||||||||||||
Class A | (419,759 | ) | (817,745 | ) | (1,705,923 | ) | (2,403,347 | ) | ||||||||
Class B(a) | — | (6 | ) | (268 | ) | (451 | ) | |||||||||
Class C | (10,121 | ) | (27,027 | ) | (21,095 | ) | (20,974 | ) | ||||||||
Class R | — | — | (22 | ) | (24 | ) | ||||||||||
Class Y | (3,195 | ) | (7,268 | ) | (1,832 | ) | (11,577 | ) | ||||||||
Return of Capital | ||||||||||||||||
Class A | — | — | — | (229,542 | ) | |||||||||||
Class B(a) | — | — | — | (106 | ) | |||||||||||
Class C | — | — | — | (4,725 | ) | |||||||||||
Class R | — | — | — | (3 | ) | |||||||||||
Class Y | — | — | — | (1,140 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total distributions | (433,075 | ) | (852,046 | ) | (1,729,140 | ) | (2,671,889 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Increase (decrease) in net assets from operations and distributions | 455,151 | (1,986,055 | ) | 1,614,064 | (6,195,933 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Share transactions: | ||||||||||||||||
Proceeds from sale of shares | ||||||||||||||||
Class A | 183,138 | 2,728,329 | 1,183,446 | 2,305,069 | ||||||||||||
Class B(a) | — | — | — | 2,140 | ||||||||||||
Class C | 2,411 | 19,589 | 315,436 | 230,537 | ||||||||||||
Class Y | 584 | 144,176 | 14,074 | 64,744 | ||||||||||||
Value of distributions reinvested | ||||||||||||||||
Class A | 258,104 | 495,158 | 1,446,835 | 2,215,918 | ||||||||||||
Class B(a) | — | 5 | 105 | 263 | ||||||||||||
Class C | 5,807 | 11,654 | 14,528 | 16,345 | ||||||||||||
Class R | — | — | 22 | 27 | ||||||||||||
Class Y | 1,214 | 1,775 | 1,081 | 8,104 | ||||||||||||
Cost of shares redeemed | ||||||||||||||||
Class A | (3,312,442 | ) | (4,697,889 | ) | (13,367,363 | ) | (38,848,745 | ) | ||||||||
Class B(a) | — | (1,725 | ) | (63,862 | ) | (55,786 | ) | |||||||||
Class C | (99,088 | ) | (670,996 | ) | (731,928 | ) | (2,077,030 | ) | ||||||||
Class Y | (102,723 | ) | (44,304 | ) | (23,541 | ) | (1,473,401 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net decrease from shares transactions | (3,062,995 | ) | (2,014,228 | ) | (11,211,167 | ) | (37,611,815 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total decrease in net assets | (2,607,844 | ) | (4,000,283 | ) | (9,597,103 | ) | (43,807,748 | ) | ||||||||
Net Assets | ||||||||||||||||
Beginning of period | 31,655,781 | 35,656,064 | 164,996,287 | 208,804,035 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
End of period | 29,047,937 | 31,655,781 | 155,399,184 | 164,996,287 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated net investment income (loss) | 51,640 | 51,685 | (131,404 | ) | (49,510 | ) | ||||||||||
|
|
|
|
|
|
|
|
(a) | Class B Shares liquidated on January 31, 2014. |
50 | See accompanying Notes to Financial Statements. |
Table of Contents
THIS PAGE LEFT BLANK INTENTIONALLY
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
CAPITAL STOCK ACTIVITY - SHARES |
Highland Global Allocation Fund | Highland Dividend Equity Fund | |||||||||||||||
Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | |||||||||||||
Class A: | ||||||||||||||||
Shares sold | 5,595,672 | 719,796 | 148,271 | 219,235 | ||||||||||||
Issued for distribution reinvested | 974,969 | 4,581,534 | 4,178 | 1,095 | ||||||||||||
Shares redeemed | (1,836,896 | ) | (4,376,514 | ) | (34,302 | ) | (6,890 | ) | ||||||||
Subscriptions from Reorganization (Note 10) | — | 3,802,075 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | 4,733,745 | 4,726,891 | 118,147 | 213,440 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Class B(a): | ||||||||||||||||
Shares sold | — | — | — | — | ||||||||||||
Issued for distribution reinvested | 78 | 212 | — | — | ||||||||||||
Shares redeemed | (1,907 | ) | (5,993 | ) | — | — | ||||||||||
Subscriptions from Reorganization (Note 10) | — | 1,333 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net (decrease) in fund shares | (1,829 | ) | (4,448 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Class C: | ||||||||||||||||
Shares sold | 2,113,004 | 160,626 | 57,852 | 89,589 | ||||||||||||
Issued for distribution reinvested | 30,013 | 90,020 | 3,390 | 1,247 | ||||||||||||
Shares redeemed | (146,816 | ) | (114,653 | ) | (14,921 | ) | (7,897 | ) | ||||||||
Subscriptions from Reorganization (Note 10) | — | 99,859 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | 1,996,201 | 235,852 | 46,321 | 82,939 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Class R: | ||||||||||||||||
Shares sold | — | — | — | — | ||||||||||||
Issued for distribution reinvested | 21 | 63 | — | — | ||||||||||||
Shares redeemed | — | — | — | — | ||||||||||||
Subscriptions from Reorganization (Note 10) | — | 235 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase in fund shares | 21 | 298 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Class Y: | ||||||||||||||||
Shares sold | 4,757,728 | 96,431 | 157,397 | 259,930 | ||||||||||||
Issued for distribution reinvested | 11,042 | 24,457 | 16,219 | 4,099 | ||||||||||||
Shares redeemed | (42,790 | ) | (253,814 | ) | (69,501 | ) | (178,394 | ) | ||||||||
Subscriptions from Reorganization (Note 10) | — | 2,759 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | 4,725,980 | (130,167 | ) | 104,115 | 85,635 | |||||||||||
|
|
|
|
|
|
|
|
(a) | Class B Shares liquidated on January 31, 2014. |
52 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Premier Growth Equity Fund | Highland Small-Cap Equity Fund | Highland Total Return Fund | ||||||||||||||||||||
Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | |||||||||||||||||
337,746 | 440,263 | 40,230 | 72,815 | 71,212 | 39,855 | |||||||||||||||||
265,801 | 23,588 | 162,929 | 196,130 | 24,629 | 31,188 | |||||||||||||||||
(312,718 | ) | (810,770 | ) | (140,541 | ) | (480,803 | ) | (241,172 | ) | (560,067 | ) | |||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
290,829 | (346,919 | ) | 62,618 | (211,858 | ) | (145,331 | ) | (489,024 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
— | — | — | 73 | — | — | |||||||||||||||||
230 | — | 497 | 731 | 18 | — | |||||||||||||||||
(3,526 | ) | (1,608 | ) | (10,070 | ) | (5,314 | ) | (5,833 | ) | (1,078 | ) | |||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(3,296 | ) | (1,608 | ) | (9,573 | ) | (4,510 | ) | (5,815 | ) | (1,078 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
43,460 | 150,159 | 12,596 | 38,055 | 9,096 | 15,158 | |||||||||||||||||
33,181 | — | 21,435 | 23,703 | 600 | 582 | |||||||||||||||||
(42,861 | ) | (110,821 | ) | (28,554 | ) | (50,262 | ) | (25,068 | ) | (93,193 | ) | |||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
33,780 | 39,338 | 5,477 | 11,496 | (15,372 | ) | (77,453 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
2,741 | 4,654 | — | — | — | — | |||||||||||||||||
750 | 28 | 7 | 7 | — | 1 | |||||||||||||||||
(532 | ) | (1,819 | ) | — | — | — | — | |||||||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
2,959 | 2,863 | 7 | 7 | — | 1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
69,331 | 141,415 | 12,305 | 91,241 | 2,043 | 5,217 | |||||||||||||||||
46,220 | 5,613 | 6,021 | 2,646 | 97 | 127 | |||||||||||||||||
(64,587 | ) | (246,419 | ) | (8,678 | ) | (30,107 | ) | (1,773 | ) | (1,573 | ) | |||||||||||
— | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
50,964 | (99,391 | ) | 9,648 | 63,780 | 367 | 3,771 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 53 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
CAPITAL STOCK ACTIVITY - SHARES |
Highland Tax-Exempt Fund | Highland Fixed Income Fund | |||||||||||||||
Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | |||||||||||||
Class A: | ||||||||||||||||
Shares sold | 15,781 | 220,498 | 93,334 | 179,027 | ||||||||||||
Issued for distribution reinvested | 22,029 | 41,001 | 113,958 | 173,351 | ||||||||||||
Shares redeemed | (282,114 | ) | (385,501 | ) | (1,055,421 | ) | (3,019,499 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net decrease in fund shares | (244,304 | ) | (124,002 | ) | (848,129 | ) | (2,667,121 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Class B(a): | ||||||||||||||||
Shares sold | — | — | — | 164 | ||||||||||||
Issued for distribution reinvested | — | — | 8 | 21 | ||||||||||||
Shares redeemed | — | (139 | ) | (5,051 | ) | (4,322 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | — | (139 | ) | (5,043 | ) | (4,137 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Class C: | ||||||||||||||||
Shares sold | 206 | 1,592 | 24,936 | 17,841 | ||||||||||||
Issued for distribution reinvested | 496 | 965 | 1,143 | 1,284 | ||||||||||||
Shares redeemed | (8,504 | ) | (56,730 | ) | (57,874 | ) | (160,445 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net decrease in fund shares | (7,802 | ) | (54,173 | ) | (31,795 | ) | (141,320 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Class R: | ||||||||||||||||
Issued for distribution reinvested | — | — | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase in fund shares | — | — | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Class Y: | ||||||||||||||||
Shares sold | 46 | 10,924 | 1,108 | 5,027 | ||||||||||||
Issued for distribution reinvested | 96 | 137 | 85 | 627 | ||||||||||||
Shares redeemed | (8,136 | ) | (3,433 | ) | (1,860 | ) | (113,628 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | (7,994 | ) | 7,628 | (667 | ) | (107,974 | ) | |||||||||
|
|
|
|
|
|
|
|
(a) | Class B Shares liquidated on January 31, 2014. |
54 | See accompanying Notes to Financial Statements. |
Table of Contents
THIS PAGE LEFT BLANK INTENTIONALLY
Table of Contents
For the six month period ended March 31, 2014 (unaudited) and the years or periods ended September 30
Selected data for a share outstanding throughout each period is as follows:
Income (Loss) from Investment Operations | Less Distributions From | |||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss)(a) | Net Realized and Unrealized Gain (Loss) on Investments | Total from Operations | Net Investment Income | Net Realized Gains | Return of Capital | Total Distributions | |||||||||||||||||||||||||
Highland Global Allocation Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 9.03 | $ | 0.08 | $ | 1.56 | $ | 1.64 | $ | (0.06 | ) | $ | (0.34 | ) | $ | — | $ | (0.40 | ) | |||||||||||||
2013 | 10.24 | 0.15 | 1.45 | 1.60 | (0.15 | ) | (2.66 | ) | — | (2.81 | ) | |||||||||||||||||||||
2012 | 8.15 | 0.07 | 2.11 | 2.18 | (0.09 | ) | — | — | (0.09 | ) | ||||||||||||||||||||||
2011 | 8.45 | 0.08 | (0.31 | ) | (0.23 | ) | (0.07 | ) | — | — | (0.07 | ) | ||||||||||||||||||||
2010 | 8.07 | 0.08 | 0.38 | 0.46 | (0.08 | ) | — | — | (0.08 | ) | ||||||||||||||||||||||
2009 | 8.86 | 0.10 | (0.69 | ) | (0.59 | ) | (0.10 | ) | (0.10 | ) | — | (0.20 | ) | |||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 8.20 | $ | 0.05 | $ | 1.42 | $ | 1.47 | $ | (0.05 | ) | $ | (0.34 | ) | $ | — | $ | (0.39 | ) | |||||||||||||
2013 | 9.51 | 0.07 | 1.34 | 1.41 | (0.06 | ) | (2.66 | ) | — | (2.72 | ) | |||||||||||||||||||||
2012 | 7.58 | — | (g) | 1.96 | 1.96 | (0.03 | ) | — | — | (0.03 | ) | |||||||||||||||||||||
2011 | 7.86 | 0.01 | (0.29 | ) | (0.28 | ) | — | — | — | — | ||||||||||||||||||||||
2010 | 7.54 | 0.02 | 0.34 | 0.36 | (0.04 | ) | — | — | (0.04 | ) | ||||||||||||||||||||||
2009 | 8.28 | 0.04 | (0.64 | ) | (0.60 | ) | (0.04 | ) | (0.10 | ) | — | (0.14 | ) | |||||||||||||||||||
Class R | ||||||||||||||||||||||||||||||||
2014(d) | $ | 9.16 | $ | 0.07 | $ | 1.60 | $ | 1.67 | $ | (0.06 | ) | $ | (0.34 | ) | $ | — | $ | (0.40 | ) | |||||||||||||
2013 | 10.33 | 0.14 | 1.46 | 1.60 | (0.11 | ) | (2.66 | ) | — | (2.77 | ) | |||||||||||||||||||||
2012 | 8.16 | 0.05 | 2.14 | 2.19 | (0.02 | ) | — | — | (0.02 | ) | ||||||||||||||||||||||
2011 | 8.44 | 0.06 | (0.29 | ) | (0.23 | ) | (0.05 | ) | — | — | (0.05 | ) | ||||||||||||||||||||
2010 | 8.06 | 0.06 | 0.37 | 0.43 | (0.05 | ) | — | — | (0.05 | ) | ||||||||||||||||||||||
2009 | 8.85 | 0.08 | (0.69 | ) | (0.61 | ) | (0.08 | ) | (0.10 | ) | — | (0.18 | ) | |||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 10.36 | $ | 0.14 | $ | 1.76 | $ | 1.90 | $ | (0.07 | ) | $ | (0.34 | ) | $ | — | $ | (0.41 | ) | |||||||||||||
2013 | 11.38 | 0.17 | 1.65 | 1.82 | (0.18 | ) | (2.66 | ) | — | (2.84 | ) | |||||||||||||||||||||
2012 | 9.04 | 0.08 | 2.37 | 2.45 | (0.11 | ) | — | — | (0.11 | ) | ||||||||||||||||||||||
2011 | 9.37 | 0.12 | (0.36 | ) | (0.24 | ) | (0.09 | ) | — | — | (0.09 | ) | ||||||||||||||||||||
2010 | 8.94 | 0.10 | 0.43 | 0.53 | (0.10 | ) | — | — | (0.10 | ) | ||||||||||||||||||||||
2009 | 9.79 | 0.12 | (0.75 | ) | (0.63 | ) | (0.12 | ) | (0.10 | ) | — | (0.22 | ) | |||||||||||||||||||
Highland Dividend Equity Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 13.92 | $ | 0.13 | $ | 1.16 | $ | 1.29 | $ | (0.09 | ) | $ | (0.19 | ) | $ | — | $ | (0.28 | ) | |||||||||||||
2013 | 11.96 | 0.21 | 1.95 | 2.16 | (0.22 | ) | (0.00 | )(g) | — | (0.22 | ) | |||||||||||||||||||||
2012(h) | 10.00 | 0.11 | 2.00 | 2.11 | (0.15 | ) | — | — | (0.15 | ) | ||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 13.24 | $ | 0.07 | $ | 1.11 | $ | 1.18 | $ | (0.05 | ) | $ | (0.19 | ) | $ | — | $ | (0.24 | ) | |||||||||||||
2013 | 11.40 | 0.12 | 1.85 | 1.97 | (0.14 | ) | (0.00 | )(g) | — | (0.14 | ) | |||||||||||||||||||||
2012(h) | 10.00 | 0.04 | 1.44 | 1.48 | (0.08 | ) | — | — | (0.08 | ) | ||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 13.24 | $ | 0.14 | $ | 1.11 | $ | 1.25 | $ | (0.11 | ) | $ | (0.19 | ) | $ | — | $ | (0.30 | ) | |||||||||||||
2013 | 11.40 | 0.25 | 1.84 | 2.09 | (0.26 | ) | (0.00 | )(g) | — | (0.26 | ) | |||||||||||||||||||||
2012(h) | 10.00 | 0.14 | 1.44 | 1.58 | (0.18 | ) | — | — | (0.18 | ) |
56 | See accompanying Notes to Financial Statements. |
Table of Contents
Ratios and Supplemental Data | ||||||||||||||||||||||||||||||
Redemptions Fees | Net Asset Value, End of Period | Total Return(b) | Net Assets, End of Period (000) | Net Investment Income/ (Loss)(c) | Net Expenses(c) | Gross Expenses(c) | Portfolio Turnover Rate | |||||||||||||||||||||||
$— | $ | 10.27 | 18.76 | %(e) | $ | 292,629 | 1.68 | % | 1.00 | % | 1.00 | % | 115 | %(e) | ||||||||||||||||
— | 9.03 | 15.89 | 214,521 | 1.38 | 1.14 | 1.14 | 236 | |||||||||||||||||||||||
— | 10.24 | 26.97 | 194,779 | 0.77 | 1.41 | 1.41 | 47 | |||||||||||||||||||||||
— | 8.15 | (2.85 | ) | 29,171 | 0.89 | 1.13 | (f) | 1.13 | 47 | |||||||||||||||||||||
— | 8.45 | 5.70 | 34,667 | 1.00 | 1.36 | (f) | 1.41 | 50 | ||||||||||||||||||||||
— | 8.07 | (6.11 | ) | 34,466 | 1.39 | 1.33 | (f) | 1.52 | 69 | |||||||||||||||||||||
$— | $ | 9.28 | 18.44 | %(e) | $ | 24,064 | 1.11 | % | 1.76 | % | 1.76 | % | 115 | %(e) | ||||||||||||||||
— | 8.20 | 14.97 | 4,905 | 0.67 | 1.88 | 1.88 | 236 | |||||||||||||||||||||||
— | 9.51 | 25.97 | 3,443 | 0.02 | 2.16 | 2.16 | 47 | |||||||||||||||||||||||
— | 7.58 | (3.56 | ) | 1,361 | 0.14 | 1.88 | (f) | 1.88 | 47 | |||||||||||||||||||||
— | 7.86 | 4.83 | 1,907 | 0.25 | 2.12 | (f) | 2.16 | 50 | ||||||||||||||||||||||
— | 7.54 | (6.76 | ) | 1,852 | 0.60 | 2.08 | (f) | 2.27 | 69 | |||||||||||||||||||||
$— | $ | 10.43 | 18.66 | %(e) | $ | 5 | 1.45 | % | 1.25 | % | 1.25 | % | 115 | %(e) | ||||||||||||||||
— | 9.16 | 15.69 | 5 | 1.32 | 1.26 | 1.26 | 236 | |||||||||||||||||||||||
— | 10.33 | 26.87 | 2 | 0.52 | 1.66 | 1.66 | 47 | |||||||||||||||||||||||
— | 8.16 | (2.82 | ) | 1 | 0.64 | 1.38 | (f) | 1.38 | 47 | |||||||||||||||||||||
— | 8.44 | 5.34 | 9 | 0.75 | 1.61 | (f) | 1.66 | 50 | ||||||||||||||||||||||
— | 8.06 | (6.35 | ) | 9 | 1.11 | 1.58 | (f) | 1.77 | 69 | |||||||||||||||||||||
$— | $ | 11.85 | 18.89 | %(e) | $ | 57,704 | 2.38 | % | 0.75 | % | 0.75 | % | 115 | %(e) | ||||||||||||||||
— | 10.36 | 16.27 | 1,495 | 1.44 | 0.87 | 0.87 | 236 | |||||||||||||||||||||||
— | 11.38 | 27.34 | 3,124 | 1.02 | 1.16 | 1.16 | 47 | |||||||||||||||||||||||
— | 9.04 | (2.68 | ) | 94 | 1.14 | 0.88 | (f) | 0.88 | 47 | |||||||||||||||||||||
— | 9.37 | 5.88 | 149 | 1.19 | 1.11 | (f) | 1.14 | 50 | ||||||||||||||||||||||
— | 8.94 | (5.83 | ) | 294 | 1.48 | 1.01 | (f) | 1.07 | 69 | |||||||||||||||||||||
$—(g) | $ | 14.93 | 9.52 | %(e) | $ | 5,481 | 1.75 | % | 1.35 | % | 1.92 | % | 5 | %(e) | ||||||||||||||||
0.02 | 13.92 | 18.47 | 3,464 | 1.52 | 1.40 | 2.62 | 6 | |||||||||||||||||||||||
—(g) | 11.96 | 21.16 | (e) | 424 | 1.10 | 2.25 | 4.03 | 6 | (e) | |||||||||||||||||||||
$—(g) | $ | 14.18 | 9.14 | %(e) | $ | 2,793 | 1.04 | % | 2.00 | % | 2.56 | % | 5 | %(e) | ||||||||||||||||
0.01 | 13.24 | 17.59 | 1,994 | 0.93 | 2.04 | 3.19 | 6 | |||||||||||||||||||||||
—(g) | 11.40 | 14.89 | (e) | 771 | 0.45 | 2.90 | 4.68 | 6 | (e) | |||||||||||||||||||||
$—(g) | $ | 14.19 | 9.75 | %(e) | $ | 15,036 | 2.08 | % | 1.00 | % | 1.56 | % | 5 | %(e) | ||||||||||||||||
0.01 | 13.24 | 18.72 | 12,650 | 1.98 | 1.02 | 2.17 | 6 | |||||||||||||||||||||||
—(g) | 11.40 | 15.90 | (e) | 9,911 | 1.45 | 1.90 | 3.68 | 6 | (e) |
See accompanying Notes to Financial Statements. | 57 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the six month period ended March 31, 2014 (unaudited) and the years or periods ended September 30
Selected data for a share outstanding throughout each period is as follows:
Income (Loss) from Investment Operations | Less Distributions From | |||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss)(a) | Net Realized and Unrealized Gain (Loss) on Investments | Total from Operations | Net Investment Income | Net Realized Gains | Return of Capital | Total Distributions | |||||||||||||||||||||||||
Highland Premier Growth Equity Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 31.22 | $ | 0.05 | $ | 2.97 | $ | 3.02 | $ | (0.04 | ) | $ | (1.95 | ) | $ | — | $ | (1.99 | ) | |||||||||||||
2013 | 26.13 | 0.11 | 5.12 | 5.23 | (0.14 | ) | — | — | (0.14 | ) | ||||||||||||||||||||||
2012 | 19.39 | 0.03 | 6.71 | 6.74 | — | — | — | — | ||||||||||||||||||||||||
2011 | 19.45 | — | (g) | (0.06 | ) | (0.06 | ) | — | — | — | — | |||||||||||||||||||||
2010 | 18.45 | (0.01 | ) | 1.06 | 1.05 | (0.05 | ) | — | — | (0.05 | ) | |||||||||||||||||||||
2009 | 20.84 | 0.06 | (1.27 | ) | (1.21 | ) | (0.01 | ) | (1.17 | ) | — | (1.18 | ) | |||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 26.82 | $ | (0.06 | ) | $ | 2.55 | $ | 2.49 | $ | — | $ | (1.95 | ) | $ | — | $ | (1.95 | ) | |||||||||||||
2013 | 22.50 | (0.09 | ) | 4.41 | 4.32 | — | — | — | — | |||||||||||||||||||||||
2012 | 16.82 | (0.12 | ) | 5.80 | 5.68 | — | — | — | — | |||||||||||||||||||||||
2011 | 17.00 | (0.15 | ) | (0.03 | ) | (0.18 | ) | — | — | — | — | |||||||||||||||||||||
2010 | 16.21 | (0.14 | ) | 0.93 | 0.79 | — | — | — | — | |||||||||||||||||||||||
2009 | 18.62 | (0.06 | ) | (1.18 | ) | (1.24 | ) | — | (1.17 | ) | — | (1.17 | ) | |||||||||||||||||||
Class R | ||||||||||||||||||||||||||||||||
2014(d) | $ | 30.86 | $ | 0.01 | $ | 2.94 | $ | 2.95 | $ | — | $ | (1.95 | ) | $ | — | $ | (1.95 | ) | ||||||||||||||
2013 | 25.84 | 0.02 | 5.08 | 5.10 | (0.08 | ) | — | — | (0.08 | ) | ||||||||||||||||||||||
2012 | 19.22 | (0.03 | ) | 6.65 | 6.62 | — | — | — | — | |||||||||||||||||||||||
2011 | 19.33 | (0.06 | ) | (0.05 | ) | (0.11 | ) | — | — | — | — | |||||||||||||||||||||
2010 | 18.39 | (0.06 | ) | 1.05 | 0.99 | (0.05 | ) | — | — | (0.05 | ) | |||||||||||||||||||||
2009 | 20.80 | 0.02 | (1.26 | ) | (1.24 | ) | — | (1.17 | ) | — | (1.17 | ) | ||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 31.96 | $ | 0.09 | $ | 3.05 | $ | 3.14 | $ | (0.11 | ) | $ | (1.95 | ) | $ | — | $ | (2.06 | ) | |||||||||||||
2013 | 26.74 | 0.18 | 5.24 | 5.42 | (0.20 | ) | — | — | (0.20 | ) | ||||||||||||||||||||||
2012 | 19.80 | 0.09 | 6.85 | 6.94 | — | — | — | — | ||||||||||||||||||||||||
2011 | 19.81 | 0.05 | (0.06 | ) | (0.01 | ) | — | — | — | — | ||||||||||||||||||||||
2010 | 18.78 | 0.04 | 1.08 | 1.12 | (0.09 | ) | — | — | (0.09 | ) | ||||||||||||||||||||||
2009 | 21.25 | 0.11 | (1.31 | ) | (1.20 | ) | (0.10 | ) | (1.17 | ) | — | (1.27 | ) | |||||||||||||||||||
Highland Small-Cap Equity Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 14.93 | $ | (0.03 | ) | $ | 1.30 | $ | 1.27 | $ | — | $ | (1.06 | ) | $ | — | $ | (1.06 | ) | |||||||||||||
2013 | 12.88 | (0.06 | ) | 3.07 | 3.01 | — | (0.96 | ) | — | (0.96 | ) | |||||||||||||||||||||
2012 | 10.07 | (0.10 | ) | 2.91 | 2.81 | — | — | — | — | |||||||||||||||||||||||
2011 | 9.64 | (0.07 | ) | 0.50 | 0.43 | — | — | — | — | |||||||||||||||||||||||
2010 | 8.49 | (0.03 | ) | 1.18 | 1.15 | — | — | — | — | |||||||||||||||||||||||
2009 | 10.73 | (0.04 | ) | (1.34 | ) | (1.38 | ) | — | (0.86 | ) | — | (0.86 | ) | |||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.35 | $ | (0.07 | ) | $ | 1.07 | $ | 1.00 | $ | — | $ | (1.06 | ) | $ | — | $ | (1.06 | ) | |||||||||||||
2013 | 10.91 | (0.16 | ) | 2.56 | 2.40 | — | (0.96 | ) | — | (0.96 | ) | |||||||||||||||||||||
2012 | 8.59 | (0.17 | ) | 2.49 | 2.32 | — | — | — | — | |||||||||||||||||||||||
2011 | 8.29 | (0.14 | ) | 0.44 | 0.30 | — | — | — | — | |||||||||||||||||||||||
2010 | 7.35 | (0.08 | ) | 1.02 | 0.94 | — | — | — | — | |||||||||||||||||||||||
2009 | 9.53 | (0.08 | ) | (1.24 | ) | (1.32 | ) | — | (0.86 | ) | — | (0.86 | ) |
58 | See accompanying Notes to Financial Statements. |
Table of Contents
Ratios and Supplemental Data | ||||||||||||||||||||||||||||||
Redemptions Fees | Net Asset Value, End of Period | Total Return(b) | Net Assets, End of Period (000) | Net Investment Income/ (Loss)(c) | Net Expenses(c) | Gross Expenses(c) | Portfolio Turnover Rate | |||||||||||||||||||||||
$— | $ | 32.25 | 9.76 | %(e) | $ | 154,991 | 0.31 | % | 1.16 | % | 1.16 | % | 9 | %(e) | ||||||||||||||||
— | 31.22 | 20.12 | 140,949 | 0.39 | 1.25 | 1.27 | 20 | |||||||||||||||||||||||
— | 26.13 | 34.76 | 127,028 | 0.14 | 1.22 | 1.31 | 16 | |||||||||||||||||||||||
— | 19.39 | (0.31 | ) | 109,321 | (0.02 | ) | 1.07 | (f) | 1.10 | 23 | ||||||||||||||||||||
— | 19.45 | 5.69 | 140,095 | (0.08 | ) | 1.00 | (f) | 1.00 | 21 | |||||||||||||||||||||
— | 18.45 | (3.58 | ) | 149,681 | 0.36 | 1.10 | (f) | 1.10 | 27 | |||||||||||||||||||||
$— | $ | 27.36 | 9.37 | %(e) | $ | 14,785 | (0.44 | )% | 1.91 | % | 1.91 | % | 9 | %(e) | ||||||||||||||||
— | 26.82 | 19.20 | 13,589 | (0.37 | ) | 2.00 | 2.02 | 20 | ||||||||||||||||||||||
— | 22.50 | 33.77 | 10,512 | (0.61 | ) | 1.97 | 2.06 | 16 | ||||||||||||||||||||||
— | 16.82 | (1.06 | ) | 10,248 | (0.77 | ) | 1.82 | (f) | 1.85 | 23 | ||||||||||||||||||||
— | 17.00 | 4.87 | 13,770 | (0.83 | ) | 1.75 | (f) | 1.75 | 21 | |||||||||||||||||||||
— | 16.21 | (4.23 | ) | 14,378 | (0.41 | ) | 1.85 | (f) | 1.85 | 27 | ||||||||||||||||||||
$— | $ | 31.86 | 9.65 | %(e) | $ | 473 | 0.05 | % | 1.41 | % | 1.41 | % | 9 | %(e) | ||||||||||||||||
— | 30.86 | 19.80 | 367 | 0.08 | 1.50 | 1.52 | 20 | |||||||||||||||||||||||
— | 25.84 | 34.44 | 233 | (0.11 | ) | 1.47 | 1.56 | 16 | ||||||||||||||||||||||
— | 19.22 | (0.57 | ) | 171 | (0.27 | ) | 1.32 | (f) | 1.35 | 23 | ||||||||||||||||||||
— | 19.33 | 5.40 | 103 | (0.31 | ) | 1.23 | (f) | 1.24 | 21 | |||||||||||||||||||||
— | 18.39 | (3.76 | ) | 9 | 0.10 | 1.35 | (f) | 1.35 | 27 | |||||||||||||||||||||
$— | $ | 33.04 | 9.91 | %(e) | $ | 29,388 | 0.56 | % | 0.91 | % | 0.91 | % | 9 | %(e) | ||||||||||||||||
— | 31.96 | 20.45 | 26,802 | 0.64 | 1.00 | 1.02 | 20 | |||||||||||||||||||||||
— | 26.74 | 35.05 | 25,083 | 0.39 | 0.97 | 1.06 | 16 | |||||||||||||||||||||||
— | 19.80 | (0.05 | ) | 24,705 | 0.23 | 0.82 | (f) | 0.85 | 23 | |||||||||||||||||||||
— | 19.81 | 5.94 | 36,848 | 0.19 | 0.74 | (f) | 0.74 | 21 | ||||||||||||||||||||||
— | 18.78 | (3.30 | ) | 22,971 | 0.70 | 0.85 | (f) | 0.85 | 27 | |||||||||||||||||||||
$— | $ | 15.14 | 8.66 | %(e) | $ | 37,341 | (0.35 | )% | 1.59 | % | 1.59 | % | 13 | %(e) | ||||||||||||||||
— | 14.93 | 25.36 | 35,882 | (0.47 | ) | 1.91 | 1.91 | 64 | ||||||||||||||||||||||
— | 12.88 | 27.91 | 33,698 | (0.86 | ) | 2.00 | 2.00 | 24 | ||||||||||||||||||||||
— | 10.07 | 4.46 | 31,155 | (0.65 | ) | 1.91 | (f) | 1.92 | 71 | |||||||||||||||||||||
— | 9.64 | 13.55 | 34,798 | (0.33 | ) | 1.81 | (f) | 1.97 | 42 | |||||||||||||||||||||
— | 8.49 | (10.17 | ) | 32,456 | (0.56 | ) | 2.14 | (f) | 2.20 | 51 | ||||||||||||||||||||
$— | $ | 12.29 | 8.25 | %(e) | $ | 3,531 | (1.10 | )% | 2.34 | % | 2.34 | % | 13 | %(e) | ||||||||||||||||
— | 12.35 | 24.39 | 3,480 | (1.21 | ) | 2.66 | 2.66 | 64 | ||||||||||||||||||||||
— | 10.91 | 26.89 | 2,947 | (1.61 | ) | 2.75 | 2.75 | 24 | ||||||||||||||||||||||
— | 8.59 | 3.62 | 2,587 | (1.40 | ) | 2.66 | (f) | 2.67 | 71 | |||||||||||||||||||||
— | 8.29 | 12.79 | 2,832 | (1.08 | ) | 2.56 | (f) | 2.71 | 42 | |||||||||||||||||||||
— | 7.35 | (10.90 | ) | 2,839 | (1.30 | ) | 2.89 | (f) | 2.95 | 51 |
See accompanying Notes to Financial Statements. | 59 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the six month period ended March 31, 2014 (unaudited) and the years or periods ended September 30
Selected data for a share outstanding throughout each period is as follows:
Income (Loss) from Investment Operations | Less Distributions From | |||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss)(a) | Net Realized and Unrealized Gain (Loss) on Investments | Total from Operations | Net Investment Income | Net Realized Gains | Return of Capital | Total Distributions | |||||||||||||||||||||||||
Highland Small-Cap Equity Fund (continued) |
| |||||||||||||||||||||||||||||||
Class R | ||||||||||||||||||||||||||||||||
2014(d) | $ | 14.79 | $ | (0.04 | ) | $ | 1.29 | $ | 1.25 | $ | — | $ | (1.06 | ) | $ | — | $ | (1.06 | ) | |||||||||||||
2013 | 12.79 | (0.09 | ) | 3.05 | 2.96 | — | (0.96 | ) | — | (0.96 | ) | |||||||||||||||||||||
2012 | 9.99 | (0.13 | ) | 2.93 | 2.80 | — | — | — | — | |||||||||||||||||||||||
2011 | 9.58 | (0.10 | ) | 0.51 | 0.41 | — | — | — | — | |||||||||||||||||||||||
2010 | 8.46 | (0.05 | ) | 1.17 | 1.12 | — | — | — | — | |||||||||||||||||||||||
2009 | 10.72 | (0.06 | ) | (1.34 | ) | (1.40 | ) | — | (0.86 | ) | — | (0.86 | ) | |||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 15.72 | $ | (0.01 | ) | $ | 1.37 | $ | 1.36 | $ | — | $ | (1.06 | ) | $ | — | $ | (1.06 | ) | |||||||||||||
2013 | 13.48 | (0.05 | ) | 3.25 | 3.20 | — | (0.96 | ) | — | (0.96 | ) | |||||||||||||||||||||
2012 | 10.51 | (0.08 | ) | 3.05 | 2.97 | — | — | — | — | |||||||||||||||||||||||
2011 | 10.04 | (0.05 | ) | 0.52 | 0.47 | — | — | — | — | |||||||||||||||||||||||
2010 | 8.82 | — | 1.22 | 1.22 | — | — | — | — | ||||||||||||||||||||||||
2009 | 11.06 | (0.01 | ) | (1.37 | ) | (1.38 | ) | — | (0.86 | ) | — | (0.86 | ) | |||||||||||||||||||
Highland Total Return Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 22.93 | $ | 0.13 | $ | 1.21 | $ | 1.34 | $ | (0.22 | ) | $ | — | $ | — | $ | (0.22 | ) | ||||||||||||||
2013 | 20.85 | 0.20 | 2.09 | 2.29 | (0.21 | ) | — | — | (0.21 | ) | ||||||||||||||||||||||
2012 | 18.03 | 0.19 | 2.87 | 3.06 | (0.24 | ) | — | — | (0.24 | ) | ||||||||||||||||||||||
2011 | 18.80 | 0.21 | (0.87 | ) | (0.66 | ) | (0.11 | ) | — | — | (0.11 | ) | ||||||||||||||||||||
2010 | 17.90 | 0.17 | 0.99 | 1.16 | (0.26 | ) | — | — | (0.26 | ) | ||||||||||||||||||||||
2009 | 20.16 | 0.26 | (1.08 | ) | (0.82 | ) | (0.39 | ) | (1.05 | ) | — | (1.44 | ) | |||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 21.17 | $ | 0.04 | $ | 1.11 | $ | 1.15 | $ | (0.09 | ) | $ | — | $ | — | $ | (0.09 | ) | ||||||||||||||
2013 | 19.25 | 0.03 | 1.94 | 1.97 | (0.05 | ) | — | — | (0.05 | ) | ||||||||||||||||||||||
2012 | 16.63 | 0.04 | 2.65 | 2.69 | (0.07 | ) | — | — | (0.07 | ) | ||||||||||||||||||||||
2011 | 17.37 | 0.06 | (0.80 | ) | (0.74 | ) | — | — | — | — | ||||||||||||||||||||||
2010 | 16.59 | 0.03 | 0.91 | 0.94 | (0.16 | ) | — | — | (0.16 | ) | ||||||||||||||||||||||
2009 | 18.76 | 0.13 | (1.01 | ) | (0.88 | ) | (0.24 | ) | (1.05 | ) | — | (1.29 | ) | |||||||||||||||||||
Class R | ||||||||||||||||||||||||||||||||
2014(d) | $ | 23.04 | $ | 0.10 | $ | 1.21 | $ | 1.31 | $ | (0.18 | ) | $ | — | $ | — | $ | (0.18 | ) | ||||||||||||||
2013 | 20.94 | 0.28 | 1.99 | 2.27 | (0.17 | ) | — | — | (0.17 | ) | ||||||||||||||||||||||
2012 | 18.02 | 0.14 | 2.88 | 3.02 | (0.10 | ) | — | — | (0.10 | ) | ||||||||||||||||||||||
2011 | 18.79 | 0.16 | (0.86 | ) | (0.70 | ) | (0.07 | ) | — | — | (0.07 | ) | ||||||||||||||||||||
2010 | 17.87 | 0.12 | 0.99 | 1.11 | (0.19 | ) | — | — | (0.19 | ) | ||||||||||||||||||||||
2009 | 20.13 | 0.23 | (1.09 | ) | (0.86 | ) | (0.35 | ) | (1.05 | ) | — | (1.40 | ) | |||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 23.20 | $ | 0.16 | $ | 1.21 | $ | 1.37 | $ | (0.26 | ) | $ | — | $ | — | $ | (0.26 | ) | ||||||||||||||
2013 | 21.09 | 0.27 | 2.11 | 2.38 | (0.27 | ) | — | — | (0.27 | ) | ||||||||||||||||||||||
2012 | 18.24 | 0.24 | 2.90 | 3.14 | (0.29 | ) | — | — | (0.29 | ) | ||||||||||||||||||||||
2011 | 19.03 | 0.27 | (0.89 | ) | (0.62 | ) | (0.17 | ) | — | — | (0.17 | ) | ||||||||||||||||||||
2010 | 18.10 | 0.21 | 1.01 | 1.22 | (0.29 | ) | — | — | (0.29 | ) | ||||||||||||||||||||||
2009 | 20.39 | 0.31 | (1.10 | ) | (0.79 | ) | (0.45 | ) | (1.05 | ) | — | (1.50 | ) |
60 | See accompanying Notes to Financial Statements. |
Table of Contents
Ratios and Supplemental Data | ||||||||||||||||||||||||||||||
Redemptions Fees | Net Asset Value, End of Period | Total Return(b) | Net Assets, End of Period (000) | Net Investment Income/ (Loss)(c) | Net Expenses(c) | Gross Expenses(c) | Portfolio Turnover Rate | |||||||||||||||||||||||
$— | $ | 14.98 | 8.60 | %(e) | $ | 1 | (0.56 | )% | 1.67 | % | 1.67 | % | 13 | %(e) | ||||||||||||||||
— | 14.79 | 25.24 | 1 | (0.57 | ) | 1.99 | 1.99 | 64 | ||||||||||||||||||||||
— | 12.79 | 27.93 | 1 | (1.11 | ) | 2.25 | 2.25 | 24 | ||||||||||||||||||||||
— | 9.99 | 4.28 | 1 | (0.90 | ) | 2.16 | (f) | 2.17 | 71 | |||||||||||||||||||||
— | 9.58 | 13.24 | 9 | (0.55 | ) | 2.03 | (f) | 2.19 | 42 | |||||||||||||||||||||
— | 8.46 | (10.37 | ) | 8 | (0.84 | ) | 2.39 | (f) | 2.45 | 51 | ||||||||||||||||||||
$— | $ | 16.02 | 8.80 | %(e) | $ | 1,723 | (0.10 | )% | 1.34 | % | 1.34 | % | 13 | %(e) | ||||||||||||||||
— | 15.72 | 25.66 | 1,539 | (0.28 | ) | 1.64 | 1.64 | 64 | ||||||||||||||||||||||
— | 13.48 | 28.26 | 460 | (0.61 | ) | 1.75 | 1.75 | 24 | ||||||||||||||||||||||
— | 10.51 | 4.68 | 209 | (0.40 | ) | 1.66 | (f) | 1.67 | 71 | |||||||||||||||||||||
— | 10.04 | 13.83 | 198 | (0.04 | ) | 1.58 | (f) | 1.72 | 42 | |||||||||||||||||||||
— | 8.82 | (9.83 | ) | 1,035 | (0.18 | ) | 1.89 | (f) | 1.95 | 51 | ||||||||||||||||||||
$— | $ | 24.05 | 5.85 | %(e) | $ | 71,485 | 1.10 | % | 1.31 | % | 1.31 | % | 66 | %(e) | ||||||||||||||||
— | 22.93 | 11.15 | 71,505 | 0.92 | 1.33 | 1.34 | 138 | |||||||||||||||||||||||
— | 20.85 | 17.01 | 75,216 | 0.97 | 1.60 | 1.82 | 169 | |||||||||||||||||||||||
— | 18.03 | (3.51 | ) | 79,574 | 1.07 | 1.42 | (f) | 1.46 | 177 | |||||||||||||||||||||
— | 18.80 | 6.51 | 104,835 | 0.92 | 1.15 | (f) | 1.26 | 137 | ||||||||||||||||||||||
— | 17.90 | (2.60 | ) | 105,256 | 1.66 | 1.08 | (f) | 1.13 | 144 | |||||||||||||||||||||
$— | $ | 22.23 | 5.44 | %(e) | $ | 5,978 | 0.35 | % | 2.06 | % | 2.06 | % | 66 | %(e) | ||||||||||||||||
— | 21.17 | 10.28 | 6,019 | 0.17 | 2.08 | 2.09 | 138 | |||||||||||||||||||||||
— | 19.25 | 16.17 | 6,965 | 0.22 | 2.35 | 2.57 | 169 | |||||||||||||||||||||||
— | 16.63 | (4.20 | ) | 8,183 | 0.32 | 2.17 | (f) | 2.21 | 177 | |||||||||||||||||||||
— | 17.37 | 5.71 | 11,714 | 0.19 | 1.90 | (f) | 2.01 | 137 | ||||||||||||||||||||||
— | 16.59 | (3.33 | ) | 10,841 | 0.90 | 1.83 | (f) | 1.88 | 144 | |||||||||||||||||||||
$— | $ | 24.17 | 5.68 | %(e) | $ | 1 | 0.85 | % | 1.53 | % | 1.53 | % | 66 | %(e) | ||||||||||||||||
— | 23.04 | 10.99 | 1 | 1.27 | 1.28 | 1.28 | 138 | |||||||||||||||||||||||
— | 20.94 | 16.68 | 1 | 0.72 | 1.85 | 2.07 | 169 | |||||||||||||||||||||||
— | 18.02 | (3.70 | ) | 1 | 0.82 | 1.67 | (f) | 1.71 | 177 | |||||||||||||||||||||
— | 18.79 | 6.25 | 9 | 0.66 | 1.41 | (f) | 1.52 | 137 | ||||||||||||||||||||||
— | 17.87 | (2.88 | ) | 9 | 1.40 | 1.33 | (f) | 1.38 | 144 | |||||||||||||||||||||
$— | $ | 24.31 | 5.93 | %(e) | $ | 351 | 1.36 | % | 1.06 | % | 1.06 | % | 66 | %(e) | ||||||||||||||||
— | 23.20 | 11.41 | 326 | 1.22 | 1.08 | 1.09 | 138 | |||||||||||||||||||||||
— | 21.09 | 17.36 | 217 | 1.22 | 1.35 | 1.57 | 169 | |||||||||||||||||||||||
— | 18.24 | (3.36 | ) | 238 | 1.32 | 1.17 | (f) | 1.21 | 177 | |||||||||||||||||||||
— | 19.03 | 6.81 | 5,070 | 1.16 | 0.90 | (f) | 1.00 | 137 | ||||||||||||||||||||||
— | 18.10 | (2.39 | ) | 7,788 | 1.90 | 0.83 | (f) | 0.88 | 144 |
See accompanying Notes to Financial Statements. | 61 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the six month period ended March 31, 2014 (unaudited) and the years or periods ended September 30
Selected data for a share outstanding throughout each period is as follows:
Income (Loss) from Investment Operations | Less Distributions From | |||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss)(a) | Net Realized and Unrealized Gain (Loss) on Investments | Total from Operations | Net Investment Income | Net Realized Gains | Return of Capital | Total Distributions | |||||||||||||||||||||||||
Highland Tax-Exempt Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 11.64 | $ | 0.17 | $ | 0.16 | $ | 0.33 | $ | (0.16 | ) | $ | — | $ | — | $ | (0.16 | ) | ||||||||||||||
2013 | 12.34 | 0.31 | (0.70 | ) | (0.39 | ) | (0.31 | ) | — | — | (0.31 | ) | ||||||||||||||||||||
2012 | 11.86 | 0.32 | 0.48 | 0.80 | (0.32 | ) | — | — | (0.32 | ) | ||||||||||||||||||||||
2011 | 11.97 | 0.34 | (0.11 | ) | 0.23 | (0.34 | ) | — | — | (0.34 | ) | |||||||||||||||||||||
2010 | 11.79 | 0.41 | 0.18 | 0.59 | (0.41 | ) | — | — | (0.41 | ) | ||||||||||||||||||||||
2009 | 10.90 | 0.41 | 0.88 | 1.29 | (0.40 | ) | — | — | (0.40 | ) | ||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 11.63 | $ | 0.12 | $ | 0.17 | $ | 0.29 | $ | (0.12 | ) | $ | — | $ | — | $ | (0.12 | ) | ||||||||||||||
2013 | 12.33 | 0.22 | (0.71 | ) | (0.49 | ) | (0.21 | ) | — | — | (0.21 | ) | ||||||||||||||||||||
2012 | 11.86 | 0.23 | 0.47 | 0.70 | (0.23 | ) | — | — | (0.23 | ) | ||||||||||||||||||||||
2011 | 11.96 | 0.26 | (0.10 | ) | 0.16 | (0.26 | ) | — | — | (0.26 | ) | |||||||||||||||||||||
2010 | 11.78 | 0.33 | 0.17 | 0.50 | (0.32 | ) | — | — | (0.32 | ) | ||||||||||||||||||||||
2009 | 10.89 | 0.31 | 0.90 | 1.21 | (0.32 | ) | — | — | (0.32 | ) | ||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.58 | $ | 0.20 | $ | 0.18 | $ | 0.38 | $ | (0.19 | ) | $ | — | $ | — | $ | (0.19 | ) | ||||||||||||||
2013 | 13.34 | 0.36 | (0.76 | ) | (0.40 | ) | (0.36 | ) | — | — | (0.36 | ) | ||||||||||||||||||||
2012 | 12.83 | 0.37 | 0.51 | 0.88 | (0.37 | ) | — | — | (0.37 | ) | ||||||||||||||||||||||
2011 | 12.93 | 0.40 | (0.11 | ) | 0.29 | (0.39 | ) | — | — | (0.39 | ) | |||||||||||||||||||||
2010 | 12.74 | 0.48 | 0.19 | 0.67 | (0.48 | ) | — | — | (0.48 | ) | ||||||||||||||||||||||
2009 | 11.78 | 0.45 | 0.97 | 1.42 | (0.46 | ) | — | — | (0.46 | ) | ||||||||||||||||||||||
Highland Fixed Income Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.61 | $ | 0.13 | $ | 0.13 | $ | 0.26 | $ | (0.13 | ) | $ | — | $ | — | $ | (0.13 | ) | ||||||||||||||
2013 | 13.04 | 0.17 | (0.41 | ) | (0.24 | ) | (0.17 | ) | — | (0.02 | ) | (0.19 | ) | |||||||||||||||||||
2012 | 12.54 | 0.20 | 0.59 | 0.79 | (0.27 | ) | — | (0.02 | ) | (0.29 | ) | |||||||||||||||||||||
2011 | 12.26 | 0.37 | 0.31 | 0.68 | (0.40 | ) | — | — | (0.40 | ) | ||||||||||||||||||||||
2010 | 11.71 | 0.36 | 0.63 | 0.99 | (0.44 | ) | — | — | (0.44 | ) | ||||||||||||||||||||||
2009 | 11.44 | 0.44 | 0.26 | 0.70 | (0.43 | ) | — | — | (0.43 | ) | ||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.62 | $ | 0.08 | $ | 0.14 | $ | 0.22 | $ | (0.09 | ) | $ | — | $ | — | $ | (0.09 | ) | ||||||||||||||
2013 | 13.06 | 0.07 | (0.42 | ) | (0.35 | ) | (0.07 | ) | — | (0.02 | ) | (0.09 | ) | |||||||||||||||||||
2012 | 12.56 | 0.10 | 0.59 | 0.69 | (0.17 | ) | — | (0.02 | ) | (0.19 | ) | |||||||||||||||||||||
2011 | 12.27 | 0.27 | 0.33 | 0.60 | (0.31 | ) | — | — | (0.31 | ) | ||||||||||||||||||||||
2010 | 11.72 | 0.27 | 0.63 | 0.90 | (0.35 | ) | — | — | (0.35 | ) | ||||||||||||||||||||||
2009 | 11.46 | 0.35 | 0.26 | 0.61 | (0.35 | ) | — | — | (0.35 | ) | ||||||||||||||||||||||
Class R | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.61 | $ | 0.12 | $ | 0.13 | $ | 0.25 | $ | (0.12 | ) | $ | — | $ | — | $ | (0.12 | ) | ||||||||||||||
2013 | 13.05 | 0.14 | (0.42 | ) | (0.28 | ) | (0.14 | ) | — | (0.02 | ) | (0.16 | ) | |||||||||||||||||||
2012 | 12.55 | 0.16 | 0.59 | 0.75 | (0.23 | ) | — | (0.02 | ) | (0.25 | ) | |||||||||||||||||||||
2011 | 12.26 | 0.33 | 0.34 | 0.67 | (0.38 | ) | — | — | (0.38 | ) | ||||||||||||||||||||||
2010 | 11.71 | 0.33 | 0.63 | 0.96 | (0.41 | ) | — | — | (0.41 | ) | ||||||||||||||||||||||
2009 | 11.45 | 0.41 | 0.25 | 0.66 | (0.40 | ) | — | — | (0.40 | ) |
62 | See accompanying Notes to Financial Statements. |
Table of Contents
Ratios and Supplemental Data | ||||||||||||||||||||||||||||||
Redemptions Fees | Net Asset Value, End of Period | Total Return(b) | Net Assets, End of Period (000) | Net Investment Income/ (Loss)(c) | Net Expenses(c) | Gross Expenses(c) | Portfolio Turnover Rate | |||||||||||||||||||||||
$— | $ | 11.81 | 2.92 | %(e) | $ | 27,957 | 2.87 | % | 0.96 | % | 0.96 | % | 13 | %(e) | ||||||||||||||||
— | 11.64 | (3.26 | ) | 30,390 | 2.53 | 1.12 | 1.13 | 16 | ||||||||||||||||||||||
— | 12.34 | 6.79 | 33,747 | 2.62 | 1.14 | 1.18 | 26 | |||||||||||||||||||||||
— | 11.86 | 2.06 | 36,024 | 2.97 | 1.15 | (f) | 1.18 | 40 | ||||||||||||||||||||||
— | 11.97 | 5.14 | 40,049 | 3.49 | 0.86 | (f) | 0.63 | 28 | ||||||||||||||||||||||
— | 11.79 | 12.09 | 36,260 | 3.58 | 0.86 | (f) | 1.14 | 24 | ||||||||||||||||||||||
$— | $ | 11.80 | 2.54 | %(e) | $ | 923 | 2.13 | % | 1.72 | % | 1.72 | % | 13 | %(e) | ||||||||||||||||
— | 11.63 | (3.98 | ) | 1,000 | 1.77 | 1.87 | 1.88 | 16 | ||||||||||||||||||||||
— | 12.33 | 5.93 | 1,728 | 1.87 | 1.89 | 1.93 | 26 | |||||||||||||||||||||||
— | 11.86 | 1.39 | 1,675 | 2.22 | 1.90 | (f) | 1.93 | 40 | ||||||||||||||||||||||
— | 11.96 | 4.33 | 2,699 | 2.68 | 1.60 | (f) | 1.24 | 28 | ||||||||||||||||||||||
— | 11.78 | 11.24 | 945 | 2.72 | 1.61 | (f) | 1.89 | 24 | ||||||||||||||||||||||
$— | $ | 12.77 | 3.10 | %(e) | $ | 168 | 3.11 | % | 0.71 | % | 0.71 | % | 13 | %(e) | ||||||||||||||||
— | 12.58 | (3.03 | ) | 266 | 2.78 | 0.87 | 0.87 | 16 | ||||||||||||||||||||||
— | 13.34 | 6.97 | 180 | 2.87 | 0.89 | 0.93 | 26 | |||||||||||||||||||||||
— | 12.83 | 2.39 | 179 | 3.22 | 0.90 | (f) | 0.93 | 40 | ||||||||||||||||||||||
— | 12.93 | 5.36 | 700 | 3.73 | 0.61 | (f) | 0.30 | 28 | ||||||||||||||||||||||
— | 12.74 | 12.34 | 507 | 3.63 | 0.61 | (f) | 0.71 | 24 | ||||||||||||||||||||||
$— | $ | 12.74 | 2.13 | %(e) | $ | 152,521 | 2.08 | % | 0.93 | % | 0.93 | % | 181 | %(e) | ||||||||||||||||
— | 12.61 | (1.92 | ) | 161,673 | 1.32 | 1.04 | 1.04 | 456 | ||||||||||||||||||||||
— | 13.04 | 6.35 | 202,060 | 1.59 | 1.13 | 1.14 | 350 | |||||||||||||||||||||||
— | 12.54 | 5.78 | 94,079 | 2.97 | 0.90 | (f) | 0.91 | 392 | ||||||||||||||||||||||
— | 12.26 | 8.65 | 98,741 | 3.02 | 0.91 | (f) | 0.99 | 342 | ||||||||||||||||||||||
— | 11.71 | 6.36 | 103,525 | 3.90 | 0.85 | (f) | 0.88 | 341 | ||||||||||||||||||||||
$— | $ | 12.75 | 1.75 | %(e) | $ | 2,724 | 1.34 | % | 1.68 | % | 1.68 | % | 181 | %(e) | ||||||||||||||||
— | 12.62 | (2.57 | ) | 3,098 | 0.57 | 1.79 | 1.79 | 456 | ||||||||||||||||||||||
— | 13.06 | 5.48 | 5,051 | 0.84 | 1.88 | 1.89 | 350 | |||||||||||||||||||||||
— | 12.56 | 4.99 | 846 | 2.22 | 1.65 | (f) | 1.66 | 392 | ||||||||||||||||||||||
— | 12.27 | 7.93 | 933 | 2.25 | 1.66 | (f) | 1.74 | 342 | ||||||||||||||||||||||
— | 11.72 | 5.47 | 915 | 3.12 | 1.60 | (f) | 1.63 | 341 | ||||||||||||||||||||||
$— | $ | 12.74 | 2.07 | %(e) | $ | 2 | 1.90 | % | 1.05 | % | 1.05 | % | 181 | %(e) | ||||||||||||||||
— | 12.61 | (2.14 | ) | 2 | 1.12 | 1.22 | 1.22 | 456 | ||||||||||||||||||||||
— | 13.05 | 6.05 | 2 | 1.34 | 1.38 | 1.39 | 350 | |||||||||||||||||||||||
— | 12.55 | 5.60 | 1 | 2.72 | 1.15 | (f) | 1.16 | 392 | ||||||||||||||||||||||
— | 12.26 | 8.37 | 11 | 2.73 | 1.17 | (f) | 1.25 | 342 | ||||||||||||||||||||||
— | 11.71 | 5.99 | 10 | 3.61 | 1.10 | (f) | 1.13 | 341 |
See accompanying Notes to Financial Statements. | 63 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the six month period ended March 31, 2014 (unaudited) and the years or periods ended September 30
Selected data for a share outstanding throughout each period is as follows:
Income (Loss) from Investment Operations | Less Distributions From | |||||||||||||||||||||||||||||||
Net Asset Value, Beginning of Period | Net Investment Income (Loss)(a) | Net Realized and Unrealized Gain (Loss) on Investments | Total from Operations | Net Investment Income | Net Realized Gains | Return of Capital | Total Distributions | |||||||||||||||||||||||||
Highland Fixed Income Fund (continued) |
| |||||||||||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2014(d) | $ | 12.60 | $ | 0.15 | $ | 0.13 | $ | 0.28 | $ | (0.15 | ) | $ | — | $ | — | $ | (0.15 | ) | ||||||||||||||
2013 | 13.03 | 0.16 | (0.37 | ) | (0.21 | ) | (0.20 | ) | — | (0.02 | ) | (0.22 | ) | |||||||||||||||||||
2012 | 12.52 | 0.23 | 0.60 | 0.83 | (0.29 | ) | — | (0.03 | ) | (0.32 | ) | |||||||||||||||||||||
2011 | 12.24 | 0.40 | 0.31 | 0.71 | (0.43 | ) | — | — | (0.43 | ) | ||||||||||||||||||||||
2010 | 11.70 | 0.33 | 0.68 | 1.01 | (0.47 | ) | — | — | (0.47 | ) | ||||||||||||||||||||||
2009 | 11.43 | 0.46 | 0.27 | 0.73 | (0.46 | ) | — | — | (0.46 | ) |
(a) | Net investment income per share is based on average shares outstanding during the period. |
(b) | Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower. |
(c) | The ratios for periods of less than one full year are annualized. |
(d) | Unaudited. |
(e) | Not annualized. |
(f) | Includes waiver of management fee with respect to the Fund’s investment in the Pyxis Money Market Fund II. |
(g) | Less than $0.005 per share or less than 0.005%. |
(h) | Class A commenced operations on November 23, 2011, Class C commenced operations on November 15, 2011 and Class Y commenced operations on November 14, 2011. |
64 | See accompanying Notes to Financial Statements. |
Table of Contents
Ratios and Supplemental Data | ||||||||||||||||||||||||||||||
Redemptions Fees | Net Asset Value, End of Period | Total Return(b) | Net Assets, End of Period (000) | Net Investment Income/ (Loss)(c) | Net Expenses(c) | Gross Expenses(c) | Portfolio Turnover Rate | |||||||||||||||||||||||
$— | $ | 12.73 | 2.26 | %(e) | $ | 152 | 2.34 | % | 0.68 | % | 0.68 | % | 181 | %(e) | ||||||||||||||||
— | 12.60 | (1.60 | ) | 159 | 1.27 | 0.79 | 0.79 | 456 | ||||||||||||||||||||||
— | 13.03 | 6.62 | 1,571 | 1.84 | 0.88 | 0.89 | 350 | |||||||||||||||||||||||
— | 12.52 | 6.04 | 1,072 | 3.22 | 0.65 | (f) | 0.66 | 392 | ||||||||||||||||||||||
— | 12.24 | 8.81 | 2,686 | 3.36 | 0.67 | (f) | 0.75 | 342 | ||||||||||||||||||||||
— | 11.70 | 6.63 | 8,545 | 4.15 | 0.60 | (f) | 0.63 | 341 |
See accompanying Notes to Financial Statements. | 65 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited)
March 31, 2014 | Highland Funds II |
Note 1. Organization
Highland Funds II (the “Trust”) is a Massachusetts business trust organized on August 10, 1992. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. It comprises thirteen portfolios (each a “Fund” and collectively the “Funds”), although only the following eight are currently being offered: Highland Global Allocation Fund (the “Global Allocation Fund”), Highland Dividend Equity Fund (the “Dividend Equity Fund”), Highland Premier Growth Equity Fund (the “Premier Growth Equity Fund”), Highland Small-Cap Equity Fund (the “Small-Cap Equity Fund”), Highland Total Return Fund (the “Total Return Fund”), Highland Tax-Exempt Fund (the “Tax-Exempt Fund”), and Highland Fixed Income Fund (the “Fixed Income Fund”). The Highland Energy MLP (Master Limited Partnership) Fund is reported separately. The Alpha Trend Strategies fund liquidated on October 31, 2013. The Trend Following Fund liquidated on January 24, 2014. The Alternative Income Fund was sold on January 24, 2014.
Fund Shares
Each Fund is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share (each a “Share” and collectively, the “Shares”). Each fund (other than the Dividend Equity Fund and the Tax-Exempt Fund) currently offers four share classes to investors, namely Class A, Class C, Class R and Class Y Shares. The Dividend Equity Fund currently offers four share classes to investors but has only sold three, namely Class A, Class C and Class Y shares. The Tax-Exempt Fund currently offers three share classes to investors, namely Class A, Class C and Class Y Shares. As of January 29, 2007, Class B Shares were closed to new investments for all Funds that offered Class B Shares. Class B Shares liquidated on January 31, 2014.
Class A Shares are sold with a front-end sales charge. Maximum sales load imposed on purchases of Class A Shares (as a percentage of offering price) is as follows:
Fund | % | |||
Global Allocation Fund | 5.75 | |||
Dividend Equity Fund | 5.75 | |||
Premier Growth Equity Fund | 5.75 | |||
Small-Cap Equity Fund | 5.75 | |||
Total Return Fund | 5.75 | |||
Tax-Exempt Fund | 4.25 | |||
Fixed Income Fund | 4.25 |
There is no front-end sales charge imposed on individual purchases of Class A Shares of $1 million or more. The front-end sales charge is also waived in other instances as described in the Funds’ prospectuses. Purchases of
$1 million or more of Class A Shares at net asset value are subject to a 0.50% contingent deferred sales charge (“CDSC”) if redeemed within one year of purchase.
The maximum CDSC imposed on redemptions of Class C Shares for all Funds is 1.00% within the first year of purchase and 0.00% thereafter.
No front-end or CDSCs are assessed by the Trust with respect to Class R and Class Y Shares of all Funds.
Note 2. Significant Accounting Policies
The following summarizes the significant accounting policies consistently followed by the Funds in the preparation of their financial statements.
Offering Costs
Costs of $109,695 incurred in connection with the offering of the Dividend Equity Fund were capitalized and amortized on a straight-line basis over twelve months based on the commencement date of the Fund, November 14, 2011.
Use of Estimates
The Funds’ financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Securities Valuation
The Funds utilize various methods to measure the fair value of most of its investments on a recurring basis. GAAP establishes a framework for measuring fair value and providing related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.
66 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 — | Quoted prices for identical investments in active markets. |
Level 2 — | Quoted prices for similar investments in active markets; quoted prices for identical or similar investments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
Level 3 — | Significant inputs to the valuation model are unobservable. |
Policies and procedures are maintained to value investments using the best and most relevant data available. In addition, pricing vendors are utilized to assist in valuing investments. Highland Capital Management Fund Advisors, L.P., (the “Investment Adviser” or “Highland”) performs periodic reviews of the methodologies used by independent pricing services including price validation of individual securities.
Fair Value Measurement
The following section describes the valuation methodologies the Funds use to measure different financial investments at fair value.
A Fund’s portfolio securities are valued generally on the basis of market quotations. Equity securities generally are valued at the last reported sales price on the primary market in which they are traded. Portfolio securities listed on National Association of Securities Dealers Automated Quotation (‘‘NASDAQ”) are valued using the NASDAQ Official Closing Price; Level 1 securities primarily include publicly-traded equity securities which may not necessarily represent the last sale price. If no sales occurred on the exchange or NASDAQ that day, the portfolio security will be valued at the mean between the most recently quoted bid and asked prices produced by the principal market makers. In those circumstances the Fund classifies the investment securities in Level 2.
Debt securities (other than short-term securities described below) generally are valued at an evaluated bid as reported by an independent pricing service. Municipal obligations are valued at the quoted bid prices when available. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from
market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, government, mortgage and asset-backed securities.
In the absence of a reliable price from such a pricing service, debt securities may be valued based on dealer supplied valuations or quotations. In these infrequent circumstances, pricing vendors may provide the Funds with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.
The Funds use non-binding broker quotes as the primary basis for valuation when there is limited, or no, relevant market activity for a specific investment or for other investments that share similar characteristics. The Funds have not adjusted the prices obtained. Investment securities priced using broker quotes are included in Level 2. As is the case with the primary pricing vendor, third-party brokers do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, Highland conducts internal reviews of pricing for all such investment securities periodically to ensure reasonableness of valuations used in the Funds’ financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, Highland believes that the fair values provided by the brokers are representative of prices that would be received to sell the assets at the measurement date (exit prices).
Short-term securities of sufficient credit quality with remaining maturities of sixty days or less at the time of purchase are valued on the basis of amortized cost which approximates market value and these are included in Level 2.
Written or purchased options are valued at the last sales price, or if no sales occurred that day, at the last reported bid price and those are also included in Level 2.
Semi-Annual Report | 67 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
If prices are not readily available for a portfolio security, or if it is believed that a price for a portfolio security does not represent its fair value, the security may be valued using procedures approved by the Funds’ Board of Trustees that are designed to establish its “fair” value. These securities would be classified in Level 3. Those procedures require that the fair value of a security be established by the fair valuation committee. The fair valuation committee follows different protocols for different types of investments and circumstances. The fair value procedures may be used to value any investment of any Fund in the appropriate circumstances.
Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security’s primary market and before the close of regular trading on the New York Stock Exchange (“NYSE”). In these circumstances the Fund classifies the investment securities in Level 2. This independent fair value pricing service uses a model to identify affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price.
Portfolio securities may be valued using techniques other than market quotations, under the circumstances described above. The value established for a portfolio security may be different than what would be produced through the use of another methodology or if it had been priced using market quotations. Portfolio securities that are valued using techniques other than market quotations, including “fair valued” securities, may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that the Funds could sell a portfolio security for the value established for it at any time and it is possible that the Funds would incur a loss because a portfolio security is sold at a discount to its established value.
Other financial investments are derivative instruments that are not reflected in Total Investments, such as futures, forwards, swaps, and written options contracts, which are valued based on fair value as discussed above.
The Funds use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts. Derivative assets and liabilities included in Level 3 primarily represent interest
rate products that contain embedded optionality or prepayment features.
Fair value determinations are required for securities whose value is affected by a significant event that will materially affect the value of a domestic or foreign security and which occurs subsequent to the time of the close of the principal market on which such domestic or foreign security trades but prior to the calculation of the Fund’s net asset value (“NAV”).
At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
68 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at the value at the beginning of the period. A summary of the inputs used to value each Fund’s assets as of March 31, 2014 is as follows:
Total value at March 31, 2014 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Global Allocation Fund | ||||||||||||||||
Assets | ||||||||||||||||
U.S. Senior Loans(1) | $ | 8,437,398 | $ | — | $ | 6,095,845 | $ | 2,341,553 | ||||||||
Non-U.S. Senior Loans(1) | 21,442,993 | — | 21,442,993 | |||||||||||||
Non-U.S. Asset-Backed Securities | 28,419,583 | — | 28,419,583 | — | ||||||||||||
U.S. Convertible Bonds(1) | 1,006,875 | — | 1,006,875 | — | ||||||||||||
U.S. Corporate Bonds & Notes(1) | 3,342,773 | — | 3,342,773 | — | ||||||||||||
Non-U.S. Corporate Bonds & Notes(1) | 12,488,172 | — | 12,488,172 | — | ||||||||||||
U.S. Equity(1) | 95,884,002 | 95,884,002 | — | — | ||||||||||||
Non-U.S. Equity(1) | 94,251,175 | 94,251,175 | — | — | ||||||||||||
U.S. Exchange-Traded Funds | 2,344,400 | 2,344,400 | — | — | ||||||||||||
Non-U.S. Exchange-Traded Funds | 13,680,945 | 13,680,945 | — | — | ||||||||||||
U.S. Rights(1) | 8,456,408 | — | 8,456,408 | — | ||||||||||||
Investment Companies | 75,650,084 | 75,650,084 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 365,404,808 | $ | 281,810,606 | $ | 81,252,649 | $ | 2,341,553 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Dividend Equity Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 22,495,491 | $ | 22,495,491 | $ | — | $ | — | ||||||||
Exchange-Traded Funds | 574,518 | 574,518 | — | — | ||||||||||||
Investment Companies | 6,577,052 | 6,577,052 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 29,647,061 | $ | 29,647,061 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Premier Growth Equity Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 194,963,641 | $ | 194,963,641 | $ | — | $ | — | ||||||||
Investment Companies | 1,393,326 | 1,393,326 | — | — | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Equity Contracts — Futures(2) | 16,240 | 16,240 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 196,373,207 | $ | 196,373,207 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Small-Cap Equity Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 42,298,033 | $ | 42,298,033 | $ | — | $ | — | ||||||||
Investment Companies | 12,005,885 | 12,005,885 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 54,303,918 | $ | 54,303,918 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
Semi-Annual Report | 69 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Total value at March 31, 2014 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Total Return Fund | ||||||||||||||||
Assets | ||||||||||||||||
Agency Collateralized Mortgage Obligations | $ | 104,439 | $ | — | $ | 104,439 | $ | — | ||||||||
Agency Mortgage-Backed Securities | 6,300,485 | — | 6,300,485 | — | ||||||||||||
Asset-Backed Securities | 10,034 | — | 10,034 | — | ||||||||||||
Corporate Bonds & Notes(1) | 5,536,624 | — | 5,536,624 | — | ||||||||||||
Foreign Corporate Bonds & Notes(1) | 2,092,063 | — | 2,092,063 | — | ||||||||||||
Municipal Bonds & Notes(1) | 168,872 | — | 168,872 | — | ||||||||||||
Non-Agency Collateralized Mortgage Obligations | 125,224 | — | 125,224 | — | ||||||||||||
Non-Agency Collateralized Mortgage-Backed Securities | 1,137,342 | — | 1,137,342 | — | ||||||||||||
Sovereign Bonds | 195,456 | — | 195,456 | — | ||||||||||||
U.S. Treasuries | 6,992,083 | — | 6,992,083 | — | ||||||||||||
Domestic Equity(1) | 24,491,364 | 24,467,778 | 23,586 | — | ||||||||||||
Foreign Equity(1) | 19,334,601 | 19,334,601 | — | — | ||||||||||||
Exchange-Traded Funds | 2,726,051 | 2,726,051 | ||||||||||||||
Investment Companies | 15,614,184 | 15,614,184 | — | — | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Equity Contracts — Futures(2) | 14,714 | 14,714 | — | — | ||||||||||||
Interest Rate Contracts — Futures(2) | 21,162 | 21,162 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Assets | 84,864,698 | 62,178,490 | 22,686,208 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Other Financial Instruments | ||||||||||||||||
Equity Contracts — Futures(2) | (2,049 | ) | (2,049 | ) | — | — | ||||||||||
Interest Rate Contracts — Futures(2) | (20,090 | ) | (20,090 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Liabilities | (22,139 | ) | (22,139 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 84,842,559 | $ | 62,156,351 | $ | 22,686,208 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Tax-Exempt Fund | ||||||||||||||||
Assets | ||||||||||||||||
Municipal Bonds & Notes | $ | 29,034,748 | $ | — | $ | 29,034,748 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 29,034,748 | $ | — | $ | 29,034,748 | $ | — | ||||||||
|
|
|
|
|
|
|
|
70 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Total value at March 31, 2014 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Fixed Income Fund | ||||||||||||||||
Assets | ||||||||||||||||
Agency Collateralized Mortgage Obligations | $ | 817,420 | $ | — | $ | 817,420 | $ | — | ||||||||
Agency Mortgage-Backed Securities | 43,751,641 | — | 43,751,641 | — | ||||||||||||
Asset-Backed Securities | 1,936,094 | — | 1,936,094 | — | ||||||||||||
Corporate Bonds & Notes(1) | 35,760,745 | — | 35,760,745 | — | ||||||||||||
Foreign Corporate Bonds & Notes(1) | 14,205,462 | — | 14,205,462 | — | ||||||||||||
Municipal Bonds & Notes | 867,851 | — | 867,851 | — | ||||||||||||
Non-Agency Collateralized Mortgage Obligations | 1,075,163 | — | 1,075,163 | — | ||||||||||||
Non-Agency Collateralized Mortgage-Backed Securities | 7,492,375 | — | 7,492,375 | — | ||||||||||||
Sovereign Bonds | 2,999,870 | — | 2,999,870 | — | ||||||||||||
U.S. Treasuries | 43,807,882 | — | 43,807,882 | — | ||||||||||||
Domestic Equity(1) | 163,856 | — | 163,856 | — | ||||||||||||
Investment Companies | 13,844,728 | 13,844,728 | — | — | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Interest Rate Contracts — Futures(2) | 109,509 | 109,509 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Assets | 166,832,596 | 13,954,237 | 152,878,359 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Other Financial Instruments | ||||||||||||||||
Interest Rate Contracts — Futures(2) | (79,590 | ) | (79,590 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Liabilities | (79,590 | ) | (79,590 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 166,753,006 | $ | 13,874,647 | $ | 152,878,359 | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
(2) | Includes cumulative unrealized appreciation/(depreciation) of future contracts as reported in the Investment Portfolio. |
Certain foreign securities are fair valued by utilizing an external pricing service in the event of any significant market movements between the time the series valued such foreign securities and the earlier closing of foreign markets. Such fair valuations are categorized as Level 2 in the hierarchy.
There were no transfers between Levels 1, 2, or 3 during the period ended March 31, 2014.
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of identified cost for both financial statement and U.S. federal income tax purposes.
Each Fund’s income, expenses (other than distribution fees and shareholder service fees) and realized and unrealized gains and losses are allocated proportionally each day among each Fund’s respective share classes based upon the relative net assets of each class share.
Income Recognition
Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding
taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis.
Accretion of discount and amortization of premium on taxable bonds are computed to the call or maturity date, whichever is shorter, using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable country’s tax rules and rates.
Expenses
Fund specific expenses are allocated to the Fund that incurs such expense and pro rata across share classes. Expenses, other than those incurred by a specific Fund, are allocated pro rata among Funds and share classes. Such expenses may include custodial fees, legal and accounting fees, printing costs and registration fees. Certain class specific expenses (such as distribution and shareholder service fees) are allocated to the class that incurs such expense.
Semi-Annual Report | 71 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Short-Term Trading (Redemption) Fees
Shares held in the Dividend Equity Fund less than 60 days are subject to a short-term trading fee equal to 2.00% of the proceeds of the redeemed shares. These fees, which are retained by the Fund, are accounted for as an addition to paid-in capital. For the period ended March 31, 2014, the redemption fee amount for Class A, Class C and Class Y Shares was $33, $18 and $119, respectively. Effective October 17, 2013, the short-term trading fee was eliminated.
U.S. Federal Income Tax Status
Each Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The funds intend to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and will distribute substantially all of its taxable income and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Funds intend to distribute, in each calendar year, all of their net investment income, capital gains and certain other amounts, if any, such that the Funds should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.
Management has analyzed the Funds’ tax positions taken on U.S. federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Funds’ financial statements. The Funds’ U.S. federal and state income and U.S. federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Distributions to Shareholders
The Tax-Exempt Fund and Fixed Income Fund declare investment income dividends daily and pay them monthly. The Dividend Equity Fund declares and pays investment income dividends monthly. The Global Allocation Fund declares and pays investment income dividends quarterly. All other Funds declare and pay dividends from investment income annually. All Funds declare and pay distributions from net realized capital gains in excess of capital loss carryforwards annually.
Cash & Cash Equivalents
The Funds consider liquid assets deposited with a bank and certain short term debt instruments with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market
value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities.
Foreign Currency
Accounting records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
Securities Sold Short
The Funds may sell securities short. A security sold short is a transaction in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. When a Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. A Fund may have to pay a fee to borrow particular securities and is often obligated to pay any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Statement of Assets and Liabilities. Cash in the amount of $3,356,862 was held at the prime broker for the Global Allocation Fund. The Global Allocation Fund entered into short sale transactions during the year; however, none were open as of March 31, 2014.
When-Issued Securities & Forward Commitments
The Funds may purchase or sell securities on a when-issued or forward commitment basis. These transactions are arrangements in which the Funds purchase and sell securities with payment and delivery scheduled a month or more after entering into the transactions. The price of the underlying securities and the date when these securities will be delivered and paid for are fixed at the time the transaction is negotiated. Losses may arise due to changes
72 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
in the market value of the underlying securities or if the counterparty does not perform under the contract. In connection with such purchases, the Funds maintain cash or liquid assets in an amount equal to purchase commitments for such underlying securities until settlement date. For sales commitments, the Funds maintain equivalent deliverable securities as “cover” for the transaction. Unsettled commitments are valued at current market value of the underlying security. Daily fluctuations in the value of such contracts are recorded as unrealized gains or losses. The Funds will not enter into such commitments for the purpose of investment leverage. As of March 31, 2014, the Total Return Fund and the Fixed Income Fund each held securities on a when-issued basis. These securities are detailed in each Fund’s Investment Portfolio.
Note 3. Derivative Transactions
The Funds are subject to equity price risk, interest rate risk and foreign currency exchange rate risk in the normal course of pursuing their investment objectives. The Funds enter into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions, and for managing the duration of fixed income investments.
Futures Contracts
A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Certain Funds invest in interest rate, financial and stock or bond index futures contracts subject to certain limitations. The Funds invest in futures contracts to manage their exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase a Fund’s exposure to the underlying instrument while selling futures tends to decrease a Fund’s exposure to the underlying instrument, or economically hedge other Fund investments. With futures contracts, there is minimal counterparty credit risk to the Funds since futures contracts are exchange-traded and the exchange’s clearinghouse, as counterparty to all traded futures, guarantees the futures against default. A Fund will not enter into a transaction involving futures for speculative purposes. A Fund’s risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade.
Upon entering into a financial futures contract, the Funds are required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margins, are made or received by the Funds each day, depending on the daily fluctuation in the fair value of the underlying security. The Funds record an unrealized gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Funds may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Funds recognize a realized gain or loss on the expiration or closing of a futures contract. For the period ended March 31, 2014, the Premier Growth Equity Fund, Total Return Fund and Fixed Income Fund held futures contracts as detailed in each fund’s Investment Portfolio. These funds entered into futures transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions, and for managing the duration of fixed-income investments. Cash held as collateral for futures contracts is shown on the Statement of Assets and Liabilities as “Restricted Cash — Futures.” No funds held securities collateral for futures contracts as of March 31, 2014.
Additional Derivative Information
The Funds adopted amendments to authoritative guidance on disclosures about derivative instruments and hedging activities which require that the Funds disclose: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.
The fair value of derivative instruments on the Statement of Assets and Liabilities have the following risk exposure at March 31, 2014.
Fair Value | ||||||||
Fund | Asset Derivative(1)(2) | Liability Derivative(2) | ||||||
Premier Growth Equity Fund | ||||||||
Equity Contracts | $ | 16,240 | $ | — | ||||
Total Return Fund | ||||||||
Equity Contracts | 14,714 | (2,049 | ) | |||||
Interest Rate Contracts | 21,162 | (20,090 | ) | |||||
Fixed Income Fund | ||||||||
Interest Rate Contracts | 109,509 | (79,590 | ) |
(1) | Statement of Assets and Liabilities location: Variation margin receivable. |
(2) | Includes cumulative unrealized appreciation/(depreciation) of futures contracts as reported in the Investment Portfolio and within the components of the net assets section of the Statement of Assets and Liabilities. Only the current day’s variation margin is reported within the receivables and/or payables of the Statements of Assets and Liabilities. |
Semi-Annual Report | 73 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
The effect of derivative instruments on the Statement of Operations for the period ended March 31, 2014, is as follows:
Fund | Net Realized Gain (Loss) on Derivatives(1) | Net Change in Unrealized Appreciation/ (Depreciation) on Derivatives(2) | ||||||
Premier Growth Equity Fund | ||||||||
Equity Contracts | $ | 131,303 | $ | 39,952 | ||||
Total Return Fund | ||||||||
Equity Contracts | 351,281 | 4,790 | ||||||
Interest Rate Contracts | (57,184 | ) | 35,902 | |||||
Fixed Income Fund | ||||||||
Interest Rate Contracts | (401,793 | ) | 267,041 |
(1) | Statement of Operations location: Net realized gain (loss) on future contracts. |
(2) | Statement of Operations location: Net change in unrealized appreciation (depreciation) on future contracts. |
For the period ended March 31, 2014, each Fund’s average volume of derivatives is as follows:
Fund | Average Notional Volume Six Months Ended 03/31/2014 | As of 03/31/2014 Notional | ||||||
Long Futures: | ||||||||
Global Allocation Fund | $ | 1,187,652 | $ | — | ||||
Premier Growth Equity Fund | 2,553,815 | 2,144,290 | ||||||
Total Return Fund | 8,098,017 | 8,747,229 | ||||||
Fixed Income Fund | 25,649,347 | 28,699,890 | ||||||
Short Futures: | ||||||||
Total Return Fund | 5,068,105 | 4,986,313 | ||||||
Fixed Income Fund | 28,255,437 | 23,908,656 |
Note 4. Securities Lending
Each Fund may make secured loans of its portfolio securities amounting to not more than one-third of the value of its total assets, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delays in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially and possible investment losses in the investment of collateral. Pursuant to the Fund’s securities lending policies, securities loans are made to unaffiliated broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral in cash or short-term debt obligations at least equal at all times to the value of the securities subject to the loan. The borrower pays to a Fund an amount equal to any interest or dividends received on securities subject to the loan. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower.
Securities lending transactions are entered into Securities Lending Authorization Agreements (“SLAA”), which provides the right, in the event of default (including bankruptcy or insolvency) for the non-defaulting party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional collateral. In the event that a borrower defaults, the Fund, as lender, would offset the market value of the collateral received against the market value of the securities loaned. The value of the collateral is typically greater than that of the market value of the securities loaned, leaving the lender with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of a SLAA counterparty’s bankruptcy or insolvency. Under the SLAA, the Fund can reinvest cash collateral, or, upon an event of default, resell or repledge the collateral, and the borrower can resell or repledge the loaned securities. The risks of securities lending also include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate this risk, the Fund benefits from a borrower default indemnity provided by State Street Bank and Trust Company (“State Street”). State Street’s indemnity allows for full replacement of securities lent.
The following table presents financial instruments that are subject to enforceable netting arrangements as of March 31, 2014:
Gross Amounts Not Offset in the Statement of Assets and Liabilities | ||||||||||||||||
Fund | Gross Amounts of Liabilities Presented in Statement of Assets & Liabilities(1) | Financial Instrument(2) | Collateral Received | Net Amount (not less than 0) | ||||||||||||
Global Allocation Fund | $ | 75,650,084 | $ | 78,609,260 | $ | — | $ | — | ||||||||
Dividend Equity Fund | 6,577,052 | 6,499,023 | — | 78,029 | ||||||||||||
Premier Growth Equity Fund | 1,393,326 | 1,340,785 | — | 52,541 | ||||||||||||
Small-Cap Equity Fund | 12,005,885 | 11,870,205 | — | 135,680 | ||||||||||||
Total Return Fund | 15,614,184 | 16,595,918 | — | — | ||||||||||||
Fixed Income Fund | 13,844,728 | 14,941,045 | — | — |
(1) | In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to over collateralization. |
(2) | Represents market value of securities on loan at period end. |
74 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
For the period ended March 31, 2014, the market value of securities loaned and the amounts secured with cash and securities collateral, which are included on each Fund’s Investment Portfolio were as follows:
Fund | Security Lending Market Value | Security Lending Collateral Cash Collateral (1) | Security Lending Collateral Non-Cash Collateral(2) | |||||||||
Global Allocation Fund | $ | 78,609,260 | $ | 75,650,084 | $ | 4,044,622 | ||||||
Dividend Equity Fund | 6,499,023 | 6,577,052 | — | |||||||||
Premier Growth Equity Fund | 1,340,785 | 1,393,326 | — | |||||||||
Small-Cap Equity | 11,870,205 | 12,005,885 | — | |||||||||
Total Return Fund | 16,595,918 | 15,614,184 | 1,318,582 | |||||||||
Fixed Income Fund | 14,941,045 | 13,844,728 | 1,402,960 |
(1) | The loaned securities were secured with cash collateral which was invested in the State Street Navigator Prime Securities Lending Portfolio. |
(2) | Security lending non-cash collateral consists of U.S. Government Treasury & Agency debt and Sovereign debt. |
For the period ended March 31, 2014, the Highland Tax-Exempt Fund did not participate in securities lending.
Note 5. U.S. Federal Income Tax Information
The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, foreign taxes, investments in futures, losses deferred to off-setting positions, tax treat-
ment of organizational start-up costs, losses deferred due to wash sale transactions, tax treatment of net investment loss and distributions in excess of net investment income, dividends deemed paid upon shareholder redemption of fund shares and tax attributes from fund reorganizations. Reclassifications are made to the Funds’ capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or net asset value of the Funds. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.
For the year ended September 30, 2013, permanent differences chiefly resulting from net investment losses, dividends on short sales, foreign currency gains and losses, equalization, short sale holding period reclass and REITs were identified and reclassified among the components of the Funds’ net assets as follows:
Fund | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) | Paid-in- Capital | |||||||||
Global Allocation Fund | $ | 23,857 | $ | (6,701,818 | ) | $ | 6,677,961 | |||||
Dividend Equity Fund | (8,966 | ) | 8,966 | — | ||||||||
Premier Growth Equity Fund | 7,631 | (5,870 | ) | (1,761 | ) | |||||||
Small-Cap Equity Fund | 463,304 | (463,797 | ) | 493 | ||||||||
Total Return Fund | 53,786 | (69,246 | ) | 15,460 | ||||||||
Tax-Exempt Fund | 1,055 | (1,024 | ) | (31 | ) | |||||||
Fixed Income Fund | 1,053,350 | (193,297 | ) | (860,053 | ) |
At September 30, 2013, the most recent tax year end, components of distributable earnings on a tax basis is as follows:
Fund | Undistributed Income | Undistributed Long-Term Capital Gains | Undistributed Tax-Exempt Income | Accumulated Capital and Other Losses | Net Tax Appreciation/ (Depreciation)(1) | |||||||||||||||
Global Allocation Fund | $ | 1,867,659 | $ | 1,413,007 | $ | — | $ | (7,897,966 | ) | $ | 2,776,159 | |||||||||
Dividend Equity Fund | 29,241 | 279,430 | — | — | 2,715,336 | |||||||||||||||
Premier Growth Equity Fund | — | 11,366,963 | — | (956 | ) | 59,733,024 | ||||||||||||||
Small-Cap Equity Fund | — | 2,935,294 | — | (111,383 | ) | 8,564,832 | ||||||||||||||
Total Return Fund | 686,398 | — | — | (2,877,315 | ) | 7,270,769 | ||||||||||||||
Tax-Exempt Fund | — | — | 80,522 | (540,974 | ) | 1,445,771 | ||||||||||||||
Fixed Income Fund | — | — | — | (3,375,998 | ) | (2,220,060 | ) |
(1) | Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales and other adjustments. |
Semi-Annual Report | 75 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
As of September 30, 2013, the most recent tax year end, the following Funds have capital loss carryovers as indicated below. The capital loss carryover is available to offset future realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income.
Fund | 2016 | 2017 | 2018 | 2019 | No Short-Term(1) | No Expiration Long-Term(1) | Total | |||||||||||||||||||||
Global Allocation Fund | $ | 334,502 | (2) | $ | 4,972,826 | (2) | $ | 2,590,638 | (2) | $ | — | $ | — | $ | — | $ | 7,897,966 | |||||||||||
Dividend Equity Fund | — | — | — | — | — | — | — | |||||||||||||||||||||
Premier Growth Equity Fund | — | — | — | — | — | — | — | |||||||||||||||||||||
Small-Cap Equity Fund | — | — | — | — | — | — | — | |||||||||||||||||||||
Total Return Fund | — | — | 2,877,315 | — | — | — | 2,877,315 | |||||||||||||||||||||
Tax-Exempt Fund | 44,469 | 291,901 | 97,619 | — | — | — | 433,989 | |||||||||||||||||||||
Fixed Income Fund | — | — | — | — | 1,004,284 | (3) | 2,322,204 | 3,326,488 |
(1) | Under the recently enacted Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law. |
(2) | Includes capital loss acquired due to Global Allocation Fund’s merger with U.S. Equity Fund on September 28, 2012 (See Note 10). |
(3) | Capital loss acquired due to Fixed Income Fund’s merger with Short Term Government Fund and Government Securities Fund on September 28, 2012 (See Note 10). |
During the year ended September 30, 2013, the Global Allocation Fund, the Total Return Fund, the Tax-Exempt Fund and the Premier Growth Equity Fund utilized capital carryforwards in the amount of $4,711,046, $4,651,445, $123,657 and $435,857, respectively.
The tax composition of distributions paid during the periods or years ended September 30, 2013 and September 30, 2012 (unless otherwise indicated) were as follows:
Distributions Paid From: | ||||||||||||||||
Fund | Exempt Interest | Ordinary Income(1) | Long-Term Capital Gains | Return of Capital(2) | ||||||||||||
Global Allocation Fund | ||||||||||||||||
2013 | $ | — | $ | 21,850,008 | $ | 24,058,299 | $ | — | ||||||||
2012 | — | 326,921 | — | — | ||||||||||||
Dividend Equity Fund | ||||||||||||||||
2013 | — | 267,980 | — | — | ||||||||||||
2012 | — | 155,825 | — | — | ||||||||||||
Premier Growth Equity Fund | ||||||||||||||||
2013 | — | 825,743 | — | — | ||||||||||||
2012 | — | — | — | — | ||||||||||||
Small-Cap Equity Fund | ||||||||||||||||
2013 | — | — | 2,731,468 | — | ||||||||||||
2012 | — | — | — | — |
Distributions Paid From: | ||||||||||||||||
Fund | Exempt Interest | Ordinary Income(1) | Long-Term Capital Gains | Return of Capital(2) | ||||||||||||
Total Return Fund | ||||||||||||||||
2013 | $ | — | $ | 751,663 | $ | — | $ | — | ||||||||
2012 | — | 1,063,431 | — | — | ||||||||||||
Tax-Exempt Fund | ||||||||||||||||
2013 | 837,181 | 14,865 | — | — | ||||||||||||
2012 | 954,950 | 1,882 | — | — | ||||||||||||
Fixed Income Fund | ||||||||||||||||
2013 | — | 2,436,373 | — | 235,516 | ||||||||||||
2012 | — | 1,915,462 | 8,748 | 180,400 |
(1) | For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions. |
(2) | Additional Information will be distributed on Form 1099 at the end of the calendar year. |
76 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Unrealized appreciation and depreciation at March 31, 2014, based on cost of investments for U.S. federal income tax purposes was:
Fund | Gross Appreciation | Gross Depreciation | Net Appreciation/ (Depreciation) | Cost | ||||||||||||
Global Allocation Fund | $ | 25,961,718 | $ | 8,740,726 | $ | 17,220,992 | $ | 348,183,816 | ||||||||
Dividend Equity Fund | 4,296,191 | — | 4,296,191 | 25,350,870 | ||||||||||||
Premier Growth Equity Fund | 71,389,813 | — | 71,389,813 | 124,967,154 | ||||||||||||
Small-Cap Equity Fund | 10,652,736 | 371,711 | 10,281,025 | 44,022,893 | ||||||||||||
Total Return Fund | 9,156,491 | 498,148 | 8,658,343 | 76,170,479 | ||||||||||||
Tax-Exempt Fund | 1,950,046 | 110,184 | 1,839,862 | 27,194,886 | ||||||||||||
Fixed Income Fund | 1,595,082 | 1,404,651 | 190,431 | 166,532,656 |
Under current laws, certain capital losses after October 31 may be deferred (and certain ordinary losses after January 1st may be deferred) and treated as occurring on the first day of the following fiscal year. For the fiscal year ended September 30, 2013, the Funds elected to defer the following losses incurred from November 1, 2012 through September 30, 2013:
Fund | Realized Capital Losses | Ordinary Losses | ||||||
Global Allocation Fund | $ | — | $ | — | ||||
Dividend Equity Fund | — | — | ||||||
Premier Growth Equity Fund | — | 956 | ||||||
Small-Cap Equity Fund | — | 111,383 | ||||||
Total Return Fund | — | — | ||||||
Tax-Exempt Fund | 78,148 | — | ||||||
Fixed Income Fund | — | — |
Note 6. Credit Agreement
Effective May 24, 2013, the Funds entered into a $25,000,000 unsecured credit agreement with State Street Bank and Trust Company (the “Unsecured Credit Agreement”) to be used for temporary purposes to facilitate portfolio liquidity. The Funds have access to the facility, but aggregate borrowings cannot exceed $25,000,000. Interest is charged to the Funds based on their borrowings at a rate equal to the greater of the Federal Funds Effective Rate plus 1.25% or the LIBOR plus
1.25%. In addition, the Funds agree to pay commitment fee expenses of 0.10% on the undrawn amounts, which are included in “Other” on the Statement of Operations. The Unsecured Credit Agreement is set to expire May 23, 2014. During the period ended March 31, 2014, the Funds did not have any outstanding borrowings.
Note 7. Transactions with Affiliates & Expenses Incurred by the Fund
Investment Advisory Fees and Administration Fees
Highland serves as the investment adviser to each Fund. For its investment advisory and administrative services, each Fund pays Highland a monthly fee, computed and accrued daily, based on an annual rate of the Funds’ Average Daily Managed Assets. Average Daily Managed Assets of the Fund means the average daily value of the total assets of the Fund less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).
The table below shows each Fund’s contractual advisory fee with Highland for the year ended March 31, 2014:
Fund | Annual Fee Rate to Highland | |||
Global Allocation Fund | 0.40 | % | ||
Dividend Equity Fund | 1.00 | %(1) | ||
Premier Growth Equity Fund | 0.60 | % | ||
Small-Cap Equity Fund | 0.95 | % | ||
Total Return Fund | 0.50 | % | ||
Tax-Exempt Fund | 0.35 | % | ||
Fixed Income Fund | 0.35 | % |
(1) | Highland has contractually agreed to “limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, as amended, taxes, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses) of the Fund to 1.00% of average daily net assets attributable to any class of the Fund.” |
To the extent Highland waives its fee or reimburses expenses to satisfy the contractual limitation set forth above (the “cap”), it may seek repayment of a portion or all of such amounts at any time within thirty-six months after the date the Fund accrues the liability, subject to the cap. There can be no assurance that this fee reduction will be sufficient to avoid any loss. On March 31, 2014, the amounts subject to possible future recoupment under the Dividend Equity Fund’s expense limitation are $119,384 expiring in 2015, $129,689 expiring in 2016 and $39,317 expiring in 2017.
For the Dividend Equity Fund, Highland provides administrative services for a monthly administration fee, computed
Semi-Annual Report | 77 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
and accrued daily, at an annual rate of 0.20% of the Fund’s Average Daily Managed Assets. During the period ended March 31, 2014, Highland waived $19,931 in administrative fees for the Dividend Equity Fund. This administration fee waiver is voluntary and is subject to termination at any time by Highland without notice.
Sub-Advisory Fees
The Premier Growth Equity Fund, Total Return Fund, Tax-Exempt Fund and Fixed Income Fund are sub-advised by GE Asset Management Incorporated (“GEAM”). The Dividend Equity Fund is sub-advised by Brookmont Capital Management, LLC. The Small-Cap Equity Fund is sub-advised by Palisade Capital Management, LLC (“Palisade”). Highland pays each sub-adviser an investment sub-advisory fee out of the advisory fee that it receives from the respective Fund.
Fees Paid to Officers and Trustees
Each Trustee who is not an “interested person” of the Funds as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser and its affiliated advisors as of the date of this report.
The Funds pay no compensation to their one interested Trustee or any of their officers, all of whom are employees of the Investment Adviser.
Distribution and Shareholder Service Fees
Each fund has a distribution and shareholder service plan (each a “Plan” and collectively the “Plans”) pursuant to Rule 12b-1 under the 1940 Act. The Plans require the payment of a monthly service fee to Foreside Funds Distributors LLC (the “Underwriter”) at an annual rate of 0.25% of the average daily net assets attributable to Class A, Class C and Class R shares of the Funds. In addition, the Plans also require the payment of a monthly distribution fee to the Underwriter at an annual rate of 0.10% of the average daily net assets attributable to Class A shares for the Dividend Equity Fund and the Tax-Exempt Fund. The Plans also require the payment of a monthly distribution fee to the Underwriter at an annual rate of 0.75% of the average daily net assets attributable to Class C shares and 0.25% of the average daily net assets attributable to Class R shares. Currently Class Y shares are not subject to a 12b-1 fee.
The Underwriter received $28,475 of front end sales charges from the sale of Class A shares and $8,078 in contingent deferred sales charges from the redemption of
Class C shares of the Funds. Effective April 1, 2014, Foreside Funds Distributors LLC will no longer be the underwriter for the Funds; this function will be performed by Highland Capital Fund Distributors, Inc.
Note 8. Disclosure of Significant Risks and Contingencies
The primary risks of investing in the Funds are described below in alphabetical order:
Counterparty Credit Risk
Counterparty credit risk is the potential loss the Funds may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Funds would record if its counterparties failed to perform pursuant to the terms of their obligations to the Funds. Because the Funds may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Funds may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Funds conduct business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Credit Risk
Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and/ or interest payments. Investments in high yield debt may result in greater net asset value fluctuation than if the Fund did not make such investments.
Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the NAV of the Fund.
Currency Risk
A portion of the Funds’ assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Funds’ investment performance may be negatively affected by a devaluation of a currency in which the Funds’ investments are quoted or denominated. Further, the Funds’ investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase
78 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Illiquid Securities Risk
The investments made by the Funds may be illiquid, and consequently the Funds may not be able to sell such investments at prices that reflect the Investment Adviser’s assessment of their value or the amount originally paid for such investments by the Funds. Illiquidity may result from the absence of an established market for the investments as well as legal, contractual or other restrictions on their resale and other factors. Furthermore, the nature of the Funds’ investments, especially those in financially distressed companies, may require a long holding period prior to profitability. For the period ended March 31, 2014, only the Global Allocation Fund was subject to illiquid securities risk.
Indemnification Risk
The Funds have a variety of indemnification obligations under contracts with their service providers. The Funds’ maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Investments in Foreign Markets Risk
Investments in foreign markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile.
The Funds may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.
Note 9. Investment Transactions
Purchases & Sales of Securities
The cost of purchases and the proceeds from sales of investments, other than short-term securities and short-term options, for the period ended March 31, 2014, were as follows:
U.S. Government Securities | Other Securities | |||||||||||||||
Fund | Purchases | Sales | Purchases | Sales | ||||||||||||
Global Allocation Fund | $ | — | $ | — | $ | 320,841,225 | $ | 277,615,246 | ||||||||
Dividend Equity Fund | — | — | 4,485,634 | 1,002,537 | ||||||||||||
Premier Growth Equity Fund | — | — | 18,524,995 | 16,174,670 | ||||||||||||
Small-Cap Equity Fund | — | — | 5,204,164 | 6,863,075 | ||||||||||||
Total Return Fund | 33,390,581 | 31,864,446 | 12,982,563 | 19,858,673 | ||||||||||||
Tax-Exempt Fund | — | — | 3,778,182 | 5,825,223 | ||||||||||||
Fixed Income Fund | 240,664,372 | 237,575,408 | 42,525,403 | 56,088,617 |
Semi-Annual Report | 79 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Note 10. Reorganization
On January 17, 2013, the Board of Trustees approved an agreement and plan of reorganization which provided for the transfer of all of the assets and liabilities of the Global Select Equity Fund and the International Equity Fund (“Predecessor Funds”) into the Global Allocation Fund (the “Reorganization”). Shareholders of the Predecessor Funds approved the Reorganization at a joint meeting held on September 13, 2013. The tax-free Reorganization was completed on September 20, 2013. The financial statements and historical information contained in the Financial Highlights and footnotes for the Global Allocation Fund reflect the Predecessor Funds’ information.
Class A | Class B | Class C | Class R | Class Y | ||||||||||||||||
Global Select Equity Fund (before reorganization)(1) | ||||||||||||||||||||
Shares | 987,367 | 28 | 6,538 | 46 | 467 | |||||||||||||||
Net Assets | $ | 23,861,874 | $ | 608 | $ | 141,140 | $ | 1,107 | $ | 11,368 | ||||||||||
Net Asset Value | $ | 24.17 | $ | 21.38 | $ | 21.59 | $ | 24.18 | $ | 24.36 | ||||||||||
International Equity Fund (before reorganization)(1) | ||||||||||||||||||||
Shares | 745,278 | 833 | 53,079 | 74 | 1,198 | |||||||||||||||
Net Assets | $ | 10,584,899 | $ | 10,738 | $ | 680,703 | $ | 1,050 | $ | 17,300 | ||||||||||
Net Asset Value | $ | 14.20 | $ | 12.89 | $ | 12.82 | $ | 14.29 | $ | 14.44 | ||||||||||
Global Allocation Fund (before reorganization) | ||||||||||||||||||||
Shares | 19,804,257 | 496 | 474,750 | 267 | 123,671 | |||||||||||||||
Net Assets | $ | 179,367,703 | $ | 4,220 | $ | 3,907,526 | $ | 2,455 | $ | 1,284,554 | ||||||||||
Net Asset Value | $ | 9.06 | $ | 8.51 | $ | 8.23 | $ | 9.19 | $ | 10.39 | ||||||||||
Global Allocation Fund (after reorganization) | ||||||||||||||||||||
Shares issued (Global Select Equity Fund) | 2,633,761 | 71 | 17,149 | 121 | 1,094 | |||||||||||||||
Shares issued (International Equity Fund) | 1,168,313 | 1,262 | 82,710 | 114 | 1,665 | |||||||||||||||
Net Asset Value | $ | 9.06 | $ | 8.51 | $ | 8.23 | $ | 9.19 | $ | 10.39 | ||||||||||
Shares Outstanding | 23,606,331 | 1,829 | 574,609 | 502 | 126,430 | |||||||||||||||
Net Assets | $ | 213,814,476 | $ | 15,566 | $ | 4,729,369 | $ | 4,612 | $ | 1,313,222 | ||||||||||
Conversion Ratios | ||||||||||||||||||||
Global Select Equity Fund | 2.6675 | 2.5120 | 2.6229 | 2.6313 | 2.3448 | |||||||||||||||
International Equity Fund | 1.5676 | 1.5146 | 1.5582 | 1.5554 | 1.3899 |
(1) | Unrealized appreciation before the reorganization was $4,828,450 and $1,111,344, respectively. |
Assuming the acquisition had been completed on October 1, 2012, the Fund’s results of operations for the year ended September 30, 2013 would have been as follows:
Global Allocation Fund | ||||
Net investment income (loss) | $ | 2,241,758 | ||
Net realized and unrealized gain (loss) on investments | 50,424,427 | |||
Net increase in net assets from operations | 52,666,185 |
Note 11. Subsequent Events
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no subsequent events.
80 | Semi-Annual Report |
Table of Contents
ADDITIONAL INFORMATION (unaudited)
March 31, 2014 | Highland Funds II |
Additional Portfolio Information
The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Funds are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Funds, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Funds and one or more of such other accounts are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Funds and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Funds and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Funds, in some cases these activities may adversely affect the price paid or received by the Funds or the size of the position obtained or disposed of by the Funds.
Disclosure of Fund Expenses
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchases and redemption fees; and (2) ongoing costs, including management fees; distribution (12b-1) and service fees; and other Fund expenses. This example is intended to help you understand the ongoing costs (in dollars) of investing in your Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period October 1, 2013 through March 31, 2014, unless otherwise indicated.
This table illustrates your Fund’s costs in two ways:
Actual Expenses: The first part of the table provides information about actual account values and actual
expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes: The second part of the table provides information about hypothetical account values and hypothetical expenses based on your Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund’s actual return. The actual expense ratio includes voluntary fee waivers or expense reimbursements by the Fund’s investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption fees. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value 10/01/13 | Ending Account Value 03/31/14 | Annualized Expense Ratio(1) | Expenses Paid During the Period(1) | Actual Returns for Period | ||||||||||||||||
Highland Global Allocation Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,187.60 | 1.00 | % | $ | 5.45 | 18.76 | % | ||||||||||
Class C | 1,000.00 | 1,184.40 | 1.76 | % | 9.59 | 18.44 | % | |||||||||||||
Class R | 1,000.00 | 1,186.60 | 1.25 | % | 6.81 | 18.66 | % | |||||||||||||
Class Y | 1,000.00 | 1,188.90 | 0.75 | % | 4.09 | 18.89 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,019.95 | 1.00 | % | $ | 5.04 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,016.16 | 1.76 | % | 8.85 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,018.70 | 1.25 | % | 6.29 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,021.19 | 0.75 | % | 3.78 | 5.00 | % |
Semi-Annual Report | 81 |
Table of Contents
ADDITIONAL INFORMATION (unaudited) (continued)
March 31, 2014 | Highland Funds II |
Beginning Account Value 10/01/13 | Ending Account Value 03/31/14 | Annualized Expense Ratio(1) | Expenses Paid During the Period(1) | Actual Returns for Period | ||||||||||||||||
Highland Dividend Equity Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,095.20 | 1.35 | % | $ | 7.05 | 9.52 | % | ||||||||||
Class C | 1,000.00 | 1,091.40 | 2.00 | % | 10.43 | 9.14 | % | |||||||||||||
Class Y | 1,000.00 | 1,097.50 | 1.00 | % | 5.23 | 9.75 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,018.20 | 1.35 | % | $ | 6.79 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,014.96 | 2.00 | % | 10.05 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,019.95 | 1.00 | % | 5.04 | 5.00 | % | |||||||||||||
Highland Premier Growth Equity Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,097.60 | 1.16 | % | $ | 6.07 | 9.76 | % | ||||||||||
Class C | 1,000.00 | 1,093.70 | 1.91 | % | 9.97 | 9.37 | % | |||||||||||||
Class R | 1,000.00 | 1,096.50 | 1.41 | % | 7.37 | 9.65 | % | |||||||||||||
Class Y | 1,000.00 | 1,099.10 | 0.91 | % | 4.76 | 9.91 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,019.15 | 1.16 | % | $ | 5.84 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,015.41 | 1.91 | % | 9.60 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,017.90 | 1.41 | % | 7.09 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,020.39 | 0.91 | % | 4.58 | 5.00 | % | |||||||||||||
Highland Small-Cap Equity Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,086.60 | 1.59 | % | $ | 8.27 | 8.66 | % | ||||||||||
Class C | 1,000.00 | 1,082.50 | 2.34 | % | 12.15 | 8.25 | % | |||||||||||||
Class R | 1,000.00 | 1,086.00 | 1.67 | % | 8.69 | 8.60 | % | |||||||||||||
Class Y | 1,000.00 | 1,088.00 | 1.34 | % | 6.98 | 8.80 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,017.00 | 1.59 | % | $ | 8.00 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,013.26 | 2.34 | % | 11.75 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,016.60 | 1.67 | % | 8.40 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,018.25 | 1.34 | % | 6.74 | 5.00 | % | |||||||||||||
Highland Total Return Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,058.50 | 1.31 | % | $ | 6.72 | 5.85 | % | ||||||||||
Class C | 1,000.00 | 1,054.40 | 2.06 | % | 10.55 | 5.44 | % | |||||||||||||
Class R | 1,000.00 | 1,056.80 | 1.53 | % | 7.85 | 5.68 | % | |||||||||||||
Class Y | 1,000.00 | 1,059.30 | 1.06 | % | 5.44 | 5.93 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,018.40 | 1.31 | % | $ | 6.59 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,014.66 | 2.06 | % | 10.35 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,017.30 | 1.53 | % | 7.70 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,019.65 | 1.06 | % | 5.34 | 5.00 | % |
Beginning Account Value 10/01/13 | Ending Account Value 03/31/14 | Annualized Expense Ratio(1) | Expenses Paid During the Period(1) | Actual Returns for Period | ||||||||||||||||
Highland Tax-Exempt Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,029.20 | 0.96 | % | $ | 4.85 | 2.92 | % | ||||||||||
Class C | 1,000.00 | 1,025.40 | 1.72 | % | 8.69 | 2.54 | % | |||||||||||||
Class Y | 1,000.00 | 1,031.00 | 0.71 | % | 3.60 | 3.10 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,020.14 | 0.96 | % | $ | 4.84 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,016.36 | 1.72 | % | 8.65 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,021.39 | 0.71 | % | 3.58 | 5.00 | % | |||||||||||||
Highland Fixed Income Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,021.30 | 0.93 | % | $ | 4.69 | 2.13 | % | ||||||||||
Class C | 1,000.00 | 1,017.50 | 1.68 | % | 8.45 | 1.75 | % | |||||||||||||
Class R | 1,000.00 | 1,020.70 | 1.05 | % | 5.29 | 2.07 | % | |||||||||||||
Class Y | 1,000.00 | 1,022.60 | 0.68 | % | 3.43 | 2.26 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,020.29 | 0.93 | % | $ | 4.68 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,016.55 | 1.68 | % | 8.45 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,019.70 | 1.05 | % | 5.29 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,021.54 | 0.68 | % | 3.43 | 5.00 | % |
(1) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, divided by the number of days in the full fiscal year (182/365). |
82 | Semi-Annual Report |
Table of Contents
IMPORTANT INFORMATION ABOUT THIS REPORT
Investment Adviser
Highland Capital Management Fund Advisors, L.P.
200 Crescent Court, Suite 700
Dallas, TX 75201
Sub-Advisers
Anchor Capital Management Group, Inc.
15 Enterprise, Suite 450
Aliso Viejo, California 92656
Brookmont Capital Management, LLC
2000 McKinney Avenue, Suite 1230
Dallas, Texas 75201
GE Asset Management Incorporated
3001 Summer Street
P.O. Box 7900
Stamford, CT 06904
Palisade Capital Management, LLC
One Bridge Plaza
Fort Lee, NJ 07024
Transfer Agent
Boston Financial Data Services, Inc.
30 Dan Road
Canton, Massachusetts 02021
Underwriter
Foreside Funds Distributors LLC
400 Berwyn Park
899 Cassatt Road, 1st Floor
Berwyn, PA 19312
Custodian
State Street Bank and Trust Company
801 Pennsylvania Avenue
Kansas City, Missouri 64105
Independent Registered Public Accounting Firm
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Fund Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199-3600
This report has been prepared for shareholders of Highland Global Allocation Fund, Highland Dividend Equity Fund, Highland Premier Growth Equity Fund, Highland Small-Cap Equity Fund, Highland Total Return Fund, Highland Tax-Exempt Fund and Highland Fixed Income Fund (collectively, the “Funds”). The Funds mail one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you.
A description of the policies and procedures that the Funds use to determine how to vote proxies relating to their portfolio securities, and the Funds’ proxy voting records for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the Commission’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Funds’ website at www.highlandfunds.com.
The Statements of Additional Information include additional information about the Funds’ Trustees and are available upon request without charge by calling 1-877-665-1287.
Semi-Annual Report | 83 |
Table of Contents
THIS PAGE LEFT BLANK INTENTIONALLY
Table of Contents
200 Crescent Court, Suite 700
Dallas, TX 75201
Highland Funds II | Semi-Annual Report, March 31, 2014 |
www.highlandfunds.com | HLC-HFII-SEMI-03/14 |
Table of Contents
Highland Energy MLP Fund
Semi-Annual Report
March 31, 2014
Table of Contents
Highland Energy MLP Fund
1 | ||||
2 | ||||
3 | ||||
4 | ||||
6 | ||||
7 | ||||
Statement of Changes in Net Assets — Capital Stock Activity — Shares | 8 | |||
9 | ||||
13 | ||||
22 |
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.
Table of Contents
Highland Energy MLP Fund |
Objective
Highland Energy MLP Fund (the “Fund”) seeks to provide investors with current income and capital appreciation.
Net Assets as of March 31, 2014
$4.0 million
Portfolio Data as of March 31, 2014
The information below provides a snapshot of the Fund at the end of the reporting period. The Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Top 10 Holdings as of 03/31/2014 (%)(1) | ||||
EnLink Midstream Partners LP (Master Limited Partnerships) | 6.4 | |||
Targa Resources Corp. (Common Stocks) | 6.0 | |||
Enterprise Products Partners LP (Master Limited Partnerships) | 5.9 | |||
MarkWest Energy Partners LP (Master Limited Partnerships) | 5.2 | |||
Targa Resources Partners LP (Master Limited Partnerships) | 5.0 | |||
Atlas Pipeline Partners LP (Master Limited Partnerships) | 4.8 | |||
Williams Partners LP (Master Limited Partnerships) | 4.5 | |||
Plains All American Pipeline LP (Master Limited Partnerships) | 4.5 | |||
Tesoro Logistics LP (Master Limited Partnerships) | 4.4 | |||
Phillips 66 Partners LP (Master Limited Partnerships) | 4.3 |
(1) | Holdings are calculated as a percentage of total net assets. |
Semi-Annual Report | 1 |
Table of Contents
March 31, 2014 | Highland Energy MLP Fund |
A guide to understanding the Fund’s financial statements
Investment Portfolio | The Investment Portfolio details of the Fund’s holdings and its market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. | |
Statement of Assets and Liabilities | This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period. | |
Statement of Operations | This statement reports income earned by the Fund and the expenses incurred by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations. | |
Statement of Changes in Net Assets | This statement details how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding. | |
Financial Highlights | The Financial Highlights demonstrate how the Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets). | |
Notes to Financial Statements | These notes disclose the organizational background of the Fund, certain of its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. |
2 | Semi-Annual Report |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2014 | Highland Energy MLP Fund |
Shares | Value ($) | |||||||
| Common Stocks - 10.2% |
| ||||||
ENERGY - 10.2% | ||||||||
1,000 | Kinder Morgan, Inc. | 32,490 | ||||||
2,387 | Targa Resources Corp. | 236,933 | ||||||
3,267 | Williams Cos., Inc. (The) | 132,575 | ||||||
|
| |||||||
401,998 | ||||||||
|
| |||||||
Total Common Stocks | 401,998 | |||||||
|
| |||||||
| Master Limited Partnerships - 101.3% |
| ||||||
ENERGY - 101.3% | ||||||||
1,768 | Access Midstream Partners LP | 101,748 | ||||||
2,134 | Atlas Energy LP | 91,847 | ||||||
5,952 | Atlas Pipeline Partners LP | 191,119 | ||||||
1,929 | Buckeye Partners LP | 144,772 | ||||||
5,267 | Crestwood Midstream Partners LP | 118,718 | ||||||
4,268 | Enbridge Energy Partners LP | 116,986 | ||||||
2,744 | Energy Transfer Equity LP | 128,282 | ||||||
2,978 | Energy Transfer Partners LP | 160,187 | ||||||
8,341 | EnLink Midstream Partners LP | 253,733 | ||||||
3,360 | Enterprise Products Partners LP | 233,050 | ||||||
1,926 | EQT Midstream Partners LP | 135,456 | ||||||
1,846 | Genesis Energy LP | 100,053 | ||||||
1,814 | Holly Energy Partners LP | 60,170 | ||||||
1,801 | Magellan Midstream Partners LP | 125,602 | ||||||
3,124 | MarkWest Energy Partners LP | 204,060 | ||||||
1,500 | MPLX LP | 73,485 | ||||||
2,890 | NGL Energy Partners LP | 108,462 | ||||||
2,647 | ONEOK Partners LP | 141,747 | ||||||
3,528 | Phillips 66 Partners LP | 171,355 | ||||||
3,236 | Plains All American Pipeline LP | 178,368 | ||||||
3,950 | Plains GP Holdings LP, Class A | 110,521 | ||||||
4,320 | Regency Energy Partners LP | 117,590 | ||||||
4,559 | Tallgrass Energy Partners LP | 165,993 | ||||||
3,509 | Targa Resources Partners LP | 197,416 | ||||||
2,870 | Tesoro Logistics LP | 172,803 | ||||||
2,319 | Valero Energy Partners LP | 91,809 | ||||||
772 | Western Gas Equity Partners LP | 37,913 | ||||||
2,969 | Western Refining Logistics LP | 92,484 | ||||||
3,520 | Williams Partners LP | 179,309 | ||||||
|
| |||||||
4,005,038 | ||||||||
|
| |||||||
Total Master Limited Partnerships | 4,005,038 | |||||||
|
| |||||||
| Total Investments - 111.5% | 4,407,036 | ||||||
|
| |||||||
| (Cost $3,494,750) | |||||||
| Other Assets & Liabilities, Net - (11.5)% | (455,788 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 3,951,248 | ||||||
|
|
See accompanying Notes to Financial Statements. | 3 |
Table of Contents
STATEMENT OF ASSETS AND LIABILITIES
As of March 31, 2014 (unaudited) | Highland Energy MLP Fund |
($) | ||||
Assets | ||||
Investments, at value | 4,407,036 | |||
Cash | 2,416 | |||
Receivable for: | ||||
Investment advisory and administration fees (Note 6) | 13,208 | |||
Fund shares sold | 54,378 | |||
Prepaid expenses and other assets | 4,799 | |||
|
| |||
Total assets | 4,481,837 | |||
|
| |||
Liabilities | ||||
Payable for: | ||||
Trustees’ fees | 136 | |||
Distribution and shareholder service fees (Note 6) | 13 | |||
Transfer agent fees | 61 | |||
Net deferred tax liability (Note 4) | 355,647 | |||
Commitment fee payable (Note 5) | 7 | |||
Accrued expenses and other liabilities | 174,725 | |||
|
| |||
Total liabilities | 530,589 | |||
|
| |||
Net Assets | 3,951,248 | |||
|
| |||
Net Assets Consist of: | ||||
Par value (Note 1) | 355 | |||
Paid-in capital | 3,446,035 | |||
Accumulated net investment loss, net of income taxes | (28,873 | ) | ||
Accumulated net realized loss from investments, net of income taxes | (42,563 | ) | ||
Net unrealized appreciation on investments, net of income taxes | 576,294 | |||
|
| |||
Net Assets | 3,951,248 | |||
|
| |||
Investments, at cost | 3,494,750 |
4 | See accompanying Notes to Financial Statements. |
Table of Contents
STATEMENT OF ASSETS AND LIABILITIES (continued)
As of March 31, 2014 (unaudited) | Highland Energy MLP Fund |
($) | ||||
Class A: | ||||
Net assets | 102,072 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 9,190 | |||
|
| |||
Net asset value per share(a)(b) | 11.11 | |||
|
| |||
Maximum offering price per share(c) | 11.79 | |||
|
| |||
Class C: | ||||
Net assets | 54,904 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 4,942 | |||
|
| |||
Net asset value and offering price per share(a) | 11.11 | |||
|
| |||
Class R: | ||||
Net assets | 11,858 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 1,067 | |||
|
| |||
Net asset value, offering and redemption price per share | 11.12 | |||
|
| |||
Class Y: | ||||
Net assets | 3,782,414 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 339,759 | |||
|
| |||
Net asset value, offering and redemption price per share | 11.13 | |||
|
|
(a) | Redemption price per share is equal to net asset value per share less any applicable contingent deferred sales charge (“CDSC”). |
(b) | Purchases of $1,000,000 or more are subject to a 0.50% CDSC if redeemed within one year of purchase. |
(c) | The sales charge is 5.75%. On sales of $1,000,000 or more, there is no sales charge and therefore the offering will be lower. |
See accompanying Notes to Financial Statements. | 5 |
Table of Contents
For the six months ended March 31, 2014 (unaudited) | Highland Energy MLP Fund |
($) | ||||
Investment Income | ||||
Income: | ||||
Dividends and distributions | 99,014 | |||
Less: Foreign taxes withheld | (79 | ) | ||
Return of capital (Note 2) | (89,113 | ) | ||
Interest | 9 | |||
Securities lending income (Note 3) | 45 | |||
|
| |||
Total Income | 9,876 | |||
|
| |||
Expenses: | ||||
Investment advisory and administration fees (Note 6) | 21,854 | |||
Distribution and shareholder service fees: (Note 6) | ||||
Class A | 131 | |||
Class C | 109 | |||
Class R | 28 | |||
Transfer agent fees | 310 | |||
Trustees fees (Note 6) | 254 | |||
Accounting services fees | 1,433 | |||
Audit fees | 55,833 | |||
Legal fees | 1,204 | |||
Registration fees | 6,712 | |||
Insurance | 44 | |||
Reports to shareholders | 15,536 | |||
Commitment fees-credit agreement (Note 5) | 24 | |||
Other | 1,038 | |||
|
| |||
Total operating expenses before waiver and reimbursement (Note 6) | 104,510 | |||
Less: Expenses waived or borne by the Adviser and administrator | (84,210 | ) | ||
|
| |||
Net operating expenses | 20,300 | |||
|
| |||
Net investment loss, before income taxes | (10,424 | ) | ||
|
| |||
Current tax benefit (Note 4) | 7,250 | |||
|
| |||
Net investment loss, net of income tax benefit | (3,174 | ) | ||
|
| |||
Net Realized and Unrealized Gain (Loss) on Investments | ||||
Investments | 54,013 | |||
Deferred tax expense (Note 4) | (604 | ) | ||
Current tax expense (Note 4) | (16,651 | ) | ||
Change in unrealized appreciation (depreciation) on: | ||||
Investments | 539,275 | |||
Deferred tax expense (Note 4) | (200,962 | ) | ||
|
| |||
Net realized and unrealized gain on investments | 375,071 | |||
|
| |||
Total increase in net assets resulting from operations | 371,897 | |||
|
|
6 | See accompanying Notes to Financial Statements. |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS
Highland Energy MLP Fund |
Six Months Ended March 31, 2014 (unaudited) ($) | Year Ended September 30, 2013 ($) | |||||||
Increase (Decrease) in Net Assets | ||||||||
Operations: | ||||||||
Net investment loss, net of income taxes | (3,174 | ) | (8,100 | ) | ||||
Net realized gain (loss) on investments, net of income taxes | 36,758 | 91,010 | ||||||
Net change in unrealized appreciation (depreciation) on investments, net of income taxes | 338,313 | 237,981 | ||||||
|
|
|
| |||||
Net increase from operations | 371,897 | 320,891 | ||||||
|
|
|
| |||||
Distributions to shareholders from: | ||||||||
Earnings and profits | ||||||||
Class A | (204 | ) | (2,630 | ) | ||||
Class C | (60 | ) | (1,857 | ) | ||||
Class R | (30 | ) | (1,579 | ) | ||||
Class Y | (9,664 | ) | (425,284 | ) | ||||
Return of capital | ||||||||
Class A | (1,813 | ) | (530 | ) | ||||
Class C | (470 | ) | (374 | ) | ||||
Class R | (252 | ) | (318 | ) | ||||
Class Y | (85,609 | ) | (85,640 | ) | ||||
|
|
|
| |||||
Total distributions | (98,102 | ) | (518,212 | ) | ||||
|
|
|
| |||||
Increase (decrease) in net assets from operations and distributions | 273,795 | (197,321 | ) | |||||
|
|
|
| |||||
Share transactions: | ||||||||
Proceeds from sale of shares | ||||||||
Class A | 94,302 | 27,256 | ||||||
Class C | 32,500 | 10,120 | ||||||
Class R | — | 123 | ||||||
Class Y | 33,084 | 3,218,452 | ||||||
Value of distributions reinvested | ||||||||
Class A | 1,744 | 957 | ||||||
Class C | 379 | 242 | ||||||
Class R | 282 | 251 | ||||||
Class Y | 95,273 | 81,392 | ||||||
Cost of shares redeemed | ||||||||
Class A | (37,180 | ) | — | |||||
Class Y | (3,416 | ) | (3,907,338 | ) | ||||
|
|
|
| |||||
Net increase (decrease) from shares transactions | 216,968 | (568,545 | ) | |||||
|
|
|
| |||||
Total increase (decrease) in net assets | 490,763 | (765,866 | ) | |||||
Net Assets | ||||||||
Beginning of period | 3,460,485 | 4,226,351 | ||||||
|
|
|
| |||||
End of period | 3,951,248 | 3,460,485 | ||||||
|
|
|
| |||||
Accumulated net investment loss, net of income taxes | (28,873 | ) | (15,741 | ) | ||||
|
|
|
|
See accompanying Notes to Financial Statements. | 7 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
CAPITAL STOCK ACTIVITY - SHARES | Highland Energy MLP Fund |
Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | |||||||
Class A: | ||||||||
Shares sold | 8,871 | 2,563 | ||||||
Issued for distribution reinvested | 166 | 93 | ||||||
Shares redeemed | (3,508 | ) | — | |||||
|
|
|
| |||||
Net increase in fund shares | 5,529 | 2,656 | ||||||
|
|
|
| |||||
Class C: | ||||||||
Shares sold | 2,934 | 949 | ||||||
Issued for distribution reinvested | 35 | 23 | ||||||
|
|
|
| |||||
Net increase in fund shares | 2,969 | 972 | ||||||
|
|
|
| |||||
Class R: | ||||||||
Shares sold | — | 13 | ||||||
Issued for distribution reinvested | 27 | 24 | ||||||
|
|
|
| |||||
Net increase in fund shares | 27 | 37 | ||||||
|
|
|
| |||||
Class Y: | ||||||||
Shares sold | 3,036 | 294,633 | ||||||
Issued for distribution reinvested | 9,017 | 7,887 | ||||||
Shares redeemed | (310 | ) | (356,110 | ) | ||||
|
|
|
| |||||
Net increase (decrease) in fund shares | 11,743 | (53,590 | ) | |||||
|
|
|
|
8 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Energy MLP Fund, Class A |
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | For the Period Ended September 30, 2012(a) | ||||||||||
Net Asset Value, Beginning of Period | $ | 10.32 | $ | 10.98 | $ | 10.00 | ||||||
Income from Investment Operations: | ||||||||||||
Net investment income/(loss)(b) | (0.02 | ) | (0.08 | ) | 0.01 | |||||||
Net realized and unrealized gain | 1.08 | 1.06 | 1.02 | |||||||||
|
|
|
|
|
| |||||||
Total from investment operations | 1.06 | 0.98 | 1.03 | |||||||||
Less Distributions Declared to Shareholders: | ||||||||||||
From earnings and profits | (0.03 | ) | (1.32 | ) | (0.05 | ) | ||||||
From return of capital | (0.24 | ) | (0.32 | ) | — | |||||||
|
|
|
|
|
| |||||||
Total distributions declared to shareholders | (0.27 | ) | (1.64 | ) | (0.05 | ) | ||||||
Net Asset Value, End of Period | $ | 11.11 | $ | 10.32 | $ | 10.98 | ||||||
Total Return(c) | 10.47 | %(d) | 10.07 | % | 10.31 | %(d) | ||||||
Ratios to Average Net Assets(e)/Supplemental Data: | ||||||||||||
Net assets, end of period (in 000’s) | $ | 102 | $ | 38 | $ | 11 | ||||||
Total operating expenses | 6.11 | % | 20.12 | % | 6.88 | % | ||||||
Waiver/reimbursement | (4.65 | )% | (18.88 | )% | (4.63 | )% | ||||||
Net operating expenses (f) | 1.46 | % | 1.24 | % | 2.25 | % | ||||||
Dividends for short positions | — | — | 0.02 | |||||||||
Net expenses(f) | 1.46 | % | 1.24 | % | 2.27 | % | ||||||
Income tax expenses | 11.58 | % | 6.18 | % | — | |||||||
Total expense | 13.04 | % | 7.42 | % | 2.27 | % | ||||||
Net investment income/(loss) | (0.44 | )% | (0.74 | )% | 0.07 | % | ||||||
Portfolio turnover rate | 27 | %(d) | 177 | % | 254 | %(d) |
(a) | Commenced operations on December 1, 2011. |
(b) | Per share data was calculated using average shares outstanding during the period. |
(c) | Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower. |
(d) | Not annualized. |
(e) | All ratios for the period have been annualized, unless otherwise indicated. |
(f) | Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable. |
See accompanying Notes to Financial Statements. | 9 |
Table of Contents
FINANCIAL HIGHLIGHTS
Highland Energy MLP Fund, Class C |
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | For the Period Ended September 30, 2012(a) | ||||||||||
Net Asset Value, Beginning of Period | $ | 10.34 | $ | 10.96 | $ | 10.00 | ||||||
Income from Investment Operations: | ||||||||||||
Net investment loss(b) | (0.06 | ) | (0.18 | ) | (0.05 | ) | ||||||
Net realized and unrealized gain | 1.08 | 1.10 | 1.02 | |||||||||
|
|
|
|
|
| |||||||
Total from investment operations | 1.02 | 0.92 | 0.97 | |||||||||
Less Distributions Declared to Shareholders: | ||||||||||||
From earnings and profits | (0.03 | ) | (1.22 | ) | (0.01 | ) | ||||||
From return of capital | (0.22 | ) | (0.32 | ) | — | |||||||
|
|
|
|
|
| |||||||
Total distributions declared to shareholders | (0.25 | ) | (1.54 | ) | (0.01 | ) | ||||||
Net Asset Value, End of Period | $ | 11.11 | $ | 10.34 | $ | 10.96 | ||||||
Total Return(c) | 10.05 | %(d) | 9.42 | % | 9.69 | %(d) | ||||||
Ratios to Average Net Assets(e)/Supplemental Data: | ||||||||||||
Net assets, end of period (in 000’s) | $ | 55 | $ | 20 | $ | 11 | ||||||
Total operating expenses | 6.73 | % | 20.61 | % | 7.53 | % | ||||||
Waiver/reimbursement | (4.63 | )% | (18.44 | )% | (4.63 | )% | ||||||
Net operating expenses (f) | 2.10 | % | 2.17 | % | 2.90 | % | ||||||
Dividends for short positions | — | — | 0.02 | % | ||||||||
Net expenses(f) | 2.10 | % | 2.17 | % | 2.92 | % | ||||||
Income tax expenses | 11.58 | % | 6.18 | % | — | |||||||
Total expense | 13.68 | % | 8.35 | % | 2.92 | % | ||||||
Net investment income/(loss) | (1.15 | )% | (1.68 | )% | (0.58 | )% | ||||||
Portfolio turnover rate | 27 | %(d) | 177 | % | 254 | %(d) |
(a) | Commenced operations on December 1, 2011. |
(b) | Per share data was calculated using average shares outstanding during the period. |
(c) | Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower. |
(d) | Not annualized. |
(e) | All ratios for the period have been annualized, unless otherwise indicated. |
(f) | Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable. |
10 | See accompanying Notes to Financial Statements. |
Table of Contents
FINANCIAL HIGHLIGHTS
Highland Energy MLP Fund, Class R |
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | For the Period Ended September 30, 2012(a) | ||||||||||
Net Asset Value, Beginning of Period | $ | 10.34 | $ | 10.98 | $ | 10.00 | ||||||
Income from Investment Operations: | ||||||||||||
Net investment loss(b) | (0.04 | ) | (0.16 | ) | (0.01 | ) | ||||||
Net realized and unrealized gain | 1.09 | 1.13 | 1.03 | |||||||||
|
|
|
|
|
| |||||||
Total from investment operations | 1.05 | 0.97 | 1.02 | |||||||||
Less Distributions Declared to Shareholders: | ||||||||||||
From earnings and profits | (0.03 | ) | (1.29 | ) | (0.04 | ) | ||||||
From return of capital | (0.24 | ) | (0.32 | ) | — | |||||||
|
|
|
|
|
| |||||||
Total distributions declared to shareholders | (0.27 | ) | (1.61 | ) | (0.04 | ) | ||||||
Net Asset Value, End of Period | $ | 11.12 | $ | 10.34 | $ | 10.98 | ||||||
Total Return(c) | 10.31 | %(d) | 10.02 | % | 10.11 | %(d) | ||||||
Ratios to Average Net Assets(e)/Supplemental Data: | ||||||||||||
Net assets, end of period (in 000’s) | $ | 12 | $ | 11 | $ | 11 | ||||||
Total operating expenses | 6.22 | % | 18.83 | % | 7.03 | % | ||||||
Waiver/reimbursement | (4.62 | )% | (16.86 | )% | (4.63 | )% | ||||||
Net operating expenses (f) | 1.60 | % | 1.97 | % | 2.40 | % | ||||||
Dividends for short positions | — | — | 0.02 | % | ||||||||
Net expenses(f) | 1.60 | % | 1.97 | % | 2.42 | % | ||||||
Income tax expenses | 11.58 | % | 6.18 | % | — | |||||||
Total expense | 13.18 | % | 8.15 | % | 2.42 | % | ||||||
Net investment income/(loss) | (0.66 | )% | (1.52 | )% | (0.08 | )% | ||||||
Portfolio turnover rate | 27 | %(d) | 177 | % | 254 | %(d) |
(a) | Commenced operations on December 1, 2011. |
(b) | Per share data was calculated using average shares outstanding during the period. |
(c) | Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower. |
(d) | Not annualized. |
(e) | All ratios for the period have been annualized, unless otherwise indicated. |
(f) | Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable. |
See accompanying Notes to Financial Statements. | 11 |
Table of Contents
FINANCIAL HIGHLIGHTS
Highland Energy MLP Fund, Class Y |
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended March 31, 2014 (unaudited) | Year Ended September 30, 2013 | For the Period Ended September 30, 2012(a) | ||||||||||
Net Asset Value, Beginning of Period | $ | 10.34 | $ | 10.99 | $ | 10.00 | ||||||
Income from Investment Operations: | ||||||||||||
Net investment income (loss)(b) | (0.01 | ) | (0.07 | ) | 0.04 | |||||||
Net realized and unrealized gain | 1.09 | 1.11 | 1.02 | |||||||||
|
|
|
|
|
| |||||||
Total from investment operations | 1.08 | 1.04 | 1.06 | |||||||||
Less Distributions Declared to Shareholders: | ||||||||||||
From earnings and profits | (0.03 | ) | (1.37 | ) | (0.07 | ) | ||||||
From return of capital | (0.26 | ) | (0.32 | ) | — | |||||||
|
|
|
|
|
| |||||||
Total distributions declared to shareholders | (0.29 | ) | (1.69 | ) | (0.07 | ) | ||||||
Net Asset Value, End of Period | $ | 11.13 | $ | 10.34 | $ | 10.99 | ||||||
Total Return(c) | 10.59 | %(d) | 10.62 | % | 10.63 | %(d) | ||||||
Ratios to Average Net Assets(e)/Supplemental Data: | ||||||||||||
Net assets, end of period (in 000’s) | $ | 3,782 | $ | 3,392 | $ | 4,193 | ||||||
Total operating expenses | 5.72 | % | 11.25 | % | 6.53 | % | ||||||
Waiver/reimbursement | (4.62 | )% | (10.05 | )% | (4.63 | )% | ||||||
Net operating expenses (f) | 1.10 | % | 1.20 | % | 1.90 | % | ||||||
Dividends for short positions | — | — | 0.02 | % | ||||||||
Net expenses(f) | 1.10 | % | 1.20 | % | 1.92 | % | ||||||
Income tax expenses | 11.58 | % | 6.18 | % | — | |||||||
Total expense | 12.68 | % | 7.38 | % | 1.92 | % | ||||||
Net investment income/(loss) | (0.16 | )% | (0.71 | )% | 0.42 | % | ||||||
Portfolio turnover rate | 27 | %(d) | 177 | % | 254 | %(d) |
(a) | Commenced operations on December 1, 2011. |
(b) | Per share data was calculated using average shares outstanding during the period. |
(c) | Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower. |
(d) | Not annualized. |
(e) | All ratios for the period have been annualized, unless otherwise indicated. |
(f) | Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable. |
12 | See accompanying Notes to Financial Statements. |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited)
March 31, 2014 | Highland Energy MLP Fund |
Note 1. Organization
Highland Funds II (the “Trust”) is a Massachusetts business trust organized on August 10, 1992. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. It comprises thirteen portfolios although only the following eight are currently being offered including the Highland Energy MLP Fund (‘the Fund”). The following portfolios are reported separately: Highland Global Allocation Fund (the “Global Allocation Fund”), Highland Dividend Equity Fund (the “Dividend Equity Fund”), Highland Premier Growth Equity Fund (the “Premier Growth Equity Fund”), Highland Small-Cap Equity Fund (the “Small-Cap Equity Fund”), Highland Total Return Fund (the “Total Return Fund”), Highland Tax-Exempt Fund (the “Tax-Exempt Fund”), and Highland Fixed Income Fund (the “Fixed Income Fund”). The Alpha Trend Strategies fund liquidated on October 31, 2013. The Trend Following Fund liquidated on January 24, 2014. The Alternative Income Fund was sold on January 24, 2014.
Effective February 1, 2013, the Fund revised its investment strategy to focus on master limited partnership (“MLP”) investments. Under normal market conditions, the Fund seeks to achieve its objective of providing investors with current income and capital appreciation by investing at least 80% of its net assets (plus any borrowings for investment purposes) in a portfolio of MLP investments. MLPs typically are characterized as “publicly traded partnerships” that qualify to be treated as partnerships for U.S. federal income tax purposes and are principally engaged in one or more aspects of the exploration, production, processing, transmission, marketing, storage or delivery of energy-related commodities, such as natural gas, natural gas liquids, coal, crude oil or refined petroleum products (collectively, the energy industry). The Fund’s MLP investments include investments that offer economic exposure to public MLPs in the form of common or subordinated units issued by MLPs, securities of entities holding primarily general partner or managing member interests in MLPs, debt securities of MLPs, and securities that are derivatives of interests in MLPs, including I-Shares, and derivative instruments in which the Fund may invest that have economic characteristics of MLP securities.
Fund Shares
The Fund is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share (each a “Share” and collectively, the “Shares”). The Fund currently offers four share classes to investors, namely Class A, Class C, Class R and Class Y Shares.
Class A Shares are sold with a front-end sales charge. Maximum sales load imposed on purchases of Class A Shares (as a percentage of offering price) is 5.75%.
There is no front-end sales charge imposed on individual purchases of Class A Shares of $1 million or more. The front-end sales charge is also waived in other instances as described in the Fund’s prospectus. Purchases of $1 million or more of Class A Shares at net asset value are subject to a 0.50% contingent deferred sales charge (“CDSC”) if redeemed within one year of purchase.
Class C Shares may be subject to a CDSC. The maximum CDSC imposed on redemptions of Class C Shares is 1.00% within the first year of purchase and 0.00% thereafter.
No front-end or CDSCs are assessed by the Trust with respect to Class R and Class Y Shares of the Fund.
Note 2. Significant Accounting Policies
The following summarizes the significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
Use of Estimates
The Fund’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Securities Valuation
The Fund utilizes various methods to measure the fair value of most of its investments on a recurring basis. GAAP establishes a framework for measuring fair value and providing related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.
Semi-Annual Report | 13 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 — | Quoted prices for identical investments in active markets. |
Level 2 — | Quoted prices for similar investments in active markets; quoted prices for identical or similar investments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
Level 3 — | Significant inputs to the valuation model are unobservable. |
Policies and procedures are maintained to value investments using the best and most relevant data available. In addition, pricing vendors are utilized to assist in valuing investments. Highland Capital Management Fund Advisors, L.P., (the “Investment Adviser” or “Highland”) performs periodic reviews of the methodologies used by independent pricing services including price validation of individual securities.
Fair Value Measurement
The following section describes the valuation methodologies the Fund uses to measure different financial investments at fair value.
The Fund’s portfolio securities are valued generally on the basis of market quotations. Equity securities generally are valued at the last reported sales price on the primary market in which they are traded. Portfolio securities listed on National Association of Securities Dealers Automated Quotation (‘‘NASDAQ”) are valued using the NASDAQ Official Closing Price; Level 1 securities primarily include publicly-traded equity securities which may not necessarily represent the last sale price. If no sales occurred on the exchange or NASDAQ that day, the portfolio security will be valued at the mean between the most recently quoted bid and asked prices produced by the principal market makers. In those circumstances the Fund classifies the investment securities in Level 2.
Debt securities (other than short-term securities described below) generally are valued at an evaluated bid as reported by an independent pricing service. Municipal obligations are valued at the quoted bid prices when available. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from
market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, government, mortgage and asset-backed securities.
In the absence of a reliable price from such a pricing service, debt securities may be valued based on dealer supplied valuations or quotations. In these infrequent circumstances, pricing vendors may provide the Fund with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.
The Fund uses non-binding broker quotes as the primary basis for valuation when there is limited, or no, relevant market activity for a specific investment or for other investments that share similar characteristics. The Fund has not adjusted the prices obtained. Investment securities priced using broker quotes are included in Level 2. As is the case with the primary pricing vendor, third-party brokers do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, Highland conducts internal reviews of pricing for all such investment securities periodically to ensure reasonableness of valuations used in the Fund’s financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, Highland believes that the fair values provided by the brokers are representative of prices that would be received to sell the assets at the measurement date (exit prices).
Short-term securities of sufficient credit quality with remaining maturities of sixty days or less at the time of purchase are valued on the basis of amortized cost which approximates market value and these are included in Level 2.
Written or purchased options are valued at the last sales price, or if no sales occurred that day, at the last reported bid price and those are also included in Level 2.
If prices are not readily available for a portfolio security, or if it is believed that a price for a portfolio security does not
14 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
represent its fair value, the security may be valued using procedures approved by the Fund’s Board of Trustees that are designed to establish its “fair” value. These securities would be classified in Level 3. Those procedures require that the fair value of a security be established by the fair valuation committee. The fair valuation committee follows different protocols for different types of investments and circumstances. The fair value procedures may be used to value any investment of the Fund in the appropriate circumstances.
Foreign securities may be valued with the assistance of an independent fair value pricing service in circumstances where it is believed that they have been or would be materially affected by events occurring after the close of the portfolio security’s primary market and before the close of regular trading on the New York Stock Exchange (“NYSE”). In these circumstances the Fund classifies the investment securities in Level 2. This independent fair value pricing service uses a model to identify affected securities and portfolios taking into consideration various factors and the fair value of such securities may be something other than the last available quotation or other market price.
Portfolio securities may be valued using techniques other than market quotations, under the circumstances described above. The value established for a portfolio security may be different than what would be produced through the use of another methodology or if it had been priced using market quotations. Portfolio securities that are valued using techniques other than market quotations, including “fair valued” securities, may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that the Fund could sell a portfolio security for the value established for it at any time and it is possible that the Fund would incur a loss because a portfolio security is sold at a discount to its established value.
Other financial investments are derivative instruments that are not reflected in Total Investments, such as futures, forwards, swaps, and written options contracts, which are valued based on fair value as discussed above.
The Fund uses closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts. Derivative assets and liabilities included in Level 3 primarily represent interest rate products that contain embedded optionality or prepayment features.
Fair value determinations are required for securities whose value is affected by a significant event that will materially affect the value of a domestic or foreign security and which occurs subsequent to the time of the close of the principal market on which such domestic or foreign security trades but prior to the calculation of the Fund’s net asset value (“NAV”).
At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at the value at the beginning of the period. A summary of the inputs used to value the Fund’s assets as of March 31, 2014 is as follows:
Total value at March 31, 2014 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Energy MLP Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 401,998 | $ | 401,998 | $ | — | $ | — | ||||||||
Master Limited Partner- | 4,005,038 | 4,005,038 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 4,407,036 | $ | 4,407,036 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
Certain foreign securities are fair valued by utilizing an external pricing service in the event of any significant market movements between the time the series valued such foreign securities and the earlier closing of foreign
Semi-Annual Report | 15 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
markets. Such fair valuations are categorized as Level 2 in the hierarchy.
There were no transfers between levels 1, 2, or 3 during the period ended March 31, 2014.
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of identified cost for both financial statement and U.S. federal income tax purposes.
The Fund’s income, expenses (other than distribution fees and shareholder service fees) and realized and unrealized gains and losses are allocated proportionally each day among the Fund’s respective share classes based upon the relative net assets of each class share.
Income Recognition
Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis.
Partnership Accounting Policy
The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Fund’s Statement of Operations as “Dividends and distributions” and “Return of capital.”
Expenses
Expenses are allocated pro rata among the Fund’s share classes. Such expenses may include custodial fees, legal and accounting fees, printing costs and registration fees. Certain class specific expenses (such as distribution fees and shareholder service fees) are allocated to the class that incurs such expense.
Short-Term Trading (Redemption) Fees
Shares held less than two months were subject to a short-term trading fee equal to 2.00% of the proceeds of the redeemed shares. These fees, which were retained by the Fund, were accounted for as an addition to paid-in capital. No redemption fees were recorded during the period ended March 31, 2014. Effective October 13, 2013, the short-term trading fee was was eliminated.
U.S. Federal Income Tax Status
The Fund will be taxable as a regular corporation, or a “C” corporation, for U.S. federal income tax purposes and thus
will pay entity-level taxes as described below. The Internal Revenue Code of 1986, as amended (the “Code”), generally provides that an investment company registered under the 1940 Act that elects to be treated and qualifies each taxable year as a regulated investment company (“RIC”) under Subchapter M of the Code, including by complying with applicable qualifying income, diversification and distribution requirements, does not pay any entity-level U.S. federal income tax on any income or gains that the investment company distributes to its shareholders. The Fund had previously elected to be treated as a RIC under the Code and, prior to the taxable year ending September 30, 2013, had annually so qualified for the special treatment accorded RICs and their shareholders under the Code.
Upon implementation of the Fund’s revised strategy to concentrate in MLP investments, retroactively beginning on the Fund’s previous taxable year, which began on October 1, 2012 and ended on September 30, 2013, and continuing for the current and future taxable years, the Fund is no longer eligible for treatment as a regulated investment company under the Code. Accordingly, the Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes. As a result, the Fund is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently at a maximum rate of 35%) as well as state and local income taxes. The Fund’s major tax jurisdictions are Louisiana and Oklahoma.
The Fund invests its assets primarily in MLPs, which generally are treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, the Fund includes its allocable share of the MLP’s taxable income in computing its own taxable income. Deferred income taxes reflect (i) taxes on unrealized gains (losses), which are attributable to the temporary difference between fair market value and tax basis, (ii) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net operating and capital losses.
In calculating the Fund’s daily net asset value the Fund will account for its deferred tax liability and/or asset balances. The Fund will accrue, in accordance with GAAP, a deferred income tax liability balance, at the currently effective statutory U.S. federal income tax rate plus an estimated state and local income tax rate, for its future tax liability associated with the capital appreciation of its investments and the distributions received by the Fund on equity securities of MLPs considered to be return of capital and for any net operating gains. Any deferred tax liability
16 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
balance will reduce the Fund’s net asset value. Upon the Fund’s sale of a portfolio security, the Fund may be liable for previously deferred taxes. If the Fund is required to sell portfolio securities to meet redemption requests, the Fund may recognize income and gains for U.S. federal, state and local income tax purposes, which will result in corporate income taxes imposed on the Fund.
The Fund also will accrue in accordance with GAAP, a deferred tax asset balance, which reflects an estimate of the Fund’s future tax benefit associated with net operating losses, capital loss carryforwards and unrealized losses. To the extent the Fund has a net deferred tax asset balance, the Fund will record a valuation allowance, which would offset the value of some or all of the Fund’s deferred tax asset balance. The Fund then will assess whether such valuation allowance is needed, considering all positive and negative evidence related to the realization of the Fund’s deferred tax asset. The Fund intends to assess whether a valuation allowance is required to offset some or all of any deferred tax asset balance in connection with the calculation of the Fund’s daily net asset value; however, to the extent the final valuation allowance differs from the estimates of the Fund used in calculating the Fund’s daily net asset value, the application of such final valuation allowance could have a material impact on the Fund’s net asset value. In the assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future cash distributions from the Fund’s MLP holdings), the duration of statutory carryforward periods and the associated risk that operating and capital loss carryforwards may expire unused. From time to time, the Fund may modify its estimates or assumptions regarding its deferred tax liability and/or asset balance as new information becomes available. Such modifications, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on net operating and capital losses (if any) and changes in applicable tax law could result in increases or decreases in the Fund’s net asset value per share, which could be material.
For all open tax years and for all major jurisdictions, management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Furthermore, management of the Fund 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.
The Fund may rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income allocable to the MLP units held in the portfolio and to estimate the associated deferred tax liability. Such estimates are made in good faith. From time to time, as new information becomes available, the Fund modifies its estimates or assumptions regarding the deferred tax liability.
The Fund’s policy is to classify interest and penalties associated with underpayment of federal and state income taxes, if any, as income tax expense on its Statement of Operations. The current tax year remains open and subject to examination by tax jurisdictions.
Return of Capital Estimates
Distributions received from the Fund’s investments in MLPs generally are comprised of income and return of capital. The Fund records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP and other industry sources. These estimates may subsequently be revised based on information received from MLPs after their tax reporting periods are concluded. For the six months ended March 31, 2014 the Fund estimated that approximately 90% of the MLP distributions received would be treated as a return of capital. The Fund recorded as return of capital the amount of $89,113 of dividends and distributions received from its investments.
Distributions to Shareholders
The Fund intends to make quarterly cash distributions of all or a portion of its net income (after taxes) to its shareholders. Due to the tax treatment of the Fund’s allocations and distributions from MLPs, HCM expects that a significant portion of the Fund’s distributions to shareholders will typically be treated as a return of capital in the hands of shareholders for U.S. federal income tax purposes (i.e., as distributions in excess of the Fund’s current and accumulated earnings and profits as described below). However, no assurance can be given in this regard; just as the Fund’s corporate income tax liability can fluctuate materially from year to year, the extent to which the Fund is able to make return-of-capital distributions also can vary materially from year to year depending on a number of different factors, including the composition of the Fund’s portfolio, the level of allocations of net income and other tax items for the Fund from its underlying MLP investments during a particular taxable year, the length of time the Fund has owned the MLP equity securities in its portfolio, and the extent to which the Fund disposes of MLP equity securities during a particular year, including, if necessary, to meet Fund shareholder redemption requests.
Semi-Annual Report | 17 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
In general, a distribution will constitute a return of capital to a shareholder, rather than a dividend, to the extent such distribution exceeds the Fund’s current and accumulated earnings and profits. The portion of any distribution treated as a return of capital will constitute a tax-free return of capital to the extent of the shareholder’s basis in its Fund shares and thereafter generally will be taxable to the shareholder as capital gain. Any such distribution, in turn, will result in a reduction in a shareholder’s basis in the Fund’s shares (but not below zero) to the extent of the return of capital and in the shareholder’s recognizing more gain or less loss (that is, will result in an increase of a shareholder’s tax liability) when the shareholder later sells shares of the Fund. To permit the Fund to maintain a more stable distribution rate, the Fund may distribute less or more than the entire amount of cash it receives from its investments in a particular period. Any undistributed cash would be available to supplement future distributions, and until distributed would add to the Fund’s net asset value. Correspondingly, such amounts, once distributed, will be deducted from the Fund’s net asset value. In addition, in the discretion of the Fund, the Fund may determine not to make distributions in quarters in which the Fund believes that a distribution could cause adverse tax consequences to shareholders, including when the Fund believes that a distribution may not constitute a tax-free return of capital as described above.
Cash & Cash Equivalents
The Fund considers liquid assets deposited with a bank and certain short term debt instruments of sufficient credit quality with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at amortized cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities.
Master Limited Partnerships
Entities commonly referred to as “MLPs” are generally organized under state law as limited partnerships or limited liability companies. The Fund intends to primarily invest in MLPs receiving partnership taxation treatment under the Code, and whose interests or “units” are traded on securities exchanges like shares of corporate stock. To be treated as a partnership for U.S. federal income tax purposes, an MLP whose units are traded on a securities exchange must receive at least 90% of its income from qualifying sources such as interest, dividends, real estate rents, gain from the sale or disposition of real property,
income and gain from mineral or natural resources activities, income and gain from the transportation or storage of certain fuels, and, in certain circumstances, income and gain from commodities or futures, forwards and options with respect to commodities. Mineral or natural resources activities include exploration, development, production, processing, mining, refining, marketing and transportation (including pipelines), of oil and gas, minerals, geothermal energy, fertilizer, timber or industrial source carbon dioxide. An MLP consists of a general partner and limited partners (or in the case of MLPs organized as limited liability companies, a managing member and members). The general partner or managing member typically controls the operations and management of the MLP and has an ownership stake in the partnership. The limited partners or members, through their ownership of limited partner or member interests, provide capital to the entity, are intended to have no role in the operation and management of the entity and receive cash distributions. The MLPs themselves generally do not pay U.S. federal income taxes. Thus, unlike investors in corporate securities, direct MLP investors are generally not subject to double taxation (i.e., corporate level tax and tax on corporate dividends). Currently, most MLPs operate in the energy and/or natural resources sector.
Note 3. Securities Lending
The Fund may make secured loans of its portfolio securities amounting to not more than one-third of the value of its total assets, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delays in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially and possible investment losses in the investment of collateral. Pursuant to the Fund’s securities lending policies, securities loans are made to unaffiliated broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral in cash or short-term debt obligations at least equal at all times to the value of the securities subject to the loan. The borrower pays to the Fund an amount equal to any interest or dividends received on securities subject to the loan. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower.
Securities lending transactions are entered into Securities Lending Authorization Agreements (“SLAA”), which provides the right, in the event of default (including bankruptcy or insolvency) for the non-defaulting party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional collateral. In the event that a borrower defaults, the Fund, as lender, would offset the market value of the collateral received against the market
18 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
value of the securities loaned. The value of the collateral is typically greater than that of the market value of the securities loaned, leaving the lender with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of a SLAA counterparty’s bankruptcy or insolvency. Under the SLAA, the Fund can reinvest cash collateral, or, upon an event of default, resell or repledge the collateral, and the borrower can resell or repledge the loaned securities. The risks of securities lending also include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate this risk, the Fund benefits from a borrower default indemnity provided by State Street Bank and Trust Company (“State Street”). State Street’s indemnity allows for full replacement of securities lent.
For the period ended March 31, 2014, the Fund did not participate in securities lending.
Note 4. U.S. Federal Income Tax Information
The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, foreign taxes, investments in futures, losses deferred to off-setting positions, tax treatment of organizational start-up costs, losses deferred due to wash sale transactions, dividends deemed paid upon shareholder redemption of fund shares and tax attributes from fund reorganizations. Reclassifications are made to the Fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or net asset value of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.
The Fund’s income tax provision consists of the following:
Current | Deferred | Total | ||||||||||
Federal Tax (Expense)/Benefit | $ | (9,322 | ) | $ | (200,962 | ) | $ | (210,284 | ) | |||
State Tax (Expense)/Benefit | — | (604 | ) | (604 | ) | |||||||
International Tax (Expense)/Benefit | (79 | ) | — | (79 | ) | |||||||
|
|
|
|
|
| |||||||
Total Tax (Expense)/Benefit | $ | (9,401 | ) | $ | (201,566 | ) | $ | (210,967 | ) | |||
|
|
|
|
|
|
Deferred income taxes reflect (i) taxes on unrealized gains/(losses), which are attributable to the difference between fair market value and tax basis and (ii) the net tax effects of temporary differences between the carrying amounts of assets and liability for financial reporting purposes and the amounts used for income tax purposes and (iii) the net tax benefit of net operating losses.
At March 31, 2014, components of the Fund’s net deferred tax liability was as follows:
Total | ||||
Deferred Tax Assets: | ||||
Net Operating Loss Carryforwards | $ | — | ||
Deferred Tax Liabilities: | ||||
Unrealized Gains on Investment Securities | $ | 355,647 | ||
Basis Reduction resulting from Book v. Taxable Income Received from MLPs) | — | |||
|
| |||
Total Net Deferred Tax Liability | $ | 355,647 | ||
|
|
Total income taxes have been computed by applying the federal statutory income tax rate of 34% plus a blended state income tax rate of 2.2%. The Fund applied this effective rate to net investment income, realized and unrealized gains on investments before taxes in computing its total income taxes.
Although the Fund currently has a net deferred tax liability, it periodically reviews the recoverability of its deferred tax assets based on the weight of available evidence. As referenced in Note 2, when assessing the recoverability of its deferred tax assets, significant weight is given to the effects of potential future realized and unrealized gains on investments and the period over which these deferred tax assets can be realized, as the expiration date for the federal net operating loss carryforward is 20 years.
To the extent the Fund has a net capital loss in any tax year, the net capital loss generally can be carried back three years and forward five years to offset any capital gains realized during those other years. To the extent the Fund has a net operating loss in any tax year, the net operating loss generally can be carried back two years or forward twenty years to reduce the Fund’s net income realized during those other years. In the event a capital loss carryover or net operating loss carryover cannot be utilized in the carryover periods, the Fund’s U.S. federal income tax liability may be higher than expected, which will result in less cash available to distribute to shareholders. As of March 31, 2014, the Fund did not have any capital loss carryovers.
The tax composition of distributions paid during the six months ended March 31, 2014, and year ended September 30, 2013 was as follows:
Year | Return of Capital | Earnings & Profits | ||||||
2014 | $ | 88,144 | $ | 9,958 | ||||
2013 | 86,862 | 431,350 |
(1) | For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions. |
Semi-Annual Report | 19 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
Unrealized appreciation and depreciation at March 31, 2014, based on cost of investments for U.S. federal income tax purposes was:
Gross Appreciation | Gross Depreciation | Net Appreciation/ (Depreciation) Before Tax | Net Appreciation/ (Depreciation) After Tax | Cost | ||||||||||||||
$ | 917,762 | $ | 5,476 | $ | 912,286 | $ | 576,294 | $ | 3,494,750 |
Note 5. Credit Agreement
Effective May 24, 2013, the Fund entered into a $25,000,000 unsecured credit agreement with State Street Bank and Trust Company (the “Unsecured Credit Agreement”) to be used for temporary purposes to facilitate portfolio liquidity. The Fund had access to the facility, but aggregate borrowings cannot exceed $25,000,000. Interest is charged to the Fund based on their borrowings at a rate equal to the greater of the Federal Funds Effective Rate plus 1.25% or the LIBOR plus 1.25%. In addition, the Fund agrees to pay commitment fee expenses of 0.10% on the undrawn amounts, which are included in “Other” on the Statement of Operations. The Unsecured Credit Agreement is set to expire May 23, 2014. During the period ended March 31, 2014, the Fund did not have any outstanding borrowings.
Note 6. Transactions with Affiliates & Expenses Incurred by the Fund
Investment Advisory and Administration Fees
Highland serves as the investment adviser to the Fund. For its investment advisory and administrative services, the Fund pays Highland a monthly fee, computed and accrued daily, based on an annual rate of the Fund’s Average Daily Managed Assets. Average Daily Managed Assets of the Fund means the average daily value of the total assets of the Fund less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage). The Fund’s contractual advisory fee with Highland for the six months ended March 31, 2014 was 1.00%.
Highland has contractually agreed to limit the total annual operating expenses of the Fund (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, taxes, such as deferred tax expenses, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses) of the Fund to 1.10% of average daily net assets of the Fund (the “Expense Cap”). The Expense Cap will continue through at least January 31, 2015, and may not be terminated prior to this date without the action or consent of the Board of Trustees.
To the extent Highland waives its fee or reimburses expenses to satisfy the contractual limitation set forth above (the “cap”), it may seek repayment of a portion or all of such amounts at any time within 36 months after the date such amounts were waived or reimbursed, subject to the cap. There can be no assurance that this fee reduction will be sufficient to avoid any loss. On March 31, 2014, the amount subject to possible future recoupment under the Fund’s expense limitation agreement is $80,750 expiring in 2016.
Highland provides administrative services for a monthly administration fee, computed and accrued daily, at an annual rate of 0.20% of the Fund’s Average Daily Managed Assets. During the period ended March 31, 2014, Highland waived $3,460 in administrative fees for the Fund. This administration fee waiver is voluntary and is subject to termination at any time by Highland without notice.
Sub-Advisory Fees
Highland Capital Management, L.P. (“HCM”) is the investment sub-adviser to the Fund. Highland pays the sub-adviser an investment sub-advisory fee out of the advisory fee that it receives from the Fund.
Fees Paid to Officers and Trustees
Each Trustee who is not an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser and its affiliated advisors as of the date of this report.
The Fund paid no compensation to its one interested Trustee or any of their officers, all of whom are employees of the Investment Adviser.
Distribution and Shareholder Service Fees
The Fund has a distribution and shareholder service plan (the “Plan”) pursuant to Rule12b-1 under the 1940 Act. The Plan requires the payment of a monthly service fee to Foreside Funds Distributors LLC (the “Underwriter”) at an annual rate of 0.25% of the average daily net assets attributable to Class A, Class C and Class R shares of the Fund. In addition, the Plan also requires the payment of a monthly distribution fee to the Underwriter at an annual rate of 0.10% of the average daily net assets attributable to Class A shares. The Plan also requires the payment of a monthly distribution fee to the Underwriter at an annual rate of 0.75% of the average daily net assets attributable to Class C shares and 0.25% of the average daily net assets attributable to Class R shares. Currently Class Y
20 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2014 | Highland Energy MLP Fund |
shares are not subject to a 12b-1 fee. Effective April 1, 2014, Foreside Funds Distributors LLC will no longer be the underwriter for the Fund; this function will be performed by Highland Capital Fund Distributors, Inc.
Note 7. Disclosure of Significant Risks and Contingencies
The primary risks of investing in the Fund are described below in alphabetical order:
Counterparty Credit Risk
Counterparty credit risk is the potential loss the Fund may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Fund would record if its counterparties failed to perform pursuant to the terms of their obligations to the Fund. Because the Fund may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Fund may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Indemnification Risk
The Fund has a variety of indemnification obligations under contracts with its service providers. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Note 8. Investment Transactions
Purchases & Sales of Securities
The cost of purchases and the proceeds from sales of investments for the six months ended March 31, 2014, were as follows:
Other Securities | ||
Purchases | Sales | |
$1,351,792 | $1,079,385 |
Note 9. Significant Shareholders
The number of shareholders each owning 5% or more of the Fund is listed below. The total percentage of the Fund held by such shareholders as well as percentage of the Fund held by certain directly and indirectly wholly-owned subsidiaries of the Investment Adviser and their affiliates (“Highland Affiliates”) at March 31, 2014 were:
Number | % of Fund Held | |
1 | 90.57% |
Investment activities of these shareholders could have a material impact on the Fund.
Note 10. Subsequent Events
Management has evaluated the impact of all subsequent events for the Fund through the date the financial statements were issued, and has determined that there were no subsequent events.
Semi-Annual Report | 21 |
Table of Contents
ADDITIONAL INFORMATION (unaudited)
March 31, 2014 | Highland Energy MLP Fund |
Additional Portfolio Information
The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Fund are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Fund, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Fund and one or more of such other accounts are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Fund and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Fund, in some cases these activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.
Disclosure of Fund Expenses
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchases and redemption fees; and (2) ongoing costs, including management fees; distribution (12b-1) and service fees; and other Fund expenses. This example is intended to help you understand the ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period October 1, 2013 through March 31, 2014, unless otherwise indicated.
This table illustrates the Fund’s costs in two ways:
Actual Expenses: The first part of the table provides information about actual account values and actual
expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes: The second part of the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The actual expense ratio includes voluntary fee waivers or expense reimbursements by the Fund’s investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption fees. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value 10/01/13 | Ending Account Value 03/31/14 | Annualized Expense Ratio(1) | Expenses Paid During the Period(1) | Actual Returns for Period | ||||||||||||||||
Highland Energy MLP Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,104.70 | 1.46 | % | $ | 7.66 | 10.47 | % | ||||||||||
Class C | 1,000.00 | 1,100.50 | 2.10 | % | 10.99 | 10.05 | % | |||||||||||||
Class R | 1,000.00 | 1,103.10 | 1.60 | % | 8.39 | 10.31 | % | |||||||||||||
Class Y | 1,000.00 | 1,105.90 | 1.10 | % | 5.78 | 10.59 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,017.65 | 1.46 | % | $ | 7.34 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,014.46 | 2.10 | % | 10.54 | 5.00 | % | |||||||||||||
Class R | 1,000.00 | 1,016.85 | 1.60 | % | 8.05 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,019.45 | 1.10 | % | 5.54 | 5.00 | % |
(1) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, divided by the number of days in the full fiscal year (182/365). |
22 | Semi-Annual Report |
Table of Contents
IMPORTANT INFORMATION ABOUT THIS REPORT
Investment Adviser
Highland Capital Management Fund Advisors, L.P.
200 Crescent Court, Suite 700
Dallas, TX 75201
Sub-Adviser
Highland Capital Management, L.P.
300 Crescent Court, Suite 700
Dallas, TX 75201
Transfer Agent
Boston Financial Data Services, Inc.
30 Dan Road
Canton, Massachusetts 02021
Underwriter
Foreside Funds Distributors LLC
400 Berwyn Park
899 Cassatt Road, 1st Floor
Berwyn, PA 19312
Custodian
State Street Bank and Trust Company
801 Pennsylvania Avenue
Kansas City, Missouri 64105
Independent Registered Public
Accounting Firm
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Fund Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199-3600
This report has been prepared for shareholders of Highland Energy MLP Fund. The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to their portfolio securities, and the Fund’s proxy voting records for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Fund’s website at www.highlandfunds.com.
The Statement of Additional Information includes additional information about the Fund’s Trustees and is available upon request without charge by calling 1-877-665-1287.
Semi-Annual Report | 23 |
Table of Contents
THIS PAGE LEFT BLANK INTENTIONALLY
Table of Contents
200 Crescent Court, Suite 700
Dallas, TX 75201
Highland Energy MLP Fund | Semi-Annual Report, March 31, 2014 |
www.highlandfunds.com | HLC-MLP-SEMI-03/14 |
Table of Contents
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors.
Item 11. Controls and Procedures.
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c)) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
Table of Contents
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) | Not applicable. |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(a)(3) | Not applicable. |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HIGHLAND FUNDS II
By (Signature and Title): | /s/ Ethan Powell | |
Ethan Powell Executive Vice President and Principal Executive Officer (Principal Executive Officer) | ||
Date: June 5, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title): | /s/ Ethan Powell | |
Ethan Powell Executive Vice President and Principal Executive Officer (Principal Executive Officer) | ||
Date: June 5, 2014 |
By (Signature and Title): | /s/ Brian Mitts | |
Brian Mitts Chief Financial Officer and Treasurer (Principal Financial Officer) | ||
Date: June 5, 2014 |