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
(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, 2016
Table of Contents
Item 1: Reports to Stockholders.
A copy of the Reports to Shareholders transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended, (the “1940 Act”) is attached herewith.
Table of Contents
Highland Funds II
Highland Global Allocation 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, 2016
Table of Contents
Highland Funds II
Highland Global Allocation Fund
Highland Premier Growth Equity Fund
Highland Small-Cap Equity Fund
Highland Total Return Fund
Highland Tax-Exempt Fund
Highland Fixed Income Fund
1 | ||||
7 | ||||
32 | ||||
36 | ||||
38 | ||||
Statements of Changes in Net Assets — Capital Stock Activity — Shares | 42 | |||
46 | ||||
53 | ||||
73 | ||||
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. (Future income means the ability to pay dividends in the future.)
Net Assets as of March 31, 2016
$928.7 Million
Portfolio Data as of March 31, 2016
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.
Sector Classifications as of 03/31/2016 (%)(1) | ||||
U.S. Senior Loans | 21.6 | |||
Non-U.S. Asset-Backed Securities | 18.3 | |||
Non-U.S. Government Bonds | 17.1 | |||
U.S. Equity | 16.4 | |||
Non-U.S. Equity | 11.1 | |||
Non-U.S. Master Limited Partnerships | 9.9 | |||
U.S. Master Limited Partnerships | 9.0 | |||
Non-U.S. Senior Loans | 7.8 | |||
U.S. Corporate Bonds & Notes | 4.4 | |||
Non-U.S. Corporate Bonds & Notes | 3.3 | |||
U.S. Purchased Call Options | 1.2 | |||
U.S. Exchange-Traded Funds | 0.9 | |||
Non-U.S. Investment Companies | 0.4 | |||
Non-U.S. Exchange-Traded Funds | 0.2 | |||
U.S. Warrants | 0.0 | † | ||
Other Investments and Assets & Liabilities(2) | (21.6 | ) |
Top 10 Holdings as of 03/31/2016 (%)(1)(3) | ||||
Texas Competitive Electric Holdings Co. LLC, 4.92%, 10/10/2017 | 14.7 | |||
TerreStar Corp. (U.S. Equity) | 10.3 | |||
Salesforce.com, Inc. (Non-U.S. Equity) | 7.6 | |||
Argentine Republic Government International Bond, 8.28%, 12/31/2038 (Non-U.S. Government Bonds) | 7.0 | |||
Argentine Republic Government International Bond, 2.5%, 02/27/2020 | 4.5 | |||
TerreStar Corporation, 11%, 12/31/2033 (U.S. Senior Loans) | 4.2 | |||
Patterson Cos., Inc. (U.S. Equity) | 3.6 | |||
Westchester CLO, Ltd., 1.47%, 08/01/2022 (Non-U.S. Asset-Backed Securities) | 3.1 | |||
Enterprise Products Partners LP (Non-U.S. Master Limited Partnerships) | 2.9 | |||
Brazil Letras do Tesouro Nacional (Non-U.S. Government Bonds) | 2.7 |
(1) | Asset classifications and holdings are calculated as a percentage of total net assets and net of long and short positions. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $10,161,603 and cash equivalent investments in the amount of $7,001,979. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending and cash equivalent investments. |
† | Less than 0.05%. |
Semi-Annual Report | 1 |
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, 2016
$218.6 million
Portfolio Data as of March 31, 2016
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 03/31/2016 (%)(1) | ||||
Software & Services | 25.9 | |||
Diversified Financials | 13.8 | |||
Media | 11.7 | |||
Healthcare Equipment & Services | 10.9 | |||
Retailing | 5.6 | |||
Technology Hardware & Equipment | 5.5 | |||
Pharmaceuticals, Biotechnology & Life Sciences | 5.2 | |||
Real Estate | 4.0 | |||
Food, Beverage & Tobacco | 4.0 | |||
Materials | 2.9 | |||
Energy | 2.7 | |||
Capital Goods | 1.4 | |||
Semiconductors & Semiconductor Equipment | 1.4 | |||
Consumer Services | 1.4 | |||
Transportation | 1.3 | |||
Other Investments and Assets & Liabilities(2) | 2.3 |
Top 10 Holdings as of 03/31/2016 (%)(1)(3) | ||||
Alphabet, Inc. (Common Stocks) | 5.9 | |||
Apple, Inc. (Common Stocks) | 5.5 | |||
Visa, Inc. (Common Stocks) | 5.3 | |||
Facebook, Inc. (Common Stocks) | 5.0 | |||
Amazon.com, Inc. (Common Stocks) | 4.7 | |||
Baidu, Inc., (Common Stocks) | 4.6 | |||
Medtronic PLC (Common Stocks) | 4.3 | |||
Comcast Corp. (Common Stocks) | 4.2 | |||
CME Group, Inc. (Common Stocks) | 4.1 | |||
American Tower Corp. (Common Stocks) | 4.0 |
(1) | Industries and holdings are calculated as a percentage of total net assets and net of long and short positions. |
(2) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $19,416,751. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending and cash equivalent investments. |
2 | Semi-Annual Report |
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, 2016
$31.9 Million
Portfolio Data as of March 31, 2016
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 03/31/2016 (%)(1) | ||||
Energy | 27.4 | |||
Pharmaceuticals, Biotechnology & Life Sciences | 23.6 | |||
Consumer Services | 10.6 | |||
Healthcare Equipment & Services | 9.5 | |||
Diversified Financials | 8.6 | |||
Banks | 4.7 | |||
Software & Services | 4.7 | |||
Materials | 4.6 | |||
Retailing | 4.2 | |||
Utilities | 3.9 | |||
Commercial & Professional Services | 3.1 | |||
Other Investments and Assets & Liabilities(2) | (4.9 | ) |
Top 10 Holdings as of 03/31/2016 (%)(1)(3) | ||||
Amicus Therapeutics, Inc. (Common Stocks) | 7.0 | |||
Pacira Pharmaceuticals, Inc. (Common Stocks) | 5.8 | |||
Western Gas Equity Partners LP (Master Limited Partnerships) | 4.4 | |||
Energy Transfer Equity LP (Master Limited Partnerships) | 4.2 | |||
Calpine Corp. (Common Stocks) | 3.9 | |||
SemGroup Corp. (Common Stocks) | 3.8 | |||
Sonic Corp. (Common Stocks) | 3.8 | |||
Dynagas LNG Partners LP (Master Limited Partnerships) | 3.7 | |||
SeaWorld Entertainment, Inc. (Common Stocks) | 3.6 | |||
Fortress Investment Group LLC (Common Stocks) | 3.5 |
(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 $7,752,734 and cash equivalent investments in the amount of $52,857. |
(3) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending and cash equivalent investments. |
Semi-Annual Report | 3 |
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, 2016
$75.7 million
Portfolio Data as of March 31, 2016
The information below provides a snapshot of 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 03/31/2016 (%)(1)(2) | ||||
AAA | 4.9 | |||
AA | 60.2 | |||
A | 6.2 | |||
BBB | 9.1 | |||
BB | 7.6 | |||
B | 4.0 | |||
CCC | 2.8 | |||
Not Rated | 5.2 |
Sector Classifications as of 03/31/2016 (%)(1) | ||||
Common Stocks | 71.0 | |||
Registered Investment Companies | 35.4 | |||
Agency Mortgage-Backed Securities | 3.1 | |||
Preferred Stocks | 1.6 | |||
Corporate Bonds & Notes | 1.2 | |||
Non-Agency Collateralized Mortgage-Backed Securities | 0.5 | |||
Foreign Corporate Bonds & Notes | 0.5 | |||
Agency Collateralized Mortgage Obligations | 0.0 | † | ||
Asset-Backed Securities | 0.0 | † | ||
Other Investments and Assets & Liabilities(3) | (13.3 | ) |
Top 10 Holdings as of 03/31/2016 (%)(1)(2) | ||||
PICO Holdings, Inc. (Common Stocks) | 7.8 | |||
Level 3 Communications, Inc. (Common Stocks) | 4.1 | |||
PIMCO Corporate & Income Opportunity Fund | 4.1 | |||
Biogen, Ltd. (Common Stocks) | 3.9 | |||
Allergan PLC (Common Stocks) | 3.7 | |||
Live Nation Entertainment, Inc. (Common Stocks) | 3.2 | |||
Pfizer, Inc. (Common Stocks) | 3.1 | |||
Wynn Resorts, Ltd. (Common Stocks) | 3.0 | |||
Lions Gate Entertainment Corp. (Common Stocks) | 2.9 | |||
FTD Cos., Inc. (Common Stocks) | 2.8 |
(1) | Quality is calculated as a percentage of total bonds and 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. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to de-leverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality Ratings are subject to change. |
(2) | Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending and cash equivalent investments. |
(3) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $20,109,459 and cash equivalent investments in the amount of $7,726,195. |
† | Less than 0.05%. |
4 | Semi-Annual Report |
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, 2016
$28.0 million
Portfolio Data as of March 31, 2016
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 03/31/2016 (%)(1)(2) | ||||
AAA | 15.2 | |||
AA | 51.3 | |||
A | 25.9 | |||
Not Rated | 7.6 |
Sector Classifications as of 03/31/2016 (%)(1) | ||||
Municipal Bonds & Notes | 69.8 | |||
Cash Equivalents | 38.9 | |||
Other Investments and Assets & Liabilities(3) | (8.7 | ) |
Top 10 Holdings as of 03/31/2016 (%)(1)(2) | ||||
City of Atlanta, GA Water & Wastewater 5.75%, 11/01/30 (Municipal Bonds & Notes) | 2.5 | |||
Los Angeles County Public Works Financing Authority 5.00%, 12/01/27 (Municipal Bonds & Notes) | 2.2 | |||
Regional Transportation District, CO 5.00%, 11/01/27 (Municipal Bonds & Notes) | 2.2 | |||
California State Department of Water Resources 5.00%, 12/01/21 (Municipal Bonds & Notes) | 2.2 | |||
Kentucky Municipal Power Agency 5.00%, 09/01/24 (Municipal Bonds & Notes) | 2.2 | |||
Alaska Housing Finance Corp. 5.00%, 12/01/27 (Municipal Bonds & Notes) | 2.1 | |||
Massachusetts Water Resources Authority 5.00%, 08/01/32 (Municipal Bonds & Notes) | 2.1 | |||
Town of Fairfield, CT 5.00%, 01/01/21 (Municipal Bonds & Notes) | 2.1 | |||
City of Atlanta Department of Aviation 5.00%, 01/01/33 (Municipal Bonds & Notes) | 2.1 | |||
State of Connecticut 5.00%, 01/01/22 (Municipal Bonds & Notes) | 2.1 |
(1) | Quality is calculated as a percentage of total bonds and 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. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to de-leverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality Ratings are subject to change. 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. |
(2) | Excludes the Fund’s cash equivalent investments. |
(3) | Includes the Fund’s cash equivalent investments in the amount of $10,878,536. |
Semi-Annual Report | 5 |
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, 2016
$133.7 million
Portfolio Data as of March 31, 2016
The information below provides a snapshot of 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 03/31/2016 (%)(1)(2) | ||||
AAA | 0.1 | |||
AA | 22.3 | |||
A | 9.4 | |||
BBB | 27.3 | |||
BB | 5.6 | |||
B | 2.6 | |||
CCC | 0.2 | |||
CC | 0.2 | |||
Not Rated | 32.3 |
Sector Classifications as of 03/31/2016 (%)(1) | ||||
Corporate Bonds & Notes | 33.9 | |||
U.S. Government Agencies | 17.0 | |||
Agency Mortgage-Backed Securities | 16.4 | |||
Registered Investment Companies | 7.6 | |||
Foreign Corporate Bonds & Notes | 7.1 | |||
Municipal Bonds & Notes | 3.9 | |||
Non-Agency Collateralized Mortgage-Backed Securities | 3.4 | |||
Preferred Stocks | 2.8 | |||
Common Stocks | 1.7 | |||
Sovereign Bonds | 0.7 | |||
Asset-Backed Securities | 0.4 | |||
Agency Collateralized Mortgage Obligations | 0.1 | |||
Other Investments and Assets & Liabilities(3) | 5.0 |
Top 10 Holdings as of 03/31/2016 (%)(1)(2) | ||||
Federal National Mortgage Assoc. 4.50%, 09/01/40 (Agency Mortgage-Backed Securities) | 2.1 | |||
Government National Mortgage Assoc. 3.50%, 05/20/43 (Agency Mortgage-Backed Securities) | 1.7 | |||
Government National Mortgage Assoc. 4.00%, 01/20/41 (Agency Mortgage-Backed Securities) | 1.6 | |||
Federal National Mortgage Assoc. 3.00%, 06/01/43 (Agency Mortgage-Backed Securities) | 1.5 | |||
Federal National Mortgage Assoc. 3.00%, 05/01/43 (Agency Mortgage-Backed Securities) | 1.5 | |||
Federal Home Loan Mortgage Corp., MTN 1.25%, 09/30/20 (U.S. Government Agencies) | 1.5 | |||
Federal Home Loan Mortgage Corp., MTN 1.25%, 12/14/20 (U.S. Government Agencies) | 1.5 | |||
Federal National Mortgage Assoc. 1.38%, 10/29/20 (U.S. Government Agencies) | 1.5 | |||
Federal Home Loan Mortgage Corp., MTN 1.25%, 10/29/20 (U.S. Government Agencies) | 1.5 | |||
Federal Home Loan Mortgage Corp., MTN 1.50%, 10/15/20 (U.S. Government Agencies) | 1.5 |
(1) | Quality is calculated as a percentage of total bonds and 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. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to deleverage through free cash flow, quality of management, market positioning and access to capital, as well as such security specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not 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 and cash equivalent investments. |
(3) | Includes the Fund’s investments of cash collateral received in connection with securities lending in the amount of $5,925,820 and cash equivalent investments in the amount of $6,322,380. |
6 | Semi-Annual Report |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| U.S. Senior Loans (a) - 21.6% |
| ||||||
CHEMICALS - 0.2% | ||||||||
3,951,884 | Vertellus Specialties, Inc. | 2,356,311 | ||||||
|
| |||||||
ENERGY - 0.1% | ||||||||
1,466,478 | Arch Coal, Inc. | 532,823 | ||||||
|
| |||||||
FINANCIAL - 0.3% | ||||||||
3,000,000 | Maxim Crane Works LP | 2,835,000 | ||||||
|
| |||||||
HEALTHCARE - 0.6% | ||||||||
5,922,032 | HLS Therapeutics, Inc. | 5,843,269 | ||||||
|
| |||||||
MEDIA & TELECOMMUNICATIONS - 1.0% | ||||||||
11,984,161 | Getty Images, Inc. | 8,964,632 | ||||||
|
| |||||||
TELECOMMUNICATIONS - 4.5% | ||||||||
3,063,366 | Avaya, Inc. | 2,061,752 | ||||||
39,587,181 | TerreStar Corporation | 39,428,833 | ||||||
|
| |||||||
41,490,585 | ||||||||
|
| |||||||
TRANSPORTATION - 0.1% | ||||||||
1,500,000 | Quality Distribution, Inc. | 1,125,000 | ||||||
|
| |||||||
UTILITY - 14.8% | ||||||||
1,000,000 | Granite Acquisition Inc. | 785,000 | ||||||
471,039,553 | Texas Competitive Electric Holdings Co. LLC | 136,601,470 | ||||||
|
| |||||||
137,386,470 | ||||||||
|
| |||||||
Total U.S. Senior Loans (Cost $358,977,124) | 200,534,090 | |||||||
|
| |||||||
| Non-U.S. Senior Loans (a)(f) - 7.8% |
| ||||||
ENERGY - 3.3% | ||||||||
10,344,624 | Azure Midstream Energy LLC | 5,430,928 | ||||||
13,409,691 | Chief Exploration & Development LLC | 7,995,528 |
Principal Amount ($) | Value ($) | |||||||
ENERGY (continued) | ||||||||
10,515,935 | Drillships Financing Holding, Inc. | 3,805,506 | ||||||
10,105,937 | Drillships Ocean Ventures Inc. | 4,655,098 | ||||||
31,516,671 | Fieldwood Energy LLC | 5,830,584 | ||||||
7,590,892 | Seadrill Partners Finco LLC | 3,391,497 | ||||||
|
| |||||||
31,109,141 | ||||||||
|
| |||||||
HEALTHCARE - 0.3% | ||||||||
3,758,898 | Onex Carestream Finance LP | 3,126,144 | ||||||
|
| |||||||
INFORMATION TECHNOLOGY - 0.4% | ||||||||
7,000,000 | SkillSoft Corp. | 3,325,000 | ||||||
|
| |||||||
MANUFACTURING - 0.1% | ||||||||
675,862 | Doncasters US Finance LLC | 617,569 | ||||||
|
| |||||||
MEDIA & TELECOMMUNICATIONS - 0.5% | ||||||||
6,428,571 | iHeartCommunications, Inc. | 4,479,107 | ||||||
|
| |||||||
RETAIL - 1.0% | ||||||||
1,180,672 | Toys ‘R’ Us Property Co. I LLC | 1,047,847 | ||||||
10,564,148 | Toys ‘R’ Us-Delaware, Inc. | 8,578,933 | ||||||
|
| |||||||
9,626,780 | ||||||||
|
| |||||||
SERVICE - 2.2% | ||||||||
1,725,179 | EnergySolutions LLC | 1,604,416 | ||||||
25,232,505 | Weight Watchers International, Inc. | 18,747,751 | ||||||
|
| |||||||
20,352,167 | ||||||||
|
| |||||||
Total Non-U.S. Senior Loans | 72,635,908 | |||||||
|
| |||||||
| Non-U.S. Asset-Backed Securities (f)(g)(h) - 18.3% |
| ||||||
6,750,000 | Acis CLO, Ltd. | 4,534,987 | ||||||
6,000,000 | Series 2014-3A, Class D 3.74%, 02/01/2026 (i) | 4,365,000 |
See accompanying Notes to Financial Statements. | 7 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| Non-U.S. Asset-Backed Securities (continued) |
| ||||||
12,000,000 | Series 2014-5A, Class D 4.96%, 11/01/2026 (i) | 9,740,000 | ||||||
4,000,000 | Series 2014-4A, Class F 5.77%, 05/01/2026 (i) | 1,730,600 | ||||||
4,000,000 | Series 2013-2A, Class E 5.55%, 10/14/2022 (i) | 3,276,800 | ||||||
3,075,000 | AIMCO CLO | 2,613,750 | ||||||
800,000 | Allegro CLO II, Ltd. | 659,920 | ||||||
2,700,000 | Series 2014-1A, Class E 7.37%, 01/21/2027 | 1,891,890 | ||||||
Anchorage Capital CLO, Ltd. | ||||||||
3,000,000 | Series 2014-5A, Class E 5.62%, 10/15/2026 | 2,307,000 | ||||||
3,500,000 | Series 2015-7A, Class E 5.62%, 10/15/2027 | 2,741,550 | ||||||
2,000,000 | Series 2014-5A, Class F 6.52%, 10/15/2026 | 1,340,600 | ||||||
3,000,000 | Apidos CLO XXI | 2,035,200 | ||||||
2,000,000 | Arrowpoint CLO, Ltd. | 1,670,000 | ||||||
1,250,000 | Betony CLO, Ltd. | 862,500 | ||||||
1,400,000 | Cathedral Lake CLO, Ltd. | 1,169,000 | ||||||
1,000,000 | Cent CLO, Ltd. | 539,500 | ||||||
1,000,000 | CFIP CLO, Ltd. | 764,380 | ||||||
1,000,000 | CIFC Funding IV, Ltd. | 667,400 | ||||||
3,192,677 | Eastland CLO, Ltd. | 2,547,011 | ||||||
12,010,000 | Series 2007-1A, Class C 2.12%, 05/01/2022 (i) | 9,703,119 | ||||||
1,500,000 | Figueroa CLO, Ltd. | 775,635 | ||||||
1,500,000 | Flagship CLO VIII, Ltd. | 1,185,000 | ||||||
4,000,000 | Series 2014-8A, Class E 5.82%, 01/16/2026 | 2,380,000 | ||||||
2,000,000 | Series 2014-8A, Class F 6.47%, 01/16/2026 | 940,000 | ||||||
1,500,000 | Franklin CLO V, Ltd. | 1,426,875 |
Principal Amount ($) | Value ($) | |||||||
500,000 | Galaxy XVII CLO, Ltd. | 344,050 | ||||||
7,200,000 | Grayson CLO, Ltd. | 5,866,560 | ||||||
2,250,000 | Halcyon Loan Advisors Funding, Ltd. Series 2014-3A, Class E1 5.77%, 10/22/2025 | 1,181,250 | ||||||
1,962,500 | Highbridge Loan Management, Ltd. | 1,534,479 | ||||||
208,580 | Highland Park CDO, Ltd. | 195,370 | ||||||
2,000,000 | Series 2006-1A, Class A2 1.03%, 11/25/2051 (i) | 1,420,000 | ||||||
7,000,000 | KVK CLO, Ltd. | 5,040,000 | ||||||
1,500,000 | Magnetite XIV, Ltd. | 1,110,000 | ||||||
3,200,000 | Marathon CLO VI, Ltd. | 2,016,000 | ||||||
1,000,000 | Marea CLO, Ltd. | 830,000 | ||||||
1,500,000 | Mountain Hawk CLO, Ltd. | 857,400 | ||||||
5,000,000 | Mountain View CLO II, Ltd. | 3,666,875 | ||||||
2,000,000 | Mountain View CLO X, Ltd. | 1,110,000 | ||||||
3,720,000 | Neptuno CLO II BV | 3,700,547 | ||||||
1,000,000 | PPM Grayhawk CLO, Ltd. | 869,500 | ||||||
2,000,000 | Recette CLO LLC | 1,453,600 | ||||||
4,620,339 | Red River CLO, Ltd. | 4,223,337 | ||||||
6,500,000 | Rockwall CDO II, Ltd. | 5,713,175 | ||||||
2,000,000 | Saranac CLO III, Ltd. | 1,265,000 | ||||||
1,800,000 | Silver Spring CLO, Ltd. | 803,286 | ||||||
2,450,000 | Sound Harbor Loan Fund, Ltd. | 1,879,640 |
8 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| Non-U.S. Asset-Backed Securities (continued) |
| ||||||
3,805,154 | Stanfield McLaren CLO Delaware Corp. | 3,348,295 | ||||||
3,774,031 | Stratford CLO, Ltd. | 3,357,755 | ||||||
1,000,000 | THL Credit Wind River CLO, Ltd. | 872,000 | ||||||
1,500,000 | Series 2014-1A, Class E 5.57%, 04/18/2026 | 1,143,750 | ||||||
4,000,000 | Series 2014-2A, Class E 5.87%, 07/15/2026 | 2,934,000 | ||||||
2,000,000 | Series 2014-3A, Class E 6.22%, 01/22/2027 | 1,460,000 | ||||||
500,000 | TICP CLO III, Ltd. | 350,000 | ||||||
1,000,000 | Vibrant CLO II, Ltd. | 550,000 | ||||||
2,000,000 | Vibrant CLO, Ltd. | 1,525,180 | ||||||
1,000,000 | West CLO, Ltd. | 710,000 | ||||||
32,673,000 | Westchester CLO, Ltd. | 28,876,561 | ||||||
6,750,000 | Series 2007-1A, Class D 2.97%, 08/01/2022 (i) | 5,958,900 | ||||||
9,377,206 | Series 2007-1A, Class E 4.92%, 08/01/2022 (i) | 8,000,851 | ||||||
4,000,000 | Zais CLO, Ltd. | 2,841,200 | ||||||
700,000 | Series 2014-2A, Class E 7.12%, 07/25/2026 | 413,490 | ||||||
1,500,000 | Ziggurat CLO I, Ltd. | 870,600 | ||||||
|
| |||||||
Total Non-U.S. Asset-Backed Securities | 170,160,368 | |||||||
|
| |||||||
| U.S. Corporate Bonds & Notes - 5.1% |
| ||||||
CHEMICALS - 2.2% | ||||||||
28,996,500 | Momentive Performance Materials, Inc. | 17,252,917 | ||||||
4,978,000 | 3.88%, 10/24/2021 (j) | 3,621,495 | ||||||
|
| |||||||
20,874,412 | ||||||||
|
| |||||||
CONSUMER SERVICES - 0.6% | ||||||||
5,999,600 | Guitar Center, Inc. | 5,429,638 | ||||||
|
| |||||||
GAMING & LEISURE - 0.8% | ||||||||
8,844,000 | Scientific Games International, Inc. | 7,207,860 | ||||||
|
|
Principal Amount ($) | Value ($) | |||||||
RETAIL - 0.5% | ||||||||
5,000,000 | Men’s Wearhouse, Inc. (The) | 4,262,500 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.3% | ||||||||
9,500,000 | Avaya, Inc. | 2,968,750 | ||||||
|
| |||||||
UTILITIES - 0.7% | ||||||||
51,140,000 | Texas Competitive Electric Holdings Co., LLC | 1,917,750 | ||||||
3,000,000 | 10/01/2020 (b)(g) | 877,500 | ||||||
25,000,000 | 04/01/2021 (b) | 968,750 | ||||||
75,094,000 | 11/01/2015 (b) | 2,628,290 | ||||||
9,346,000 | 11/01/2016 (b) | 327,110 | ||||||
|
| |||||||
6,719,400 | ||||||||
|
| |||||||
Total U.S. Corporate Bonds & Notes (Cost $79,599,224) | 47,462,560 | |||||||
|
| |||||||
| Non-U.S. Corporate Bonds & Notes (f) - 5.2% |
| ||||||
AUTOMOBILES & COMPONENTS - 1.2% | ||||||||
75,000,000 | DPH Holdings Corp. | 2,343,750 | ||||||
25,000,000 | 06/15/2006 (b) | 781,250 | ||||||
30,000,000 | 08/15/2013 (b) | 937,500 | ||||||
2,308,000 | Intelsat Jackson Holdings SA | 1,246,320 | ||||||
6,000,000 | YPF SA | 6,022,500 | ||||||
|
| |||||||
11,331,320 | ||||||||
|
| |||||||
BROADCASTING - 0.5% | ||||||||
20,484,063 | iHeartCommunications, Inc. PIK 14.00%, 02/01/2021 (k) | 4,711,335 | ||||||
|
| |||||||
CHEMICALS - 0.1% | ||||||||
2,000,000 | Hexion, Inc./Hexion Nova Scotia Finance ULC | 815,000 | ||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.2% | ||||||||
2,000,000 | Laureate Education, Inc. | 1,480,000 | ||||||
|
| |||||||
ENERGY - 2.7% | ||||||||
290 | American Energy-Permian Basin LLC | 90 | ||||||
3,000,000 | MEG Energy Corp. | 1,826,250 | ||||||
37,083,000 | Ocean Rig UDW, Inc. 7.25%, 04/01/2019 (g)(k) | 22,991,460 | ||||||
|
| |||||||
24,817,800 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 0.5% | ||||||||
6,875,000 | Crimson Merger Sub, Inc. 6.63%, 05/15/2022 (g)(j) | 5,147,656 | ||||||
|
| |||||||
Total Non-U.S. Corporate Bonds & Notes | 48,303,111 | |||||||
|
|
See accompanying Notes to Financial Statements. | 9 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| Non-U.S. Government Bonds (f) - 17.1% |
| ||||||
62,500,000 | Argentine Republic Government International Bond | 41,906,250 | ||||||
54,679,670 | 12/31/2033 (b) | 64,767,370 | ||||||
40,600,000 | Brazil Letras do Tesouro Nacional 0.00%, 01/01/2017 (l) | 10,389,625 | ||||||
106,190,000 | 0.00%, 10/01/2017 (l) | 24,773,042 | ||||||
7,975,000 | Brazil Letras Financeiras do Tesouro | 17,188,092 | ||||||
|
| |||||||
Total Non-U.S. Government Bonds | 159,024,379 | |||||||
|
| |||||||
Shares | ||||||||
| U.S. Equity - 20.9% |
| ||||||
BANKS - 0.4% | ||||||||
45,720 | CIT Group, Inc. (j) | 1,418,692 | ||||||
102,131 | Hilltop Holdings, Inc. (j)(m) | 1,928,233 | ||||||
|
| |||||||
3,346,925 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.0% | ||||||||
1,000 | Fastenal Co. (k) | 49,000 | ||||||
1,500 | Graco, Inc. (d) | 125,940 | ||||||
1,000 | Northrop Grumman Corp. (k) | 197,900 | ||||||
|
| |||||||
372,840 | ||||||||
|
| |||||||
CHEMICALS - 0.6% | ||||||||
242,762 | MPM Holdings, Inc (d)(m)(n) | 1,699,334 | ||||||
487,722 | MPM Holdings, Inc. (j)(k)(m) | 3,414,054 | ||||||
|
| |||||||
5,113,388 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.0% | ||||||||
3,000 | Waste Management, Inc. (k) | 177,000 | ||||||
|
| |||||||
CONSUMER SERVICES - 2.0% | ||||||||
1,685,151 | K12, Inc. (j)(m) | 16,666,143 | ||||||
80,000 | Service Corp. International (j) | 1,974,400 | ||||||
|
| |||||||
18,640,543 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.0% | ||||||||
2,000 | Sysco Corp. (k) | 93,460 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.1% | ||||||||
5,000 | Hormel Foods Corp. (d)(k) | 216,200 | ||||||
9,400 | Kraft Heinz Co. (The) (j) | 738,464 | ||||||
|
| |||||||
954,664 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 5.1% | ||||||||
25,000 | ABIOMED, Inc. (j)(m) | 2,370,250 | ||||||
158,775 | Brookdale Senior Living, Inc. (j)(m) | 2,521,347 | ||||||
2,000 | Henry Schein, Inc. (d)(k)(m) | 345,260 | ||||||
2,000 | IDEXX Laboratories, Inc. (d)(m) | 156,640 | ||||||
135,000 | Kindred Healthcare, Inc. (j) | 1,667,250 | ||||||
187,796 | LDR Holding Corp. (j)(k)(m) | 4,786,920 | ||||||
720,000 | Patterson Cos., Inc. (j) | 33,501,600 | ||||||
57,707 | Tenet Healthcare Corp. (j)(m) | 1,669,464 | ||||||
|
| |||||||
47,018,731 | ||||||||
|
|
Shares | Value ($) | |||||||
HOUSEHOLD & PERSONAL PRODUCTS - 0.0% | ||||||||
1,500 | Clorox Co. (The) | 189,090 | ||||||
|
| |||||||
INSURANCE - 0.3% | ||||||||
83,585 | FNF Group (j) | 2,833,531 | ||||||
|
| |||||||
MATERIALS - 0.2% | ||||||||
2,000 | Dow Chemical Co. (The) (k) | 101,720 | ||||||
18,600 | Vulcan Materials Co. (j) | 1,963,602 | ||||||
|
| |||||||
2,065,322 | ||||||||
|
| |||||||
MEDIA - 0.1% | ||||||||
1,570,000 | Cumulus Media, Inc., Class A (j)(m) | 728,951 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.1% | ||||||||
2,000 | Johnson & Johnson (k) | 216,400 | ||||||
58,950 | Otonomy, Inc. (j)(m) | 879,534 | ||||||
|
| |||||||
1,095,934 | ||||||||
|
| |||||||
REAL ESTATE - 0.5% | ||||||||
1,000 | AvalonBay Communities, Inc., REIT | 190,200 | ||||||
18,000 | Extra Space Storage, Inc., REIT (j) | 1,682,280 | ||||||
500 | Simon Property Group, Inc., REIT (k) | 103,845 | ||||||
273,599 | Spirit Realty Capital, Inc., REIT (j) | 3,077,989 | ||||||
|
| |||||||
5,054,314 | ||||||||
|
| |||||||
RETAILING - 0.2% | ||||||||
2,000 | Pool Corp. (k) | 175,480 | ||||||
48,000 | Sally Beauty Holdings, Inc. (j)(m) | 1,554,240 | ||||||
|
| |||||||
1,729,720 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.0% | ||||||||
5,000 | SunPower Corp. (k)(m) | 111,700 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 0.7% | ||||||||
300 | Alphabet, Inc., Class A (d)(m) | 228,870 | ||||||
3,457 | Alphabet, Inc., Class C (j)(m) | 2,575,292 | ||||||
42,854 | CDK Global, Inc. (j) | 1,994,854 | ||||||
2,501 | Microsoft Corp. | 138,130 | ||||||
59,700 | Sabre Corp. (j) | 1,726,524 | ||||||
|
| |||||||
6,663,670 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 10.3% | ||||||||
306,550 | TerreStar Corp. (c)(e)(m)(o) | 95,520,980 | ||||||
|
| |||||||
TRANSPORTATION - 0.2% | ||||||||
19,300 | Kansas City Southern (j) | 1,649,185 | ||||||
|
| |||||||
UTILITIES - 0.1% | ||||||||
7,500 | New Jersey Resources Corp. (k) | 273,225 | ||||||
2,000 | Ormat Technologies, Inc. | 82,480 | ||||||
2,000 | WGL Holdings, Inc. (k) | 144,740 | ||||||
|
| |||||||
500,445 | ||||||||
|
| |||||||
Total U.S. Equity | 193,860,393 | |||||||
|
| |||||||
| Non-U.S. Equity (f) - 13.1% |
| ||||||
CONSUMER DURABLES & APPAREL - 0.3% | ||||||||
3,500 | Mattel, Inc. | 117,670 | ||||||
47,500 | Michael Kors Holdings, Ltd. (j)(m) | 2,705,600 | ||||||
|
| |||||||
2,823,270 | ||||||||
|
|
10 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Shares | Value ($) | |||||||
| Non-U.S. Equity (continued) |
| ||||||
CONSUMER SERVICES - 0.1% | ||||||||
18,755 | Norwegian Cruise Line Holdings, Ltd. (j)(m) | 1,036,964 | ||||||
|
| |||||||
ENERGY - 1.1% | ||||||||
131,301 | DryShips, Inc. (j) | 308,557 | ||||||
1,000 | Exxon Mobil Corp. (k) | 83,590 | ||||||
6,526,114 | Ocean Rig UDW, Inc. (j) | 5,353,371 | ||||||
848,886 | Overseas Shipholding Group, Inc., Class A (g)(j) | 1,595,906 | ||||||
17,500 | Pioneer Natural Resources Co. (j) | 2,462,950 | ||||||
|
| |||||||
9,804,374 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.1% | ||||||||
1,500 | JM Smucker Co. (The) (k) | 194,760 | ||||||
3,000 | Kellogg Co. | 229,650 | ||||||
|
| |||||||
424,410 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 1.0% | ||||||||
7,769 | Edwards Lifesciences Corp. (d)(j)(m) | 685,304 | ||||||
275,000 | HLS Therapeutics, Inc. (c)(m) | 1,575,750 | ||||||
921,059 | Neovasc, Inc. (j)(m) | 3,932,922 | ||||||
15,000 | NuVasive, Inc. (j)(m) | 729,750 | ||||||
29,400 | Sysmex Corp. | 1,841,505 | ||||||
|
| |||||||
8,765,231 | ||||||||
|
| |||||||
INSURANCE - 0.0% | ||||||||
2,500 | Aflac, Inc. (k) | 157,850 | ||||||
1,500 | Chubb, Ltd. (d) | 178,725 | ||||||
|
| |||||||
336,575 | ||||||||
|
| |||||||
MATERIALS - 0.0% | ||||||||
5,000 | Agnico Eagle Mines, Ltd. | 180,800 | ||||||
5,000 | Pan American Silver Corp. | 54,350 | ||||||
2,000 | Sealed Air Corp. (k) | 96,020 | ||||||
|
| |||||||
331,170 | ||||||||
|
| |||||||
MEDIA - 0.3% | ||||||||
77,945 | Loral Space & Communications, Inc. (j)(m) | 2,738,208 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.3% | ||||||||
40,000 | AstraZeneca PLC ADR (k) | 1,126,400 | ||||||
3,980 | Eurofins Scientific | 1,461,990 | ||||||
|
| |||||||
2,588,390 | ||||||||
|
| |||||||
RETAILING - 0.2% | ||||||||
29,298 | Lowe’s Cos., Inc. (j) | 2,219,324 | ||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.2% | ||||||||
80,050 | Marvell Technology Group, Ltd. (j) | 825,315 | ||||||
14,483 | NXP Semiconductor NV (j)(m) | 1,174,137 | ||||||
|
| |||||||
1,999,452 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 8.0% | ||||||||
31,619 | Facebook, Inc., Class A (d)(j)(m) | 3,607,728 | ||||||
958,027 | Salesforce.com, Inc. (j)(m) | 70,731,133 | ||||||
|
| |||||||
74,338,861 | ||||||||
|
|
Shares | Value ($) | |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 0.0% | ||||||||
2,500 | Itron, Inc. (k)(m) | 104,300 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.0% | ||||||||
1,500 | Verizon Communications, Inc. (k) | 81,120 | ||||||
|
| |||||||
UTILITIES - 1.5% | ||||||||
1,079,650 | NRG Energy, Inc. (j) | 14,046,246 | ||||||
|
| |||||||
Total Non-U.S. Equity | 121,637,895 | |||||||
|
| |||||||
| U.S. Exchange-Traded Funds - 0.9% |
| ||||||
10,000 | Direxion Daily Small Cap Bull 3X Shares, ETF (d)(m) | 580,000 | ||||||
95,000 | Highland HFR Equity Hedge ETF (e)(j)(m) | 1,836,825 | ||||||
95,000 | Highland HFR Event-Driven ETF (e)(j) | 1,606,450 | ||||||
43,198 | Highland/iBoxx Senior Loan ETF (e)(j) | 787,500 | ||||||
20,000 | iShares 20 Year Treasury Bond ETF (k) | 2,612,200 | ||||||
10,000 | ProShares Ultra QQQ, ETF (d) | 738,000 | ||||||
|
| |||||||
Total U.S. Exchange-Traded Funds | 8,160,975 | |||||||
|
| |||||||
| Non-U.S. Exchange-Traded Funds (e)(f)(j) - 0.2% |
| ||||||
95,000 | Highland HFR Global ETF | 1,795,500 | ||||||
|
| |||||||
Total Non-U.S. Exchange-Traded Funds | 1,795,500 | |||||||
|
| |||||||
| U.S. Master Limited Partnerships (j) - 9.0% |
| ||||||
ENERGY - 9.0% | ||||||||
839,800 | Boardwalk Pipeline Partners LP | 12,378,652 | ||||||
729,264 | MPLX LP | 21,651,848 | ||||||
2,506,528 | Plains GP Holdings LP, Class A | 21,781,728 | ||||||
248,500 | SemGroup Corp., Class A | 5,566,400 | ||||||
306,250 | Western Gas Equity Partners LP | 10,914,750 | ||||||
705,914 | Williams Cos., Inc. (The) | 11,344,038 | ||||||
|
| |||||||
83,637,416 | ||||||||
|
| |||||||
Total U.S. Master Limited Partnerships | 83,637,416 | |||||||
|
| |||||||
| Non-U.S. Master Limited Partnerships (f) - 9.9% |
| ||||||
ENERGY - 9.9% | ||||||||
239,250 | Dynagas LNG Partners LP (j) | 2,727,450 | ||||||
1,215,640 | Energy Transfer Equity LP (j) | 8,667,513 | ||||||
600,000 | Energy Transfer Partners LP (j) | 19,404,000 | ||||||
1,081,875 | Enterprise Products Partners LP (j) | 26,635,762 | ||||||
3,593,490 | Highland Energy MLP Fund (e) | 12,361,604 | ||||||
122,932 | Shell Midstream Partners LP (j) | 4,500,541 | ||||||
581,626 | Targa Resources Corp. (j) | 17,367,352 | ||||||
|
| |||||||
91,664,222 | ||||||||
|
| |||||||
Total Non-U.S. Master Limited Partnerships | 91,664,222 | |||||||
|
|
See accompanying Notes to Financial Statements. | 11 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Units | Value ($) | |||||||
| U.S. Warrants (m) - 0.0% |
| ||||||
ENERGY - 0.0% | ||||||||
6,705,000 | Kinder Morgan, Inc., | 244,733 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 0.0% | ||||||||
37,751 | HLS Therapeutics, Inc. | 83,807 | ||||||
|
| |||||||
Total U.S. Warrants (Cost $9,071,445) | 328,540 | |||||||
|
| |||||||
Contracts | ||||||||
| U.S. Purchased Call Options (p) -1.2% |
| ||||||
20,000 | American Airlines Group, Inc., | 11,240,000 | ||||||
|
| |||||||
Total U.S. Purchased Call Options | 11,240,000 | |||||||
|
| |||||||
Shares | ||||||||
| U.S. Registered Investment Companies (q) - 1.1% |
| ||||||
10,161,603 | State Street Navigator Prime Securities Lending Portfolio | 10,161,603 | ||||||
|
| |||||||
Total U.S. Registered Investment Companies | 10,161,603 | |||||||
|
| |||||||
| Non-U.S. Investment Companies (e)(f) - 0.4% |
| ||||||
10,000 | BB Votorantim Highland | 3,488,447 | ||||||
|
| |||||||
Total Non-U.S. Investment Companies | 3,488,447 | |||||||
|
| |||||||
| U.S. Cash Equivalents - 0.8% |
| ||||||
7,001,979 | State Street Institutional Liquid Reserves Fund | 7,001,979 | ||||||
|
| |||||||
Total U.S. Cash Equivalents | 7,001,979 | |||||||
|
| |||||||
| Total Investments — 132.6% | 1,231,097,386 | ||||||
|
| |||||||
| (Cost $1,736,918,304) | |||||||
Principal Amount ($) | ||||||||
| Securities Sold Short (r) - (9.1)% |
| ||||||
| U.S. Corporate Bonds & Notes - (0.7)% |
| ||||||
PACKING & CONTAINER - (0.4)% | ||||||||
(3,200,000) | Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer Lu | (3,296,000 | ) | |||||
|
|
Principal Amount ($) | Value ($) | |||||||
TELECOMMUNICATION SERVICES - (0.3)% | ||||||||
(2,750,000) | Frontier Communications Corp. 10.50%, 09/15/2022 (d)(g) | (2,829,062 | ) | |||||
|
| |||||||
Total U.S. Corporate Bonds & Notes | (6,125,062 | ) | ||||||
|
| |||||||
| Non-U.S. Corporate Bonds & Notes (f) - (1.9)% |
| ||||||
CONSUMER SERVICES - (0.9)% | ||||||||
(4,000,000) | Fiat Chrysler Automobiles NV 5.25%, 04/15/2023 | (3,994,250 | ) | |||||
(4,000,000) | Solera LLC/Solera Finance, Inc. 10.50%, 03/01/2024 (g) | (4,030,000 | ) | |||||
|
| |||||||
(8,024,250 | ) | |||||||
|
| |||||||
MATERIALS - (0.3)% | ||||||||
(3,000,000) | ArcelorMittal | (2,955,000 | ) | |||||
|
| |||||||
SOFTWARE & SERVICES - (0.6)% | ||||||||
(5,000,000) | Alibaba Group Holding, Ltd. 4.50%, 11/28/2034 | (5,134,990 | ) | |||||
|
| |||||||
TELECOMMUNICATION SERVICES - (0.1)% | ||||||||
(2,307,000) | Intelsat Jackson Holdings SA 5.50%, 08/01/2023 | (1,401,503 | ) | |||||
|
| |||||||
Total Non-U.S. Corporate Bonds & Notes | (17,515,743 | ) | ||||||
|
| |||||||
Shares | ||||||||
| U.S. Equity - (4.5)% |
| ||||||
HEALTHCARE EQUIPMENT & SERVICES - (2.5)% | ||||||||
490,150 | Boston Scientific Corp. (r) | (9,219,722 | ) | |||||
137,000 | Stryker Corp. | (14,698,730 | ) | |||||
|
| |||||||
(23,918,452 | ) | |||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - (0.4)% | ||||||||
5,000 | Amgen, Inc. | (749,650 | ) | |||||
5,000 | Biogen Idec, Inc. (s) | (1,301,600 | ) | |||||
10,000 | Illumina, Inc. (s) | (1,621,100 | ) | |||||
|
| |||||||
(3,672,350 | ) | |||||||
|
| |||||||
SOFTWARE & SERVICES - (1.6)% | ||||||||
48,750 | Netflix, Inc. (s) | (4,983,712 | ) | |||||
411,000 | Zillow Group, Inc., Class C (s) | (9,753,030 | ) | |||||
|
| |||||||
(14,736,742 | ) | |||||||
|
| |||||||
Total U.S. Equity | (42,327,544 | ) | ||||||
|
| |||||||
| Non-U.S. Equity (f) - (2.0)% |
| ||||||
ENERGY - (0.2)% | ||||||||
66,250 | Cheniere Energy, Inc. (s) | (2,241,238 | ) | |||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - (1.0)% | ||||||||
13,550 | Medtronic PLC | (1,016,250 | ) | |||||
80,000 | Zimmer Holdings, Inc. | (8,530,400 | ) | |||||
|
| |||||||
(9,546,650 | ) | |||||||
|
|
12 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Principal Amount ($) | Value ($) | |||||||
| Non-U.S. Equity (continued) |
| ||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - (0.8)% | ||||||||
30,000 | Concordia Healthcare Corp. | (770,961 | ) | |||||
15,000 | Jazz Pharmaceuticals PLC (s) | (1,958,250 | ) | |||||
60,000 | Mallinckrodt PLC (s) | (3,676,800 | ) | |||||
27,000 | Valeant Pharmaceuticals International, Inc. (s) | (710,100 | ) | |||||
|
| |||||||
(7,116,111 | ) | |||||||
|
| |||||||
Total Non-U.S. Equity | (18,903,999 | ) | ||||||
|
| |||||||
Total Securities Sold Short | (84,872,348 | ) | ||||||
|
| |||||||
| Other Assets & Liabilities, Net - (23.5)% | (217,552,584 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 928,672,454 | ||||||
|
|
(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, 2016. 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) | The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued. |
(c) | Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $142,452,639, or 15.3% of net assets, were fair valued under the Fund’s valuation procedures as of March 31, 2016. |
(d) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
(e) | Affiliated issuer. Assets with a total aggregate market value of $156,826,139, or 16.9% of net assets, were affiliated with the Fund as of March 31, 2016. |
(f) | 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. |
(g) | 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, 2016, these securities amounted to $211,641,056 or 22.8% of net assets. |
(h) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2016. |
(i) | Securities of collateralized loan obligations where an affiliate of the Investment Adviser serves as collateral manager. |
(j) | All or part of this security is pledged as collateral for short sales and written options contracts. The market value of the securities pledged as collateral was $416,414,521. |
(k) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $10,099,942. The loaned securities were secured with cash and securities collateral of $10,292,853. Collateral is calculated based on prior day’s prices. See Note 4. |
(l) | Zero coupon bond. Coupon amount represents effective yield to maturity. |
(m) | Non-income producing security. |
(n) | All or a portion of this security is a 4(a)(2) Security. The 4(a)(2) Securities will be deemed “restricted securities” (as defined by Rule 144 of the Securities Act) that may not be offered, sold, exchanged, assigned or otherwise transferred unless they are registered under the Securities Act, or an exemption from registration under the Securities Act is available. |
(o) | Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Fund’s Board of Trustees. |
(p) | Options are shown at market value. |
(q) | Represents investments of cash collateral received in connection with securities lending. |
(r) | As of March 31, 2016, $122,091,079 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net.” |
(s) | No dividend payable on security sold short. |
Glossary:
ADR | American Depositary Receipt | |
CDO | Collateralized Debt Obligation | |
CLO | Collateralized Loan Obligation | |
ETF | Exchange-Traded Fund | |
MLP | Master Limited Partnership | |
PIK | Payment-in-Kind | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust |
The Fund had the following futures contracts, brokered by Goldman Sachs, for which $22,341,117 was pledged as collateral, open at March 31, 2016:
Description | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation (Depreciation) | ||||||||||||
Long Future: | ||||||||||||||||
WTI Crude | April 2016 | 2,977 | $ | 114,138,180 | $ | (3,744,153 | ) | |||||||||
|
| |||||||||||||||
Short Future: | ||||||||||||||||
Russell 2000 Mini Index | June 2016 | 954 | $ | 105,855,840 | $ | (3,997,880 | ) | |||||||||
|
| |||||||||||||||
$ | (7,742,033 | ) | ||||||||||||||
|
|
See accompanying Notes to Financial Statements. | 13 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Global Allocation Fund |
Written options contracts outstanding as of March 31, 2016 were as follows:
Description | Exercise Price | Expiration Date | Number of Contracts | Notional Value | Premium | Value | ||||||||||||||||||
WRITTEN PUT OPTIONS: | ||||||||||||||||||||||||
American Airlines Group, Inc | $ | 40.00 | January 2017 | 5,950 | $ | 23,800,000 | $ | 3,243,929 | $ | (2,647,750 | ) | |||||||||||||
American Express Co. | $ | 75.00 | September 2016 | 13,607 | 102,052,500 | 16,956,844 | (19,344,529 | ) | ||||||||||||||||
Corning, Inc | $ | 22.00 | January 2017 | 35,170 | 77,374,000 | 19,630,064 | (9,249,710 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Written Options Contracts |
| $ | 39,830,837 | $ | (31,241,989 | ) | ||||||||||||||||||
|
|
|
|
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 | ||||||||
Corporate Bonds & Notes | $ | 2,340,795 | $ | 2,340,795 | ||||
Common Stock | 7,820,808 | 7,820,808 | ||||||
Total Borrowings | $ | 10,161,603 | $ | 10,161,603 | ||||
Gross amount of recognized liabilities for securities lending transactions |
| $ | 10,161,603 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand. |
14 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Premier Growth Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks - 100.0% |
| ||||||
CAPITAL GOODS - 1.4% | ||||||||
50,000 | United Rentals, Inc. (a) | 3,109,500 | ||||||
|
| |||||||
CONSUMER SERVICES - 1.4% | ||||||||
57,334 | Las Vegas Sands Corp. (b) | 2,963,021 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 13.8% | ||||||||
248,680 | Charles Schwab Corp. (The) | 6,968,014 | ||||||
93,255 | CME Group, Inc. (b) | 8,957,143 | ||||||
82,893 | McGraw Hill Financial, Inc. (b) | 8,204,749 | ||||||
102,926 | State Street Corp. | 6,023,229 | ||||||
|
| |||||||
30,153,135 | ||||||||
|
| |||||||
ENERGY - 2.7% | ||||||||
81,512 | Schlumberger, Ltd. | 6,011,510 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 4.0% | ||||||||
84,275 | PepsiCo, Inc. (b) | 8,636,502 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 10.9% | ||||||||
155,424 | Abbott Laboratories (b) | 6,501,386 | ||||||
33,848 | Cooper Cos., Inc. (The) (b) | 5,211,577 | ||||||
101,892 | LDR Holding Corp. (a)(c) | 2,597,227 | ||||||
125,721 | Medtronic PLC (b) | 9,429,075 | ||||||
|
| |||||||
23,739,265 | ||||||||
|
| |||||||
MATERIALS - 2.9% | ||||||||
72,532 | Monsanto Co. | 6,363,958 | ||||||
|
| |||||||
MEDIA - 11.7% | ||||||||
151,971 | Comcast Corp., Class A (b) | 9,282,389 | ||||||
180,000 | Liberty Global PLC, Series C (a)(b) | 6,760,800 | ||||||
1,398,009 | Sirius XM Holdings, Inc. (a)(c) | 5,522,135 | ||||||
40,000 | Walt Disney Co. (The) | 3,972,400 | ||||||
|
| |||||||
25,537,724 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 5.2% | ||||||||
10,000 | Alexion Pharmaceuticals, Inc. (a) | 1,392,200 | ||||||
20,000 | Allergan PLC (a)(b) | 5,360,600 | ||||||
50,000 | Gilead Sciences, Inc. (b) | 4,593,000 | ||||||
|
| |||||||
11,345,800 | ||||||||
|
| |||||||
REAL ESTATE - 4.0% | ||||||||
86,347 | American Tower Corp., REIT (b) | 8,839,342 | ||||||
|
| |||||||
RETAILING - 7.9% | ||||||||
17,477 | Amazon.com, Inc. (a)(b) | 10,375,046 | ||||||
90,000 | Lowe’s Cos., Inc. (b) | 6,817,500 | ||||||
|
| |||||||
17,192,546 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.4% | ||||||||
60,701 | QUALCOMM, Inc. | 3,104,249 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 25.9% | ||||||||
17,269 | Alphabet, Inc., Class C (a)(b) | 12,864,542 | ||||||
52,499 | Baidu, Inc., ADR (a)(b) | 10,021,009 | ||||||
95,624 | Facebook, Inc., Class A (a)(b) | 10,910,698 | ||||||
62,170 | Intuit, Inc. (b) | 6,466,302 | ||||||
124,340 | PayPal Holdings, Inc. (a) | 4,799,524 | ||||||
151,971 | Visa, Inc., Class A (c) | 11,622,742 | ||||||
|
| |||||||
56,684,817 | ||||||||
|
|
Shares | Value ($) | |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 5.5% | ||||||||
110,524 | Apple, Inc. (b) | 12,046,011 | ||||||
|
| |||||||
TRANSPORTATION - 1.3% | ||||||||
27,631 | United Parcel Service, Inc., Class B | 2,914,242 | ||||||
|
| |||||||
Total Common Stocks | 218,641,622 | |||||||
|
| |||||||
Contracts | ||||||||
| Purchased Put Options - 0.1% |
| ||||||
500,000 | Powershares QQQ Trust Series 1, Strike price $106.50, expires 04/22/2016 | 335,000 | ||||||
|
| |||||||
Total Purchased Put Options | 335,000 | |||||||
|
| |||||||
Shares | ||||||||
| Registered Investment Companies (d) - 8.9% |
| ||||||
19,416,751 | State Street Navigator Prime Securities Lending Portfolio | 19,416,751 | ||||||
|
| |||||||
Total Registered Investment Companies | 19,416,751 | |||||||
|
| |||||||
| Total Investments - 109.1% | 238,393,373 | ||||||
|
| |||||||
| (Cost $179,660,271) | |||||||
| Securities Sold Short (e) - (3.9)% |
| ||||||
EXCHANGE-TRADED FUNDS - (1.6)% | ||||||||
45,000 | Consumer Discretionary Select Sector SPDR Fund, ETF | (3,557,250 | ) | |||||
|
| |||||||
Total Exchange-Traded Funds | (3,557,250 | ) | ||||||
|
| |||||||
| Common Stocks (f) - (2.3)% |
| ||||||
RETAILING - (2.3)% | ||||||||
50,000 | Netflix, Inc. | (5,111,500 | ) | |||||
|
| |||||||
Total Common Stocks | (5,111,500 | ) | ||||||
|
| |||||||
Total Securities Sold Short | (8,668,750 | ) | ||||||
|
| |||||||
| Other Assets & Liabilities, Net - (5.1)% | (11,151,952 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 218,572,671 | ||||||
|
|
(a) | Non-income producing security. |
(b) | All or part of this security is pledged as collateral for short sales. The market value of the securities pledged as collateral was $79,999,428. |
(c) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $18,976,220. The loaned securities were secured with cash and securities collateral of $19,666,538. Collateral is calculated based on prior day’s prices. See Note 4. |
(d) | Represents investments of cash collateral received in connection with securities lending. |
(e) | As of March 31, 2016, $10,499,877 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net.” |
(f) | No dividend payable on security sold short. |
See accompanying Notes to Financial Statements. | 15 |
Table of Contents
INVESTMENT PORTFOLIO(unaudited) (continued)
As of March 31, 2016 | Highland Premier Growth Equity Fund |
Glossary: | ||
ADR | American Depositary Receipt | |
ETF | Exchange-Traded Fund | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust | |
SPDR | Standard & Poor’s Depositary Receipt |
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 | ||||||||
Common Stock | $ | 19,416,751 | $ | 19,416,751 | ||||
Total Borrowings | $ | 19,416,751 | $ | 19,416,751 | ||||
Gross amount of recognized liabilities for securities lending transactions |
| $ | 19,416,751 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand. |
16 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Small-Cap Equity Fund |
Shares | Value ($) | |||||||
| Common Stocks - 90.0% |
| ||||||
BANKS - 4.7% | ||||||||
6,887 | Iberiabank Corp. | 353,096 | ||||||
16,775 | PrivateBancorp, Inc. (a) | 647,515 | ||||||
4,915 | SVB Financial Group (b) | 501,576 | ||||||
|
| |||||||
1,502,187 | ||||||||
|
| |||||||
CAPITAL GOODS - 2.3% | ||||||||
21,756 | Luxfer Holdings PLC, ADR (a) | 230,831 | ||||||
5,711 | Teledyne Technologies, Inc. (b) | 503,368 | ||||||
|
| |||||||
734,199 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 3.1% | ||||||||
21,108 | Resources Connection, Inc. | 328,441 | ||||||
29,166 | West Corp. | 665,568 | ||||||
|
| |||||||
994,009 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.1% | ||||||||
697 | Deckers Outdoor Corp. (a)(b) | 41,757 | ||||||
|
| |||||||
CONSUMER SERVICES - 10.6% | ||||||||
41,340 | ClubCorp Holdings, Inc. (a) | 580,413 | ||||||
11,172 | J Alexander’s Holdings, Inc. (a)(b) | 117,976 | ||||||
31,149 | K12, Inc. (a)(b) | 308,064 | ||||||
55,127 | SeaWorld Entertainment, Inc. (a) | 1,160,975 | ||||||
34,412 | Sonic Corp. (a) | 1,209,926 | ||||||
|
| |||||||
3,377,354 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 5.1% | ||||||||
64,683 | FNFV Group (a)(b) | 701,811 | ||||||
847 | Greenhill & Co., Inc. (a) | 18,803 | ||||||
19,093 | Raymond James Financial, Inc. (a) | 909,018 | ||||||
|
| |||||||
1,629,632 | ||||||||
|
| |||||||
ENERGY - 8.6% | ||||||||
5,000 | Dril-Quip, Inc. (a)(b) | 302,800 | ||||||
9,775 | Forum Energy Technologies, Inc. (a)(b) | 129,030 | ||||||
8,599 | Oil States International, Inc. (b) | 271,040 | ||||||
16,624 | Sanchez Energy Corp. (b) | 91,266 | ||||||
54,700 | SemGroup Corp., Class A (a) | 1,225,280 | ||||||
38,177 | SM Energy Co. (a) | 715,437 | ||||||
|
| |||||||
2,734,853 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 2.2% | ||||||||
23,028 | SpartanNash Co. | 697,979 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 9.5% | ||||||||
10,115 | Air Methods Corp. (a)(b) | 366,365 | ||||||
20,000 | K2M Group Holdings, Inc. (a)(b) | 296,600 | ||||||
28,102 | LDR Holding Corp. (a)(b) | 716,320 | ||||||
14,000 | LHC Group, Inc. (a)(b) | 497,840 | ||||||
16,445 | MEDNAX, Inc. (a)(b) | 1,062,676 | ||||||
10,000 | Teladoc, Inc. (a)(b) | 96,000 | ||||||
|
| |||||||
3,035,801 | ||||||||
|
| |||||||
MATERIALS - 4.6% | ||||||||
16,009 | PolyOne Corp. (a) | 484,272 | ||||||
6,335 | Quaker Chemical Corp. | 537,588 | ||||||
6,966 | Sensient Technologies Corp. (a) | 442,063 | ||||||
|
| |||||||
1,463,923 | ||||||||
|
|
Shares | Value ($) | |||||||
MEDIA - 0.1% | ||||||||
768 | John Wiley & Sons, Inc., Class A | 37,547 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 23.6% | ||||||||
265,387 | Amicus Therapeutics, Inc. (a)(b) | 2,242,520 | ||||||
35,800 | Coherus Biosciences, Inc. (a)(b) | 760,034 | ||||||
80,000 | Endocyte, Inc. (b) | 248,000 | ||||||
34,925 | Pacira Pharmaceuticals, Inc. (a)(b) | 1,850,326 | ||||||
32,775 | Portola Pharmaceuticals, Inc. (a)(b) | 668,610 | ||||||
56,500 | ProQR Therapeutics NV (a)(b) | 275,720 | ||||||
29,050 | Relypsa, Inc. (a)(b) | 393,628 | ||||||
17,050 | Ultragenyx Pharmaceutical, Inc. (a)(b) | 1,079,436 | ||||||
|
| |||||||
7,518,274 | ||||||||
|
| |||||||
REAL ESTATE - 0.1% | ||||||||
1,087 | RLJ Lodging Trust, REIT | 24,871 | ||||||
|
| |||||||
RETAILING - 4.2% | ||||||||
5,814 | Group 1 Automotive, Inc. (a) | 341,224 | ||||||
31,439 | LKQ Corp. (b) | 1,003,847 | ||||||
|
| |||||||
1,345,071 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.4% | ||||||||
20,875 | Semtech Corp. (a)(b) | 459,041 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 4.7% | ||||||||
14,850 | CoreLogic, Inc. (b) | 515,295 | ||||||
12,308 | Cornerstone OnDemand, Inc. (a)(b) | 403,333 | ||||||
9,116 | SS&C Technologies Holdings, Inc. (a) | 578,137 | ||||||
|
| |||||||
1,496,765 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 1.2% | ||||||||
1,542 | Control4 Corp. (a)(b) | 12,274 | ||||||
5,435 | Zebra Technologies Corp., Class A (a)(b) | 375,015 | ||||||
|
| |||||||
387,289 | ||||||||
|
| |||||||
UTILITIES - 3.9% | ||||||||
81,250 | Calpine Corp. (b) | 1,232,562 | ||||||
|
| |||||||
Total Common Stocks | 28,713,114 | |||||||
|
| |||||||
| Master Limited Partnerships - 22.3% |
| ||||||
DIVERSIFIED FINANCIALS - 3.5% | ||||||||
232,000 | Fortress Investment Group LLC, Class A | 1,108,960 | ||||||
|
| |||||||
ENERGY - 18.8% | ||||||||
73,200 | Boardwalk Pipeline Partners LP | 1,078,967 | ||||||
104,000 | Dynagas LNG Partners LP | 1,185,600 | ||||||
187,700 | Energy Transfer Equity LP | 1,338,301 | ||||||
22,150 | Tesoro Logistics LP | 1,011,369 | ||||||
39,500 | Western Gas Equity Partners LP | 1,407,780 | ||||||
|
| |||||||
6,022,017 | ||||||||
|
| |||||||
Total Master Limited Partnerships | 7,130,977 | |||||||
|
| |||||||
| Registered Investment Companies (c) - 24.3% |
| ||||||
7,752,734 | State Street Navigator Prime Securities Lending Portfolio | 7,752,734 | ||||||
|
| |||||||
Total Registered Investment Companies | 7,752,734 | |||||||
|
|
See accompanying Notes to Financial Statements. | 17 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Small-Cap Equity Fund |
Shares | Value ($) | |||||||
| Cash Equivalents - 0.2% |
| ||||||
52,857 | State Street Institutional Liquid Reserves Fund | 52,857 | ||||||
|
| |||||||
Total Cash Equivalents | 52,857 | |||||||
|
| |||||||
| Total Investments - 136.8% | 43,649,682 | ||||||
|
| |||||||
| (Cost $42,516,932) | |||||||
| Other Assets & Liabilities, Net - (36.8)% | (11,743,471 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 31,906,211 | ||||||
|
|
(a) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $8,826,258. The loaned securities were secured with cash and securities collateral of $8,848,702. 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 |
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 |
| |||||||
Common Stock | $ | 7,752,734 | $ | 7,752,734 | ||||
Total Borrowings | $ | 7,752,734 | $ | 7,752,734 | ||||
Gross amount of recognized liabilities for securities lending transactions |
| $ | 7,752,734 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand. |
18 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes - 5.3% |
| ||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0% | ||||||||
107,853 | Federal National Mortgage Assoc. REMIC | 17,044 | ||||||
7,557 | Federal National Mortgage Assoc. STRIPS | 7,309 | ||||||
|
| |||||||
Total Agency Collateralized Mortgage Obligations | 24,353 | |||||||
|
| |||||||
AGENCY MORTGAGE-BACKED SECURITIES - 3.1% | ||||||||
90,652 | Federal Home Loan Mortgage Corp. 5.00%, 06/01/2041 | 101,808 | ||||||
Federal National Mortgage Assoc. |
| |||||||
617,257 | 3.00%, 02/01/2043 - 06/01/2043 (d) | 635,118 | ||||||
283,462 | 3.50%, 11/01/2042 - 02/01/2043 (d) | 299,564 | ||||||
129,758 | 4.00%, 02/01/2044 | 139,427 | ||||||
277,587 | 4.50%, 02/01/2040 - 01/01/2041 (d) | 303,034 | ||||||
133,075 | 5.00%, 06/01/2041 | 150,428 | ||||||
Government National Mortgage Assoc. |
| |||||||
183,353 | 3.00%, 04/20/2043 - 06/20/2043 (d) | 190,371 | ||||||
192,462 | 3.50%, 05/20/2043 | 203,961 | ||||||
229,249 | 4.00%, 01/20/2041 - 04/20/2043 (d) | 247,137 | ||||||
94,568 | 4.50%, 05/20/2040 - 03/20/2041 (d) | 102,975 | ||||||
|
| |||||||
Total Agency Mortgage-Backed Securities | 2,373,823 | |||||||
|
| |||||||
ASSET-BACKED SECURITIES - 0.0% | ||||||||
2 | Bear Stearns Asset-Backed Securities Trust | 2 | ||||||
|
| |||||||
Total Asset-Backed Securities (Cost $2) | 2 | |||||||
|
| |||||||
CORPORATE BONDS & NOTES - 1.2% | ||||||||
BANKS - 0.0% | ||||||||
27,000 | Bank of America Corp. | 27,475 | ||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.0% | ||||||||
31,000 | ACCO Brands Corp. | 32,937 | ||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.0% | ||||||||
19,000 | Lennar Corp. | 19,855 | ||||||
|
| |||||||
CONSUMER SERVICES - 0.1% | ||||||||
32,000 | MGM Resorts International | 32,960 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 0.3% | ||||||||
150,000 | Daimler Finance North America LLC 2.38%, 08/01/2018 (f) | 152,469 |
Principal Amount ($) | Value ($) | |||||||
DIVERSIFIED FINANCIALS (continued) | ||||||||
19,000 | General Motors Financial Co., Inc. | 19,182 | ||||||
12,000 | 3.50%, 07/10/2019 | 12,315 | ||||||
13,000 | Hyundai Capital America | 13,037 | ||||||
|
| |||||||
197,003 | ||||||||
|
| |||||||
ENERGY - 0.1% | ||||||||
14,000 | Kinder Morgan, Inc. | 13,795 | ||||||
42,000 | 5.63%, 11/15/2023(f) | 42,675 | ||||||
|
| |||||||
56,470 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.1% | ||||||||
43,000 | Aramark Services, Inc. | 44,371 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.0% | ||||||||
27,000 | Constellation Brands, Inc. | 27,574 | ||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 0.2% | ||||||||
44,000 | HCA, Inc. | 48,400 | ||||||
9,000 | Medtronic, Inc. | 9,319 | ||||||
50,000 | Tenet Healthcare Corp. | 51,500 | ||||||
30,000 | 6.00%, 10/01/2020 | 32,100 | ||||||
|
| |||||||
141,319 | ||||||||
|
| |||||||
INSURANCE - 0.0% | ||||||||
21,000 | CNA Financial Corp. | 23,462 | ||||||
|
| |||||||
MEDIA - 0.0% | ||||||||
15,000 | Scripps Networks Interactive, Inc. | 15,082 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.1% | ||||||||
26,000 | Roche Holdings, Inc. | 26,806 | ||||||
15,000 | Valeant Pharmaceuticals International | 12,525 | ||||||
|
| |||||||
39,331 | ||||||||
|
| |||||||
REAL ESTATE - 0.1% | ||||||||
49,000 | American Tower Corp. | 50,266 | ||||||
30,000 | Iron Mountain, Inc. | 31,650 | ||||||
|
| |||||||
81,916 | ||||||||
|
| |||||||
RETAILING - 0.0% | ||||||||
18,000 | Glencore Funding LLC | 16,560 | ||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.0% | ||||||||
16,000 | Xilinx, Inc. | 16,093 | ||||||
|
|
See accompanying Notes to Financial Statements. | 19 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Total Return Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
TELECOMMUNICATION SERVICES - 0.2% | ||||||||
17,000 | Hughes Satellite Systems Corp. | 18,785 | ||||||
505,000 | iHeartCommunications, Inc., PIK | 116,150 | ||||||
|
| |||||||
134,935 | ||||||||
|
| |||||||
UTILITIES - 0.0% | ||||||||
24,000 | Dominion Resources, Inc. | 24,078 | ||||||
|
| |||||||
Total Corporate Bonds & Notes (Cost $1,106,223) | 931,421 | |||||||
|
| |||||||
FOREIGN CORPORATE BONDS & NOTES - 0.5% | ||||||||
BANKS - 0.3% | ||||||||
200,000 | Barclays Bank PLC | 202,503 | ||||||
|
| |||||||
CAPITAL GOODS - 0.1% | ||||||||
61,000 | Bombardier, Inc. | 52,765 | ||||||
18,000 | 4.75%, 04/15/2019 (e)(f) | 15,705 | ||||||
|
| |||||||
68,470 | ||||||||
|
| |||||||
MEDIA - 0.0% | ||||||||
27,000 | Cogeco Communications, Inc. | 27,895 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.0% | ||||||||
23,000 | Valeant Pharmaceuticals International, Inc. | 20,988 | ||||||
|
| |||||||
UTILITIES - 0.1% | ||||||||
64,000 | Electricite de France SA | 64,768 | ||||||
|
| |||||||
Total Foreign Corporate Bonds & Notes | 384,624 | |||||||
|
| |||||||
NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES - 0.5% | ||||||||
55,000 | Banc of America Commercial Mortgage Trust | 55,638 | ||||||
30,000 | Bear Stearns Commercial Mortgage Securities Trust | 31,105 | ||||||
53,507 | JP Morgan Chase Commercial Mortgage Securities Trust | 54,456 | ||||||
60,000 | JPMBB Commercial Mortgage Securities Trust | 59,598 | ||||||
LB-UBS Commercial Mortgage Trust |
| |||||||
40,000 | Series 2007-C6, Class AMFL | 41,380 |
Principal Amount ($) | Value ($) | |||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES (continued) | | ||||||
35,000 | Series 2007-C6, Class AM | 36,282 | ||||||
55,000 | ML-CFC Commercial Mortgage Trust | 55,497 | ||||||
30,000 | Morgan Stanley Capital I Trust | 31,206 | ||||||
40,000 | WF-RBS Commercial Mortgage Trust | 43,546 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage-Backed Securities | 408,708 | |||||||
|
| |||||||
Total Bonds & Notes | 4,122,931 | |||||||
|
| |||||||
Shares | ||||||||
| Domestic Equity - 60.2% |
| ||||||
COMMON STOCKS - 59.4% | ||||||||
CONSUMER DURABLES & APPAREL - 1.8% | ||||||||
163,918 | UCP, Inc., Class A (e)(g) | 1,317,901 | ||||||
|
| |||||||
CONSUMER SERVICES - 3.0% | ||||||||
24,450 | Wynn Resorts, Ltd. (e) | 2,284,364 | ||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 15.4% | ||||||||
41,760 | Bank of New York Mellon Corp. (The) | 1,538,021 | ||||||
6,880 | Berkshire Hathaway, Inc., Class B (g) | 976,134 | ||||||
33,875 | Charles Schwab Corp. (The) (e) | 949,178 | ||||||
55,600 | Leucadia National Corp. (e) | 899,052 | ||||||
28,801 | Oaktree Capital Group LLC | 1,420,753 | ||||||
576,222 | PICO Holdings, Inc. (e)(g) | 5,894,751 | ||||||
|
| |||||||
11,677,889 | ||||||||
|
| |||||||
ENERGY - 0.3% | ||||||||
5,200 | Baker Hughes, Inc. | 227,916 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 1.9% | ||||||||
35,600 | Mondelez International, Inc., Class A (e) | 1,428,272 | ||||||
|
| |||||||
MEDIA - 8.5% | ||||||||
80,297 | DreamWorks Animation SKG, Inc., Class A (e)(g) | 2,003,410 | ||||||
108,270 | Live Nation Entertainment, Inc. (e)(g) | 2,415,504 | ||||||
71,660 | Twenty-First Century Fox, Inc., Class B (e) | 2,020,812 | ||||||
|
| |||||||
6,439,726 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 9.4% | ||||||||
11,225 | Biogen, Inc. (e)(g) | 2,922,092 | ||||||
4,650 | BioMarin Pharmaceutical, Inc. (e)(g) | 383,532 | ||||||
16,400 | Gilead Sciences, Inc. | 1,506,504 | ||||||
78,191 | Pfizer, Inc. (e) | 2,317,581 | ||||||
|
| |||||||
7,129,709 | ||||||||
|
|
20 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Total Return Fund |
Shares | Value ($) | |||||||
| Domestic Equity (continued) |
| ||||||
COMMON STOCKS (continued) | ||||||||
REAL ESTATE INVESTMENT TRUST - 4.7% | ||||||||
19,580 | Alexander & Baldwin, Inc. (e) | 718,194 | ||||||
72,100 | Gramercy Property Trust | 609,245 | ||||||
79,837 | Great Ajax Corp., REIT (e) | 893,376 | ||||||
14,000 | Starwood Property Trust, Inc., REIT | 265,020 | ||||||
116,900 | VEREIT, Inc., REIT (e) | 1,036,903 | ||||||
|
| |||||||
3,522,738 | ||||||||
|
| |||||||
RETAILING - 3.1% | ||||||||
81,515 | FTD Cos., Inc. (e)(g) | 2,139,769 | ||||||
20,500 | Staples, Inc. | 226,115 | ||||||
|
| |||||||
2,365,884 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 2.2% | ||||||||
31,684 | QUALCOMM, Inc. | 1,620,320 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 5.0% | ||||||||
581 | Alphabet, Inc., Class A (g) | 443,245 | ||||||
2,303 | Alphabet, Inc., Class C (g) | 1,715,620 | ||||||
39,472 | Oracle Corp. | 1,614,799 | ||||||
|
| |||||||
3,773,664 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 4.1% | ||||||||
59,285 | Level 3 Communications, Inc. (g) | 3,133,212 | ||||||
|
| |||||||
Total Common Stocks | 44,921,595 | |||||||
|
| |||||||
PREFERRED STOCKS - 0.8% | ||||||||
DIVERSIFIED FINANCIALS - 0.7% | ||||||||
12,635 | Ally Financial, Inc., | 321,687 | ||||||
150 | Wells Fargo & Co., | 180,752 | ||||||
|
| |||||||
502,439 | ||||||||
|
| |||||||
REAL ESTATE - 0.1% | ||||||||
2,600 | Kimco Realty Corp., | 67,366 | ||||||
100 | Regency Centers Corp., | 2,601 | ||||||
|
| |||||||
69,967 | ||||||||
|
| |||||||
Total Preferred Stocks | 572,406 | |||||||
|
| |||||||
Total Domestic Equity | 45,494,001 | |||||||
|
| |||||||
| Foreign Equity - 12.4% |
| ||||||
COMMON STOCKS - 11.6% | ||||||||
FOOD, BEVERAGE & TOBACCO - 2.3% | ||||||||
8,000 | Diageo PLC | 216,343 | ||||||
14,105 | Diageo PLC, ADR | 1,521,506 | ||||||
|
| |||||||
1,737,849 | ||||||||
|
|
Shares | Value ($) | |||||||
MEDIA - 2.9% | ||||||||
98,809 | Lions Gate Entertainment Corp. (e) | 2,158,976 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 6.4% | ||||||||
10,562 | Allergan PLC (g) | 2,830,933 | ||||||
5,100 | Mylan NV (g) | 236,385 | ||||||
33,480 | Teva Pharmaceutical Industries, Ltd., ADR | 1,791,515 | ||||||
|
| |||||||
4,858,833 | ||||||||
|
| |||||||
Total Common Stocks | 8,755,658 | |||||||
|
| |||||||
PREFERRED STOCKS - 0.8% | ||||||||
INDUSTRIAL - 0.8% | ||||||||
660 | Teva Pharmaceutical Industries, Ltd. | 583,400 | ||||||
|
| |||||||
Total Preferred Stocks | 583,400 | |||||||
|
| |||||||
Total Foreign Equity | 9,339,058 | |||||||
|
| |||||||
| Registered Investment Companies - 35.4% |
| ||||||
83,555 | Ares Dynamic Credit Allocation Fund, Inc. | 1,117,966 | ||||||
1,199 | BlackRock Debt Strategies Fund, Inc. | 4,160 | ||||||
1 | BlackRock Taxable Municipal Bond Trust | 23 | ||||||
1 | CBRE Clarion Global Real Estate Income Fund | 8 | ||||||
65,361 | Cohen & Steers, Ltd., Duration Preferred & Income Fund, Inc. | 1,500,689 | ||||||
32,853 | Diversified Real Asset Income Fund | 519,077 | ||||||
31,239 | Nuveen Global High Income Fund | 433,285 | ||||||
226,743 | PIMCO Corporate & Income Opportunity Fund | 3,090,507 | ||||||
20,109,459 | State Street Navigator Prime Securities Lending Portfolio (h) | 20,109,459 | ||||||
|
| |||||||
Total Registered Investment Companies | 26,775,174 | |||||||
|
| |||||||
CASH EQUIVALENTS - 10.2% | ||||||||
7,726,195 | State Street Institutional Liquid Reserves Fund | 7,726,195 | ||||||
|
| |||||||
Total Cash Equivalents | 7,726,195 | |||||||
|
| |||||||
| Total Investments - 123.5% | 93,457,359 | ||||||
|
| |||||||
| (Cost $95,159,717) | |||||||
| Other Assets & Liabilities, Net - (23.5)% | (17,781,136 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 75,676,223 | ||||||
|
|
(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, 2016. |
See accompanying Notes to Financial Statements. | 21 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Total Return Fund |
(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) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $20,614,899. The loaned securities were secured with cash and securities collateral of $21,128,554. Collateral is calculated based on prior day’s prices. See Note 4. |
(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, 2016, these securities amounted to $690,076 or 0.9% of net assets. |
(g) | Non-income producing security. |
(h) | Represents investments of cash collateral received in connection with securities lending. |
Glossary:
ADR | American Depositary Receipt | |
PIK | Payment-in-Kind | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust | |
REMIC | Real Estate Mortgage Investment Conduit | |
STRIPS | Separate Trading of Registered Interest and Principal of Security |
The Fund invested in the following countries as of March 31, 2016:
Country | Percentage (based on Total Investments) | |||
United States | 95.2 | % | ||
Israel | 2.5 | % | ||
United Kingdom | 2.1 | % | ||
Canada | 0.1 | % | ||
France | 0.1 | % | ||
|
| |||
100.0 | % | |||
|
|
Industry | Domestic | Foreign | Percentage (based on Total Investments) | |||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 10.9 | % | 2.6 | % | 13.5 | % | ||||||
Diversified Financials | 13.0 | % | 0.0 | % | 13.0 | % | ||||||
Media | 9.2 | % | 0.0 | % | 9.2 | % | ||||||
Software & Services | 4.0 | % | 0.0 | % | 4.0 | % | ||||||
Real Estate Investment Trust | 3.8 | % | 0.0 | % | 3.8 | % | ||||||
Telecommunication Services | 3.4 | % | 0.0 | % | 3.4 | % | ||||||
Food, Beverage & Tobacco | 1.5 | % | 1.9 | % | 3.4 | % | ||||||
Retailing | 2.5 | % | 0.0 | % | 2.5 | % | ||||||
Consumer Services | 2.4 | % | 0.0 | % | 2.4 | % | ||||||
Semiconductors & Semiconductor Equipment | 1.7 | % | 0.0 | % | 1.7 | % | ||||||
Consumer Durables & Apparel | 1.4 | % | 0.0 | % | 1.4 | % | ||||||
Energy | 0.3 | % | 0.0 | % | 0.3 | % | ||||||
Real Estate | 0.1 | % | 0.0 | % | 0.1 | % | ||||||
|
| |||||||||||
58.7 | % | |||||||||||
|
|
Sector | Percentage (based on Total Investments) | |||
Agency Mortgage-Backed Securities | 2.5 | % | ||
Corporate Bonds & Notes | 1.0 | % | ||
Other (each less than 1.0%) | 0.9 | % | ||
|
| |||
4.4 | % | |||
|
|
Other Instruments | Percentage (based on Total Investments) | |||
Registered Investment Companies | 28.6 | % | ||
Cash Equivalents | 8.3 | % | ||
|
| |||
36.9 | % | |||
|
| |||
100.0 | % | |||
|
|
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 |
| |||||||
Corporate Bonds & Notes | $ | 303,850 | $ | 303,850 | ||||
Common Stock | 19,805,609 | 19,805,609 | ||||||
Total Borrowings | $ | 20,109,459 | $ | 20,109,459 | ||||
Gross amount of recognized liabilities for securities lending transactions |
| $ | 20,109,459 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand. |
22 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Tax-Exempt Fund |
Principal Amount ($) | Value ($) | |||||||
| Municipal Bonds & Notes - 69.8% |
| ||||||
ALASKA - 2.1% | ||||||||
500,000 | Alaska Housing Finance Corp. | 598,620 | ||||||
|
| |||||||
ARIZONA - 1.9% | ||||||||
475,000 | Arizona Sports & Tourism Authority | 537,904 | ||||||
|
| |||||||
CALIFORNIA - 7.4% | ||||||||
500,000 | California State Department of Water Resources | 602,670 | ||||||
500,000 | Los Angeles County Public Works Financing Authority | 622,650 | ||||||
435,000 | Oxnard Financing Authority Insured: AGM | 526,189 | ||||||
18,000 | Sacramento, CA Municipal Utility District | 19,989 | ||||||
250,000 | State of California | 297,197 | ||||||
|
| |||||||
2,068,695 | ||||||||
|
| |||||||
COLORADO - 2.2% | ||||||||
500,000 | Regional Transportation District, CO | 612,990 | ||||||
|
| |||||||
CONNECTICUT - 5.3% | ||||||||
500,000 | State of Connecticut | 587,010 | ||||||
250,000 | State of Connecticut Special Tax Revenue | 301,535 | ||||||
500,000 | Town of Fairfield, CT | 590,555 | ||||||
|
| |||||||
1,479,100 | ||||||||
|
| |||||||
DISTRICT OF COLUMBIA - 2.1% | ||||||||
500,000 | District of Columbia | 577,305 | ||||||
|
| |||||||
FLORIDA - 2.5% | ||||||||
350,000 | City of Lakeland, FL | 402,763 | ||||||
250,000 | City of Tampa, FL | 297,100 | ||||||
|
| |||||||
699,863 | ||||||||
|
| |||||||
GEORGIA - 6.6% | ||||||||
500,000 | City of Atlanta Department of Aviation | 588,595 | ||||||
500,000 | City of Atlanta, GA Water & Wastewater Insured: AGM | 701,170 | ||||||
500,000 | Municipal Electric Authority of Georgia | 557,695 | ||||||
|
| |||||||
1,847,460 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
HAWAII - 2.1% | ||||||||
500,000 | State of Hawaii Airports System | 584,795 | ||||||
|
| |||||||
ILLINOIS - 5.0% | ||||||||
500,000 | City of Chicago, IL Motor Fuel Tax | 537,100 | ||||||
460,000 | Illinois Financing Authority | 521,272 | ||||||
315,000 | Illinois State University | 339,192 | ||||||
|
| |||||||
1,397,564 | ||||||||
|
| |||||||
INDIANA - 2.0% | ||||||||
500,000 | Indiana Municipal Power Agency | 562,515 | ||||||
|
| |||||||
KENTUCKY - 4.1% | ||||||||
500,000 | Kentucky Municipal Power Agency | 601,365 | ||||||
500,000 | Kentucky State Property & Building Commission | 556,610 | ||||||
|
| |||||||
1,157,975 | ||||||||
|
| |||||||
MAINE - 1.8% | ||||||||
425,000 | Maine Health & Higher Educational Facilities Authority | 494,007 | ||||||
|
| |||||||
MASSACHUSETTS - 2.1% | ||||||||
500,000 | Massachusetts Water Resources Authority | 597,550 | ||||||
|
| |||||||
MISSOURI - 2.1% | ||||||||
500,000 | Missouri Highway & Transportation Commission | 578,740 | ||||||
|
| |||||||
NEW JERSEY - 4.1% | ||||||||
35,000 | Atlantic County Improvement Authority | 35,584 | ||||||
500,000 | New Jersey Economic Development Authority | 568,260 | ||||||
500,000 | New Jersey Educational Facilities Authority | 548,150 | ||||||
|
| |||||||
1,151,994 | ||||||||
|
| |||||||
NEW YORK - 2.3% | ||||||||
90,000 | New York State Dormitory Authority | 91,503 |
See accompanying Notes to Financial Statements. | 23 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Tax-Exempt Fund |
Principal Amount ($) | Value ($) | |||||||
| Municipal Bonds & Notes (continued) |
| ||||||
NEW YORK (continued) | ||||||||
500,000 | New York State Urban Development Corp. | 561,935 | ||||||
|
| |||||||
653,438 | ||||||||
|
| |||||||
NORTH CAROLINA - 2.1% | ||||||||
500,000 | City of Charlotte, NC | 579,875 | ||||||
|
| |||||||
OHIO - 2.0% | ||||||||
500,000 | City of Cleveland, OH Airport System | 550,675 | ||||||
|
| |||||||
PENNSYLVANIA - 4.9% | ||||||||
190,000 | City of Philadelphia, PA Gas Works | 213,587 | ||||||
480,000 | Pennsylvania State Higher Educational Facilities Authority | 572,304 | ||||||
500,000 | Pennsylvania Turnpike Commission | 575,490 | ||||||
|
| |||||||
1,361,381 | ||||||||
|
| |||||||
SOUTH CAROLINA - 1.9% | ||||||||
500,000 | Georgetown County School District, SC | 539,930 | ||||||
|
| |||||||
TENNESSEE - 2.1% | ||||||||
500,000 | County of Shelby, TN | 576,000 | ||||||
|
| |||||||
TEXAS - 1.1% | ||||||||
250,000 | Texas Transportation Commission State Highway Fund | 309,160 | ||||||
|
| |||||||
Total Municipal Bonds & Notes | 19,517,536 | |||||||
|
| |||||||
Shares | ||||||||
| Cash Equivalents - 38.9% |
| ||||||
10,878,536 | State Street Institutional Liquid Reserves Fund | 10,878,536 | ||||||
|
| |||||||
Total Cash Equivalents | 10,878,536 | |||||||
|
| |||||||
| Total Investments - 108.7% | 30,396,072 | ||||||
|
| |||||||
| (Cost $28,987,560) | |||||||
| Other Assets & Liabilities, Net - (8.7)% | (2,425,212 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 27,970,860 | ||||||
|
|
(a) | Variable or floating rate security. The interest rate shown reflects the rate in effect on March 31, 2016. |
Glossary:
AGC | Assured Guaranty Corp. | |
AGM | Assured Guaranty Municipal Corp. | |
NATL-RE | National Public Finance Guarantee Corp. | |
SCSDE | South Carolina School State Department of Education | |
ST RES FD GTY | State Resource Fund Guaranty |
24 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes - 82.9% |
| ||||||
AGENCY COLLATERALIZED MORTGAGE OBLIGATION - 0.1% | ||||||||
168,569 | Federal National Mortgage Assoc. REMIC | 182,560 | ||||||
|
| |||||||
Total Agency Collateralized Mortgage Obligations | 182,560 | |||||||
|
| |||||||
AGENCY MORTGAGE-BACKED SECURITIES - 16.4% | ||||||||
Federal Home Loan Mortgage Corp. | ||||||||
1,726,858 | 4.00%, 05/01/2044 | 1,863,452 | ||||||
286,674 | 5.00%, 06/01/2041 | 321,953 | ||||||
Federal National Mortgage Assoc. | ||||||||
89,174 | 2.17%, 06/01/2033 (a) | 93,541 | ||||||
4,778,502 | 3.00%, 02/01/2043 - 06/01/2043 (b) | 4,916,840 | ||||||
2,094,340 | 3.50%, 11/01/2042 - 02/01/2043 (b) | 2,214,007 | ||||||
2,623,050 | 4.00%, 01/01/2041 - 03/01/2044 (b) | 2,823,641 | ||||||
3,975,459 | 4.50%, 10/01/2039 - 04/01/2041 (b) | 4,340,036 | ||||||
420,825 | 5.00%, 06/01/2041 | 475,701 | ||||||
91,459 | 5.50%, 01/01/2039 | 102,778 | ||||||
Government National Mortgage Assoc. | ||||||||
2,160,298 | 3.50%, 05/20/2043 | 2,289,373 | ||||||
2,323,425 | 4.00%, 01/20/2041 - 04/20/2043 (b) | 2,505,042 | ||||||
|
| |||||||
Total Agency Mortgage-Backed Securities | 21,946,364 | |||||||
|
| |||||||
ASSET-BACKED SECURITIES - 0.4% | ||||||||
332,000 | American Tower Trust I | 331,914 | ||||||
150,000 | Ford Credit Auto Owner Trust | 150,249 | ||||||
|
| |||||||
Total Asset-Backed Securities | 482,163 | |||||||
|
| |||||||
CORPORATE BONDS & NOTES - 33.9% | ||||||||
AUTOMOBILES & COMPONENTS - 0.1% | ||||||||
147,000 | American Axle & Manufacturing, Inc. | 152,329 | ||||||
|
| |||||||
BANKS - 3.0% | ||||||||
Bank of America Corp. | ||||||||
495,000 | 2.00%, 01/11/2018 | 497,254 | ||||||
128,000 | 4.10%, 07/24/2023 | 134,861 | ||||||
Bank of America Corp., MTN | ||||||||
380,000 | 2.38%, 09/28/2020 (a) | 377,914 | ||||||
311,000 | 4.00%, 04/01/2024 | 326,784 | ||||||
162,000 | 4.13%, 01/22/2024 | 171,891 | ||||||
455,000 | Corp. Andina de Fomento | 501,028 | ||||||
750,000 | Mellon Capital IV | 558,750 | ||||||
250,000 | People’s United Bank NA | 246,506 | ||||||
884,000 | Wells Fargo & Co. | 896,984 |
Principal Amount ($) | Value ($) | |||||||
BANKS (continued) | ||||||||
230,000 | Wells Fargo & Co., MTN | 241,697 | ||||||
|
| |||||||
3,953,669 | ||||||||
|
| |||||||
CAPITAL GOODS - 1.1% | ||||||||
750,000 | Ares Capital Corp. | 770,995 | ||||||
96,000 | Cargill, Inc. | 103,093 | ||||||
213,000 | DigitalGlobe, Inc. | 194,895 | ||||||
228,000 | Eaton Corp. | 228,455 | ||||||
206,000 | Illinois Tool Works, Inc. | 222,286 | ||||||
|
| |||||||
1,519,724 | ||||||||
|
| |||||||
COMMERCIAL & PROFESSIONAL SERVICES - 0.7% | ||||||||
112,000 | Catholic Health Initiatives | 112,360 | ||||||
747,000 | Pitney Bowes, Inc. | 763,052 | ||||||
|
| |||||||
875,412 | ||||||||
|
| |||||||
CONSUMER DURABLES & APPAREL - 0.6% | ||||||||
500,000 | Lennar Corp. | 513,750 | ||||||
307,000 | Mattel, Inc. | 311,154 | ||||||
|
| |||||||
824,904 | ||||||||
|
| |||||||
DIVERSIFIED FINANCIALS - 9.5% | ||||||||
750,000 | Ally Financial, Inc. | 748,125 | ||||||
500,000 | American Express Co. | 449,375 | ||||||
395,000 | American Express Credit Corp., MTN | 394,709 | ||||||
Citigroup, Inc. | ||||||||
217,000 | 1.75%, 05/01/2018 | 216,515 | ||||||
202,000 | 5.50%, 09/13/2025 | 221,462 | ||||||
750,000 | 5.88%, 03/27/2020 (a)(d) | 725,625 | ||||||
150,000 | CNH Industrial Capital LLC | 145,500 | ||||||
150,000 | Daimler Finance North America LLC | 152,469 | ||||||
Ford Motor Credit Co. LLC | ||||||||
750,000 | 1.87%, 05/09/2016 (a) | 750,580 | ||||||
200,000 | 5.88%, 08/02/2021 | 229,494 | ||||||
750,000 | General Electric Capital Corp., MTN | 705,782 | ||||||
750,000 | General Motors Financial Co., Inc. | 743,389 | ||||||
Goldman Sachs Group, Inc. (The) | ||||||||
267,000 | 2.38%, 01/22/2018 | 270,553 | ||||||
311,000 | 2.63%, 01/31/2019 | 317,364 | ||||||
104,000 | 2.90%, 07/19/2018 | 106,487 | ||||||
247,000 | 4.00%, 03/03/2024 | 259,423 | ||||||
516,000 | Goldman Sachs Group, Inc. (The), MTN | 515,915 |
See accompanying Notes to Financial Statements. | 25 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
DIVERSIFIED FINANCIALS (continued) | ||||||||
219,000 | Hyundai Capital America | 219,628 | ||||||
500,000 | International Lease Finance Corp. | 500,491 | ||||||
296,000 | JPMorgan Chase & Co. | 283,050 | ||||||
500,000 | Lazard Group LLC | 522,689 | ||||||
Morgan Stanley | ||||||||
208,000 | 2.13%, 04/25/2018 | 209,547 | ||||||
147,000 | 4.75%, 03/22/2017 | 151,860 | ||||||
224,000 | 4.88%, 11/01/2022 | 243,035 | ||||||
133,000 | 5.00%, 11/24/2025 | 144,212 | ||||||
Morgan Stanley, MTN | ||||||||
500,000 | 1.87%, 01/16/2020 (a) | 498,807 | ||||||
500,000 | 3.00%, 02/21/2020 (a)(f) | 486,300 | ||||||
237,000 | 4.10%, 05/22/2023 | 244,781 | ||||||
750,000 | Stifel Financial Corp. | 750,510 | ||||||
1,000,000 | UBS AG | 1,016,250 | ||||||
495,000 | Volkswagen Group of America Finance LLC | 489,864 | ||||||
|
| |||||||
12,713,791 | ||||||||
|
| |||||||
ENERGY - 2.1% | ||||||||
90,000 | Anadarko Petroleum Corp. | 86,849 | ||||||
500,000 | Chesapeake Energy Corp. | 196,250 | ||||||
98,000 | Continental Resources, Inc. | 73,500 | ||||||
500,000 | Devon Energy Corp. | 489,994 | ||||||
259,000 | Energy Transfer Partners LP | 235,832 | ||||||
73,000 | Freeport-McMoran Oil & Gas LLC | 58,765 | ||||||
65,000 | Kerr-McGee Corp. | 68,908 | ||||||
Kinder Morgan Energy Partners LP | ||||||||
181,000 | 3.50%, 09/01/2023 | 164,245 | ||||||
205,000 | 4.30%, 05/01/2024 | 195,147 | ||||||
514,000 | Linn Energy LLC | 59,110 | ||||||
96,000 | Newfield Exploration Co. | 94,050 | ||||||
146,000 | Rowan Cos., Inc. | 100,397 | ||||||
120,000 | Sabine Pass Liquefaction LLC | 115,950 | ||||||
214,000 | Unit Corp. | 108,605 | ||||||
Williams Cos., Inc. (The) | ||||||||
197,000 | 4.55%, 06/24/2024 | 150,705 | ||||||
99,000 | 5.75%, 06/24/2044 | 66,330 |
Principal Amount ($) | Value ($) | |||||||
ENERGY (continued) | ||||||||
317,000 | Williams Partners LP | 304,046 | ||||||
211,000 | WPX Energy, Inc. | 208,890 | ||||||
|
| |||||||
2,777,573 | ||||||||
|
| |||||||
FOOD & STAPLES RETAILING - 0.2% | ||||||||
279,000 | Ingles Markets, Inc. | 284,580 | ||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.8% | ||||||||
Altria Group, Inc. | ||||||||
108,000 | 2.95%, 05/02/2023 | 111,978 | ||||||
108,000 | 4.50%, 05/02/2043 | 116,500 | ||||||
199,000 | Anheuser-Busch InBev Worldwide, Inc. | 200,836 | ||||||
210,000 | Constellation Brands, Inc. | 214,462 | ||||||
142,000 | Diageo Investment Corp. | 148,548 | ||||||
112,000 | JBS USA LLC | 101,640 | ||||||
111,000 | Philip Morris International, Inc. | 115,380 | ||||||
|
| |||||||
1,009,344 | ||||||||
|
| |||||||
HEALTHCARE EQUIPMENT & SERVICES - 0.6% | ||||||||
207,000 | Anthem, Inc. | 209,593 | ||||||
395,000 | Express Scripts Holding Co. | 398,179 | ||||||
114,000 | HCA, Inc. | 125,400 | ||||||
|
| |||||||
733,172 | ||||||||
|
| |||||||
INSURANCE - 1.5% | ||||||||
119,000 | Allstate Corp. (The) | 121,157 | ||||||
167,000 | American International Group, Inc. | 172,710 | ||||||
750,000 | Assured Guaranty US Holdings, Inc. | 797,418 | ||||||
224,000 | Berkshire Hathaway, Inc. | 245,355 | ||||||
253,000 | Five Corners Funding Trust | 265,628 | ||||||
Genworth Holdings, Inc. | ||||||||
103,000 | 4.80%, 02/15/2024 | 75,963 | ||||||
101,000 | 7.70%, 06/15/2020 | 89,637 | ||||||
221,000 | Liberty Mutual Group, Inc. | 228,125 | ||||||
|
| |||||||
1,995,993 | ||||||||
|
| |||||||
MATERIALS - 0.3% | ||||||||
257,000 | Hexion, Inc. | 214,595 | ||||||
208,000 | Huntsman International LLC | 206,960 | ||||||
|
| |||||||
421,555 | ||||||||
|
|
26 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
MEDIA - 1.3% | ||||||||
205,000 | Cequel Communications Holdings I LLC | 192,188 | ||||||
103,000 | Comcast Corp. | 116,463 | ||||||
75,000 | iHeartCommunications, Inc. | 24,000 | ||||||
238,000 | Omnicom Group, Inc. | 250,179 | ||||||
Time Warner Cable, Inc. | ||||||||
750,000 | 5.85%, 05/01/2017 | 782,030 | ||||||
189,000 | 5.88%, 11/15/2040 | 196,237 | ||||||
168,000 | Time Warner, Inc. | 179,447 | ||||||
|
| |||||||
1,740,544 | ||||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 1.0% | ||||||||
AbbVie, Inc. | ||||||||
203,000 | 1.75%, 11/06/2017 | 204,019 | ||||||
143,000 | 2.00%, 11/06/2018 | 144,592 | ||||||
205,000 | Celgene Corp. | 212,251 | ||||||
187,000 | Endo Finance LLC & Endo Finco, Inc. | 179,052 | ||||||
209,000 | Gilead Sciences, Inc. | 224,471 | ||||||
97,000 | Mylan, Inc. | 96,771 | ||||||
153,000 | Novartis Capital Corp. | 175,695 | ||||||
124,000 | Valeant Pharmaceuticals International | 103,540 | ||||||
|
| |||||||
1,340,391 | ||||||||
|
| |||||||
REAL ESTATE - 3.1% | ||||||||
148,000 | American Campus Communities Operating Partnership LP | 152,639 | ||||||
220,000 | American Tower Corp., REIT | 225,684 | ||||||
750,000 | CBRE Services, Inc. | 767,876 | ||||||
Corporate Office Properties LP, REIT | ||||||||
139,000 | 3.60%, 05/15/2023 | 130,775 | ||||||
750,000 | 5.25%, 02/15/2024 (e) | 773,198 | ||||||
750,000 | EPR Properties, REIT | 809,660 | ||||||
610,000 | Hospitality Properties Trust, REIT | 606,988 | ||||||
164,000 | National Retail Properties, Inc., REIT | 168,387 | ||||||
500,000 | Potlatch Corp., REIT | 537,500 | ||||||
|
| |||||||
4,172,707 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
RETAILING - 1.2% | ||||||||
Bed Bath & Beyond, Inc. | ||||||||
98,000 | 3.75%, 08/01/2024 (e) | 99,075 | ||||||
29,000 | 4.92%, 08/01/2034 | 26,233 | ||||||
750,000 | Coach, Inc. | 743,537 | ||||||
Glencore Funding LLC | ||||||||
311,000 | 2.50%, 01/15/2019 (c) | 286,120 | ||||||
157,000 | 4.13%, 05/30/2023 (c) | 128,538 | ||||||
108,000 | Home Depot, Inc. (The) | 128,465 | ||||||
227,000 | Target Corp. | 249,255 | ||||||
|
| |||||||
1,661,223 | ||||||||
|
| |||||||
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.1% | ||||||||
105,000 | Xilinx, Inc. | 105,612 | ||||||
|
| |||||||
SOFTWARE & SERVICES - 0.9% | ||||||||
750,000 | eBay, Inc. | 754,535 | ||||||
310,000 | International Business Machines Corp. | 333,323 | ||||||
154,000 | Oracle Corp. | 166,968 | ||||||
|
| |||||||
1,254,826 | ||||||||
|
| |||||||
TECHNOLOGY HARDWARE & EQUIPMENT - 2.3% | ||||||||
308,000 | Apple, Inc. | 323,177 | ||||||
520,000 | HP, Inc. | 529,418 | ||||||
750,000 | Lexmark International, Inc. | 783,731 | ||||||
500,000 | Motorola Solutions, Inc. | 459,985 | ||||||
230,000 | Seagate HDD Cayman | 179,946 | ||||||
750,000 | Xerox Corp. | 754,682 | ||||||
|
| |||||||
3,030,939 | ||||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 2.0% | ||||||||
AT&T, Inc. | ||||||||
262,000 | 2.38%, 11/27/2018 | 267,814 | ||||||
156,000 | 4.45%, 04/01/2024 | 169,132 | ||||||
336,000 | 5.15%, 03/15/2042 | 339,884 | ||||||
96,000 | Frontier Communications Corp. | 99,120 | ||||||
283,000 | Hughes Satellite Systems Corp. | 312,715 | ||||||
L-3 Communications Corp. | ||||||||
139,000 | 1.50%, 05/28/2017 | 138,563 | ||||||
154,000 | 3.95%, 05/28/2024 | 148,468 | ||||||
119,000 | Sprint Corp. | 91,481 | ||||||
Verizon Communications, Inc. | ||||||||
494,000 | 1.35%, 06/09/2017 | 495,562 | ||||||
216,000 | 5.15%, 09/15/2023 | 249,702 |
See accompanying Notes to Financial Statements. | 27 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
CORPORATE BONDS & NOTES (continued) | ||||||||
TELECOMMUNICATION SERVICES (continued) | ||||||||
150,000 | 6.55%, 09/15/2043 | 198,303 | ||||||
215,000 | Windstream Services LLC | 158,562 | ||||||
|
| |||||||
2,669,306 | ||||||||
|
| |||||||
TRANSPORTATION - 0.2% | ||||||||
246,000 | Ryder System, Inc., MTN | 246,427 | ||||||
|
| |||||||
UTILITIES - 1.3% | ||||||||
103,000 | CMS Energy Corp. | 109,932 | ||||||
276,000 | Dominion Resources, Inc. | 276,897 | ||||||
146,000 | Duke Energy Corp. | 152,900 | ||||||
215,000 | Eversource Energy | 213,203 | ||||||
111,000 | Great Plains Energy, Inc. | 120,955 | ||||||
142,000 | PacifiCorp | 185,825 | ||||||
126,000 | PPL Capital Funding, Inc. | 135,574 | ||||||
324,000 | Public Service Electric & Gas Co., MTN | 323,824 | ||||||
259,000 | Southern Co. (The) | 263,295 | ||||||
|
| |||||||
1,782,405 | ||||||||
|
| |||||||
Total Corporate Bonds & Notes | 45,266,426 | |||||||
|
| |||||||
FOREIGN CORPORATE BONDS & NOTES - 7.1% | ||||||||
BANKS - 1.6% | ||||||||
500,000 | Bank of Nova Scotia (The), MTN | 508,815 | ||||||
200,000 | Bank of Tokyo-Mitsubishi UFJ, Ltd. (The) | 201,773 | ||||||
200,000 | Intesa Sanpaolo SpA | 187,597 | ||||||
394,000 | Macquarie Bank, Ltd. | 397,890 | ||||||
249,000 | Mizuho Bank, Ltd. | 251,580 | ||||||
441,000 | Royal Bank of Canada | 440,659 | ||||||
240,000 | Standard Chartered PLC | 218,264 | ||||||
|
| |||||||
2,206,578 | ||||||||
|
| |||||||
CAPITAL GOODS - 0.7% | ||||||||
200,000 | Ardagh Packaging Finance PLC | 197,500 | ||||||
750,000 | BlackRock Capital Investment Corp. | 759,844 | ||||||
|
| |||||||
957,344 | ||||||||
|
|
Principal Amount ($) | Value ($) | |||||||
DIVERSIFIED FINANCIALS - 0.9% | ||||||||
400,000 | Credit Suisse AG | 400,962 | ||||||
304,000 | Invesco Finance PLC | 310,430 | ||||||
500,000 | Prospect Capital Corp. | 501,250 | ||||||
|
| |||||||
1,212,642 | ||||||||
|
| |||||||
ENERGY - 1.9% | ||||||||
BP Capital Markets PLC | ||||||||
207,000 | 3.81%, 02/10/2024 | 215,429 | ||||||
108,000 | 1.38%, 05/10/2018 | 107,397 | ||||||
205,000 | CNOOC Nexen Finance 2014 ULC | 212,477 | ||||||
138,000 | Nexen, Inc. | 157,488 | ||||||
Petrobras Global Finance BV | ||||||||
493,000 | 2.76%, 01/15/2019 (a) | 401,845 | ||||||
286,000 | 3.50%, 02/06/2017 | 282,196 | ||||||
201,000 | 5.38%, 01/27/2021 | 166,655 | ||||||
95,000 | Petroleos Mexicanos | 96,520 | ||||||
325,000 | Shell International Finance BV | 337,188 | ||||||
Statoil ASA | ||||||||
319,000 | 3.70%, 03/01/2024 (e) | 333,542 | ||||||
106,000 | 4.80%, 11/08/2043 | 114,302 | ||||||
95,000 | Weatherford International, Ltd. | 66,500 | ||||||
|
| |||||||
2,491,539 | ||||||||
|
| |||||||
FOOD, BEVERAGE & TOBACCO - 0.2% | ||||||||
217,000 | Diageo Capital PLC | 216,216 | ||||||
|
| |||||||
INSURANCE - 0.1% | ||||||||
100,000 | XLIT, Ltd. | 104,297 | ||||||
|
| |||||||
MATERIALS - 0.4% | ||||||||
205,000 | Agrium, Inc. | 195,806 | ||||||
103,000 | Kinross Gold Corp. | 88,099 | ||||||
Teck Resources, Ltd. | ||||||||
192,000 | 3.75%, 02/01/2023 | 127,561 | ||||||
109,000 | 5.40%, 02/01/2043 (e) | 60,495 | ||||||
157,000 | Yamana Gold, Inc. | 132,881 | ||||||
|
| |||||||
604,842 | ||||||||
|
| |||||||
MEDIA - 0.1% | ||||||||
208,000 | Cogeco Communications, Inc. | 214,895 | ||||||
|
| |||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.7% | ||||||||
Actavis Funding SCS | ||||||||
237,000 | 1.30%, 06/15/2017 | 236,229 | ||||||
197,000 | 3.85%, 06/15/2024 | 206,835 | ||||||
99,000 | 4.85%, 06/15/2044 | 105,840 |
28 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
FOREIGN CORPORATE BONDS & NOTES (continued) | ||||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES (continued) | ||||||||
213,000 | Perrigo Co. PLC | 212,928 | ||||||
151,000 | Valeant Pharmaceuticals International, Inc. | 137,788 | ||||||
|
| |||||||
899,620 | ||||||||
|
| |||||||
SOFTWARE & SERVICES - 0.1% | ||||||||
109,000 | Tencent Holdings, Ltd. | 112,986 | ||||||
|
| |||||||
TELECOMMUNICATION SERVICES - 0.4% | ||||||||
295,000 | America Movil SAB de CV | 327,004 | ||||||
200,000 | Telecom Italia SpA | 205,750 | ||||||
|
| |||||||
532,754 | ||||||||
|
| |||||||
Total Foreign Corporate Bonds & Notes | 9,553,713 | |||||||
|
| |||||||
MUNICIPAL BONDS & NOTES - 3.9% | ||||||||
635,000 | Comstock Park Public Schools | 714,134 | ||||||
Industry Public Facilities Authority of California | ||||||||
750,000 | 5.04%, 01/01/2027 | 798,427 | ||||||
750,000 | 5.75%, 01/01/2024 | 754,500 | ||||||
720,000 | New York State Dormitory Authority | 727,668 | ||||||
850,000 | Pennsylvania Turnpike Commission | 984,903 | ||||||
320,000 | Port Authority of New York & New Jersey | 334,922 | ||||||
300,000 | San Francisco City & County Redevelopment Agency | 389,223 | ||||||
470,000 | Stanton Redevelopment Agency | 572,897 | ||||||
|
| |||||||
Total Municipal Bonds & Notes | 5,276,674 | |||||||
|
| |||||||
NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES - 3.4% | ||||||||
Banc of America Commercial Mortgage Trust | ||||||||
465,000 | Series 2007-1, Class AMFX | 470,396 | ||||||
300,000 | Series 2006-4, Class AM | 301,096 | ||||||
48,708 | Banc of America Merrill Lynch Commercial Mortgage, Inc. | 48,654 | ||||||
Bear Stearns Commercial Mortgage Securities Trust | ||||||||
54,107 | Series 2006-T22, Class AJ | 54,085 |
Principal Amount ($) | Value ($) | |||||||
| NON-AGENCY COLLATERALIZED MORTGAGE-BACKED SECURITIES (continued) | | ||||||
230,000 | Series 2007-PW18, Class AMA | 238,474 | ||||||
Commercial Mortgage Pass-Through Certificates | ||||||||
120,000 | Series 2014-CR14, Class AM | 132,972 | ||||||
100,000 | Series 2013-LC13, Class AM | 110,860 | ||||||
GS Mortgage Securities Trust | ||||||||
90,663 | Series 2011-GC5, Class A2 | 90,806 | ||||||
205,000 | Series 2014, Class C | 198,115 | ||||||
105,000 | Series 2014-GC20, Class AS | 113,358 | ||||||
JP Morgan Chase Commercial Mortgage Securities Trust | ||||||||
100,000 | Series 2006-LDP8, Class AM | 100,857 | ||||||
196,192 | Series 2007-CB18, Class A4 | 199,672 | ||||||
JPMBB Commercial Mortgage Securities Trust | ||||||||
100,000 | Series 2014-C18, Class C | 101,028 | ||||||
153,000 | Series 2013-C17, Class C | 151,975 | ||||||
LB-UBS Commercial Mortgage Trust | ||||||||
250,000 | Series 2007-C6, Class AMFL | 258,627 | ||||||
220,000 | Series 2007-C6, Class AM | 228,059 | ||||||
300,000 | ML-CFC Commercial Mortgage Trust | 302,708 | ||||||
Morgan Stanley Bank of America Merrill Lynch Trust | ||||||||
210,000 | Series 2013-C10, Class AS | 228,255 | ||||||
191,000 | Series 2013-C10, Class C | 189,232 | ||||||
Morgan Stanley Capital I Trust | ||||||||
31,925 | Series 2005-T17, Class AJ | 31,997 | ||||||
100,000 | Series 2012-C4, Class B | 110,244 | ||||||
88,377 | Series 2006-T21, Class AJ | 88,328 | ||||||
230,000 | Series 2007-IQ16, Class AMA | 239,243 | ||||||
WF-RBS Commercial Mortgage Trust | ||||||||
115,000 | Series 2013-C17, Class AS | 125,843 | ||||||
263,000 | Series 2014-LC14, Class AS | 286,317 | ||||||
140,000 | Series 2014-C19, Class B | 149,579 | ||||||
|
| |||||||
Total Non-Agency Collateralized Mortgage-Backed Securities | 4,550,780 | |||||||
|
|
See accompanying Notes to Financial Statements. | 29 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
Principal Amount ($) | Value ($) | |||||||
| Bonds & Notes (continued) |
| ||||||
FOREIGN CORPORATE BONDS & NOTES (continued) | ||||||||
SOVEREIGN BONDS - 0.7% | ||||||||
200,000 | Brazilian Government International Bond | 183,750 | ||||||
226,000 | Chile Government International Bond | 214,135 | ||||||
200,000 | Colombia Government International Bond | 186,500 | ||||||
210,000 | Mexico Government International Bond, MTN | 210,000 | ||||||
133,000 | Turkey Government International Bond | 125,653 | ||||||
|
| |||||||
Total Sovereign Bonds | 920,038 | |||||||
|
| |||||||
U.S. GOVERNMENT AGENCIES - 17.0% | ||||||||
Federal Farm Credit Bank | ||||||||
2,000,000 | 2.10%, 05/11/2022 | 1,989,792 | ||||||
1,000,000 | 3.04%, 06/17/2024 | 1,003,412 | ||||||
Federal Home Loan Bank | ||||||||
2,000,000 | 1.00%, 10/28/2022 (g) | 2,000,026 | ||||||
1,000,000 | 1.25%, 12/11/2020 (g) | 1,000,291 | ||||||
1,425,000 | 1.25%, 06/30/2021 (g) | 1,426,022 | ||||||
Federal Home Loan Mortgage Corp., MTN | ||||||||
1,850,000 | 1.00%, 10/15/2020 (g) | 1,850,057 | ||||||
2,000,000 | 1.00%, 12/23/2020 (g) | 1,999,926 | ||||||
2,000,000 | 1.25%, 09/30/2020 (g) | 2,004,144 | ||||||
2,000,000 | 1.25%, 10/29/2020 (g) | 2,000,192 | ||||||
2,000,000 | 1.25%, 12/14/2020 (g) | 2,000,836 | ||||||
2,000,000 | 1.50%, 10/15/2020 (g) | 2,000,182 | ||||||
1,425,000 | 1.50%, 11/25/2020 (g) | 1,426,030 | ||||||
2,000,000 | Federal National Mortgage Assoc. | 2,000,242 | ||||||
|
| |||||||
Total U.S. Government Agencies | 22,701,152 | |||||||
|
| |||||||
Total Bonds & Notes | 110,879,870 | |||||||
|
| |||||||
Shares | ||||||||
| Domestic Equity - 4.3% |
| ||||||
COMMON STOCKS - 1.7% | ||||||||
95,000 | Gramercy Property Trust | 802,750 | ||||||
158,000 | VEREIT, Inc., REIT (e) | 1,401,460 | ||||||
|
| |||||||
Total Common Stocks | 2,204,210 | |||||||
|
| |||||||
PREFERRED STOCKS - 2.6% | ||||||||
BANKS - 1.9% | ||||||||
30,000 | Countrywide Capital V | 772,500 | ||||||
22,109 | First Republic Bank (d)(e) | 613,746 | ||||||
39,748 | First Republic Bank, Series A (d)(e) | 1,035,436 | ||||||
6,572 | Wells Fargo & Co. (d) | 173,747 | ||||||
|
| |||||||
2,595,429 | ||||||||
|
|
Shares | Value ($) | |||||||
DIVERSIFIED FINANCIALS - 0.5% | ||||||||
25,842 | Ally Financial, Inc., Series A (d)(e) | 657,937 | ||||||
|
| |||||||
REAL ESTATE - 0.2% | ||||||||
7,565 | PS Business Parks, Inc., REIT, Series S (d) | 195,177 | ||||||
|
| |||||||
Total Preferred Stocks | 3,448,543 | |||||||
|
| |||||||
Total Domestic Equity | 5,652,753 | |||||||
|
| |||||||
| Foreign Equity - 0.2% |
| ||||||
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES - 0.2% | ||||||||
285 | Teva Pharmaceutical Industries, Ltd. | 251,923 | ||||||
|
| |||||||
Total Foreign Equity | 251,923 | |||||||
|
| |||||||
| Registered Investment Companies - 12.0% |
| ||||||
66,372 | BlackRock Build America Bond Trust | 1,525,892 | ||||||
69,841 | Cohen & Steers, Ltd., Duration Preferred & Income Fund, Inc. | 1,603,549 | ||||||
46,941 | DoubleLine Income Solutions Fund | 789,078 | ||||||
45,919 | Nuveen Build America Bond Fund | 991,391 | ||||||
140,000 | Nuveen Credit Strategies Income Fund | 1,107,400 | ||||||
46,950 | PCM Fund, Inc. | 446,964 | ||||||
74,400 | PIMCO Corporate & Income Opportunity Fund | 1,014,072 | ||||||
79,000 | PIMCO Dynamic Credit Income Fund | 1,377,760 | ||||||
25,000 | PIMCO Dynamic Income Fund | 651,250 | ||||||
5,925,820 | State Street Navigator Prime Securities Lending Portfolio (h) | 5,925,820 | ||||||
33,398 | Templeton Emerging Markets Income Fund | 343,332 | ||||||
22,498 | Western Asset Emerging Markets Debt Fund, Inc. | 326,671 | ||||||
|
| |||||||
Total Registered Investment Companies | 16,103,179 | |||||||
|
| |||||||
| Cash Equivalents - 4.7% |
| ||||||
6,322,380 | State Street Institutional Liquid Reserves Fund | 6,322,380 | ||||||
|
| |||||||
Total Cash Equivalents | 6,322,380 | |||||||
|
| |||||||
| Total Investments - 104.1% | 139,210,105 | ||||||
|
| |||||||
| (Cost $140,872,370) | |||||||
| Other Assets & Liabilities, Net - (4.1)% | (5,503,832 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 133,706,273 | ||||||
|
|
(a) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2016. |
(b) | Securities are grouped by coupon and represent a range of maturities. |
(c) | 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, 2016, these securities amounted to $6,181,525 or 4.6% of net assets. |
(d) | Perpetual maturity. Maturity date presented represents the next call date. |
(e) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $5,779,644. The loaned securities were secured with cash collateral of $5,925,820. Collateral is calculated based on prior day’s prices. See Note 4. |
30 | See accompanying Notes to Financial Statements. |
Table of Contents
INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 | Highland Fixed Income Fund |
(f) | Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $486,300, or 0.4% of net assets, were fair valued under the Fund’s valuation procedures as of March 31, 2016. |
(g) | Step coupon bond. The interest rate shown reflects the rate in effect March 31, 2016 and will reset at a future date. |
(h) | Represents investments of cash collateral received in connection with securities lending. |
Glossary: | ||
MTN | Medium-Term Note | |
PLC | Public Limited Company | |
REIT | Real Estate Investment Trust | |
REMIC | Real Estate Mortgage Investment Conduit |
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 |
| |||||||
Corporate Bonds & Notes | $ | 3,795,245 | $ | 3,795,245 | ||||
Common Stock | 2,130,575 | 2,130,575 | ||||||
Total Borrowings | $ | 5,925,820 | $ | 5,925,820 | ||||
Gross amount of recognized liabilities for securities lending transactions | $ | 5,925,820 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand. |
See accompanying Notes to Financial Statements. | 31 |
Table of Contents
STATEMENTS OF ASSETS AND LIABILITIES
As of March 31, 2016 (unaudited) |
Highland Global Allocation Fund ($) | Highland Premier Growth Equity Fund ($) | Highland Small-Cap Equity Fund ($) | ||||||||||
Assets | ||||||||||||
Unaffiliated investments, at value(a) | 1,067,269,268 | 238,393,373 | 43,596,825 | |||||||||
Affiliated investments, at value (Note 10) | 156,826,139 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total Investments, at value | 1,224,095,407 | 238,393,373 | 43,596,825 | |||||||||
Cash equivalents (Note 2) | 7,001,979 | — | 52,857 | |||||||||
Cash | 1,500,821 | — | — | |||||||||
Restricted Cash — Futures (Note 2) | 22,341,117 | — | — | |||||||||
Restricted Cash — Securities Sold Short (Note 2) | 122,091,079 | 10,499,877 | — | |||||||||
Foreign currency | — | — | ||||||||||
Receivable for: | ||||||||||||
Investments sold | 17,651,130 | 9,685,674 | — | |||||||||
Dividends and interest | 14,012,672 | 128,113 | 26,016 | |||||||||
Fund shares sold | 2,048,711 | 162,166 | 20,365 | |||||||||
Prepaid expenses and other assets | 193,997 | 46,181 | 29,458 | |||||||||
Variation margin on futures contracts | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total assets | 1,410,936,913 | 258,915,384 | 43,725,521 | |||||||||
|
|
|
|
|
| |||||||
Liabilities | ||||||||||||
Bank overdraft of foreign currency | 64,097 | — | — | |||||||||
Due to custodian | — | 424,368 | — | |||||||||
Due to broker | 224,518,496 | — | — | |||||||||
Notes payable (Note 6) | 62,000,000 | 10,000,000 | 4,000,000 | |||||||||
Securities sold short, at value (Notes 2 and 8) | 84,872,348 | 8,668,750 | — | |||||||||
Written options contracts, at value (Note 3) | 31,241,989 | — | — | |||||||||
Payable for: | ||||||||||||
Upon receipt of securities loaned (Note 4) | 10,161,603 | 19,416,751 | 7,752,734 | |||||||||
Distributions to shareholders | 75,802 | — | — | |||||||||
Investments purchased | 56,513,581 | — | — | |||||||||
Fund shares redeemed | 3,954,557 | 1,611,871 | 29,264 | |||||||||
Variation margin | 7,730,215 | — | — | |||||||||
Investment advisory and administration fees (Note 7) | 298,819 | 114,042 | 11,087 | |||||||||
Trustees’ fees | 43,353 | 8,629 | 1,181 | |||||||||
Distribution and shareholder service fees (Note 7) | 34,628 | 7,490 | 982 | |||||||||
Transfer agent fees | 405,927 | 17,636 | 6,147 | |||||||||
Interest expense (Note 6) | 108,217 | 2,340 | 2,294 | |||||||||
Commitment fee payable (Note 6) | 31,172 | 3,651 | 668 | |||||||||
Accrued expenses and other liabilities | 209,655 | 67,185 | 14,953 | |||||||||
|
|
|
|
|
| |||||||
Total liabilities | 482,264,459 | 40,342,713 | 11,819,310 | |||||||||
|
|
|
|
|
| |||||||
Net Assets | 928,672,454 | 218,572,671 | 31,906,211 | |||||||||
|
|
|
|
|
| |||||||
Net Assets Consist of: | ||||||||||||
Par value (Note 1) | 123,427 | 7,148 | 2,818 | |||||||||
Paid-in capital | 1,544,370,523 | 153,907,812 | 29,680,792 | |||||||||
Accumulated net investment income (loss) | (29,704,283 | ) | 480,419 | 65,362 | ||||||||
Accumulated net realized gain (loss) from investments, securities sold short, futures contracts and foreign currency transactions | (77,817,652 | ) | 6,433,894 | 1,024,488 | ||||||||
Net unrealized appreciation (depreciation) on investments, securities sold short and foreign currency translations | (508,299,561 | ) | 57,743,398 | 1,132,751 | ||||||||
|
|
|
|
|
| |||||||
Net Assets | 928,672,454 | 218,572,671 | 31,906,211 | |||||||||
|
|
|
|
|
| |||||||
Unaffiliated Investments, at cost | 1,555,627,347 | 179,660,271 | 42,464,075 | |||||||||
Affiliated investments, at cost (Note 10) | 174,288,978 | — | — | |||||||||
Cash equivalents, at cost (Note 2) | 7,001,979 | — | 52,857 | |||||||||
Foreign currency, at cost | (64,097 | ) | — | — | ||||||||
Proceeds from securities sold short | 81,552,981 | 7,679,046 | — | |||||||||
Written option premiums received | 39,830,837 | — | — | |||||||||
(a) Includes market value of securities on loan: | 10,099,942 | 18,976,220 | 8,826,258 |
32 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | ||||||||||
85,731,164 | 19,517,536 | 132,887,725 | ||||||||||
— | — | — | ||||||||||
|
|
|
|
|
|
| ||||||
85,731,164 | 19,517,536 | 132,887,725 | ||||||||||
7,726,195 | 10,878,536 | 6,322,380 | ||||||||||
300,332 | — | 6,984 | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
3,754,324 | — | — | ||||||||||
299,212 | 239,244 | 968,698 | ||||||||||
18,074 | 7,899 | 3,244 | ||||||||||
39,476 | 33,945 | 41,540 | ||||||||||
6 | 1 | |||||||||||
|
|
|
|
|
|
| ||||||
97,868,783 | 30,677,160 | 140,230,572 | ||||||||||
|
|
|
|
|
|
| ||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
20,109,459 | — | 5,925,820 | ||||||||||
— | 14,444 | 38,605 | ||||||||||
1,950,785 | 2,670,850 | — | ||||||||||
54,366 | 915 | 432,748 | ||||||||||
— | — | — | ||||||||||
31,721 | 2,725 | 34,132 | ||||||||||
2,721 | 767 | 4,924 | ||||||||||
2,381 | 940 | 4,119 | ||||||||||
6,595 | — | 13,320 | ||||||||||
— | — | — | ||||||||||
1,103 | 300 | 2,125 | ||||||||||
33,429 | 15,359 | 68,506 | ||||||||||
|
|
|
|
|
|
| ||||||
22,192,560 | 2,706,300 | 6,524,299 | ||||||||||
|
|
|
|
|
|
| ||||||
75,676,223 | 27,970,860 | 133,706,273 | ||||||||||
|
|
|
|
|
|
| ||||||
3,715 | 2,381 | 10,541 | ||||||||||
79,035,918 | 26,508,327 | 137,579,215 | ||||||||||
466,918 | 51,640 | (146,091 | ) | |||||||||
| (2,125,412 | ) | — | (2,075,127 | ) | |||||||
| (1,704,916 | ) | 1,408,512 | (1,662,265 | ) | |||||||
|
|
|
|
|
|
| ||||||
75,676,223 | 27,970,860 | 133,706,273 | ||||||||||
|
|
|
|
|
|
| ||||||
87,433,522 | 18,109,024 | 134,549,990 | ||||||||||
— | — | — | ||||||||||
7,726,195 | 10,878,536 | 6,322,380 | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
20,614,899 | — | 5,779,644 |
See accompanying Notes to Financial Statements. | 33 |
Table of Contents
STATEMENTS OF ASSETS AND LIABILITIES (continued)
As of March 31, 2016 (unaudited) |
Highland Global Allocation Fund ($) | Highland Premier Growth Equity Fund ($) | Highland Small-Cap Equity Fund ($) | ||||||||||
Class A: | ||||||||||||
Net assets | 298,744,852 | 150,560,760 | 27,815,035 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 40,788,683 | 4,796,411 | 2,400,505 | |||||||||
|
|
|
|
|
| |||||||
Net asset value per share(a)(b) | 7.32 | 31.39 | 11.59 | |||||||||
|
|
|
|
|
| |||||||
Maximum offering price per share(c) | 7.77 | 33.31 | 12.30 | |||||||||
|
|
|
|
|
| |||||||
Class C: | ||||||||||||
Net assets | 250,599,790 | 30,292,235 | 2,485,714 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 38,544,571 | 1,189,094 | 289,685 | |||||||||
|
|
|
|
|
| |||||||
Net asset value and offering price per share(a) | 6.50 | 25.48 | 8.58 | |||||||||
|
|
|
|
|
| |||||||
Class Y: | ||||||||||||
Net assets | 379,327,812 | 37,719,676 | 1,605,462 | |||||||||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 44,093,987 | 1,162,427 | 128,042 | |||||||||
|
|
|
|
|
| |||||||
Net asset value, offering and redemption price per share | 8.60 | 32.45 | 12.54 | |||||||||
|
|
|
|
|
|
(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 $1,000,000 or more, there is no sales charge and therefore the offering will be lower. |
34 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | ||||||||||
56,947,057 | 25,123,148 | 121,243,623 | ||||||||||
2,770,795 | 2,140,014 | 9,558,687 | ||||||||||
|
|
|
|
|
| |||||||
20.55 | 11.74 | 12.68 | ||||||||||
|
|
|
|
|
| |||||||
21.80 | 12.26 | 13.24 | ||||||||||
|
|
|
|
|
| |||||||
7,546,549 | 2,618,839 | 7,351,367 | ||||||||||
408,192 | 223,198 | 578,817 | ||||||||||
|
|
|
|
|
| |||||||
18.49 | 11.73 | 12.70 | ||||||||||
|
|
|
|
|
| |||||||
11,182,617 | 228,873 | 5,111,283 | ||||||||||
536,045 | 17,970 | 403,269 | ||||||||||
|
|
|
|
|
| |||||||
20.86 | 12.74 | 12.67 | ||||||||||
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 35 |
Table of Contents
For the six months ended March 31, 2016 (unaudited) |
Highland Global Allocation Fund ($) | Highland Premier Growth Equity Fund ($) | Highland Small-Cap Equity Fund ($) | ||||||||||
Investment Income | ||||||||||||
Income: | ||||||||||||
Dividends from unaffiliated issuers | 12,620,215 | 1,672,148 | 201,564 | |||||||||
Dividends from affiliated issuers (Note 10) | 277,071 | — | — | |||||||||
Less: Foreign taxes withheld | (30,353 | ) | — | — | ||||||||
Securities lending income (Note 4) | 699,025 | 14,858 | 48,204 | |||||||||
Interest from unaffiliated issuers | 36,232,176 | 5,467 | 1,427 | |||||||||
Other income | 4,559 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total Income | 49,802,693 | 1,692,473 | 251,195 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
Investment advisory (Note 7) | 2,221,400 | 728,202 | 154,876 | |||||||||
Distribution and shareholder service fees: (Note 7) | ||||||||||||
Class A | 419,794 | 218,783 | 34,641 | |||||||||
Class C | 1,508,116 | 143,489 | 12,424 | |||||||||
Class R | 1,371 | 1,056 | 7 | |||||||||
Transfer agent fees | 854,471 | 99,408 | 23,806 | |||||||||
Trustees fees (Note 7) | 91,409 | 17,151 | 2,395 | |||||||||
Accounting services fees | 350,389 | 44,689 | 11,312 | |||||||||
Audit fees | 168,665 | 28,131 | 4,137 | |||||||||
Legal fees | 436,531 | 59,598 | 9,050 | |||||||||
Registration fees | 95,728 | 25,079 | 24,248 | |||||||||
Insurance | 93,526 | 17,383 | 3,051 | |||||||||
Reports to shareholders | 101,289 | 20,940 | 5,125 | |||||||||
Interest expense (Note 6) | 647,017 | 2,340 | 2,294 | |||||||||
Commitment fees-credit agreement (Note 6) | 41,934 | 5,596 | 898 | |||||||||
Dividends and fees on securities sold short (Note 2) | 1,164,567 | 34,497 | — | |||||||||
Other | 273,213 | 6,492 | 2,482 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses before waiver and reimbursement (Note 7) | 8,469,420 | 1,452,834 | 290,746 | |||||||||
Less: Expenses waived or borne by the adviser and administrator | (535,390 | ) | — | (85,151 | ) | |||||||
|
|
|
|
|
| |||||||
Net operating expenses | 7,934,030 | 1,452,834 | 205,595 | |||||||||
|
|
|
|
|
| |||||||
Net investment income (loss) | 41,868,663 | 239,639 | 45,600 | |||||||||
|
|
|
|
|
| |||||||
Net Realized Gain (Loss) on Investments and Foreign Currencies | ||||||||||||
Investments from unaffiliated issuers | (104,339,775 | ) | 9,339,421 | 1,112,327 | ||||||||
Investments from affiliated issuers (Note 10) | (5,803,421 | ) | — | — | ||||||||
Securities sold short (Note 2) | 26,290,005 | (592,078 | ) | — | ||||||||
Written options contracts (Note 3) | (18,538,807 | ) | — | — | ||||||||
Futures contracts (Note 3) | 27,354,106 | 449,788 | — | |||||||||
Foreign currency related transactions | 395,001 | — | — | |||||||||
Change in unrealized appreciation (depreciation) on: | ||||||||||||
Investments | (120,463,901 | ) | 47,929 | (4,298 | ) | |||||||
Securities sold short (Note 2) | (13,463,643 | ) | (989,704 | ) | — | |||||||
Written options contracts (Note 3) | 38,896,317 | — | — | |||||||||
Futures contracts (Note 3) | (7,742,033 | ) | 43,898 | — | ||||||||
Foreign currency related translations | 49,216 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net realized and unrealized gain (loss) on investments | (177,366,935 | ) | 8,299,254 | 1,108,029 | ||||||||
|
|
|
|
|
| |||||||
Total increase (decrease) in net assets resulting from operations | (135,498,272 | ) | 8,538,893 | 1,153,629 | ||||||||
|
|
|
|
|
|
36 | See accompanying Notes to Financial Statements. |
Table of Contents
Highland Funds II |
Highland Total Return Fund ($) | Highland Tax- Exempt Fund ($) | Highland Fixed Income Fund ($) | ||||||||||
1,162,504 | — | 702,493 | ||||||||||
— | — | — | ||||||||||
(17,303 | ) | — | 276 | |||||||||
21,456 | — | 10,624 | ||||||||||
121,082 | 303,648 | 1,656,635 | ||||||||||
— | — | — | ||||||||||
|
|
|
|
|
| |||||||
1,287,739 | 303,648 | 2,370,028 | ||||||||||
|
|
|
|
|
| |||||||
190,050 | 37,307 | 201,926 | ||||||||||
72,396 | 23,670 | 154,613 | ||||||||||
40,206 | 10,000 | 31,385 | ||||||||||
3 | — | 27 | ||||||||||
38,682 | 6,979 | 65,601 | ||||||||||
5,367 | 1,461 | 9,500 | ||||||||||
25,920 | 10,613 | 43,140 | ||||||||||
8,906 | 2,361 | 15,622 | ||||||||||
17,764 | 4,309 | 30,170 | ||||||||||
31,383 | 25,593 | 32,717 | ||||||||||
5,950 | 1,905 | 11,129 | ||||||||||
8,596 | 3,401 | 20,815 | ||||||||||
— | — | — | ||||||||||
1,751 | 457 | 3,102 | ||||||||||
— | — | — | ||||||||||
2,888 | 1,389 | 4,640 | ||||||||||
|
|
|
|
|
| |||||||
449,862 | 129,445 | 624,387 | ||||||||||
— | (26,032 | ) | — | |||||||||
|
|
|
|
|
| |||||||
449,862 | 103,413 | 624,387 | ||||||||||
|
|
|
|
|
| |||||||
837,877 | 200,235 | 1,745,641 | ||||||||||
|
|
|
|
|
| |||||||
(1,750,615 | ) | — | 115,406 | |||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
(227 | ) | — | — | |||||||||
4,341,595 | 278,532 | 1,077,003 | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
— | — | — | ||||||||||
674 | — | — | ||||||||||
|
|
|
|
|
| |||||||
2,591,427 | 278,532 | 1,192,409 | ||||||||||
|
|
|
|
|
| |||||||
3,429,304 | 478,767 | 2,938,050 | ||||||||||
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 37 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS
Highland Global Allocation Fund | Highland Premier Growth Equity Fund | |||||||||||||||
Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | |||||||||||||
Increase (Decrease) in Net Assets | ||||||||||||||||
Operations: | ||||||||||||||||
Net investment income | 41,868,663 | 43,677,074 | 239,639 | 240,780 | ||||||||||||
Net realized gain (loss) on investments, securities sold short, futures contracts and foreign currency transactions | (74,642,891 | ) | (6,169,891 | ) | 9,197,131 | 18,528,005 | ||||||||||
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions | (102,724,044 | ) | (405,735,435 | ) | (897,877 | ) | (22,007,193 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) from operations | (135,498,272 | ) | (368,228,252 | ) | 8,538,893 | (3,238,408 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Distributions to shareholders from: | ||||||||||||||||
Net investment income | ||||||||||||||||
Class A | (12,746,543 | ) | (22,436,035 | ) | — | — | ||||||||||
Class C | (11,307,987 | ) | (15,657,199 | ) | — | — | ||||||||||
Class R | (10,145 | ) | (38,382 | ) | — | — | ||||||||||
Class Y | (15,275,471 | ) | (30,496,073 | ) | — | — | ||||||||||
Net realized gains | ||||||||||||||||
Class A | — | (18,122,978 | ) | (13,679,940 | ) | (11,788,161 | ) | |||||||||
Class C | — | (7,574,601 | ) | (2,496,399 | ) | (1,387,114 | ) | |||||||||
Class R | — | (23,582 | ) | (41,512 | ) | (10,202 | ) | |||||||||
Class Y | — | (10,274,618 | ) | (2,858,075 | ) | (2,335,115 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total distributions | (39,340,146 | ) | (104,623,468 | ) | (19,075,926 | ) | (15,520,592 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Increase (decrease) in net assets from operations and distributions | (174,838,418 | ) | (472,851,720 | ) | (10,537,033 | ) | (18,759,000 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Share transactions: | ||||||||||||||||
Proceeds from sale of shares | ||||||||||||||||
Class A | 38,114,793 | 355,234,435 | 20,767,031 | 33,515,248 | ||||||||||||
Class C | 29,076,071 | 405,941,487 | 18,336,453 | 6,951,148 | ||||||||||||
Class R | 467,956 | 1,045,392 | 134,892 | 359,001 | ||||||||||||
Class Y | 109,213,570 | 1,112,187,228 | 8,194,863 | 13,993,837 | ||||||||||||
Value of distributions reinvested | ||||||||||||||||
Class A | 11,363,541 | 37,324,754 | 13,177,863 | 11,299,144 | ||||||||||||
Class C | 7,680,990 | 14,679,548 | 2,210,199 | 1,305,541 | ||||||||||||
Class R | 10,145 | 61,964 | 41,512 | 10,202 | ||||||||||||
Class Y | 10,791,050 | 24,590,099 | 2,437,135 | 2,008,943 | ||||||||||||
Cost of shares redeemed | ||||||||||||||||
Class A | (120,901,355 | ) | (336,968,759 | ) | (45,885,955 | ) | (28,675,606 | ) | ||||||||
Class C | (130,829,945 | ) | (64,660,769 | ) | (6,875,449 | ) | (3,496,204 | ) | ||||||||
Class R | (1,048,158 | ) | (784,432 | ) | (543,753 | ) | (69,000 | ) | ||||||||
Class Y | (437,301,325 | ) | (372,484,500 | ) | (7,337,824 | ) | (8,644,935 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) from shares transactions | (483,362,667 | ) | 1,176,166,447 | 4,656,967 | 28,557,319 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total increase (decrease) in net assets | (658,201,085 | ) | 703,314,727 | (5,880,066 | ) | 9,798,319 | ||||||||||
Net Assets | ||||||||||||||||
Beginning of period | 1,586,873,539 | 883,558,812 | 224,452,737 | 214,654,418 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
End of period | 928,672,454 | 1,586,873,539 | 218,572,671 | 224,452,737 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated net investment income (loss) | (29,704,283 | ) | (32,232,800 | ) | 480,419 | 240,780 | ||||||||||
|
|
|
|
|
|
|
|
38 | 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 | ||||||||||||||||||||
Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | |||||||||||||||||
45,600 | 5,329 | 837,877 | 1,117,387 | 200,235 | 452,558 | |||||||||||||||||
| 1,112,327 | | 5,235,431 | (1,750,842 | ) | 7,913,939 | — | 1,223,843 | ||||||||||||||
(4,298 | ) | (5,956,678 | ) | 4,342,269 | (12,716,198 | ) | 278,532 | (1,280,397 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
1,153,629 | (715,918 | ) | 3,429,304 | (3,684,872 | ) | 478,767 | 396,004 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
— | — | (997,370 | ) | (701,201 | ) | (183,964 | ) | (431,970 | ) | |||||||||||||
— | — | (136,143 | ) | (55,119 | ) | (12,093 | ) | (15,270 | ) | |||||||||||||
— | — | (17 | ) | (12 | ) | — | — | |||||||||||||||
— | — | (207,486 | ) | (5,877 | ) | (4,186 | ) | (5,372 | ) | |||||||||||||
(4,220,105 | ) | (3,927,776 | ) | (5,816,092 | ) | (3,338,589 | ) | (534,409 | ) | (233,459 | ) | |||||||||||
(490,516 | ) | (416,112 | ) | (866,320 | ) | (305,361 | ) | (56,931 | ) | (11,316 | ) | |||||||||||
(1,011 | ) | (166 | ) | (118 | ) | (61 | ) | — | — | |||||||||||||
(291,974 | ) | (210,968 | ) | (954,098 | ) | (26,508 | ) | (11,298 | ) | (1,716 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(5,003,606 | ) | (4,555,022 | ) | (8,977,644 | ) | (4,432,728 | ) | (802,881 | ) | (699,103 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (3,849,977 | ) | (5,270,940 | ) | (5,548,340 | ) | (8,117,600 | ) | (324,114 | ) | (303,099 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
350,188 | 5,978,344 | 1,231,908 | 1,388,612 | 11,831,999 | 5,600,317 | |||||||||||||||||
117,924 | 791,877 | 4,324,725 | 2,053,612 | 2,664,755 | 500,317 | |||||||||||||||||
5,698 | — | — | — | — | — | |||||||||||||||||
686,090 | 6,765,875 | 5,989,415 | 8,632,058 | 58,132 | 322,496 | |||||||||||||||||
4,089,247 | 3,835,382 | 6,043,373 | 3,688,771 | 460,012 | 483,951 | |||||||||||||||||
469,907 | 393,220 | 445,816 | 195,514 | 26,738 | 13,231 | |||||||||||||||||
1,011 | 166 | 136 | 73 | — | — | |||||||||||||||||
271,511 | 189,733 | 1,048,479 | 13,595 | 13,411 | 4,599 | |||||||||||||||||
(3,147,473 | ) | (9,160,028 | ) | (5,760,455 | ) | (7,999,452 | ) | (5,317,697 | ) | (14,512,379 | ) | |||||||||||
(579,585 | ) | (1,006,595 | ) | (2,690,289 | ) | (961,779 | ) | (1,206,485 | ) | (256,931 | ) | |||||||||||
(6,617 | ) | — | (1,200 | ) | — | — | — | |||||||||||||||
(2,719,192 | ) | (4,856,894 | ) | (2,702,453 | ) | (754,150 | ) | (262,705 | ) | (66,683 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (461,291 | ) | 2,931,080 | 7,929,455 | 6,256,854 | 8,268,160 | (7,911,082 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
(4,311,268 | ) | (2,339,860 | ) | 2,381,115 | (1,860,746 | ) | 7,944,046 | (8,214,181 | ) | |||||||||||||
36,217,479 | 38,557,339 | 73,295,108 | 75,156,140 | 20,026,814 | 28,240,995 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
31,906,211 | 36,217,479 | 75,676,223 | 73,295,394 | 27,970,860 | 20,026,814 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
65,362 | 19,762 | 466,918 | 970,057 | 51,640 | 51,648 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 39 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
Highland Fixed Income Fund | ||||||||
Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | |||||||
Increase (Decrease) in Net Assets | ||||||||
Operations: | ||||||||
Net investment income | 1,745,641 | 2,976,352 | ||||||
Net realized gain (loss) on investments and securities sold short | 115,406 | 1,967,552 | ||||||
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions | 1,077,003 | (3,761,421 | ) | |||||
|
|
|
| |||||
Net increase (decrease) from operations | 2,938,050 | 1,182,483 | ||||||
|
|
|
| |||||
Distributions to shareholders from: | ||||||||
Net investment income | ||||||||
Class A | (1,718,746 | ) | (2,903,144 | ) | ||||
Class C | (65,675 | ) | (52,516 | ) | ||||
Class R | (136 | ) | (137 | ) | ||||
Class Y | (70,671 | ) | (28,741 | ) | ||||
Net realized gains | ||||||||
Class A | — | — | ||||||
Class C | — | — | ||||||
Class R | — | — | ||||||
Class Y | — | — | ||||||
Return of Capital | ||||||||
Class A | — | (290,997 | ) | |||||
Class C | — | (8,128 | ) | |||||
Class R | — | (15 | ) | |||||
Class Y | — | (2,457 | ) | |||||
|
|
|
| |||||
Total distributions | (1,855,228 | ) | (3,286,135 | ) | ||||
|
|
|
| |||||
Increase (decrease) in net assets from operations and distributions | 1,082,822 | (2,103,652 | ) | |||||
|
|
|
| |||||
Share transactions: | ||||||||
Proceeds from sale of shares | ||||||||
Class A | 2,366,951 | 6,738,623 | ||||||
Class C | 6,515,287 | 2,873,644 | ||||||
Class R | — | 10,000 | ||||||
Class Y | 1,875,712 | 4,401,420 | ||||||
Value of distributions reinvested | ||||||||
Class A | 1,524,032 | 2,792,691 | ||||||
Class C | 50,014 | 39,981 | ||||||
Class R | 123 | 152 | ||||||
Class Y | 65,376 | 25,302 | ||||||
Cost of shares redeemed | ||||||||
Class A | (10,498,211 | ) | (25,491,904 | ) | ||||
Class C | (2,993,096 | ) | (2,238,620 | ) | ||||
Class R | (12,109 | ) | — | |||||
Class Y | (900,698 | ) | (562,354 | ) | ||||
|
|
|
| |||||
Net increase (decrease) from shares transactions | (2,006,619 | ) | (11,411,065 | ) | ||||
|
|
|
| |||||
Total increase (decrease) in net assets | (923,797 | ) | (13,514,717 | ) | ||||
Net Assets | ||||||||
Beginning of period | 134,630,070 | 148,144,787 | ||||||
|
|
|
| |||||
End of period | 133,706,273 | 134,630,070 | ||||||
|
|
|
| |||||
Accumulated net investment income (loss) | (146,091 | ) | (36,504 | ) | ||||
|
|
|
|
40 | 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 Premier Growth Equity Fund | |||||||||||||||
Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | |||||||||||||
Class A: | ||||||||||||||||
Shares sold | 4,954,180 | 33,212,734 | 637,578 | 958,696 | ||||||||||||
Issued for distribution reinvested | 1,594,810 | 3,680,615 | 389,417 | 325,155 | ||||||||||||
Shares redeemed | (15,954,221 | ) | (32,458,062 | ) | (1,472,968 | ) | (819,534 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | (9,405,231 | ) | 4,435,287 | (445,973 | ) | 464,317 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Class C: | ||||||||||||||||
Shares sold | 4,306,688 | 42,225,271 | 666,561 | 237,589 | ||||||||||||
Issued for distribution reinvested | 1,212,493 | 1,669,107 | 80,283 | 45,112 | ||||||||||||
Shares redeemed | (19,561,309 | ) | (7,254,262 | ) | (271,452 | ) | (119,895 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | (14,042,128 | ) | 36,640,116 | 475,392 | 162,806 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Class R: | ||||||||||||||||
Shares sold | 56,933 | 96,127 | 3,866 | 10,210 | ||||||||||||
Issued for distribution reinvested | 1,405 | 6,065 | 1,250 | 298 | ||||||||||||
Shares redeemed | (149,242 | ) | (75,780 | ) | (17,775 | ) | (1,944 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | (90,904 | ) | 26,412 | (12,659 | ) | 8,564 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Class Y: | ||||||||||||||||
Shares sold | 12,477,023 | 89,425,880 | 250,535 | 386,473 | ||||||||||||
Issued for distribution reinvested | 1,291,618 | 2,156,933 | 69,732 | 56,241 | ||||||||||||
Shares redeemed | (49,180,039 | ) | (32,298,432 | ) | (224,812 | ) | (240,578 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in fund shares | (35,411,398 | ) | 59,284,381 | 95,455 | 202,136 | |||||||||||
|
|
|
|
|
|
|
|
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 | ||||||||||||||||||||
Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | |||||||||||||||||
30,744 | 409,446 | 59,495 | 59,728 | 1,010,729 | 460,475 | |||||||||||||||||
361,880 | 277,123 | 286,795 | 155,181 | 39,441 | 40,315 | |||||||||||||||||
(288,028 | ) | (645,768 | ) | (271,982 | ) | (336,156 | ) | (453,475 | ) | (1,205,846 | ) | |||||||||||
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104,596 | 40,801 | 74,308 | (121,247 | ) | 596,695 | (705,056 | ) | |||||||||||||||
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14,202 | 70,684 | 221,745 | 97,659 | 226,139 | 41,254 | |||||||||||||||||
56,008 | 36,208 | 23,498 | 8,980 | 2,297 | 1,104 | |||||||||||||||||
(64,620 | ) | (89,346 | ) | (151,210 | ) | (44,526 | ) | (102,881 | ) | (21,329 | ) | |||||||||||
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5,590 | 17,546 | 94,033 | 62,113 | 125,555 | 21,029 | |||||||||||||||||
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443 | — | — | — | — | — | |||||||||||||||||
91 | 12 | 6 | 3 | — | — | |||||||||||||||||
(645 | ) | — | (59 | ) | — | — | — | |||||||||||||||
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(111 | ) | 12 | (53 | ) | 3 | — | — | |||||||||||||||
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51,877 | 444,614 | 277,653 | 360,342 | 4,602 | 25,000 | |||||||||||||||||
22,218 | 12,846 | 49,020 | 564 | 1,060 | 355 | |||||||||||||||||
(204,198 | ) | (309,830 | ) | (135,439 | ) | (31,426 | ) | (20,668 | ) | (5,154 | ) | |||||||||||
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(130,103 | ) | 147,630 | 191,234 | 329,480 | (15,006 | ) | 20,201 | |||||||||||||||
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See accompanying Notes to Financial Statements. | 43 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
CAPITAL STOCK ACTIVITY - SHARES |
Highland Fixed Income Fund | ||||||||
Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | |||||||
Class A: | ||||||||
Shares sold | 189,318 | 525,211 | ||||||
Issued for distribution reinvested | 121,304 | 217,548 | ||||||
Shares redeemed | (836,428 | ) | (1,985,668 | ) | ||||
|
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| |||||
Net increase (decrease) in fund shares | (525,806 | ) | (1,242,909 | ) | ||||
|
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| |||||
Class B: | ||||||||
Class C: | ||||||||
Shares sold | 519,755 | 223,867 | ||||||
Issued for distribution reinvested | 3,977 | 3,108 | ||||||
Shares redeemed | (238,386 | ) | (174,203 | ) | ||||
|
|
|
| |||||
Net increase (decrease) in fund shares | 285,346 | 52,772 | ||||||
|
|
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| |||||
Class R: | ||||||||
Shares sold | — | 773 | ||||||
Issued for distribution reinvested | 10 | 12 | ||||||
Shares redeemed | (963 | ) | — | |||||
|
|
|
| |||||
Net increase (decrease) in fund shares | (953 | ) | 785 | |||||
|
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| |||||
Class Y: | ||||||||
Shares sold | 149,390 | 345,342 | ||||||
Issued for distribution reinvested | 5,207 | 1,999 | ||||||
Shares redeemed | (71,743 | ) | (44,320 | ) | ||||
|
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| |||||
Net increase (decrease) in fund shares | 82,854 | 303,021 | ||||||
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44 | See accompanying Notes to Financial Statements. |
Table of Contents
THIS PAGE LEFT BLANK INTENTIONALLY
Table of Contents
For the Years Ended March 31, 2016
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 | ||||||||||||||||||||||||||||||||
2016(d) | $ | 8.35 | $ | 0.28 | $ | (1.01 | ) | $ | (0.73 | ) | $ | (0.30 | ) | $ | — | $ | — | $ | (0.30 | ) | ||||||||||||
2015 | 10.58 | 0.26 | (1.69 | ) | (1.43 | ) | (0.43 | ) | (0.37 | ) | — | (0.80 | ) | |||||||||||||||||||
2014 | 9.03 | 0.16 | 1.89 | 2.05 | (0.16 | ) | (0.34 | ) | — | (0.50 | ) | |||||||||||||||||||||
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 | ) | ||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 7.45 | $ | 0.23 | $ | (0.90 | ) | $ | (0.67 | ) | $ | (0.28 | ) | $ | — | $ | — | $ | (0.28 | ) | ||||||||||||
2015 | 9.53 | 0.20 | (1.54 | ) | (1.34 | ) | (0.37 | ) | (0.37 | ) | — | (0.74 | ) | |||||||||||||||||||
2014 | 8.20 | 0.07 | 1.72 | 1.79 | (0.12 | ) | (0.34 | ) | — | (0.46 | ) | |||||||||||||||||||||
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 | ) | — | — | — | — | ||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 9.75 | $ | 0.34 | $ | (1.18 | ) | $ | (0.84 | ) | $ | (0.31 | ) | $ | — | $ | — | $ | (0.31 | ) | ||||||||||||
2015 | 12.21 | 0.39 | (2.02 | ) | (1.63 | ) | (0.46 | ) | (0.37 | ) | — | (0.83 | ) | |||||||||||||||||||
2014 | 10.36 | 0.22 | 2.16 | 2.38 | (0.19 | ) | (0.34 | ) | — | (0.53 | ) | |||||||||||||||||||||
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 | ) | ||||||||||||||||||||
Highland Premier Growth Equity Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2016(d) | $ | 32.32 | $ | 0.04 | $ | 1.65 | $ | 1.69 | $ | — | $ | (2.62 | ) | $ | — | $ | (2.62 | ) | ||||||||||||||
2015 | 34.99 | 0.04 | (0.25 | ) | (0.21 | ) | — | (2.46 | ) | — | (2.46 | ) | ||||||||||||||||||||
2014 | 31.22 | 0.06 | 5.70 | 5.76 | (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 | ) | — | — | — | — | |||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 26.76 | $ | (0.06 | ) | $ | 1.40 | $ | 1.34 | $ | — | $ | (2.62 | ) | $ | — | $ | (2.62 | ) | |||||||||||||
2015 | 29.57 | (0.18 | ) | (0.17 | ) | (0.35 | ) | — | (2.46 | ) | — | (2.46 | ) | |||||||||||||||||||
2014 | 26.82 | (0.16 | ) | 4.86 | 4.70 | — | (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 | ) | — | — | — | — | |||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 33.29 | $ | 0.08 | $ | 1.70 | $ | 1.78 | $ | — | $ | (2.62 | ) | $ | — | $ | (2.62 | ) | ||||||||||||||
2015 | 35.89 | 0.14 | (0.28 | ) | (0.14 | ) | — | (2.46 | ) | — | (2.46 | ) | ||||||||||||||||||||
2014 | 31.96 | 0.14 | 5.85 | 5.99 | (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 | ) | — | — | — | — |
46 | 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 | |||||||||||||||||||||||
$ | — | $ | 7.32 | (8.55 | )%(e) | $ | 298,745 | 7.47 | % | 1.11 | %(h) | 1.41 | %(i) | 41 | %(e) | |||||||||||||||
— | 8.35 | (14.68 | ) | 419,111 | 2.49 | 0.91 | (h) | 0.93 | (i) | 108 | ||||||||||||||||||||
— | 10.58 | 23.21 | 484,016 | 1.53 | 0.94 | 0.94 | 195 | |||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 6.50 | (8.88 | )%(e) | $ | 250,600 | 6.68 | % | 1.83 | %(h) | 2.13 | %(i) | 41 | %(e) | |||||||||||||||
— | 7.45 | (15.28 | ) | 391,754 | 2.11 | 1.66 | (h) | 1.69 | (i) | 108 | ||||||||||||||||||||
— | 9.53 | 22.32 | 151,943 | 0.76 | 1.69 | 1.69 | 195 | |||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 8.60 | (8.45 | )%(e) | $ | 379,328 | 7.53 | % | 0.83 | %(h) | 1.13 | %(i) | 41 | %(e) | |||||||||||||||
— | 9.75 | (14.41 | ) | 775,238 | 3.16 | 0.66 | (h) | 0.69 | (i) | 108 | ||||||||||||||||||||
— | 12.21 | 23.39 | 246,907 | 1.79 | 0.69 | 0.69 | 195 | |||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 31.39 | 4.64 | %(e) | $ | 150,561 | 0.25 | % | 1.15 | % | 1.15 | % | 33 | %(e) | |||||||||||||||
— | 32.32 | (1.10 | ) | 169,434 | 0.13 | 1.13 | 1.13 | 18 | ||||||||||||||||||||||
— | 34.99 | 19.08 | 167,187 | 0.17 | 1.16 | 1.16 | 20 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||
$ | — | $ | 25.48 | 4.28 | %(e) | $ | 30,292 | (0.48 | )% | 1.90 | % | 1.90 | % | 33 | %(e) | |||||||||||||||
— | 26.76 | (1.82 | ) | 19,096 | (0.63 | ) | 1.88 | 1.88 | 18 | |||||||||||||||||||||
— | 29.57 | 18.21 | 16,290 | (0.58 | ) | 1.91 | 1.91 | 20 | ||||||||||||||||||||||
— | 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 | ||||||||||||||||||||
$ | — | $ | 32.45 | 4.79 | %(e) | $ | 37,720 | 0.49 | % | 0.90 | % | 0.90 | % | 33 | %(e) | |||||||||||||||
— | 33.29 | (0.87 | ) | 35,521 | 0.38 | 0.88 | 0.88 | 18 | ||||||||||||||||||||||
— | 35.89 | 19.40 | 31,036 | 0.42 | 0.91 | 0.91 | 20 | |||||||||||||||||||||||
— | 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 |
See accompanying Notes to Financial Statements. | 47 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the Years Ended March 31, 2016
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 |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2016(d) | $ | 12.96 | $ | 0.02 | $ | 0.49 | $ | 0.51 | $ | — | $ | (1.88 | ) | $ | — | $ | (1.88 | ) | ||||||||||||||
2015 | 14.90 | 0.01 | (0.27 | ) | (0.26 | ) | — | (1.68 | ) | — | (1.68 | ) | ||||||||||||||||||||
2014 | 14.93 | (0.04 | ) | 1.07 | 1.03 | — | (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 | — | — | — | — | |||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 10.11 | $ | (0.02 | ) | $ | 0.37 | $ | 0.35 | $ | — | $ | (1.88 | ) | $ | — | $ | (1.88 | ) | |||||||||||||
2015 | 12.06 | (0.08 | ) | (0.19 | ) | (0.27 | ) | — | (1.68 | ) | — | (1.68 | ) | |||||||||||||||||||
2014 | 12.35 | (0.13 | ) | 0.90 | 0.77 | — | (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 | — | — | — | — | |||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 13.86 | $ | 0.03 | $ | 0.53 | $ | 0.56 | $ | — | $ | (1.88 | ) | $ | — | $ | (1.88 | ) | ||||||||||||||
2015 | 15.79 | 0.04 | (0.29 | ) | (0.25 | ) | — | (1.68 | ) | — | (1.68 | ) | ||||||||||||||||||||
2014 | 15.72 | — | 1.13 | 1.13 | — | (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 | — | — | — | — | |||||||||||||||||||||||
Highland Total Return Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2016(d) | $ | 21.99 | $ | 0.24 | $ | 0.90 | $ | 1.14 | $ | (0.35 | ) | $ | (2.23 | ) | $ | — | $ | (2.58 | ) | |||||||||||||
2015 | 24.52 | 0.37 | (1.44 | ) | (1.07 | ) | (0.24 | ) | (1.22 | ) | — | (1.46 | ) | |||||||||||||||||||
2014 | 22.93 | 0.24 | 1.57 | 1.81 | (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 | ) | ||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 20.03 | $ | 0.14 | $ | 0.83 | $ | 0.97 | $ | (0.28 | ) | $ | (2.23 | ) | $ | — | $ | (2.51 | ) | |||||||||||||
2015 | 22.58 | 0.18 | (1.31 | ) | (1.13 | ) | (0.20 | ) | (1.22 | ) | — | (1.42 | ) | |||||||||||||||||||
2014 | 21.17 | 0.05 | 1.45 | 1.50 | (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 | ) | — | — | — | — | ||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 22.32 | $ | 0.27 | $ | 0.91 | $ | 1.18 | $ | (0.41 | ) | $ | (2.23 | ) | $ | — | $ | (2.64 | ) | |||||||||||||
2015 | 24.82 | 0.57 | (1.59 | ) | (1.02 | ) | (0.26 | ) | (1.22 | ) | — | (1.48 | ) | |||||||||||||||||||
2014 | 23.20 | 0.30 | 1.58 | 1.88 | (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 | ) |
48 | 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 | |||||||||||||||||||||||
$ | — | $ | 11.59 | 4.28 | %(e) | $ | 27,815 | 0.33 | % | 1.22 | % | 1.75 | % | 51 | %(e) | |||||||||||||||
— | 12.96 | (2.47 | ) | 29,765 | 0.04 | 1.21 | 1.67 | 70 | ||||||||||||||||||||||
— | 14.90 | 6.93 | 33,598 | (0.27 | ) | 1.49 | 1.62 | 26 | ||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 8.58 | 3.84 | %(e) | $ | 2,486 | (0.43 | )% | 1.97 | % | 2.50 | % | 51 | %(e) | |||||||||||||||
— | 10.11 | (3.21 | ) | 2,872 | (0.72 | ) | 1.96 | 2.42 | 70 | |||||||||||||||||||||
— | 12.06 | 6.23 | 3,213 | (1.01 | ) | 2.23 | 2.37 | 26 | ||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 12.54 | 4.37 | %(e) | $ | 1,605 | 0.47 | % | 0.97 | % | 1.50 | % | 51 | %(e) | |||||||||||||||
— | 13.86 | (2.25 | ) | 3,579 | 0.28 | 0.96 | 1.42 | 70 | ||||||||||||||||||||||
— | 15.79 | 7.24 | 1,745 | (0.01 | ) | 1.23 | 1.37 | 26 | ||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 20.55 | 5.08 | %(e) | $ | 56,947 | 2.24 | % | 1.13 | % | 1.13 | % | 52 | %(e) | |||||||||||||||
— | 21.99 | (4.76 | ) | 59,307 | 1.55 | 1.20 | 1.20 | 175 | ||||||||||||||||||||||
— | 24.52 | 7.92 | 69,084 | 0.99 | 1.38 | 1.38 | 121 | |||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 18.49 | 4.69 | %(e) | $ | 7,546 | 1.52 | % | 1.88 | % | 1.88 | % | 52 | %(e) | |||||||||||||||
— | 20.03 | (5.45 | ) | 6,292 | 0.81 | 1.95 | 1.95 | 175 | ||||||||||||||||||||||
— | 22.58 | 7.10 | 5,690 | 0.24 | 2.13 | 2.13 | 121 | |||||||||||||||||||||||
— | 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 | |||||||||||||||||||||
$ | — | $ | 20.86 | 5.18 | %(e) | $ | 11,183 | 2.52 | % | 0.88 | % | 0.88 | % | 52 | %(e) | |||||||||||||||
— | 22.32 | (4.51 | ) | 7,695 | 2.39 | 0.90 | 0.90 | 175 | ||||||||||||||||||||||
— | 24.82 | 8.15 | 381 | 1.24 | 1.14 | 1.14 | 121 | |||||||||||||||||||||||
— | 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 |
See accompanying Notes to Financial Statements. | 49 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the Years Ended March 31, 2016
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 | ||||||||||||||||||||||||||||||||
2016(d) | $ | 11.94 | $ | 0.11 | $ | 0.15 | $ | 0.26 | $ | (0.11 | ) | $ | (0.35 | ) | $ | — | $ | (0.46 | ) | |||||||||||||
2015 | 12.08 | 0.25 | — | 0.25 | (0.26 | ) | (0.13 | ) | — | (0.39 | ) | |||||||||||||||||||||
2014 | 11.64 | 0.33 | 0.44 | 0.77 | (0.33 | ) | — | — | (0.33 | ) | ||||||||||||||||||||||
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 | ) | |||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 11.94 | $ | 0.07 | $ | 0.14 | $ | 0.21 | $ | (0.07 | ) | $ | (0.35 | ) | $ | — | $ | (0.42 | ) | |||||||||||||
2015 | 12.07 | 0.16 | — | 0.16 | (0.16 | ) | (0.13 | ) | — | (0.29 | ) | |||||||||||||||||||||
2014 | 11.63 | 0.24 | 0.44 | 0.68 | (0.24 | ) | — | — | (0.24 | ) | ||||||||||||||||||||||
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 | ) | |||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 12.93 | $ | 0.14 | $ | 0.16 | $ | 0.30 | $ | (0.14 | ) | $ | (0.35 | ) | $ | — | $ | (0.49 | ) | |||||||||||||
2015 | 13.06 | 0.31 | — | 0.31 | (0.31 | ) | (0.13 | ) | — | (0.44 | ) | |||||||||||||||||||||
2014 | 12.58 | 0.38 | 0.48 | 0.86 | (0.38 | ) | — | — | (0.38 | ) | ||||||||||||||||||||||
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 | ) | |||||||||||||||||||||
Highland Fixed Income Fund |
| |||||||||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
2016(d) | $ | 12.58 | $ | 0.16 | $ | 0.11 | $ | 0.27 | $ | (0.17 | ) | $ | — | $ | — | $ | (0.17 | ) | ||||||||||||||
2015 | 12.79 | 0.27 | (0.18 | ) | 0.09 | (0.27 | ) | — | (0.03 | ) | (0.30 | ) | ||||||||||||||||||||
2014 | 12.61 | 0.24 | 0.20 | 0.44 | (0.24 | ) | — | (0.02 | ) | (0.26 | ) | |||||||||||||||||||||
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 | ) | ||||||||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
2016(d) | $ | 12.60 | $ | 0.12 | $ | 0.11 | $ | 0.23 | $ | (0.13 | ) | $ | — | $ | — | $ | (0.13 | ) | ||||||||||||||
2015 | 12.80 | 0.18 | (0.18 | ) | — | (0.17 | ) | — | (0.03 | ) | (0.20 | ) | ||||||||||||||||||||
2014 | 12.62 | 0.15 | 0.19 | 0.34 | (0.15 | ) | — | (0.01 | ) | (0.16 | ) | |||||||||||||||||||||
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 | ) | ||||||||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
2016(d) | $ | 12.57 | $ | 0.18 | $ | 0.11 | $ | 0.29 | $ | (0.19 | ) | $ | — | $ | — | $ | (0.19 | ) | ||||||||||||||
2015 | 12.78 | 0.32 | (0.20 | ) | 0.12 | (0.30 | ) | — | (0.03 | ) | (0.33 | ) | ||||||||||||||||||||
2014 | 12.60 | 0.27 | 0.20 | 0.47 | (0.27 | ) | — | (0.02 | ) | (0.29 | ) | |||||||||||||||||||||
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 | ) |
50 | 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 | |||||||||||||||||||||||
$ | — | $ | 11.74 | 2.27 | %(e) | $ | 25,123 | 1.93 | % | 0.90 | % | 1.15 | % | 0 | %(e)(g) | |||||||||||||||
— | 11.94 | 2.07 | 18,435 | 2.11 | 0.92 | 1.06 | 17 | |||||||||||||||||||||||
— | 12.08 | 6.67 | 27,149 | 2.76 | 0.98 | 0.98 | 14 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||||
$ | — | $ | 11.73 | 1.81 | %(e) | $ | 2,619 | 1.20 | % | 1.63 | % | 1.87 | % | 0 | %(e)(g) | |||||||||||||||
— | 11.94 | 1.40 | 1,166 | 1.37 | 1.67 | 1.81 | 17 | |||||||||||||||||||||||
— | 12.07 | 5.88 | 925 | 2.01 | 1.73 | 1.73 | 14 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||||
$ | — | $ | 12.74 | 2.37 | %(e) | $ | 229 | 2.20 | % | 0.65 | % | 0.90 | % | 0 | %(e)(g) | |||||||||||||||
— | 12.93 | 2.42 | 426 | 2.40 | 0.67 | 0.81 | 17 | |||||||||||||||||||||||
— | 13.06 | 6.97 | 167 | 3.01 | 0.72 | 0.72 | 14 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||||
$ | — | $ | 12.68 | 2.20 | %(e) | $ | 121,244 | 2.62 | % | 0.90 | % | 0.90 | % | 20 | %(e) | |||||||||||||||
— | 12.58 | 0.66 | 126,892 | 2.09 | 0.86 | 0.86 | 57 | |||||||||||||||||||||||
— | 12.79 | 3.47 | 144,839 | 1.91 | 0.97 | 0.97 | 283 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||||
$ | — | $ | 12.70 | 1.83 | %(e) | $ | 7,351 | 1.92 | % | 1.65 | % | 1.65 | % | 20 | %(e) | |||||||||||||||
— | 12.60 | (0.01 | ) | 3,697 | 1.35 | 1.61 | 1.61 | 57 | ||||||||||||||||||||||
— | 12.80 | 2.62 | 3,082 | 1.16 | 1.72 | 1.72 | 283 | |||||||||||||||||||||||
— | 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 | ||||||||||||||||||||||
$ | — | $ | 12.67 | 2.33 | %(e) | $ | 5,111 | 2.87 | % | 0.65 | % | 0.65 | % | 20 | %(e) | |||||||||||||||
— | 12.57 | 0.91 | 4,029 | 2.45 | 0.61 | 0.61 | 57 | |||||||||||||||||||||||
— | 12.78 | 3.73 | 222 | 2.13 | 0.72 | 0.72 | 283 | |||||||||||||||||||||||
— | 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 |
See accompanying Notes to Financial Statements. | 51 |
Table of Contents
FINANCIAL HIGHLIGHTS (continued)
For the Years Ended March 31, 2016
Selected data for a share outstanding throughout each period is as follows:
(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) | Excludes dividends and fees on securities sold short. Dividends and fees on securities sold short for the Global Allocation Fund are: |
For the Period Ended September 30, 2016 | For the Years Ended September 30, | |||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
Class A | 0.20 | % | 0.02 | % | — | % | — | % | — | % | — | % | ||||||||||||
Class C | 0.20 | 0.03 | — | — | — | — | ||||||||||||||||||
Class Y | 0.20 | 0.03 | — | — | — | — |
(i) | Includes dividends and fees on securities sold short. |
52 | See accompanying Notes to Financial Statements. |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited)
March 31, 2016 | 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 seven portfolios (each a “Fund” and collectively the “Funds”) that are currently being offered: Highland Global Allocation Fund (the ���Global Allocation 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 Highland Dividend Equity Fund was liquidated on January 25, 2016.
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 currently offers three share classes to investors, Class A, Class C, and Class Y Shares. Each Fund (other than Tax-Exempt Fund) previously offered Class R shares to investors, but this share class was liquidated March 15, 2016.
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 | |||
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 (“NAV”) 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 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 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.
Use of Estimates
The Funds are investment companies that apply the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment companies. 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.
Determination of Class Net Asset Values
The Funds’ income, expenses (other than distribution fees and shareholder service fees) and realized and unrealized gains and losses are allocated proportionally each day among the Funds’ respective share classes based upon the relative net assets of each class share. Expenses of the Trust, other than those incurred by a specific Fund are allocated pro rata among the Funds and share classes. Certain class specific expenses (such as distribution and shareholder service fees) are allocated to the class that incurs such expense.
Valuation of Investments
In computing the Funds’ net assets attributable to shares, securities with readily available market quotations on the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation (NASDAQ) or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies adopted by the Funds’ Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Funds’ loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party
Semi-Annual Report | 53 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
pricing services or broker-dealer sources that Highland Capital Management Fund Advisors, LP (the “Investment Adviser”) has determined to generally have the capability to provide appropriate pricing services and have been approved by the Board.
Securities for which market quotations are not readily available, or for which the Funds have determined the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Funds’ NAV), will be valued by the Funds at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, among other things,: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Funds’ NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.
There can be no assurance that the Funds’ valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Funds. The NAV shown in the Funds’ financial statements may vary from the NAV published by each Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes and/or because of information relating to the value of each Fund’s portfolio securities as of each Fund’s period end that became available prior to the completion of this report that was not available at the time each Fund’s NAV as of its period end was published.
Fair Value Measurements
The Funds have performed an analysis of all existing investments and derivative instruments to determine the significance and character of inputs to their fair value determination. The levels of fair value inputs used to measure the Funds’ investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the
investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation.
The three levels of the fair value hierarchy are described below:
Level 1 — | Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement; |
Level 2 — | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and |
Level 3 — | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser and its affiliates. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.
As of March 31, 2016, the Funds’ investments consisted of senior loans, asset-backed securities, bonds and notes, common stocks, master limited partnerships, registered investment companies, cash equivalents, preferred stocks, exchange-traded funds, rights, warrants, securities sold short and options. The fair value of the Funds’ loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services.
54 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
The fair value of the Funds’ common stocks, preferred stocks, exchange-traded funds, rights, warrants and options that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.
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 Funds’ 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 Funds 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 the levels are recognized at the value at the end of the period. A summary of the inputs used to value each Fund’s assets as of March 31, 2016 is as follows:
Total value at September 30, 2015 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Global Allocation Fund |
| |||||||||||||||
Assets | ||||||||||||||||
U.S. Senior Loans | ||||||||||||||||
Chemicals | $ | 2,356,311 | $ | — | $ | 2,356,311 | $ | — | ||||||||
Energy | 532,823 | — | 532,823 | — | ||||||||||||
Financial | 2,835,000 | — | 2,835,000 | — | ||||||||||||
Healthcare | 5,843,269 | — | — | 5,843,269 | ||||||||||||
Media & Telecommunications | 8,964,632 | — | 8,964,632 | — | ||||||||||||
Telecommunications | 41,490,585 | — | 2,061,752 | 39,428,833 | ||||||||||||
Transportation | 1,125,000 | — | 1,125,000 | — | ||||||||||||
Utility | 137,386,470 | — | 137,386,470 | — | ||||||||||||
Non-U.S. Senior Loans | ||||||||||||||||
Energy | 31,109,141 | — | 31,109,141 | — | ||||||||||||
Healthcare | 3,126,144 | — | 3,126,144 | — | ||||||||||||
Information Technology | 3,325,000 | — | 3,325,000 | — | ||||||||||||
Manufacturing | 617,569 | — | — | 617,569 | ||||||||||||
Media & Telecommunications | 4,479,107 | — | 4,479,107 | — | ||||||||||||
Retail | 9,626,780 | — | 9,626,780 | — | ||||||||||||
Service | 20,352,167 | — | 20,352,167 | — | ||||||||||||
Non-U.S. Asset-Backed Securities | 170,160,368 | — | 170,160,368 | — | ||||||||||||
U.S. Corporate Bonds & Notes(1) | 47,462,560 | — | 47,462,560 | — | ||||||||||||
Non-U.S. Corporate Bonds & Notes(1) | 48,303,111 | — | 48,303,111 | — | ||||||||||||
Non-U.S. Government Bonds | 159,024,379 | — | 159,024,379 | — |
Semi-Annual Report | 55 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Total value at September 30, 2015 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Global Allocation Fund (continued) | ||||||||||||||||
U.S. Equity | ||||||||||||||||
Banks | $ | 3,346,925 | $ | 3,346,925 | $ | — | $ | — | ||||||||
Capital Goods | 372,840 | 372,840 | — | — | ||||||||||||
Chemicals | 5,113,388 | — | — | 5,113,388 | ||||||||||||
Commercial & Professional Services | 177,000 | 177,000 | — | — | ||||||||||||
Consumer Services | 18,640,543 | 18,640,543 | — | — | ||||||||||||
Food & Staples Retailing | 93,460 | 93,460 | — | — | ||||||||||||
Food, Beverage & Tobacco | 954,664 | 954,664 | — | — | ||||||||||||
Healthcare Equipment & Services | 47,018,731 | 47,018,731 | — | — | ||||||||||||
Household & Personal Products | 189,090 | 189,090 | — | — | ||||||||||||
Insurance | 2,833,531 | 2,833,531 | — | — | ||||||||||||
Materials | 2,065,322 | 2,065,322 | — | — | ||||||||||||
Media | 728,951 | 728,951 | — | — | ||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 1,095,934 | 1,095,934 | — | — | ||||||||||||
Real Estate | 5,054,314 | 5,054,314 | — | — | ||||||||||||
Retailing | 1,729,720 | 1,729,720 | — | — | ||||||||||||
Semiconductors & Semiconductor Equipment | 111,700 | 111,700 | — | — | ||||||||||||
Software & Services | 6,663,670 | 6,663,670 | — | — | ||||||||||||
Telecommunication Services | 95,520,980 | — | — | 95,520,980 | ||||||||||||
Transportation | 1,649,185 | 1,649,185 | — | — | ||||||||||||
Utilities | 500,445 | 500,445 | — | — | ||||||||||||
Non-U.S. Equity | ||||||||||||||||
Consumer Durables & Apparel | 2,823,270 | 2,823,270 | — | — | ||||||||||||
Consumer Services | 1,036,964 | 1,036,964 | — | — | ||||||||||||
Energy | 9,804,374 | 9,804,374 | — | — | ||||||||||||
Food, Beverage & Tobacco | 424,410 | 424,410 | — | — | ||||||||||||
Healthcare Equipment & Services | 8,765,231 | 7,189,481 | — | 1,575,750 | ||||||||||||
Insurance | 336,575 | 336,575 | — | — | ||||||||||||
Materials | 331,170 | 331,170 | — | — | ||||||||||||
Media | 2,738,208 | 2,738,208 | — | — | ||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 2,588,390 | 2,588,390 | — | — | ||||||||||||
Retailing | 2,219,324 | 2,219,324 | — | — | ||||||||||||
Semiconductors & Semiconductor Equipment | 1,999,452 | 1,999,452 | — | — | ||||||||||||
Software & Services | 74,338,861 | 74,338,861 | — | — | ||||||||||||
Technology Hardware & Equipment | 104,300 | 104,300 | — | — | ||||||||||||
Telecommunication Services | 81,120 | 81,120 | — | — | ||||||||||||
Utilities | 14,046,246 | 14,046,246 | — | — | ||||||||||||
U.S. Exchange-Traded Funds | 8,160,975 | 8,160,975 | — | — | ||||||||||||
Non-U.S. Exchange-Traded Funds | 1,795,500 | 1,795,500 | — | — | ||||||||||||
U.S. Master Limited Partnerships(1) | 83,637,416 | 83,637,416 | — | — | ||||||||||||
Non-U.S. Master Limited Partnerships(1) | 91,664,222 | 91,664,222 | — | — | ||||||||||||
U.S. Warrants(1) | ||||||||||||||||
Energy | 244,733 | 244,733 | — | — | ||||||||||||
Healthcare Equipment & Services | 83,807 | — | — | 83,807 | ||||||||||||
U.S. Purchased Call Options | 11,240,000 | 11,240,000 | — | — | ||||||||||||
U.S. Registered Investment Companies | 10,161,603 | 10,161,603 | — | — | ||||||||||||
Non-U.S. Investment Companies | 3,488,447 | — | — | 3,488,447 |
56 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Total value at September 30, 2015 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Global Allocation Fund (continued) | ||||||||||||||||
U.S. Cash Equivalents | $ | 7,001,979 | $ | 7,001,979 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Assets | 1,231,097,386 | 427,194,598 | 652,230,745 | 151,672,043 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Securities Sold Short | ||||||||||||||||
U.S. Corporate Bonds & Notes(1) | (6,125,062 | ) | — | (6,125,062 | ) | — | ||||||||||
Non-U.S. Corporate Bonds & Notes | (17,515,743 | ) | (2,955,000 | ) | (14,560,743 | ) | — | |||||||||
U.S. Equity(1) | (42,327,544 | ) | (42,327,544 | ) | — | — | ||||||||||
Non-U.S. Equity(1) | (18,903,999 | ) | (18,903,999 | ) | — | — | ||||||||||
Other Financial Instruments | ||||||||||||||||
Commodity Contracts—Futures(2) | (3,744,153 | ) | (3,744,153 | ) | — | — | ||||||||||
Equity Contracts—Futures(2) | (3,997,880 | ) | (3,997,880 | ) | — | — | ||||||||||
Written Put Options Contracts | (31,241,989 | ) | (11,897,460 | ) | (19,344,529 | ) | — | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total Liabilities | (123,856,370 | ) | (83,826,036 | ) | (40,030,334 | ) | — | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 1,107,241,016 | $ | 343,368,562 | $ | 612,200,411 | $ | 151,672,043 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
(2) | Includes cumulative unrealized appreciation/(depreciation) of future contracts as reported in the Investment Portfolio. |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Premier Growth Equity Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 218,641,622 | $ | 218,641,622 | $ | — | $ | — | ||||||||
Purchased Put Options | 335,000 | 335,000 | — | — | ||||||||||||
Registered Investment Companies | 19,416,751 | 19,416,751 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Assets | 238,393,373 | 238,393,373 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Securities Sold Short(1) | (8,668,750 | ) | (8,668,750 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Liabilities | (8,668,750 | ) | (8,668,750 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 229,724,623 | $ | 229,724,623 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Small-Cap Equity Fund | ||||||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 28,713,114 | $ | 28,713,114 | $ | — | $ | — | ||||||||
Master Limited Partnerships | 7,130,977 | 7,130,977 | — | — | ||||||||||||
Registered Investment Companies | 7,752,734 | 7,752,734 | — | — | ||||||||||||
Cash Equivalents | 52,857 | 52,857 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 43,649,682 | $ | 43,649,682 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
Semi-Annual Report | 57 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Total Return Fund | ||||||||||||||||
Assets | ||||||||||||||||
Agency Collateralized Mortgage Obligations | $ | 24,353 | $ | — | $ | 24,353 | $ | — | ||||||||
Agency Mortgage-Backed Securities | 2,373,823 | — | 2,373,823 | — | ||||||||||||
Asset-Backed Securities | 2 | — | 2 | — | ||||||||||||
Corporate Bonds & Notes(1) | 931,421 | — | 931,421 | — | ||||||||||||
Foreign Corporate Bonds & Notes(1) | 384,624 | — | 384,624 | — | ||||||||||||
Non-Agency Collateralized Mortgage-Backed Securities | 408,708 | — | 408,708 | — | ||||||||||||
Domestic Equity | ||||||||||||||||
Common Stocks(1) | 44,921,595 | 44,921,595 | — | — | ||||||||||||
Preferred Stocks(1) | 572,406 | 572,406 | — | — | ||||||||||||
Foreign Equity | ||||||||||||||||
Common Stocks(1) | 8,755,658 | 8,755,658 | — | — | ||||||||||||
Preferred Stocks(1) | 583,400 | 583,400 | — | — | ||||||||||||
Registered Investment Companies | 26,775,174 | 26,775,174 | — | — | ||||||||||||
Cash Equivalents | 7,726,195 | 7,726,195 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 93,457,359 | $ | 89,334,428 | $ | 4,122,931 | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Tax-Exempt Fund | ||||||||||||||||
Assets | ||||||||||||||||
Municipal Bonds & Notes(1) | $ | 19,517,536 | $ | — | $ | 19,517,536 | $ | — | ||||||||
Cash Equivalents | 10,878,536 | 10,878,536 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 30,396,072 | $ | 10,878,536 | $ | 19,517,536 | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Fixed Income Fund | ||||||||||||||||
Assets | ||||||||||||||||
Agency Collateralized Mortgage Obligation | $ | 182,560 | $ | — | $ | 182,560 | $ | — | ||||||||
Agency Mortgage-Backed Securities | 21,946,364 | — | 21,946,364 | — | ||||||||||||
Asset-Backed Securities | 482,163 | — | 482,163 | — | ||||||||||||
Corporate Bonds & Notes(1) | 45,266,426 | — | 44,780,126 | 486,300 | ||||||||||||
Foreign Corporate Bonds & Notes(1) | 9,553,713 | — | 9,553,713 | — | ||||||||||||
Municipal Bonds & Notes | 5,276,674 | — | 5,276,674 | — | ||||||||||||
Non-Agency Collateralized Mortgage-Backed Securities | 4,550,780 | — | 4,550,780 | — | ||||||||||||
Sovereign Bonds | 920,038 | — | 920,038 | — | ||||||||||||
U.S. Government Agencies | 22,701,152 | — | 22,701,152 | — | ||||||||||||
Domestic Equity | ||||||||||||||||
Common Stocks | 2,204,210 | 2,204,210 | — | — |
58 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Fixed Income Fund (continued) | ||||||||||||||||
Preferred Stocks(1) | $ | 3,448,543 | $ | 3,274,796 | $ | 173,747 | $ | — | ||||||||
Foreign Equity | 251,923 | 251,923 | — | — | ||||||||||||
Registered Investment Companies | 16,103,179 | 16,103,179 | — | — | ||||||||||||
Cash Equivalents | 6,322,380 | 6,322,380 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 139,210,105 | $ | 28,156,488 | $ | 110,567,317 | $ | 486,300 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
The table below sets forth a summary of changes in the Global Allocation Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the period ended March 31, 2016.
Balance as of September 30, 2015 | Transfers into Level 3 | Transfers Out of Level 3 | Net Amortization (Accretion) of Premium/ (Discount) | Net Realized Gains/ (Losses) | Net Unrealized Gains/ (Losses) | Net Purchases | Net (Sales) | Balance as of March 31, 2016 | Change in Unrealized Gain/(Loss) on Level 3 securities still held at period end | |||||||||||||||||||||||||||||||
Global Allocation Fund |
| |||||||||||||||||||||||||||||||||||||||
U.S. Senior Loans |
| |||||||||||||||||||||||||||||||||||||||
Healthcare | $ | 5,994,156 | $ | — | $ | — | $ | — | $ | — | $ | (72,919 | ) | $ | — | $ | (77,968 | ) | $ | 5,843,269 | $ | (72,919 | ) | |||||||||||||||||
Telecommunications | 37,305,603 | — | — | (3,240 | ) | (5,287 | ) | 2,131,757 | $ | 39,428,833 | (5,287 | ) | ||||||||||||||||||||||||||||
Non-U.S. Senior Loans |
| |||||||||||||||||||||||||||||||||||||||
Manufacturing | 675,017 | — | — | (189 | ) | (57,259 | ) | $ | 617,569 | (57,259 | ) | |||||||||||||||||||||||||||||
U.S. Equities |
| |||||||||||||||||||||||||||||||||||||||
Chemicals | 16,618,504 | (11,494,323 | ) | 659,112 | (669,905 | ) | $ | 5,113,388 | (11,494,323 | ) | ||||||||||||||||||||||||||||||
Healthcare | 2,120,000 | — | — | 380,000 | — | (2,500,000 | ) | — | — | |||||||||||||||||||||||||||||||
Telecommunications Services | 92,860,126 | — | — | 2,660,854 | 95,520,980 | 2,660,854 | ||||||||||||||||||||||||||||||||||
Non-U.S. Equity |
| |||||||||||||||||||||||||||||||||||||||
Healthcare Equipment & Services | — | — | — | (924,250 | ) | 2,500,000 | 1,575,750 | (924,250 | ) | |||||||||||||||||||||||||||||||
U.S. Warrants |
| |||||||||||||||||||||||||||||||||||||||
Healthcare | 149,761 | — | — | (110,185 | ) | 44,231 | 83,807 | (110,185 | ) | |||||||||||||||||||||||||||||||
Non-U.S. Investment Companies | 2,937,405 | — | — | 551,042 | 3,488,447 | 551,042 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total | $ | 158,660,572 | $ | — | $ | — | $ | (3,429 | ) | $ | — | $ | (9,072,327 | ) | $ | 5,335,100 | $ | (3,247,873 | ) | $ | 151,672,043 | $ | (9,452,327 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments.
For the six months ended March 31, 2016, a net amount of $2,430,902 of the Global Allocation Fund’s portfolio investments transferred from Level 2 to Level 1. Transfers from Level 2 to Level 1 were due to an increase in observable pricing inputs as compared to the previous period.
Semi-Annual Report | 59 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:
Category | Market Value at 3/31/2016 | Valuation Technique | Unobservable Inputs | Input Value(s) | ||||||||
Global Allocation Fund |
| |||||||||||
Common Stock | $ | 102,210,118 | Third-Party Pricing Vendor | N/A | N/A | |||||||
Multiples Analysis | Price/MHz-PoP | $0.13 - $0.50 | ||||||||||
Multiple of EBITDA | 7.2x | |||||||||||
Liquidity Discount | 10% | |||||||||||
Asset-Specific Discount | 10% | |||||||||||
Discounted Cash Flow | Discount Rate | 11% | ||||||||||
Bank Loans | 45,889,671 | Third-Party Pricing Vendor | N/A | N/A | ||||||||
Discounted Cash Flow | Spread Adjustment | 0.0% - 0.2% | ||||||||||
Debt-Yield | Yield Adjustment | 4.75% - 6% | ||||||||||
Mutual Funds | 3,488,447 | Net Asset Value | N/A | N/A | ||||||||
Warrants | 83,807 | Black-Scholes Model | Share Price | $5.92 | ||||||||
Annualized Volatility | 70% | |||||||||||
|
| |||||||||||
Total | $ | 151,672,043 |
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes.
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 and loans 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.
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 their 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. Furthermore, management of the Funds is 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 12 months.
Distributions to Shareholders
The Tax-Exempt Fund and Fixed Income Fund declare investment income dividends daily and pay them 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 typically 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 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 cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is
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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 over 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 Global Allocation Fund and Premier Growth Equity Fund’s Statement of Assets and Liabilities. Restricted cash in the amounts of $122,091,079 and $10,499,877 were held with the broker for the Global Allocation Fund and Premier Growth Equity Fund, respectively. Additionally, securities valued at $416,414,521 and $79,999,428 were posted in the Global Allocation Fund’s and Premier Growth Equity Fund’s segregated account, respectively, as collateral during the period ended March 31, 2016.
Note 3. Derivative Transactions
The Funds are subject to equity securities risk, interest rate risk and currency 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.
Forward Foreign Currency Exchange Contracts
The Funds enter into forward foreign currency exchange contracts to facilitate transactions in foreign denominated securities and to manage the Funds’ currency exposure. Forward foreign currency exchange contracts are valued at the mean between the bid and the offered forward rates as last quoted by a recognized dealer. The aggregate principal amounts of the contracts are not recorded in the Funds’ financial statements. Such amounts appear under the caption Forward Foreign Currency Exchange Contracts in the Investment Portfolio. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (or liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains or losses on foreign currency related transactions. The Funds’ risks in using these contracts include changes in the value of foreign currency or the possibility that the counterparties do not perform under the contracts’ terms. When a Fund enters into a forward foreign currency exchange contract, it is required to segregate cash or liquid assets in an amount equal to the value of the Fund’s obligation under those contracts, marked to market on a daily basis. For the six months ended March 31, 2016, none of the funds invested in forward foreign currency exchange contracts.
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. The Funds may 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’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.
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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/(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/(loss) on the expiration or closing of a futures contract.
For the six months ended March 31, 2016, the Global Allocation Fund held futures contracts with period end positions as detailed in the Fund’s Investment Portfolio. Cash held as collateral for futures is classified as restricted cash on the Global Allocation Fund’s Statement of Assets and Liabilities. Restricted cash in the amount of $22,341,117 was held with the broker for the Global Allocation Fund. The Premier Growth Equity Fund invested in futures contracts during the period, however, none were held as of March 31, 2016. 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. For the six months ended March 31, 2016, the Small-Cap Equity Fund, Total Return Fund, Tax-Exempt Fund and Fixed Income Fund did not invest in futures contracts.
Options
The Funds may utilize options on securities or indices to varying degrees as part of their principal investment strategy. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. The Funds may hold options, write option contracts, or both.
If an option written by a Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series
(type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be affected when a Fund desires. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. A Fund will realize a capital gain from a closing sale transaction if the premium received from the sale is more than the original premium paid when the option position was opened, or if the premium received from a sale is less than the original premium paid, the fund will realize a capital loss.
Transactions in written options for the six months ended March 31, 2016 were as follows:
Global Allocation Fund | Number of Contracts | Notional Value | Premium | |||||||||
Outstanding, September 30, 2015 | 82,148 | $ | 333,400,500 | $ | 26,846,076 | |||||||
Call Options Written | 2,000 | 8,000,000 | 1,394,391 | |||||||||
Put Options Written | 87,227 | 516,851,500 | 42,459,333 | |||||||||
Call Options Exercised | (750 | ) | (7,500,000 | ) | (948,499 | ) | ||||||
Put Options Exercised | (18,196 | ) | (68,690,100 | ) | (5,462,753 | ) | ||||||
Call Options Closed | (2,870 | ) | (18,005,000 | ) | (2,813,202 | ) | ||||||
Put Options Closed | (94,832 | ) | (560,830,400 | ) | (21,644,509 | ) | ||||||
|
|
|
|
|
| |||||||
Outstanding, March 31, 2016 | 54,727 | $ | 203,226,500 | $ | 39,830,837 |
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, 2016:
Fair Value | ||||||||
Fund | Asset Derivative | Liability Derivative | ||||||
Global Allocation Fund | ||||||||
Equity Price Risk | $ | 11,240,000 | (1) | $ | (35,239,869 | )(2)(3)(4) | ||
Commodity Risk | — | (3,744,153 | )(3)(4) | |||||
Premier Growth Equity Fund | ||||||||
Equity Price Risk | 335,000 | (1) | — |
(1) | Statement of Assets and Liabilities location: Unaffiliated investments, at value. |
(2) | Statement of Assets and Liabilities location: Written options contracts, at value. |
(3) | Statement of Assets and Liabilities location: Variation margin receivable/payable. |
(4) | Includes cumulative unrealized appreciation/(depreciation) of futures contracts as reported in the Investment Portfolio and within the |
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March 31, 2016 | Highland Funds II |
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. |
To reduce counterparty credit risk with respect to over-the-counter (“OTC”) transactions, the Funds have entered into master netting arrangements, established within the Funds’ International Swap and Derivatives Association, Inc. (“ISDA”) master agreements, which allows the Funds to make (or to have an entitlement to receive) a single net payment in the event of default (close-out netting) for outstanding payables and receivables with respect to certain OTC derivative positions in forward currency exchange contracts for each individual counterparty. In addition, the Funds may require that certain counterparties post cash and/or securities in collateral accounts to cover their net payment obligations for those derivative contracts subject to ISDA master agreements. If the counterparty fails to perform under these contracts and agreements, the cash and/or securities will be made available to the Funds.
Certain ISDA master agreements include credit related contingent features which allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Funds’ net assets decline by a stated percentage or the Funds fails to meet the terms of its ISDA master agreements, which would cause the Funds to accelerate payment of any net liability owed to the counterparty.
For financial reporting purposes, the Funds do not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities. Bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events.
Collateral terms are contract specific for OTC derivatives. For derivatives traded under an ISDA master agreement, the collateral requirements are typically calculated by netting the mark to market amount for each transaction under such agreement and comparing that to the value of any collateral currently pledged by the Fund or the Counterparty.
For financial reporting purposes, cash collateral that has been pledged to cover obligations of the Funds, if any, is reported in restricted cash on the Statement of Assets and Liabilities. Generally, the amount of collateral due from or to a party must exceed a minimum transfer amount threshold before a transfer has to be made. To the extent amounts due to the Funds from their counterparties are not fully collateralized, contractually or otherwise, the Funds bear the risk of loss from counterparty non-performance.
The effect of derivative instruments on the Statement of Operations for the six months ended March 31, 2016, is as follows:
Fund | Net Realized Gain(Loss) on Derivatives | Net Change in Unrealized Appreciation/ (Depreciation) on Derivatives | ||||||
Global Allocation Fund | ||||||||
Equity Price Risk | $ | (26,286,657 | )(1)(2)(3) | $ | 46,312,673 | (4)(5)(6) | ||
Commodity Risk | 27,978,638 | (3) | (3,744,153 | )(6) | ||||
Foreign Exchange Risk | (17,777,455 | )(3) | — | |||||
Premier Growth Equity Fund | ||||||||
Equity Price Risk | (1,294,296 | )(1) | (451,489 | )(4) |
(1) | Statement of Operations location: Realized gain (loss) on investments from unaffiliated issuers. |
(2) | Statement of Operations location: Realized gain (loss) on written options contracts. |
(3) | Statement of Operations location: Realized gain (loss) on future contracts. |
(4) | Statement of Operations location: Change in unrealized appreciation (depreciation) on investments. |
(5) | Statement of Operations location: Change in unrealized appreciation (depreciation) on written options contracts. |
(6) | Statement of Operations location: Change in unrealized appreciation (depreciation) on futures contracts. |
The average quarterly volume of derivative activity for the six months ended March 31, 2016, is as follows:
Fund | Units/ Contracts | Appreciation/ (Depreciation) | ||||||
Global Allocation Fund | ||||||||
Futures Contracts | — | $ | (331,337 | ) | ||||
Purchased Options Contracts | 56,858 | — | ||||||
Written Options contracts | 63,594 | — | ||||||
Premier Growth Equity Fund | ||||||||
Futures Contracts | — | (10,437 | ) | |||||
Purchased Options Contracts | 1,667 | — |
Note 4. Securities Lending
Each Fund may make secured loans of its portfolio securities amounting to not more than 30% (5% in the case of Tax-Exempt Fund) 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 Funds’ securities lending policies, securities loans are made to borrowers pursuant to agreements requiring that loans be continuously secured by collateral in cash, securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, irrevocable letters of credit issued by a bank or forms of collateral acceptable under the Funds’ securities lending agreement equal to at least 102% or 105% of the market
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March 31, 2016 | Highland Funds II |
value of the securities loaned, depending on the nature of the loaned securities and the collateral received, as set forth in the applicable securities lending agreement. 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 pursuant to 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 Funds, as lenders, 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 Funds 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, each Funds benefit from a borrower default indemnity provided by State Street Bank and Trust Company (“State Street”). State Street’s indemnity generally provides for replacement of securities lent or the approximate value thereof.
Gross Amounts of Liabilities Presented in Statement of Assets & Liabilities(1) | ||||||||||||||||
Fund | Gross Amounts Not Offset in the Statement of Assets and Liabilities | Financial Instrument(2) | Collateral Received | Net Amount (not less than 0) | ||||||||||||
Global Allocation Fund | $ | 10,292,853 | $ | (10,099,942 | ) | $ | 0 | $ | 192,911 | |||||||
Premier Growth Equity Fund | 19,666,538 | (18,976,220 | ) | 0 | 690,318 | |||||||||||
Small-Cap Equity Fund | 8,848,702 | (8,826,258 | ) | 0 | 22,444 | |||||||||||
Total Return Fund | 21,128,554 | (20,614,899 | ) | 0 | 513,655 | |||||||||||
Fixed Income Fund | 5,925,820 | (5,779,644 | ) | 0 | $ | 146,176 |
(1) | In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization. |
(2) | Represents market value of securities on loan at six months ended end. |
For the six months ended March 31, 2016, 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 | $ | 10,099,942 | $ | 10,161,603 | $ | 131,250 | ||||||
Premier Growth Equity Fund | 18,976,220 | 19,416,751 | 249,787 | |||||||||
Small-Cap Equity Fund | 8,826,258 | 7,752,734 | 1,095,968 | |||||||||
Total Return Fund | 20,614,899 | 20,109,459 | 1,019,096 | |||||||||
Fixed Income Fund | 5,779,644 | 5,925,820 | — |
(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. |
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 treatment 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 NAV 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, 2015, permanent differences chiefly resulting from equalization, short sale holding period reclass, partnership basis adjustments, defaulted bonds, foreign currency gains and losses, dividends received 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 | $ | (6,296,966 | ) | $ | 6,296,863 | $ | 103 | |||||
Dividend Equity Fund | 5,061 | (5,061 | ) | — | ||||||||
Premier Growth Equity Fund | 14,172 | (14,172 | ) | — | ||||||||
Small-Cap Equity Fund | 14,433 | (14,433 | ) | — | ||||||||
Total Return Fund | (98,597 | ) | 98,597 | — | ||||||||
Tax-Exempt Fund | — | — | — | |||||||||
Fixed Income Fund | 300,876 | (408 | ) | (300,468 | ) |
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March 31, 2016 | Highland Funds II |
At September 30, 2015, 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 | Other Temporary Differences(1) | Accumulated Capital and Other Losses | Net Tax Appreciation/ (Depreciation)(2) | ||||||||||||||||||
Global Allocation Fund | $ | 1,816,423 | $ | — | $ | — | $ | (7,010,399 | ) | $ | (4,377,475 | ) | $ | (431,411,627 | ) | |||||||||
Dividend Equity Fund | 42,942 | 2,907,066 | — | (22,528 | ) | — | (511,797 | ) | ||||||||||||||||
Premier Growth Equity Fund | 250,247 | 17,399,085 | — | (1 | ) | — | 57,545,413 | |||||||||||||||||
Small-Cap Equity Fund | 36,950 | 4,986,414 | — | — | — | 1,049,214 | ||||||||||||||||||
Total Return Fund | 2,147,792 | 6,088,052 | — | — | — | (6,050,628 | ) | |||||||||||||||||
Tax-Exempt Fund | — | 602,638 | 66,132 | — | — | 1,129,980 | ||||||||||||||||||
Fixed Income Fund | — | — | — | (36,504 | ) | (2,184,415 | ) | (2,745,386 | ) |
(1) | Other temporary differences are comprised of dividends payable and organizational expenses. |
(2) | Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sale, and other adjustments. |
As of September 30, 2015, 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 | No Short- | No Expiration Long- Term(1) | Total | ||||||||||||||||||
Global Allocation Fund | $ | — | $ | 733,520 | (2) | $ | 604,956 | (2) | $ | — | $ | — | $ | 1,338,476 | ||||||||||
Dividend Equity Fund | — | — | — | — | — | — | ||||||||||||||||||
Premier Growth Equity Fund | — | — | — | — | — | — | ||||||||||||||||||
Small-Cap Equity Fund | — | — | — | — | — | — | ||||||||||||||||||
Total Return Fund | — | — | — | — | — | — | ||||||||||||||||||
Tax-Exempt Fund | — | — | — | — | — | — | ||||||||||||||||||
Fixed Income Fund | — | — | — | — | 380,945 | 380,945 |
(1) | Under the Regulated Investment Company Modernization Act of 2010, the Funds 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 and the prior year mergers with Highland International Equity Fund and Global Select Equity Fund on September 20, 2013. The Global Allocation Fund’s ability to utilize these capital losses is limited under Internal Revenue Service regulations. |
During the year ended September 30, 2015, the Global Allocation Fund and the Fixed Income Fund utilized capital carryforwards in the amount of $1,363,307 and $1,758,948, respectively.
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March 31, 2016 | Highland Funds II |
The tax composition of distributions paid during the years ended September 30, 2015 and September 30, 2014 (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 | ||||||||||||||||
2015 | $ | — | $ | 94,000,568 | $ | 10,622,900 | $ | — | ||||||||
2014 | — | 11,339,592 | 4,076,066 | — | ||||||||||||
Dividend Equity Fund | ||||||||||||||||
2015 | — | 300,846 | 738,229 | — | ||||||||||||
2014 | — | 411,221 | 279,443 | — | ||||||||||||
Premier Growth Equity Fund | ||||||||||||||||
2015 | — | 21,606 | 15,498,986 | — | ||||||||||||
2014 | — | 276,833 | 11,468,165 | — | ||||||||||||
Small-Cap Equity Fund | ||||||||||||||||
2015 | — | 61,797 | 4,493,225 | — | ||||||||||||
2014 | — | — | 2,894,526 | — | ||||||||||||
Total Return Fund | ||||||||||||||||
2015 | — | 798,002 | 3,634,726 | — | ||||||||||||
2014 | — | 686,406 | — | — | ||||||||||||
Tax-Exempt Fund | ||||||||||||||||
2015 | 447,333 | 5,279 | 246,491 | — | ||||||||||||
2014 | 792,183 | 21,272 | — | — | ||||||||||||
Fixed Income Fund | ||||||||||||||||
2015 | — | 2,984,538 | — | 301,597 | ||||||||||||
2014 | — | 2,928,491 | — | 178,829 |
(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. |
Unrealized appreciation and depreciation at March 31, 2016, 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 | $ | 53,216,989 | $ | 557,668,151 | $ | (536,331,643 | ) | $ | 1,682,556,681 | |||||||
Premier Growth Equity Fund | 60,639,352 | 3,142,489 | 57,496,863 | 172,227,760 | ||||||||||||
Small-Cap Equity Fund | 5,244,705 | 4,188,098 | 1,056,607 | 42,593,075 | ||||||||||||
Total Return Fund | 2,963,228 | 4,836,773 | (1,873,545 | ) | 93,457,359 | |||||||||||
Tax-Exempt Fund | 1,436,379 | 27,867 | 1,408,512 | 28,987,560 | ||||||||||||
Fixed Income Fund | 2,043,778 | 3,655,135 | (1,611,357 | ) | 139,210,105 |
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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
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, 2015, the Funds elected to defer the following losses incurred from November 1, 2014 through September 30, 2015:
Fund | Realized Capital Losses | Ordinary Losses | ||||||
Global Allocation Fund | $ | 3,038,999 | $ | — | ||||
Dividend Equity Fund | — | — | ||||||
Premier Growth Equity Fund | — | — | ||||||
Small-Cap Equity Fund | — | — | ||||||
Total Return Fund | — | — | ||||||
Tax-Exempt Fund | — | — | ||||||
Fixed Income Fund | 1,803,470 | — |
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. At the time the Funds entered into the Unsecured Credit Agreement, the Funds’ aggregate borrowings could not exceed $25,000,000. Interest is charged to the Funds based on their borrowings at a rate equal to 1.25% plus the greater of the Federal Funds Effective Rate or the LIBOR. In addition, the Funds agree to pay commitment fee expenses of 0.10% on the undrawn amounts, which are included in “Commitment fees-credit agreement” on the Statement of Operations. On May 23, 2014, the Unsecured Credit Agreement was amended to extend the expiration date to May 22, 2015. On July 31, 2014, the Unsecured Credit Agreement was amended to include the addition of a new fund, Highland Opportunistic Credit Fund. On October 27, 2014, the Unsecured Credit Agreement was increased to $150,000,000. Additionally, the Funds agreed to pay increased commitment fee expenses of 0.15% on undrawn amounts. On May 22, 2015, the Unsecured Credit Agreement was amended to extend the expiration date to May 20, 2016 and to increase commitment fee expenses to 0.20% on undrawn amounts. On August 31, 2015 the Unsecured Credit Agreement was amended to include the addition of three new funds; (a) Highland HFR Equity Hedge ETF, (b) Highland HFR Event-Driven ETF and (c) Highland HFR Global ETF, each a series of Highland Funds I. On March 2, 2016 the Highland Energy MLP Fund was removed from the Unsecured Credit Agreement and entered into a Master Margin Loan Agreement (the “Agreement”) with The Bank of New York Mellon. For the period ended March 31, 2016, the Global Allocation Fund, the Premier Growth Equity Fund, and the Small-Cap Equity Fund had interest expense related to the Unsecured Credit Agreement of $647,017, $2,340 and
$2,294, respectively. Commitment fees for the Global Allocation Fund, the Premier Growth Equity Fund, the Small-Cap Equity Fund, the Total Return Fund, the Tax-Exempt Fund, and the Fixed Income Fund were $41,934, $5,596, $898, $1,751, $457, and $3,102, respectively. As of March 31, 2016, the Global Allocation Fund, the Premier Growth Equity Fund, and the Small-Cap Equity Fund had an outstanding balance of $62,000,000, $10,000,000, and $4,000,000, respectively, under the Unsecured Credit Agreement. The fair value of the outstanding debt under the Unsecured Credit Agreement was estimated to be $62,088,749, $10,014,804, and $4,005,535, respectively, and would be categorized as Level 3 within the fair value hierarchy. The fair value was estimated based on discounting the cash flows owed using a discount rate of 0.50% over the 3 month risk free rate. For the six months ended March 31, 2016 the Global Allocation Fund, the Premier Growth Equity, and the Small-Cap Equity Fund had average daily note balances of $90,689,095, $7,142,857, $1,960,000, respectively, at a weighted average interest rate of 1.63%, 1.68%, and 1.69%, respectively, for the days outstanding.
Note 7. Transactions with Affiliates & Expenses Incurred by the Fund
Investment Advisory Fees and Administration Fees
For its investment advisory and administrative services, each Fund pays the Investment Adviser a monthly fee, computed and accrued daily, based on an annual rate of the Funds’ Average Daily Managed Assets. Average Daily Managed Assets of a Fund means the average daily value of the total assets of a Fund less all accrued liabilities of a Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).
On behalf of the Funds, the Trust has entered into an administration agreement with State Street and pays State Street a fee for administration services. The Investment Adviser generally assists in all aspects of the Funds’ administration and operations and furnishes offices, necessary facilities, equipment and personnel.
The table below shows each Fund’s contractual advisory fee with the Investment Adviser for the six months ended March 31, 2016:
Fund | Annual Fee Rate to Highland | |||
Global Allocation Fund | 0.40 | % | ||
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 | 0.30 | % |
Semi-Annual Report | 67 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Sub-Advisory Fees
The Premier Growth Equity Fund was sub-advised by GE Asset Management Incorporated (“GEAM”) until January 31, 2016. The Total Return Fund was sub-advised by GEAM until February 1, 2015, at which time it became sub-advised by First Foundation Advisors (“FFA”). The Tax-Exempt Fund and the Fixed Income Fund are sub-advised by FFA. The Investment Adviser pays each sub-advisor fee that it receives from the respective Fund.
Expense Limits and Fee Reimbursements
The Investment Adviser has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Funds pursuant to their distribution plans under Rule 12b-1 under the 1940 Act, as amended, taxes, such as deferred tax expenses, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses (collectively, the “Excluded Expenses”)) of the Global Allocation Fund, the Small-Cap Equity Fund, the Total Return Fund, the Tax-Exempt Fund and the Fixed Income Fund to 0.90%, 0.95%, 0.95%, 0.65% and 0.65%, respectively, of average daily net assets attributable to any class of the Global Allocation Fund, the Small-Cap Equity Fund, the Total Return Fund, the Tax-Exempt Fund and the Fixed Income Fund (each, an “Expense Cap” and collectively, the “Expense Caps”). The Expense Caps will continue through at least January 31, 2017, and may not be terminated prior to this date without the action or consent of the Board.
The Trust, on behalf of each Fund, has contractually agreed to pay the Adviser all amounts previously paid, waived or reimbursed by the Adviser with respect to a Fund pursuant to its respective Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of such Fund, in the aggregate, would not cause a Fund’s total annual operating expenses in any such year to exceed the amount of its Expense Cap, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Adviser more than 36 months after the date such amounts were paid, waived or reimbursed by the Adviser. The Adviser may not recoup any amounts previously paid, waived or reimbursed under an Expense Cap before payment of a Fund’s operating expenses for the year in which the Adviser intends to recoup such amounts.
There can be no assurance that this fee reduction will be sufficient to avoid any loss. On March 31, 2016, the amounts subject to possible future recoupment under the Funds’ expense limitations were as follows:
Expiring | ||||||||||||
Fund | 2017 | 2018 | 2019 | |||||||||
Global Allocation Fund | $ | — | $ | — | $ | 535,390 | ||||||
Premier Growth Equity Fund | — | — | — | |||||||||
Small-Cap Equity Fund | 55,044 | 193,129 | 85,151 | |||||||||
Total Return Fund | — | — | — | |||||||||
Tax-Exempt Fund | — | 25,890 | 26,032 | |||||||||
Fixed Income 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 overseen by such Trustee based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser or its affiliated advisers and NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act as of the date of this report. Although the Funds believe that Mr. Powell is technically no longer an “interested person” of the Funds, in light of his previous employment with the Investment Adviser and an affiliate of the Investment Adviser, as well as his ongoing provision of consulting services to the Investment Adviser and affiliates of the Investment Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Funds. Therefore, the Funds intend to treat Mr. Powell as an “interested person” of the Funds for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation).
The Funds pay no compensation to their officers, all of whom are employees of the Investment Adviser or one of its affiliates.
Distribution and Shareholder Service Fees
The Funds have 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 Highland Capital Funds Distributor, Inc. (the “Underwriter”) at an annual rate of 0.25% of the average daily net assets attributable to Class A, and Class C shares of the Funds. 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. Currently Class Y shares are not subject to a 12b-1 fee.
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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
The Underwriter received $50,500 of front end sales charges from the sale of Class A shares and $50,439 in contingent deferred sales charges from the redemption of Class C shares of the Funds during the period ended March 31, 2016.
Note 8. Disclosure of Significant Risks and Contingencies
The primary risks of investing in the Funds are described below in alphabetical order:
Counterparty Risk
Counterparty 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 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 their counterparties. To limit the counterparty 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 and high yield Senior Loans may result in greater NAV fluctuation than if a 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 a 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
or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Futures Contracts Risk
The risks of entering into futures contracts include the possibilities that their markets may become illiquid and/or changes in the values of the contracts may not correlate to changes in the values of the underlying instruments.
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.
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 expects the risk of loss to be remote.
Interest Rate Risk
The risk that fixed income securities will decline in value because of changes in interest rates. When interest rates decline, the value of fixed rate securities already held by the Funds can be expected to rise. Conversely, when interest rates rise, the value of existing fixed rate portfolio securities can be expected to decline. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration. In addition, the interest rates of floating rate loans typically only adjust to changes in short-term interest rates; long-term interest rates can vary dramatically from short-term interest rates.
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.
Semi-Annual Report | 69 |
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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
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.
Restricted Securities Risk
Restricted securities (i.e., securities acquired in private placement transactions) and illiquid securities may offer higher yields than comparable publicly traded securities. The Funds, however, may not be able to sell these securities when the Investment Adviser considers it desirable to do so or, to the extent they are sold privately, may have to sell them at less than the price of otherwise comparable securities. Restricted securities are subject to limitations on resale which can have an adverse effect on the price obtainable for such securities. Also, if in order to permit resale the securities are registered under the Securities Act at a Fund’s expense, the Fund’s expenses would be increased.
Senior Loans Risk
The risk that the issuer or a senior loan may fail to pay interest or principal when due, and changes in market interest rates may reduce the value of the senior loan or reduce a Fund’s returns. The risks associated with senior loans are similar to the risks of high yield debt securities. Senior loans and other debt securities are also subject to the risk of price declines and to increases in interest rates, particularly long-term rates. Senior loans are also subject to the risk that, as interest rates rise, the cost of borrowing
increases, which may increase the risk of default. In addition, the interest rates of floating rate loans typically only adjust to changes in short-term interest rates; long-term interest rates can vary dramatically from short-term interest rates. Therefore, senior loans may not mitigate price declines in a long-term interest rate environment. The Fund’s investments in senior loans are typically below investment grade and are considered speculative because of the credit risk of their issuers.
Short-Selling Risk
Short sales by the Funds that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows the Funds to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Funds may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, a Fund might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
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 six months ended March 31, 2016, were as follows:
U.S. Government | Other Securities | |||||||||||||||
Fund | Purchases | Sales | Purchases | Sales | ||||||||||||
Global Allocation Fund | $ | — | $ | — | $ | 613,811,057 | $ | 1,321,650,972 | ||||||||
Premier Growth Equity Fund | — | — | 76,664,504 | 91,926,943 | ||||||||||||
Small-Cap Equity Fund | — | — | 16,449,737 | 17,333,093 | ||||||||||||
Total Return Fund | — | 180,464 | 35,100,101 | 38,614,078 | ||||||||||||
Tax-Exempt Fund | — | — | 2,658,510 | 15,000 | ||||||||||||
Fixed Income Fund | 19,692,260 | 20,278,386 | 12,513,048 | 4,320,490 |
Note 10. Affiliated Issuers
Under Section 2 (a) (3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities.
70 | Semi-Annual Report |
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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
The Global Allocation Fund held at least five percent of the outstanding voting securities of the following companies during the six months ended March 31, 2016:
Issuer | Shares at September 30, 2015 | Shares at March 31, 2016 | Market Value | Purchases | Sales | |||||||||||||||||||||||
September 30, 2015 | March 31, 2016 | Affiliated Income | ||||||||||||||||||||||||||
Highland HFR Equity Hedge ETF (Exchange-Traded Funds) | 495,000 | 95,000 | $ | 9,157,500 | $ | 1,836,825 | $ | — | $ | — | $ | 7,231,867 | ||||||||||||||||
Highland HFR Event-Driven ETF (Exchange-Traded Funds) | 495,000 | 95,000 | 8,573,648 | 1,606,450 | 87,464 | — | 6,459,859 | |||||||||||||||||||||
Highland HFR Global ETF (Exchange-Traded Funds) | 495,000 | 95,000 | 9,370,301 | 1,795,500 | 104,569 | — | 7,151,844 | |||||||||||||||||||||
Highland/iBoxx Senior Loan ETF (Exchange-Traded Funds) | 343,198 | 43,198 | 6,345,731 | 787,500 | 85,039 | — | 5,399,901 | |||||||||||||||||||||
Highland Energy MLP Fund (Master Limited Partnerships) | 3,385,921 | 3,593,490 | 25,970,018 | 12,361,604 | — | 2,959,478 | 2,000,000 | |||||||||||||||||||||
BB Votorantim Highland Infrastructure LLC (Non-U.S. Investment Companies) | 10,000 | 10,000 | 2,937,405 | 3,488,447 | — | — | — | |||||||||||||||||||||
TerreStar Corp. (U.S. Equity) | 306,550 | 306,550 | 92,860,126 | 95,520,980 | — | — | — | |||||||||||||||||||||
TerreStar Corp. (U.S. Senior Loans) | 37,455,424 | 14,320,737 | 37,305,603 | 39,428,833 | — | 2,131,757 | — | |||||||||||||||||||||
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42,986,094 | 18,363,296 | $ | 192,520,330 | $ | 156,826,139 | $ | 277,071 | $ | 5,091,235 | $ | 28,243,470 | |||||||||||||||||
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Note 11. New Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. For public entities this update will be effective for interim and annual periods beginning after December 15, 2015. ASU 2015-02 will modify the evaluation of limited partnerships and similar legal entities as variable interest entities (VIEs). This update will eliminate the presumption that a general partner should consolidate a limited partnership. This update also affects the consolidation analysis of reporting entities that are involved with VIEs. The update also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to Rule 2a-7 of the investment Company Act of 1940 for registered money market funds. Management is currently evaluating the impact of the provisions of this new guidance on the Fund’s financial position.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Interest—Imputation of
Interest to update the guidance to include SEC staff views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC has indicated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public entities, these updates are effective for interim and annual periods beginning after December 15, 2015. Management is currently evaluating the impact on the Fund’s financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topiv 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. Sufficient information must be provided to permit reconciliation of the fair value of assets categorized within the fair value hierarchy to the amounts presented in the Statements of Assets and Liabilities. For public entities this guidance is required to be presented for interim and annual periods beginning after December 15, 2015. Management is currently evaluating the implication, if any, of the additional disclosure requirements and its impact on the Fund’s financial statements.
Semi-Annual Report | 71 |
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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Funds II |
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and measurement of Financial Assets and Liabilities. The amendments in this update make improvements to the requirements for accounting for equity investments and simplify the impairment assessment of equity investments. For public entities this update will be effective for fiscal years beginning after December 15, 2017. Management is currently evaluating the impact of this new guidance on the Fund’s financial position.
In March 2016, the FASB issued Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. Management is currently evaluating the impact of this new guidance on the Fund’s financial position.
Note 12. 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.
On May 20, 2016, the Unsecured Credit Agreement was amended to, among other things, to change the maturity date to September 20, 2016, increase commitment fee expense to 0.25% on undrawn amounts, and to remove certain funds that had been liquidated.
72 | Semi-Annual Report |
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ADDITIONAL INFORMATION (unaudited)
March 31, 2016 | 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 take contrary provisions 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 desires 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 the Fund you incur transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following example is intended to help you understand your ongoing costs (in U.S. dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in each share class of the Fund during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of the
period and held for the entire year ended September 30, 2015.
Actual Expenses: The first section of the table for each Fund provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, 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 given for your class under the heading "Expenses paid during the period."
Hypothetical Example for Comparison Purposes: The second section of the table for each Fund 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. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges or redemption fees. Therefore, the second section of the table for each Fund 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 10/01/15 | Ending Account Value 03/31/16 | 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 | $ | 914.50 | 1.31 | % | $ | 6.27 | (8.55 | )% | ||||||||||
Class C | 1,000.00 | 911.20 | 2.04 | % | 9.75 | (8.88 | )% | |||||||||||||
Class Y | 1,000.00 | 915.50 | 1.04 | % | 4.98 | (8.45 | )% | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,018.45 | 1.31 | % | $ | 6.61 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,014.80 | 2.04 | % | 10.28 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,019.80 | 1.04 | % | 5.25 | 5.00 | % | |||||||||||||
Highland Premier Growth Equity Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,046.40 | 1.15 | % | $ | 5.88 | 4.64 | % | ||||||||||
Class C | 1,000.00 | 1,042.80 | 1.90 | % | 9.70 | 4.28 | % | |||||||||||||
Class Y | 1,000.00 | 1,047.90 | 0.90 | % | 4.61 | 4.79 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,019.25 | 1.15 | % | $ | 5.81 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,015.50 | 1.90 | % | 9.57 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,020.50 | 0.90 | % | 4.55 | 5.00 | % |
Semi-Annual Report | 73 |
Table of Contents
ADDITIONAL INFORMATION (unaudited) (continued)
March 31, 2016 | Highland Funds II |
Beginning Account Value 10/01/15 | Ending Account Value 03/31/16 | Annualized Expense Ratio(1) | Expenses Paid During the Period (1) | Actual Returns for Period | ||||||||||||||||
Highland Small-Cap Equity Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,042.80 | 1.22 | % | $ | 6.23 | 4.28 | % | ||||||||||
Class C | 1,000.00 | 1,038.40 | 1.97 | % | 10.04 | 3.84 | % | |||||||||||||
Class Y | 1,000.00 | 1,043.70 | 0.97 | % | 4.96 | 4.37 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,018.90 | 1.22 | % | $ | 6.16 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,015.15 | 1.97 | % | 9.92 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,020.15 | 0.97 | % | 4.90 | 5.00 | % | |||||||||||||
Highland Total Return Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,050.80 | 1.13 | % | $ | 5.84 | 5.08 | % | ||||||||||
Class C | 1,000.00 | 1,046.90 | 1.88 | % | 9.62 | 4.69 | % | |||||||||||||
Class Y | 1,000.00 | 1,051.80 | 0.88 | % | 4.51 | 5.18 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,019.30 | 1.13 | % | $ | 5.76 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,015.60 | 1.88 | % | 9.47 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,020.60 | 0.88 | % | 4.45 | 5.00 | % | |||||||||||||
Highland Tax-Exempt Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,022.70 | 0.90 | % | $ | 4.55 | 2.27 | % | ||||||||||
Class C | 1,000.00 | 1,018.10 | 1.63 | % | 8.22 | 1.81 | % | |||||||||||||
Class Y | 1,000.00 | 1,023.70 | 0.65 | % | 3.29 | 2.37 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,020.50 | 0.90 | % | $ | 4.55 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,016.85 | 1.63 | % | 8.22 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,021.75 | 0.65 | % | 3.29 | 5.00 | % | |||||||||||||
Highland Fixed Income Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,022.00 | 0.90 | % | $ | 4.55 | 2.20 | % | ||||||||||
Class C | 1,000.00 | 1,018.30 | 1.65 | % | 8.33 | 1.83 | % | |||||||||||||
Class Y | 1,000.00 | 1,023.30 | 0.65 | % | 3.29 | 2.33 | % | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,020.50 | 0.90 | % | $ | 4.55 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,016.75 | 1.65 | % | 8.32 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,021.75 | 0.65 | % | 3.29 | 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 (183/366). |
74 | Semi-Annual Report |
Table of Contents
Highland Funds
c/o BFDS
30 Dan Road
Canton, MA 02021-2809
Highland Funds II | Semi-Annual Report, March 31, 2016 |
www.highlandfunds.com | HLC-HFII-SEMI-03/16 |
Table of Contents
Highland Energy MLP Fund
Semi-Annual Report
March 31, 2016
Table of Contents
Highland Energy MLP Fund
1 | ||||
2 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
Statement of Changes in Net Assets — Capital Stock Activity — Shares | 6 | |||
7 | ||||
8 | ||||
11 | ||||
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, 2016
$21.8 million
Portfolio Data as of March 31, 2016
The information below provides a snapshot of the Fund at the end of the reporting period. The Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Top 10 Holdings as of 03/31/2016 (%)(1)(2) | ||||
Targa Resources Corp. (Common Stocks) | 11.5 | |||
Energy Transfer Partners LP (Master Limited Partnerships) | 11.4 | |||
Enterprise Products Partners LP (Master Limited Partnerships) | 11.4 | |||
Shell Midstream Partners LP (Master Limited Partnerships) | 10.9 | |||
Western Gas Equity Partners LP (Master Limited Partnerships) | 9.8 | |||
Tesoro Logistics LP (Master Limited Partnerships) | 9.5 | |||
MPLX LP (Master Limited Partnerships) | 8.9 | |||
Dynagas LNG Partners LP (Master Limited Partnerships) | 8.2 | |||
EnLink Midstream Partners LP (Master Limited Partnerships) | 7.7 | |||
Kinder Morgan, Inc. (Common Stocks) | 7.4 |
(1) | Holdings are calculated as a percentage of total net assets. |
(2) | Excludes the Fund’s cash equivalent investments. |
Semi-Annual Report | 1 |
Table of Contents
INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 | Highland Energy MLP Fund |
Shares | Value ($) | |||||||
| Common Stocks - 26.6% |
| ||||||
ENERGY - 26.6% | ||||||||
77,774 | EnLink Midstream LLC | 874,957 | ||||||
91,049 | Kinder Morgan, Inc. | 1,626,135 | ||||||
35,689 | SemGroup Corp., Class A | 799,434 | ||||||
84,031 | Targa Resources Corp. | 2,509,166 | ||||||
|
| |||||||
5,809,692 | ||||||||
|
| |||||||
Total Common Stocks | 5,809,692 | |||||||
|
| |||||||
| Master Limited Partnerships - 99.2% |
| ||||||
ENERGY - 99.2% | ||||||||
35,826 | Crestwood Equity Partners LP | 418,089 | ||||||
157,528 | Dynagas LNG Partners LP | 1,795,819 | ||||||
199,783 | Energy Transfer Equity LP | 1,424,453 | ||||||
76,849 | Energy Transfer Partners LP | 2,485,297 | ||||||
139,040 | EnLink Midstream Partners LP | 1,678,213 | ||||||
100,810 | Enterprise Products Partners LP | 2,481,942 | ||||||
65,241 | MPLX LP | 1,937,005 | ||||||
41,889 | NGL Energy Partners LP | 315,005 | ||||||
12,130 | Plains All American Pipeline LP | 254,366 | ||||||
148,751 | Plains GP Holdings LP, Class A | 1,292,646 | ||||||
64,962 | Shell Midstream Partners LP | 2,378,259 | ||||||
33,500 | Suburban Propane Partners LP | 1,001,315 | ||||||
45,497 | Tesoro Logistics LP | 2,077,393 | ||||||
60,132 | Western Gas Equity Partners LP | 2,143,105 | ||||||
|
| |||||||
21,682,907 | ||||||||
|
| |||||||
Total Master Limited Partnerships | 21,682,907 | |||||||
|
| |||||||
| Warrants (a) - 0.3% |
| ||||||
ENERGY - 0.3% | ||||||||
1,578,481 | Kinder Morgan, Inc., expires 05/25/2017 | 57,615 | ||||||
|
| |||||||
Total Warrants | 57,615 | |||||||
|
| |||||||
| Cash Equivalents - 1.8% |
| ||||||
391,877 | State Street Institutional Liquid Reserves Fund | 391,877 | ||||||
|
| |||||||
Total Cash Equivalents | 391,877 | |||||||
|
| |||||||
| Total Investments - 127.9% | 27,942,091 | ||||||
|
| |||||||
| (Cost $55,420,198) | |||||||
| Other Assets & Liabilities, Net - (27.9)% | (6,093,677 | ) | |||||
|
| |||||||
| Net Assets - 100.0% | 21,848,414 | ||||||
|
|
(a) | Non-income producing security. |
2 | See accompanying Notes to Financial Statements. |
Table of Contents
STATEMENTS OF ASSETS AND LIABILITIES
As of March 31, 2016 (unaudited) | Highland Energy MLP Fund |
($) | ||||
Assets | ||||
Investments, at value | 27,550,214 | |||
|
| |||
Total Investments, at value | 27,550,214 | |||
Cash equivalents (Note 2) | 391,877 | |||
Restricted Cash — Written Options (Note 2) | 181 | |||
Receivable for: | ||||
Dividends | 180 | |||
Investment advisory and administration fees (Note 7) | 16,641 | |||
Fund shares sold | 37,147 | |||
Net deferred tax asset (Note 5) | 1,930,830 | |||
Prepaid expenses and other assets | 38,279 | |||
|
| |||
Total assets | 29,965,349 | |||
|
| |||
Liabilities | ||||
Notes payable (Note 6) | 8,100,000 | |||
Payable for: | ||||
Fund shares redeemed | 5,628 | |||
Trustees’ fees | 1,102 | |||
Distribution and shareholder service fees (Note 7) | 350 | |||
Transfer agent fees | 1,579 | |||
Interest expense (Note 6) | 1,102 | |||
Accrued expenses and other liabilities | 7,174 | |||
|
| |||
Total liabilities | 8,116,935 | |||
|
| |||
Net Assets | 21,848,414 | |||
|
| |||
Net Assets Consist of: | ||||
Par value (Note 1) | 6,346 | |||
Paid-in capital | 65,022,748 | |||
Accumulated net investment gain (loss), net of income taxes | (738,799 | ) | ||
Accumulated net realized loss from investments, net of income taxes | (17,023,371 | ) | ||
Net unrealized appreciation (depreciation) on investments, net of income taxes | (25,418,510 | ) | ||
|
| |||
Net Assets | 21,848,414 | |||
|
| |||
Investments, at cost | 55,028,321 | |||
Cash equivalents, at cost (Note 2) | 391,877 | |||
Class A: | ||||
Net assets | 4,303,145 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 1,246,801 | |||
|
| |||
Net asset value per share | 3.45 | |||
|
| |||
Class C: | ||||
Net assets | 2,250,866 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 653,221 | |||
|
| |||
Net asset value and offering price per share | 3.45 | |||
|
| |||
Class Y: | ||||
Net assets | 15,294,403 | |||
Shares outstanding ($0.001 par value; unlimited shares authorized) | 4,446,429 | |||
|
| |||
Net asset value, offering and redemption price per share | 3.44 | |||
|
|
See accompanying Notes to Financial Statements. | 3 |
Table of Contents
For the six months ended March 31, 2016 (unaudited) | Highland Energy MLP Fund |
($) | ||||
Investment Income | ||||
Income: | ||||
Dividends and distributions | 1,679,114 | |||
Return of capital (Note 2) | (1,511,203 | ) | ||
Interest | 531 | |||
Other income | 9,465 | |||
|
| |||
Total Income | 177,907 | |||
|
| |||
Expenses: | ||||
Investment advisory (Note 7) | 202,875 | |||
Administration fees (Note 7) | 40,575 | |||
Distribution and shareholder service fees: (Note 7) | ||||
Class A | 7,774 | |||
Class C | 12,284 | |||
Class R | 19 | |||
Transfer agent fees | 9,100 | |||
Trustees fees (Note 7) | 2,398 | |||
Accounting services fees | 10,525 | |||
Audit fees | 60,827 | |||
Legal fees | 38,910 | |||
Registration fees | 34,879 | |||
Insurance | 2,913 | |||
Reports to shareholders | 8,675 | |||
Interest expense (Note 6) | 89,510 | |||
Commitment fees-credit agreement (Note 6) | 418 | |||
Other | 15,521 | |||
|
| |||
Total operating expenses before waiver and reimbursement (Note 7) | 537,203 | |||
Less: Expenses waived or borne by the adviser and administrator | (255,203 | ) | ||
|
| |||
Net operating expenses | 282,000 | |||
|
| |||
Net investment loss | (104,093 | ) | ||
|
| |||
Net Realized Gain (Loss) on Investments and Foreign Currencies | ||||
Investments | (16,277,190 | ) | ||
Written options contracts (Note 3) | 45,063 | |||
Change in unrealized appreciation (depreciation) on: | ||||
Investments | 536,388 | |||
Written options contracts (Note 3) | (44,223 | ) | ||
Deferred tax expense (Note 5) | (1,956,932 | ) | ||
|
| |||
Net realized and unrealized gain (loss) on investments | (17,696,894 | ) | ||
|
| |||
Total increase (decrease) in net assets resulting from operations | (17,800,987 | ) | ||
|
|
4 | See accompanying Notes to Financial Statements. |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS
Highland Energy MLP Fund |
Six Months Ended March 31, 2016 (unaudited) ($) | Year Ended September 30, 2015 ($) | |||||||
Increase (Decrease) in Net Assets | ||||||||
Operations: | ||||||||
Net investment loss | (104,093 | ) | (505,325 | ) | ||||
Net realized gain (loss) on investments, net of income taxes | (16,232,127 | ) | (838,902 | ) | ||||
Net increase (decrease) in unrealized appreciation (depreciation) on investments, net of income taxes | (1,464,767 | ) | (25,744,089 | ) | ||||
|
|
|
| |||||
Net increase (decrease) from operations | (17,800,987 | ) | (27,088,316 | ) | ||||
|
|
|
| |||||
Distributions to shareholders from: | ||||||||
Return of Capital | ||||||||
Class A | (365,149 | ) | (457,222 | ) | ||||
Class C | (128,149 | ) | (87,820 | ) | ||||
Class R | (414 | ) | (7,813 | ) | ||||
Class Y | (1,191,491 | ) | (2,048,106 | ) | ||||
|
|
|
| |||||
Total distributions | (1,685,203 | ) | (2,600,961 | ) | ||||
|
|
|
| |||||
Decrease in net assets from operations and distributions | (19,486,190 | ) | (29,514,095 | ) | ||||
|
|
|
| |||||
Share transactions: | ||||||||
Proceeds from sale of shares | ||||||||
Class A | 1,392,754 | 19,780,466 | ||||||
Class C | 2,809,015 | 3,958,426 | ||||||
Class R | — | 565,235 | ||||||
Class Y | 3,624,668 | 39,361,121 | ||||||
Value of distributions reinvested | ||||||||
Class A | 281,297 | 347,722 | ||||||
Class C | 114,886 | 71,959 | ||||||
Class R | 414 | 7,813 | ||||||
Class Y | 1,184,312 | 2,041,279 | ||||||
Cost of shares redeemed | ||||||||
Class A | (2,827,667 | ) | (6,814,827 | ) | ||||
Class C | (1,417,149 | ) | (362,298 | ) | ||||
Class R | (14,838 | ) | (505,321 | ) | ||||
Class Y | (4,636,751 | ) | (20,941,875 | ) | ||||
|
|
|
| |||||
Net increase (decrease) from shares transactions | 510,941 | 37,509,699 | ||||||
|
|
|
| |||||
Total increase (decrease) in net assets | (18,975,249 | ) | 7,820,422 | |||||
Net Assets | ||||||||
Beginning of period | 40,823,663 | 33,003,241 | ||||||
|
|
|
| |||||
End of period | 21,848,414 | 40,823,663 | ||||||
|
|
|
| |||||
Accumulated net investment loss | (738,799 | ) | (634,706 | ) | ||||
|
|
|
|
See accompanying Notes to Financial Statements. | 5 |
Table of Contents
STATEMENTS OF CHANGES IN NET ASSETS (continued)
Highland Energy MLP Fund |
Six Months Ended March 31, 2016 (unaudited) | Year Ended September 30, 2015 | |||||||
CAPITAL STOCK ACTIVITY - SHARES | ||||||||
Class A: | ||||||||
Shares sold | 292,098 | 1,885,039 | ||||||
Issued for distribution reinvested | 59,058 | 34,599 | ||||||
Shares redeemed | (558,573 | ) | (692,059 | ) | ||||
|
|
|
| |||||
Net increase (decrease) in fund shares | (207,417 | ) | 1,227,579 | |||||
|
|
|
| |||||
Class C: | ||||||||
Shares sold | 561,810 | 370,623 | ||||||
Issued for distribution reinvested | 26,742 | 7,465 | ||||||
Shares redeemed | (319,704 | ) | (34,116 | ) | ||||
|
|
|
| |||||
Net increase in fund shares | 268,848 | 343,972 | ||||||
|
|
|
| |||||
Class R: | ||||||||
Shares sold | — | 49,923 | ||||||
Issued for distribution reinvested | 93 | 711 | ||||||
Shares redeemed | (2,932 | ) | (48,885 | ) | ||||
|
|
|
| |||||
Net increase (decrease) in fund shares | (2,839 | ) | 1,749 | |||||
|
|
|
| |||||
Class Y: | ||||||||
Shares sold | 688,840 | 3,665,318 | ||||||
Issued for distribution reinvested | 265,397 | 198,772 | ||||||
Shares redeemed | (859,094 | ) | (1,948,335 | ) | ||||
|
|
|
| |||||
Net increase in fund shares | 95,143 | 1,915,755 | ||||||
|
|
|
|
6 | See accompanying Notes to Financial Statements. |
Table of Contents
For the Six Months Ended March 31, 2016 (Unaudited) | Highland Energy MLP Fund |
($) | ||||
Cash Flows Used for Operating Activities: | ||||
Net decrease in net assets resulting from operations | $ | (17,800,987 | ) | |
Adjustments to Reconcile Net Investment Income to Net Cash Provided by Operating Activities Operating Activities: | ||||
Purchases of investment securities from unaffiliated issuers | (9,335,951 | ) | ||
Proceeds from disposition investment securities from unaffiliated issues | 17,273,623 | |||
Proceeds from return of capital distributions | 1,511,203 | |||
Proceeds from sales of short-term portfolio investments, net | 134,470 | |||
Increase in restricted cash | (181 | ) | ||
Net realized loss on investments | 16,277,190 | |||
Net realized gain on written options contracts | (45,063 | ) | ||
Net change in unrealized appreciation on investments | (536,388 | ) | ||
Net change in unrealized depreciation on written options contracts | 44,223 | |||
Decrease in receivable for net deferred tax asset | 1,956,932 | |||
Decrease in receivable for dividends and interest | 201 | |||
Increase in investment advisory and administration fees receivable | (16,641 | ) | ||
Decrease in other assets | 973 | |||
Decrease in due to broker | (219 | ) | ||
Decrease in payables to related parties | (34,663 | ) | ||
Increase in payables for trustees’ fees | 1,102 | |||
Decrease in payable for distribution and shareholder service fees | (130 | ) | ||
Decrease in payable to transfer fees | (2,072 | ) | ||
Decrease in payable for interest expense | (21,842 | ) | ||
Decrease in payable for commitment fees | (813 | ) | ||
Decrease in accrued expenses and other liabilities | (81,484 | ) | ||
|
| |||
Net cash flow provided by operating activities | 9,323,483 | |||
|
| |||
Cash Flows Used In Financing Activities: | ||||
Decrease in notes payable | (7,400,000 | ) | ||
Distributions paid in cash | (104,294 | ) | ||
Payments on shares redeemed | (9,612,213 | ) | ||
Proceeds from shares sold | 7,793,020 | |||
|
| |||
Net cash flow used in financing activities | (9,323,487 | ) | ||
|
| |||
Net decrease in Cash | (4 | ) | ||
|
| |||
Cash: | ||||
Beginning of period | 4 | |||
|
| |||
End of period | $ | 0 | ||
|
| |||
Supplemental disclosure of cash flow information: | ||||
Reinvestment of distributions | $ | 1,580,909 | ||
|
| |||
Cash paid during the period for interest | $ | 111,352 | ||
|
| |||
Cash paid during the period for commitment fees | $ | 1,231 | ||
|
|
See accompanying Notes to Financial Statements. | 7 |
Table of Contents
Highland Energy MLP Fund, Class A |
For the Period Ended March 31, 2016 | For the Year Ended | For the Period Ended September 30, 2012(a) | ||||||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2013 | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 6.58 | $ | 12.17 | $ | 10.32 | $ | 10.98 | $ | 10.00 | ||||||||||
Income from Investment Operations: | ||||||||||||||||||||
Net investment income/(loss)(b) | (0.02 | ) | (0.12 | ) | (0.13 | ) | (0.08 | ) | 0.01 | |||||||||||
Net realized and unrealized gain/(loss) | (2.84 | ) | (4.94 | ) | 2.52 | 1.06 | 1.02 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total from investment operations | (2.86 | ) | (5.06 | ) | 2.39 | 0.98 | 1.03 | |||||||||||||
Less Distributions Declared to Shareholders: |
| |||||||||||||||||||
From earnings and profits | — | — | (0.09 | ) | (1.32 | ) | (0.05 | ) | ||||||||||||
From return of capital | (0.27 | ) | (0.53 | ) | (0.45 | ) | (0.32 | ) | — | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total distributions declared to shareholders | (0.27 | ) | (0.53 | ) | (0.54 | ) | (1.64 | ) | (0.05 | ) | ||||||||||
Net Asset Value, End of Period | $ | 3.45 | $ | 6.58 | $ | 12.17 | $ | 10.32 | $ | 10.98 | ||||||||||
Total Return(c) | (44.34 | )%(d) | (43.12 | )% | 23.83 | % | 10.07 | % | 10.31 | %(d) | ||||||||||
Ratios to Average Net Assets(e)/Supplemental Data: |
| |||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 4,303 | $ | 9,575 | $ | 2,758 | $ | 38 | $ | 11 | ||||||||||
Total operating expenses | 3.33 | % | 2.05 | % | 3.02 | % | 20.12 | % | 6.88 | % | ||||||||||
Waiver/reimbursement | (1.28 | )% | (0.40 | )% | (1.57 | )% | (18.88 | )% | (4.63 | )% | ||||||||||
Net operating expenses(f) | 2.05 | % | 1.65 | % | 1.45 | % | 1.24 | % | 2.25 | % | ||||||||||
Dividends for short positions | — | — | — | — | 0.02 | % | ||||||||||||||
Net expenses(f) | 2.05 | % | 1.65 | % | 1.45 | % | 1.24 | % | 2.27 | % | ||||||||||
Income tax expense/(benefit) | 13.43 | % | (9.88 | )% | (0.39 | )%(g) | 6.18 | % | — | |||||||||||
Total expense, net of income taxes | 15.48 | % | (8.23 | )% | 1.06 | %(g) | 7.42 | % | 2.27 | % | ||||||||||
Net investment income/(loss), net of income taxes | (14.30 | )% | 8.76 | % | (0.68 | )%(g) | (0.74 | )% | 0.07 | % | ||||||||||
Portfolio turnover rate | 24 | %(d) | 33 | % | 40 | % | 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. |
(g) | Excludes income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation). For the year ended September 30, 2014, ratios including income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation)were the following: |
Income tax expense/(benefit) | 7.58 | % | ||
Total expense, net of income taxes | 9.03 | % | ||
Net investment income/(loss), net of income taxes | (8.65 | )% |
8 | See accompanying Notes to Financial Statements. |
Table of Contents
FINANCIAL HIGHLIGHTS
Highland Energy MLP Fund, Class C |
For the Period Ended March 31, 2016 | For the Year Ended | For the Period Ended September 30, 2012(a) | ||||||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2013 | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 6.56 | $ | 12.16 | $ | 10.34 | $ | 10.96 | $ | 10.00 | ||||||||||
Income from Investment Operations: | ||||||||||||||||||||
Net investment income/(loss)(b) | (0.04 | ) | (0.19 | ) | (0.20 | ) | (0.18 | ) | (0.05 | ) | ||||||||||
Net realized and unrealized gain/(loss) | (2.82 | ) | (4.94 | ) | 2.52 | 1.10 | 1.02 | |||||||||||||
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Total from investment operations | (2.86 | ) | (5.13 | ) | 2.32 | 0.92 | 0.97 | |||||||||||||
Less Distributions Declared to Shareholders: | ||||||||||||||||||||
From earnings and profits | — | — | (0.08 | ) | (1.22 | ) | (0.01 | ) | ||||||||||||
From return of capital | (0.25 | ) | (0.47 | ) | (0.42 | ) | (0.32 | ) | — | |||||||||||
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Total distributions declared to shareholders | (0.25 | ) | (0.47 | ) | (0.50 | ) | (1.54 | ) | (0.01 | ) | ||||||||||
Net Asset Value, End of Period | $ | 3.45 | $ | 6.56 | $ | 12.16 | $ | 10.34 | $ | 10.96 | ||||||||||
Total Return(c) | (44.41 | )%(d) | (43.55 | )% | 23.02 | % | 9.42 | % | 9.69 | %(d) | ||||||||||
Ratios to Average Net Assets(e)/Supplemental Data: |
| |||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 2,251 | $ | 2,523 | $ | 491 | $ | 20 | $ | 11 | ||||||||||
Total operating expenses | 4.09 | % | 2.80 | % | 3.69 | % | 20.61 | % | 7.53 | % | ||||||||||
Waiver/reimbursement | (1.29 | )% | (0.40 | )% | (1.59 | )% | (18.44 | )% | (4.63 | )% | ||||||||||
Net operating expenses(f) | 2.80 | % | 2.40 | % | 2.10 | % | 2.17 | % | 2.90 | % | ||||||||||
Dividends for short positions | — | — | — | — | 0.02 | % | ||||||||||||||
Net expenses(f) | 2.80 | % | 2.40 | % | 2.10 | % | 2.17 | % | 2.92 | % | ||||||||||
Income tax expense/(benefit) | 13.43 | % | (9.88 | )% | (0.39 | )%(g) | 6.18 | % | — | |||||||||||
Total expense, net of income taxes | 16.23 | % | (7.48 | )% | 1.71 | %(g) | 8.35 | % | 2.92 | % | ||||||||||
Net investment income/(loss), net of income taxes | (15.09 | )% | 8.02 | % | (1.27 | )%(g) | (1.68 | )% | (0.58 | )% | ||||||||||
Portfolio turnover rate | 24 | %(d) | 33 | % | 40 | % | 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. |
(g) | Excludes income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation). For the year ended September 30, 2014, ratios including income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation)were the following: |
Income tax expense/(benefit) | 7.58 | % | ||
Total expense, net of income taxes | 9.68 | % | ||
Net investment income/(loss), net of income taxes | (9.24 | )% |
See accompanying Notes to Financial Statements. | 9 |
Table of Contents
FINANCIAL HIGHLIGHTS
Highland Energy MLP Fund, Class Y |
For the Period Ended March 31, 2016 | For the Year Ended | For the Period Ended September 30, 2012(a) | ||||||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2013 | ||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 6.60 | $ | 12.21 | $ | 10.34 | $ | 10.99 | $ | 10.00 | ||||||||||
Income from Investment Operations: | ||||||||||||||||||||
Net investment income/(loss)(b) | (0.02 | ) | (0.09 | ) | (0.08 | ) | (0.07 | ) | 0.04 | |||||||||||
Net realized and unrealized gain/(loss) | (2.86 | ) | (4.97 | ) | 2.52 | 1.11 | 1.02 | |||||||||||||
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Total from investment operations | (2.88 | ) | (5.06 | ) | 2.44 | 1.04 | 1.06 | |||||||||||||
Less Distributions Declared to Shareholders: |
| |||||||||||||||||||
From earnings and profits | — | — | (0.09 | ) | (1.37 | ) | (0.07 | ) | ||||||||||||
From return of capital | (0.28 | ) | (0.55 | ) | (0.48 | ) | (0.32 | ) | — | |||||||||||
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Total distributions declared to shareholders | (0.28 | ) | (0.55 | ) | (0.57 | ) | (1.69 | ) | (0.07 | ) | ||||||||||
Net Asset Value, End of Period | $ | 3.44 | $ | 6.60 | $ | 12.21 | $ | 10.34 | $ | 10.99 | ||||||||||
Total Return(c) | (44.57 | )%(d) | (43.01 | )% | 24.25 | % | 10.62 | % | 10.63 | %(d) | ||||||||||
Ratios to Average Net Assets(e)/Supplemental Data: |
| |||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 15,294 | $ | 28,707 | $ | 29,741 | $ | 3,392 | $ | 4,193 | ||||||||||
Total operating expenses | 3.08 | % | 1.80 | % | 2.68 | % | 11.25 | % | 6.53 | % | ||||||||||
Waiver/reimbursement | (1.28 | )% | (0.40 | )% | (1.58 | )% | (10.05 | )% | (4.63 | )% | ||||||||||
Net operating expenses(f) | 1.80 | % | 1.40 | % | 1.10 | % | 1.20 | % | 1.90 | % | ||||||||||
Dividends for short positions | — | — | — | — | 0.02 | % | ||||||||||||||
Net expenses(f) | 1.80 | % | 1.40 | % | 1.10 | % | 1.20 | % | 1.92 | % | ||||||||||
Income tax expense/(benefit) | 13.43 | % | (9.88 | )% | (0.39 | )%(g) | 6.18 | % | — | |||||||||||
Total expense, net of income taxes | 15.23 | % | (8.48 | )% | 0.71 | %(g) | 7.38 | % | 1.92 | % | ||||||||||
Net investment income/(loss), net of income taxes | (14.08 | )% | 9.01 | % | (0.28 | )%(g) | (0.71 | )% | 0.42 | % | ||||||||||
Portfolio turnover rate | 24 | %(d) | 33 | % | 40 | % | 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. |
(g) | Excludes income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation). For the year ended September 30, 2014, ratios including income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation) were the following: |
Income tax expense/(benefit) | 7.58 | % | ||
Total expense, net of income taxes | 8.68 | % | ||
Net investment income/(loss), net of income taxes | (8.25 | )% |
10 | See accompanying Notes to Financial Statements. |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited)
March 31, 2016 | 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 seven portfolios that 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 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 Dividend Equity Fund was liquidated on January 25, 2016.
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 three share classes to investors namely Class A, Class C and Class Y Shares. The Fund previously offered Class R shares to investors, but this share class was liquidated March 15, 2016.
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 (“NAV”) 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 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 is an investment company that follows the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment
companies. 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.
Determination of Class Net Asset Values
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. Expenses of the Trust, other than those incurred by the specific portfolio, are allocated pro rata among the portfolios and share classes. Certain class specific expenses (such as distribution and shareholder service fees) are allocated to the class that incurs such expense.
Valuation of Investments
In computing the Fund’s net assets attributable to shares, securities with readily available market quotations on the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation (NASDAQ) or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies adopted by the Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management Fund Advisors, L.P. (the “Investment Adviser”) has determined to generally have the capability to provide appropriate pricing services and have been approved by the Board.
Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a pricing service or broker-dealer is
Semi-Annual Report | 11 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
“stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Fund’s NAV), will be valued by the Fund at fair value, as determined by the Fund’s Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, among other things,: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes and/or because of information relating to the value of the Fund’s portfolio securities as of the Fund’s period end that became available prior to the completion of this report that was not available at the time the Fund’s NAV as of its period end was published.
Fair Value Measurements
The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
Level 1 — | Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement; |
Level 2 — | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and |
Level 3 — | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information. |
The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser. The Pricing Committee meets monthly to review the proposed valuations for investments and financial Instruments and is responsible for evaluating the overall fairness and consistent application of established policies.
As of March 31, 2016, the Fund’s investments consisted of common stocks, master limited partnerships, warrants, and cash equivalents. If applicable, the fair values of the Fund’s common stocks, master limited partnerships, warrants and options that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange traded options are valued based on the last traded price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option. At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity,
12 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
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 the levels are recognized at the value at the end of the period.
A summary of the inputs used to value the Fund’s assets as of March 31, 2016 is as follows:
Total value at March 31, 2016 | Level 1 Quoted Price | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||||||||||||
Assets | ||||||||||||||||
Common Stocks(1) | $ | 5,809,692 | $ | 5,809,692 | $ | — | $ | — | ||||||||
Master Limited Partnerships(1) | 21,682,907 | 21,682,907 | — | — | ||||||||||||
Warrants(1) | 57,615 | 57,615 | — | — | ||||||||||||
Cash Equivalents | 391,877 | 391,877 | — | — | ||||||||||||
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Total | $ | 27,942,091 | $ | 27,942,091 | $ | — | $ | — | ||||||||
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(1) | See Investment Portfolio detail for industry breakout. |
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) are determined based upon the specific identification method for both financial statement and U.S. federal income tax purposes.
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 the 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), 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.”
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.
Income Taxes
Since implementing the Fund’s revised strategy to concentrate in MLP investments, 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
Semi-Annual Report | 13 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
taxes. The Fund’s MLP investments operate in various state and local jurisdictions.
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 NAV, 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 balance will reduce the Fund’s NAV. 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 may record a valuation allowance, which would offset the value of some or all of the Fund’s deferred tax asset balance. The Fund assesses whether such valuation allowance is needed, considering all available 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 NAV; however, to the extent the final valuation allowance differs from the estimates of the Fund used in calculating the Fund’s daily NAV, the application of such final valuation allowance could have a material impact on the Fund’s NAV. 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 NAV 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 assets or liabilities. 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 assets or liabilities.
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 Fund’s federal and state tax returns for the years for which the applicable statues of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
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 period ended
14 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
March 31, 2016 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 $1,511,203 of dividends and distributions received from its investments.
Distributions to Shareholders
The Fund intends to make quarterly cash distributions, of all or substantially all cash distributions the Fund receives from its investments, after allowance for any fund level taxes or expenses, to its shareholders. Due to the tax treatment of the Fund’s allocations and distributions from MLPs, the Investment Adviser 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, (i.e., as between MLP equity securities and other investments), 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.
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 the 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 recognizing more gain or less loss, potentially increasing 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 NAV. Correspondingly, such amounts, once distributed, reduce the Fund’s NAV. In
addition, in the discretion of the Fund, the Fund may determine not to make distributions at one or more times during the year, including by reason of potential adverse tax consequences to shareholders.
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 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
Master Limited Partnerships, 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 treated as partnerships 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).
Semi-Annual Report | 15 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
Currently, most MLPs operate in the energy and/or natural resources sector.
Note 3. Derivative Transactions
The Fund is subject to equity securities risk, interest rate risk and currency risk in the normal course of pursuing its investment objectives. The Fund enters 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.
Options
The Fund may utilize options on securities or indices to varying degrees as part of its principal investment strategy. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. The Fund may hold options, write option contracts, or both.
If an option written by the Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected at such times as the Fund desires. In the case of an option written by the Fund, the Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if the cost of the closing option is more than the premium received from writing the option, the Fund will realize a capital loss.
Cash held as collateral for written options contracts is classified as restricted ash on the Statement of Assets and Liabilities. Restricted cash in the amount of $181 was held with the broker.
Transactions in written options for the six months ended March 31, 2016 were as follows:
Number of Contracts | Notional Value | Premium | ||||||||||
Outstanding, September 30, 2015 | 210 | $ | 1,365,000 | $ | 45,063 | |||||||
Call Options Expired | (210 | ) | (1,365,000 | ) | 45,063 | |||||||
|
|
|
|
|
| |||||||
Outstanding, March 31, 2016 | — | — | — |
Additional Derivative Information
The Fund adopted amendments to authoritative guidance on disclosures about derivative instruments and hedging activities which require that the Fund 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 effect of derivative instruments on the Statement of Operations for the six months ended March 31, 2016, is as follows:
Risk Exposure | Net Realized Gain/(Loss) on Derivatives | Net Change in Unrealized Appreciation/ (Depreciation) on Derivatives | ||||||
Equity Price Risk | $ | 45,063 | (1) | $ | (44,223 | )(2) |
(1) | Statement of Operations location: Realized gain (loss) on written options contracts. |
(2) | Statement of Operations location: Net change in unrealized appreciation/(depreciation) on written options contracts. |
For the six months ended March 31, 2016, the Fund’s average quarterly volume of derivative activity is as follows:
Fund | Units/ Contracts | |||
Written Options Contracts | 140 |
Note 4. Securities Lending
The Fund may make secured loans of its portfolio securities amounting to not more than 30% 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 policy, securities loans are made to borrowers pursuant to agreements requiring that loans be continuously secured by collateral in cash, securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, irrevocable letters of credit issued by a bank or forms of collateral acceptable under the
16 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
Fund’s securities lending agreement equal to at least 102% or 105% of the market value of the securities loaned, depending on the nature of the loaned securities and the collateral received, as set forth in the applicable securities lending agreement. 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 and receives a fee from the borrower.
Securities lending transactions are entered into pursuant to 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 generally provides for replacement of securities lent or the approximate value thereof. During the period ended March 31, 2016, the 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 U.S. federal income tax regulations which may differ from U.S. GAAP. These differences include (but are not limited to) differences with respect to the treatment of 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. 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 | $ | — | $ | (1,853,813 | ) | $ | (1,853,813 | ) | ||||
State Tax (Expense)/ Benefit | — | (103,119 | ) | (103,119 | ) | |||||||
|
|
|
|
|
| |||||||
Total | $ | — | $ | (1,956,932 | ) | $ | (1,956,932 | ) | ||||
|
|
|
|
|
|
Deferred income taxes reflect (i) taxes on unrealized gains/ (losses), which are attributable to the difference between fair market value and tax basis; (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.
Total income taxes were different from the amount computed by applying the federal statutory income tax rate of 34% to the net investment loss and realized and unrealized gains (losses) on investments before taxes for the period ended March 31, 2016 as follows:
2016 | ||||
Tax at U.S. federal statutory income tax rate | (34.00 | )% | ||
State income taxes, net of federal benefit | (1.89 | ) | ||
Dividends received deduction | (0.79 | ) | ||
Change in valuation allowance | 49.07 | |||
Other | (0.04 | ) | ||
Effective Income Tax Rate | 12.35 | % |
For the period ended March 31, 2016 the Fund’s effective tax rate of 12.35% was less than the combined federal and state tax rate of 35.89% due in large part to the change in valuation allowance.
As of March 31, 2016 significant components of the Fund’s net deferred tax assets were as follows:
Total | ||||
Deferred Tax Assets: | ||||
Net unrealized losses (gains) on investments | $ | 8,799,473 | (1) | |
Net operating loss carryforward | 1,136,976 | |||
Capital loss carryforward | 6,392,969 | |||
|
| |||
Total deferred tax assets | 16,329,418 | |||
|
| |||
Valuation allowance | (14,398,588 | ) | ||
|
| |||
Total Net Deferred Tax Asset | $ | 1,930,830 | ||
|
|
(1) | $5,324,501 pertains to unrealized losses (gains) on corporate investments. |
As of March 31, 2016, the Fund has tax attributes that carry forward for varying periods. The Fund’s federal net operating loss carryforward of $3,167,835 predominately originated during 2014 - 2016. The net operating loss carryforward generally can be carried back two years or forward twenty years to reduce the Fund’s net income realized during those other years. The Fund’s capital loss
Semi-Annual Report | 17 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
carryforwards of $17,812,049 originated in 2014 - 2016. 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. 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.
The Fund periodically reviews the recoverability of its deferred tax assets based on the weight of available evidence and the criteria for whether it is more likely than not that the asset would be utilized under ASC 740. In analyzing the potential need for a valuation allowance, the Fund considered the fact that it has incurred a cumulative loss over the three year period ended March 31, 2016. A significant portion of the Fund’s net pre-tax losses related to unrealized depreciation of investments arose during the fourth quarter of the 2015 fiscal year and first quarter of the 2016 fiscal year as a result of the decline in the overall financial, commodity and MLP markets.
The balance of the deferred tax asset is equal to the tax effected unrealized losses on the Fund’s C-corporation investments. When assessing the recoverability of its deferred tax asset, significant weight was given to the Fund’s forecast of future taxable income, which is based principally on the expected continuation of MLP cash distributions at or near current levels. Due to the tax treatment of the Fund’s partnership investments, Management has been able to forecast future taxable income of the appropriate character from those investments. This expected taxable income is sufficient to more likely than not realize a portion of the benefit of the unrealized losses of the C-corporation investments. Recovery of the balance of the deferred tax asset is dependent on continued payment of the MLP cash distributions at or near current levels in the future and the resultant generation of taxable income. Management has determined that it is more likely than not that the balance of the deferred tax asset will be realized through expected future taxable income of the appropriate character.
The Fund will review its financial forecasts in relation to actual results and expected trends on an ongoing basis. Unexpected significant decreases in MLP cash distributions or significant further declines in the fair value of its portfolio of investments may change the Fund’s assessment regarding the recoverability of the balance of the deferred tax asset and would likely result in additional valuation allowance. If additional valuation allowance is required to reduce or a reduction in valuation allowance is required to increase the balance of the deferred tax asset in the future,
it could have a material impact on the Fund’s net asset value and results of operations in the period it is recorded.
The tax character of distributions paid during the period/year ended March 31, 2016 and September 30, 2015 was as follows:
Year | Return of Capital | Earnings & Profit | ||||||
2016 | $ | 1,685,203 | $ | — | ||||
2015 | 2,600,961 | — |
Unrealized appreciation and depreciation as of March 31, 2016, based on cost of investments for U.S. federal income tax purposes is:
Gross Appreciation | Gross Depreciation | Net Appreciation/ (Depreciation) | Net (Depreciation) | Cost | ||||||||||||||
$ | — | $ | 24,893,964 | $ | (24,893,964 | ) | $ | (22,963,118 | ) | $ | 52,444,178 |
Note 6. 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. At the time the Fund entered into the Unsecured Credit Agreement, the Fund’s aggregate borrowings could not exceed $25,000,000. Interest is charged to the Fund based on its borrowings at a rate equal to 1.25% plus the greater of the Federal Funds Effective Rate or the LIBOR. In addition, the Fund agreed to pay commitment fee expenses of 0.10% on the undrawn amounts, which are included in “Commitment fees-credit agreement” on the Statement of Operations. On May 23, 2014, the Unsecured Credit Agreement was amended to extend the expiration date to May 22, 2015. On July 31, 2014, the Unsecured Credit Agreement was amended to include the addition of a new fund, Highland Opportunistic Credit Fund. On October 27, 2014, the Unsecured Credit Agreement was increased to $150,000,000. Additionally, the Fund agreed to pay increased commitment fee expenses of 0.15% on undrawn amounts. On May 22, 2015, the Unsecured Credit Agreement was amended to extend the expiration date to May 20, 2016 and to increase commitment fee expenses to 0.20% on undrawn amounts. On August 31, 2015 the Unsecured Credit Agreement was amended to include the addition of three new funds; (a) Highland HFR Equity Hedge ETF, (b) Highland HFR Event-Driven ETF and (c) Highland HFR Global ETF, each a series of Highland Funds I. On March 2, 2016 the Fund was removed from the Unsecured Credit Agreement.
Effective March 2, 2016, the Fund entered into a $25,000,000 Master Margin Loan Agreement (the
18 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
“Agreement”) with The Bank of New York Mellon. Interest is charged on the funded amount at a rate per annum on each day equal to LIBOR plus 1.10%. Interest is charged at a rate of 0.40% for unfunded amounts. The Agreement has a maturity date of March 1, 2017. Included in the Statement of Operations is $89,510 of interest expense related to the Unsecured Credit Agreement and $418 of commitment fees. For the period ended March 31, 2016, the Fund’s average daily note balance was $14,189,525, at a weighted average interest rate of 1.53% for the days outstanding.
Note 7. Transactions with Affiliates & Expenses Incurred by the Fund
Investment Advisory and Administration Fees
For its investment advisory and administrative services, the Fund pays the Investment Adviser 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 the Investment Adviser for the period ended March 31, 2016 was 1.00%.
Expense Limits and Fee Reimbursements
The Investment Adviser 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, as amended, taxes, such as deferred tax expenses, dividend expenses on short sales, interest payments, 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 attributable to any class of the Fund (the “Expense Cap”). The Expense Cap will continue through at least January 31, 2017, and may not be terminated prior to this date without the action or consent of the Board.
The Trust, on behalf of the Fund, has contractually agreed to pay the Investment Adviser all amounts previously paid, waived or reimbursed by the Investment Adviser with respect to the Fund pursuant to its Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of the Fund, in the aggregate, would not cause the Fund’s total annual operating expenses in any such year to exceed the amount of its Expense Cap, and provided further that no additional payments by the Trust will
be made with respect to amounts paid, waived or reimbursed by the Investment Adviser more than 36 months after the date such amounts were paid, waived or reimbursed by the Investment Adviser. The Investment Adviser may not recoup any amounts previously paid, waived or reimbursed under an Expense Cap before payment of the Fund’s operating expenses for the year in which the Investment Adviser intends to recoup such amounts. There can be no assurance that this fee reduction will be sufficient to avoid any loss. On March 31, 2016, the amount subject to possible future recoupment under the Fund’s expense limitation agreement is $286,066 expiring in 2016, $156,187 expiring in 2017, $101,941 expiring in 2018, and $157,627 expiring in 2019.
The Investment Adviser 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, 2016, the Investment Adviser waived $29,007 in administrative fees for the Fund. This administration fee waiver is voluntary and is subject to termination at any time by the Investment Adviser without notice.
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 overseen by such Trustee based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser or its affiliated advisers and NexPoint Capital, Inc,. as closed-end management investment company that has elected to be treated as a business development company under the 1940 Act as of the date of this report. Although the Fund believes that Mr. Powell is technically no longer an “interested person” of the Fund, in light of his previous employment with the Investment Adviser and an affiliate of the Investment Adviser, as well as his ongoing provision of consulting services to the Investment Adviser and affiliates of the Investment Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Fund. Therefore, the Fund intends to treat Mr. Powell as an “interested person” of the Fund for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation).
The Fund pays no compensation to its officers, all of whom are employees of the Investment Adviser or one of its affiliates.
Semi-Annual Report | 19 |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
Distribution and Shareholder Service Fees
The Fund has a distribution and shareholder service plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. The Plan requires the payment of a monthly service fee to Highland Capital Funds Distributor, Inc. (the “Underwriter”) at an annual rate of 0.25% of the average daily net assets attributable to Class A and Class C 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 Fund is not currently authorized by the Board to charge such fees for Class A shares but may at any time without shareholder approval. 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. Currently Class Y shares are not subject to a 12b-1 fee.
Note 8. Disclosure of Significant Risks and Contingencies
The primary risks of investing in the Fund are described below in alphabetical order:
Counterparty Risk
Counterparty 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 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 risk associated with such transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Industry Concentration Risk
The Fund may be particularly susceptible to economic, political or regulatory events affecting those industries in which the Fund focuses its investments. Because the Fund normally invests at least 80% of the value of its assets in MLP investments, the Fund’s performance largely depends on the overall condition of these industries and the Fund is susceptible to economic, political and regulatory risks or other occurrences associated with these industries.
MLP Risk
The Fund intends to invest substantially in MLP units. Holders of MLP units have limited control and voting rights on matters affecting the partnership. Holders of units issued by a MLP are exposed to a remote possibility of liability for
all of the obligations of that MLP in the event that a court determines that the rights of the holders of MLP units to vote to remove or replace the general partner of that MLP, to approve amendments to that MLP’s partnership agreement, or to take other action under the partnership agreement of that MLP would constitute “control” of the business of that MLP, or a court or governmental agency determines that the MLP is conducting business in a state without complying with the partnership statute of that state. Holders of MLP units are also exposed to the risk that they will be required to repay amounts to the MLP that are wrongfully distributed to them. Investments in MLP units also present special tax risks.
Leverage Risk
The Fund may use leverage for investment purposes to create opportunities for greater total returns. Any investment income or gains earned with respect to the amounts borrowed that are in excess of the interest that is due on the borrowing will augment the Fund’s income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the Fund’s shares may decrease more quickly than would otherwise be the case. Interest payments and fees incurred in connection with such borrowings will reduce the amount of net income available for payment to Fund shareholders.
Note 9. Investment Transactions
Purchase and 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 six months ended March 31, 2016, were as follows:
Other Securities | ||
Purchases | Sales | |
$ 9,335,951 | $ 17,273,623 |
Note 10. 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, 2016 were:
Number | % of Fund Held | |
2 | 60.38% |
Investment activities of these shareholders could have a material impact on the Fund.
20 | Semi-Annual Report |
Table of Contents
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016 | Highland Energy MLP Fund |
Note 11. New Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. For public entities this update will be effective for interim and annual periods beginning after December 15, 2015. ASU 2015-02 will modify the evaluation of limited partnerships and similar legal entities as variable interest entities (VIEs). This update will eliminate the presumption that a general partner should consolidate a limited partnership. This update also affects the consolidation analysis of reporting entities that are involved with VIEs. The update also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to Rule 2a-7 of the investment Company Act of 1940 for registered money market funds. Management is currently evaluating the impact of the provisions of this new guidance on the Fund’s financial position.
In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Interest — Imputation of Interest to update the guidance to include SEC staff views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC has indicated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public entities, these updates are effective for interim and annual periods beginning after December 15, 2015. Management is currently evaluating the implication of this update on the Fund’s financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. Sufficient information must be provided to permit reconciliation of the fair value of assets categorized within the fair value hierarchy to the amounts presented in the Statements of Assets and Liabilities. For public entities this guidance is required to be presented for interim and annual periods beginning after December 15, 2015. Management is currently evaluating the implication, if any, of the additional disclosure requirements and its impact on the Fund’s financial statements.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and measurement of Financial Assets and Liabilities. The amendments in this update make improvements to the requirements for accounting for equity investments and simplify the impairment assessment of equity investments. For public entities this update will be effective for fiscal years beginning after December 15, 2017. Management is currently evaluating the impact of this new guidance on the Fund’s financial position.
In March 2016, the FASB issued Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. Management is currently evaluating the impact of this new guidance on the Fund’s financial position.
Note 12. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events.
Semi-Annual Report | 21 |
Table of Contents
ADDITIONAL INFORMATION (unaudited)
March 31, 2016 | 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 take contrary provisions 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 is prepared to invest in, or desires 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 transaction and ongoing expenses. Transaction expenses including sales charges on purchase payments, reinvested dividends (or other distributions), and redemption fees directly reduce the investment return of the Fund. Ongoing costs include portfolio management fees, distribution and service fees, professional fees, administrative fees and other Fund expenses. The following example is intended to help you understand your ongoing costs (in U.S. dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in each share class of the Fund during the period. The information in the following table is based on an investment of $1,000, which is invested at the beginning of
the period and held for the year ended September 30, 2015.
Actual Expenses: The first section of the table provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, 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 given for your class under the heading “Expenses Paid During the Period.”
Hypothetical Example for Comparison Purposes: The second section 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. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholders reports of other funds.
Please note that the expenses shown in the table do not reflect any transaction costs, such as sales charges or redemption fees, or deferred income tax benefit/(expense).
Beginning | Ending | Annualized | Expenses | Actual | ||||||||||||||||
Highland Energy MLP Fund |
| |||||||||||||||||||
Actual Fund Return |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 556.60 | 2.05 | % | $ | 7.98 | (44.34 | )% | ||||||||||
Class C | 1,000.00 | 555.90 | 2.80 | % | 10.89 | (44.41 | )% | |||||||||||||
Class Y | 1,000.00 | 554.30 | 1.80 | % | 6.99 | (44.57 | )% | |||||||||||||
Hypothetical 5% Return (before expenses) |
| |||||||||||||||||||
Class A | $ | 1,000.00 | $ | 1,014.75 | 2.05 | % | $ | 10.33 | 5.00 | % | ||||||||||
Class C | 1,000.00 | 1,011.00 | 2.80 | % | 14.08 | 5.00 | % | |||||||||||||
Class Y | 1,000.00 | 1,016.00 | 1.80 | % | 9.07 | 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 (183/366). |
22 | Semi-Annual Report |
Table of Contents
Highland Funds
c/o BFDS
30 Dan Road
Canton, MA 02021-2809
Highland Energy MLP Fund | Semi-Annual Report, March 31, 2016 |
www.highlandfunds.com | HLC-MLP-SEMI-03/16 |
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 Reports 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 Highland Fund II’s (the “Registrant”) Board of Trustees.
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 1940 Act (17 CFR 270.30a-3(c)) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the Registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
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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) | Certification pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 is attached hereto. |
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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/ J. Bradley Ross | |
J. Bradley Ross | ||
President and Principal Executive Officer |
Date: May 31, 2016
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/ J. Bradley Ross | |
J. Bradley Ross | ||
President and Principal Executive Officer |
Date: May 31, 2016
By (Signature and Title): | /s/ Brian Mitts | |
Brian Mitts | ||
Secretary, Principal Accounting Officer and Principal Financial Officer |
Date: May 31, 2016