As a shareholder of the Fund, you incur two types of cost: (1) transaction costs, including redemption/exchange fees; and (2) ongoing costs, including management fees; to the extent applicable, distribution (12b-1) fees and/or shareholder services fees; and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2005 to April 30, 2006.
The first section of the table below 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 incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
The second section of the table below 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption/exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
Principal
Amount | | | | | Value |
|
| | | CORPORATE BONDS--91.7% | | | |
| | | Aerospace / Defense--2.1% | | | |
$ | 75,000 | | Alliant Techsystems, Inc., Sr. Sub. Note, 6.75%, 4/1/2016 | | $ | 74,250 |
| 75,000 | 1,2 | DRS Technologies, Inc., Sr. Note, 6.625%, 2/1/2016 | | | 74,625 |
| 50,000 | | K&F Acquisition, Inc., Sr. Sub. Note, 7.75%, 11/15/2014 | | | 51,375 |
| 100,000 | | L-3 Communications Corp., Sr. Sub. Note, 6.125%, 1/15/2014 | | | 96,500 |
| 100,000 | | L-3 Communications Holdings, Inc., Sr. Sub. Note, 5.875%, 1/15/2015 | | | 94,500 |
| 75,000 | | TransDigm, Inc., Sr. Sub. Note, 8.375%, 7/15/2011 | | | 79,125 |
|
| | | TOTAL | | | 470,375 |
|
| | | Automotive--5.5% | | | |
| 50,000 | | Advanced Accessory Systems LLC, Sr. Note, 10.75%, 6/15/2011 | | | 39,750 |
| 100,000 | | Cooper-Standard Automotive, Inc., Sr. Sub. Note, 8.375%, 12/15/2014 | | | 82,000 |
| 150,000 | | Ford Motor Co., Unsecd. Note, 7.45%, 7/16/2031 | | | 110,250 |
| 275,000 | | Ford Motor Credit Co., Note, 7.25%, 10/25/2011 | | | 247,070 |
| 200,000 | | General Motors Acceptance Corp., 6.875%, 9/15/2011 | | | 187,565 |
| 150,000 | | General Motors Acceptance Corp., 8.00%, 11/1/2031 | | | 142,604 |
| 125,000 | | General Motors Corp., Note, 8.375%, 7/15/2033 | | | 93,750 |
| 50,000 | | Stanadyne Corp., Sr. Sub. Note, 10.00%, 8/15/2014 | | | 46,250 |
| 50,000 | | Stanadyne Holdings, Inc., Sr. Disc. Note, 2/15/2015 | | | 25,750 |
| 50,000 | | Stoneridge, Inc., Company Guarantee, 11.50%, 5/1/2012 | | | 46,500 |
| 50,000 | | TRW Automotive, Inc., Sr. Note, 9.375%, 2/15/2013 | | | 54,000 |
| 50,000 | | TRW Automotive, Inc., Sr. Sub. Note, 11.00%, 2/15/2013 | | | 55,500 |
| 50,000 | | Tenneco Automotive, Inc., Sr. Sub. Note, 8.625%, 11/15/2014 | | | 50,875 |
| 75,000 | | United Components, Inc., Sr. Sub. Note, 9.375%, 6/15/2013 | | | 73,875 |
|
| | | TOTAL | | | 1,255,739 |
|
| | | Building Materials--2.2% | | | |
| 50,000 | | ERICO International Corp., Sr. Sub. Note, 8.875%, 3/1/2012 | | | 51,750 |
| 75,000 | | Goodman Global Holdings, Inc., Sr. Sub. Note, 7.875%, 12/15/2012 | | | 75,375 |
| 50,000 | | Norcraft Cos. LLC, Sr. Sub. Note, Series WI, 9.00%, 11/1/2011 | | | 52,500 |
| 100,000 | | Norcraft Holdings LP, Sr. Disc. Note, 0/9.75%, 9/1/2012 | | | 81,500 |
| 75,000 | | Nortek Holdings, Inc., Sr. Disc. Note, 0/10.75%, 3/1/2014 | | | 57,469 |
| 50,000 | | Nortek Holdings, Inc., Sr. Sub. Note, 8.50%, 9/1/2014 | | | 51,500 |
| 50,000 | | Texas Industries, Inc., Sr. Note, 7.25%, 7/15/2013 | | | 51,500 |
| 75,000 | | U.S. Concrete, Inc., Sr. Sub. Note, 8.375%, 4/1/2014 | | | 77,437 |
|
| | | TOTAL | | | 499,031 |
|
| | | CORPORATE BONDS--continued | | | |
| | | Chemicals--6.2% | | | |
$ | 50,000 | | Chemtura Corp., Sr. Note, 6.875%, 6/1/2016 | | $ | 50,106 |
| 75,000 | | Compass Minerals International, Inc., Sr. Disc. Note, 0/12.00%, 6/1/2013 | | | 68,625 |
| 100,000 | | Compass Minerals International, Inc., Sr. Disc. Note, 0/12.75%, 12/15/2012 | | | 95,500 |
| 155,000 | | Crystal US Holdings, Sr. Disc. Note, 10/1/2014 | | | 123,225 |
| 50,000 | | Crystal US Holdings, Sr. Sub. Note, 9.625%, 6/15/2014 | | | 55,250 |
| 50,000 | | Equistar Chemicals LP, Sr. Note, 10.125%, 9/1/2008 | | | 53,812 |
| 100,000 | | Equistar Chemicals LP, Sr. Note, 8.75%, 2/15/2009 | | | 105,125 |
| 125,000 | | Hexion U.S. Finance Corp., Sr. Secd. Note, 9.00%, 7/15/2014 | | | 129,687 |
| 125,000 | 1,2 | Invista, Unit, 9.25%, 5/1/2012 | | | 134,063 |
| 59,000 | | Koppers, Inc., Sr. Secd. Note, 9.875%, 10/15/2013 | | | 64,900 |
| 50,000 | | Nalco Co., Sr. Note, 7.75%, 11/15/2011 | | | 50,500 |
| 100,000 | | Nalco Co., Sr. Sub. Note, 8.875%, 11/15/2013 | | | 103,750 |
| 125,000 | 1,2 | Nell AF SARL, Sr. Note, 8.375%, 8/15/2015 | | | 124,531 |
| 50,000 | 1,2 | PQ Corp., Sr. Sub. Note, 7.50%, 2/15/2013 | | | 47,750 |
| 75,000 | | Polypore, Inc., Sr. Sub. Note, 8.75%, 5/15/2012 | | | 71,438 |
| 75,000 | | Union Carbide Corp., Deb., 7.50%, 6/1/2025 | | | 78,438 |
| 50,000 | 1,2 | VeraSun Energy Corp., Sr. Secd. Note, 9.875%, 12/15/2012 | | | 53,500 |
|
| | | TOTAL | | | 1,410,200 |
|
| | | Construction Machinery--0.5% | | | |
| 50,000 | | Case New Holland, Sr. Note, 9.25%, 8/1/2011 | | | 53,375 |
| 50,000 | | NationsRent Cos., Inc., Sr. Secd. Note, 9.50%, 10/15/2010 | | | 54,375 |
|
| | | TOTAL | | | 107,750 |
|
| | | Consumer Products--5.4% | | | |
| 100,000 | | AAC Group Holding Corp., Sr. Disc. Note, 0/10.25%, 10/1/2012 | | | 81,250 |
| 75,000 | | Alltrista Corp., Unsecd. Note, 9.75%, 5/1/2012 | | | 78,375 |
| 50,000 | | American Achievement Corp., Sr. Sub. Note, 8.25%, 4/1/2012 | | | 51,000 |
| 75,000 | | Ames True Temper, Inc., Sr. Sub. Note, 10.00%, 7/15/2012 | | | 63,187 |
| 50,000 | | Church and Dwight, Inc., Sr. Sub. Note, 6.00%, 12/15/2012 | | | 48,500 |
| 75,000 | | Doane Pet Care Co., Sr. Sub. Note, Series WI, 10.625%, 11/15/2015 | | | 91,875 |
| 325,000 | | Jostens Holding Corp., Discount Bond, 0/10.25%, 12/1/2013 | | | 252,687 |
| 100,000 | 1,2 | Jostens Holding Corp., Sr. Note, 8.75%, 12/1/2013 | | | 98,000 |
| 25,000 | | Leiner Health Products, Unsecd. Note, 11.00%, 6/1/2012 | | | 24,500 |
| 50,000 | 1,2 | Nutro Products, Inc., Sr. Sub. Note, 10.75%, 4/15/2014 | | | 52,000 |
| 75,000 | | Playtex Products, Inc., Company Guarantee, 9.375%, 6/1/2011 | | | 78,563 |
| 125,000 | | Spectrum Brands, Inc., Sr. Sub. Note, 7.375%, 2/1/2015 | | | 105,625 |
| 50,000 | 1,2 | Steinway Musical Instruments, Sr. Note, 7.00%, 3/1/2014 | | | 49,875 |
| 125,000 | | True Temper Sports, Inc., Sr. Sub. Note, 8.375%, 9/15/2011 | | | 115,938 |
| | | CORPORATE BONDS--continued | | | |
| | | Consumer Products--continued | | | |
$ | 45,000 | | WH Holdings Ltd., Sr. Note, 9.50%, 4/1/2011 | | $ | 48,375 |
|
| | | TOTAL | | | 1,239,750 |
|
| | | Energy--2.2% | | | |
| 50,000 | 1,2 | Basic Energy Services, Inc., Sr. Note, 7.125%, 4/15/2016 | | | 49,625 |
| 100,000 | 1,2 | Chesapeake Energy Corp., Sr. Note, 6.875%, 11/15/2020 | | | 98,750 |
| 50,000 | | Grant Prideco, Inc., Sr. Unsecd. Note, Series B, 6.125%, 8/15/2015 | | | 48,125 |
| 75,000 | | Pioneer Natural Resources, Inc., Bond, 6.875%, 5/1/2018 | | | 75,532 |
| 50,000 | | Pogo Producing Co., Sr. Sub. Note, 6.625%, 3/15/2015 | | | 48,750 |
| 50,000 | | Range Resources Corp., Sr. Sub. Note, 6.375%, 3/15/2015 | | | 48,500 |
| 25,000 | | Range Resources Corp., Sr. Sub. Note, 7.375%, 7/15/2013 | | | 25,719 |
| 100,000 | | Swift Energy Co., Sr. Sub. Note, 9.375%, 5/1/2012 | | | 106,750 |
|
| | | TOTAL | | | 501,751 |
|
| | | Entertainment--2.1% | | | |
| 50,000 | | AMC Entertainment, Inc., Sr. Sub. Note, 9.875%, 2/1/2012 | | | 50,750 |
| 50,000 | | Cinemark USA, Sr. Sub. Note, 9.00%, 2/1/2013 | | | 53,750 |
| 125,000 | | Cinemark, Inc., Sr. Disc. Note, 0/9.75%, 3/15/2014 | | | 100,000 |
| 75,000 | 1,2 | Hard Rock Park Operations LLC, Sr. Secd. Note, 9.81813%, 4/1/2012 | | | 75,750 |
| 75,000 | | Intrawest Corp., Sr. Note, 7.50%, 10/15/2013 | | | 76,312 |
| 75,000 | | Universal City Development Partners Ltd., Sr. Note, 11.75%, 4/1/2010 | | | 82,969 |
| 50,000 | | Universal City Florida Holding Co., Floating Rate Note, 9.43%, 5/1/2010 | | | 51,750 |
|
| | | TOTAL | | | 491,281 |
|
| | | Environmental--0.6% | | | |
| 100,000 | | Allied Waste North America, Inc., Company Guarantee, Series B, 8.875%, 4/1/2008 | | | 105,500 |
| 32,000 | | Clean Harbors, Inc., Sr. Secd. Note, 11.25%, 7/15/2012 | | | 36,320 |
|
| | | TOTAL | | | 141,820 |
|
| | | Financial Institutions--0.4% | | | |
| 100,000 | | American Real Estate Partners LP Finance, Sr. Note, 7.125%, 2/15/2013 | | | 99,750 |
|
| | | Food & Beverage--3.8% | | | |
| 200,000 | | ASG Consolidated LLC, Sr. Disc. Note, 0/11.50%, 11/1/2011 | | | 168,000 |
| 50,000 | | B&G Foods Holdings Corp., Sr. Note, 8.00%, 10/1/2011 | | | 51,500 |
| 50,000 | | Cott Beverages, Inc., Company Guarantee, 8.00%, 12/15/2011 | | | 51,125 |
| 75,000 | | Del Monte Corp., Sr. Sub. Note, 6.75%, 2/15/2015 | | | 72,000 |
| 75,000 | 1,2 | Eurofresh, Inc., Sr. Note, 11.50%, 1/15/2013 | | | 75,375 |
| 100,000 | | Michael Foods, Inc., Sr. Sub. Note, 8.00%, 11/15/2013 | | | 100,750 |
| 75,000 | | Pierre Foods, Inc., Sr. Sub. Note, 9.875%, 7/15/2012 | | | 78,281 |
| 50,000 | | Pilgrim’s Pride Corp., Sr. Sub. Note, 9.25%, 11/15/2013 | | | 50,750 |
| | | CORPORATE BONDS--continued | | | |
| | | Food & Beverage--continued | | | |
$ | 125,000 | | Reddy Ice Group, Inc., Sr. Disc. Note, 0/10.50%, 11/1/2012 | | $ | 103,750 |
| 50,000 | | Smithfield Foods, Inc., Sr. Note, Series B, 8.00%, 10/15/2009 | | | 51,500 |
| 75,000 | | UAP Holding Corp., Sr. Disc. Note, 0/10.75%, 7/15/2012 | | | 67,969 |
|
| | | TOTAL | | | 871,000 |
|
| | | Gaming--5.6% | | | |
| 75,000 | | 155 East Tropicana LLC, Sr. Secd. Note, 8.75%, 4/1/2012 | | | 74,437 |
| 100,000 | | Boyd Gaming Corp., Sr. Sub. Note, 7.75%, 12/15/2012 | | | 104,250 |
| 100,000 | 1,2 | Galaxy Entertainment Finance Co. Ltd., Company Guarantee, 9.875%, 12/15/2012 | | | 104,000 |
| 50,000 | | Herbst Gaming, Inc., Sr. Sub. Note, 7.00%, 11/15/2014 | | | 50,250 |
| 75,000 | | Kerzner International Ltd., Sr. Sub. Note, 6.75%, 10/1/2015 | | | 78,187 |
| 225,000 | | MGM Mirage, Sr. Sub. Note, 8.375%, 2/1/2011 | | | 237,937 |
| 75,000 | | MTR Gaming Group, Inc., Company Guarantee, Series B, 9.75%, 4/1/2010 | | | 80,063 |
| 50,000 | | Magna Entertainment Corp., Conv. Note, 7.25%, 12/15/2009 | | | 48,559 |
| 50,000 | 1,2 | Majestic Star Casino LLC, Sr. Note, 9.75%, 1/15/2011 | | | 51,500 |
| 100,000 | | Mandalay Resort Group, Sr. Sub. Note, 9.375%, 2/15/2010 | | | 108,000 |
| 75,000 | | Penn National Gaming, Inc., Sr. Sub. Note, 6.75%, 3/1/2015 | | | 74,063 |
| 50,000 | 1,2 | San Pasqual Casino Development Group, Inc., Sr. Note, 8.00%, 9/15/2013 | | | 50,750 |
| 100,000 | | Station Casinos, Inc., Sr. Sub. Note, 6.50%, 2/1/2014 | | | 97,750 |
| 75,000 | 1,2 | Tunica-Biloxi Gaming Authority, Sr. Unsecd. Note, 9.00%, 11/15/2015 | | | 78,375 |
| 50,000 | | Wynn Las Vegas LLC, 1st Mtg. Note, 6.625%, 12/1/2014 | | | 48,875 |
|
| | | TOTAL | | | 1,286,996 |
|
| | | Health Care--6.2% | | | |
| 50,000 | | AMR Holding Co./Emcare Holding Co., Sr. Sub. Note, 10.00%, 2/15/2015 | | | 53,750 |
| 50,000 | | Accellent, Inc., Sr. Sub., 10.50%, 12/1/2013 | | | 54,000 |
| 125,000 | | AmeriPath, Inc., Company Guarantee, 10.50%, 4/1/2013 | | | 133,437 |
| 150,000 | | CDRV Investors, Inc., Sr. Disc. Note, 0/9.625%, 1/1/2015 | | | 106,875 |
| 75,000 | 1,2 | CRC Health Corp., Sr. Sub. Note, 10.75%, 2/1/2016 | | | 77,438 |
| 100,000 | | Concentra Operating Corp., Sr. Sub. Note, 9.50%, 8/15/2010 | | | 104,750 |
| 100,000 | | Fisher Scientific International, Inc., Sr. Sub. Note, 6.125%, 7/1/2015 | | | 95,750 |
| 150,000 | | HCA, Inc., Sr. Note, 6.375%, 1/15/2015 | | | 145,179 |
| 75,000 | | HCA, Inc., Sr. Note, 6.75%, 7/15/2013 | | | 74,697 |
| 100,000 | | HCA, Inc., Sr. Note, 7.50%, 11/6/2033 | | | 96,957 |
| 50,000 | | National Mentor, Inc., Sr. Sub. Note, 9.625%, 12/1/2012 | | | 56,750 |
| 50,000 | | Omnicare, Inc., Sr. Sub. Note, 6.875%, 12/15/2015 | | | 49,688 |
| 50,000 | | Psychiatric Solutions, Inc., Sr. Sub. Note, 7.75%, 7/15/2015 | | | 51,500 |
| 50,000 | 1,2 | Tenet Healthcare Corp., Sr. Note, 9.50%, 2/1/2015 | | | 51,125 |
| | | CORPORATE BONDS--continued | | | |
| | | Health Care--continued | | | |
$ | 125,000 | | VWR International, Inc., Sr. Sub. Note, 8.00%, 4/15/2014 | | $ | 125,625 |
| 50,000 | | Vanguard Health Holdings II, Sr. Sub. Note, 9.00%, 10/1/2014 | | | 51,875 |
| 50,000 | | Ventas Realty LP, Sr. Note, 6.50%, 6/1/2016 | | | 48,625 |
| 50,000 | | Ventas Realty LP, Sr. Note, 6.625%, 10/15/2014 | | | 49,188 |
|
| | | TOTAL | | | 1,427,209 |
|
| | | Industrial - Other--6.8% | | | |
| 125,000 | | ALH Finance LLC/ALH Finance Corp., Sr. Sub. Note, 8.50%, 1/15/2013 | | | 123,125 |
| 50,000 | | American Tire Distributors, Inc., Sr. Note, 10.75%, 4/1/2013 | | | 47,000 |
| 75,000 | 1,2 | Amsted Industries, Inc., Sr. Note, 10.25%, 10/15/2011 | | | 82,125 |
| 100,000 | | Brand Services, Inc., Company Guarantee, 12.00%, 10/15/2012 | | | 109,000 |
| 50,000 | | Da-Lite Screen Co., Inc., Sr. Note, 9.50%, 5/15/2011 | | | 53,375 |
| 100,000 | | Hawk Corp., Sr. Note, 8.75%, 11/1/2014 | | | 101,000 |
| 98,000 | | Interline Brands, Inc., Sr. Sub. Note, 11.50%, 5/15/2011 | | | 109,270 |
| 150,000 | 1,2 | Knowledge Learning Corp., Sr. Sub. Note, 7.75%, 2/1/2015 | | | 143,062 |
| 75,000 | | Mueller Group, Inc., Sr. Sub. Note, 10.00%, 5/1/2012 | | | 82,500 |
| 146,000 | 1,2 | Neenah Corp., Sr. Secd. Note, 11.00%, 9/30/2010 | | | 159,870 |
| 75,000 | | Norcross Safety Products, Sr. Sub. Note, Series B, 9.875%, 8/15/2011 | | | 78,937 |
| 75,000 | 1,2 | Panolam Industries International, Inc., Sr. Sub. Note, 10.75%, 10/1/2013 | | | 73,875 |
| 75,000 | | Rexnord Corp., Company Guarantee, 10.125%, 12/15/2012 | | | 82,688 |
| 83,915 | | Safety Products Holdings, Inc., Sr. Note, Series B, 11.75%, 1/1/2012 | | | 88,111 |
| 75,000 | | Sensus Metering Systems, Inc., Sr. Sub. Note, 8.625%, 12/15/2013 | | | 73,313 |
| 100,000 | | Superior Essex Communications LLC, Sr. Note, 9.00%, 4/15/2012 | | | 101,500 |
| 50,000 | | Valmont Industries, Inc., Sr. Sub. Note, 6.875%, 5/1/2014 | | | 50,000 |
|
| | | TOTAL | | | 1,558,751 |
|
| | | Lodging--1.3% | | | |
| 50,000 | | Gaylord Entertainment Co., Sr. Note, 6.75%, 11/15/2014 | | | 48,125 |
| 150,000 | 1,2 | Host Marriott LP, Note, 6.75%, 6/1/2016 | | | 148,875 |
| 100,000 | | Starwood Hotels & Resorts Worldwide, Inc., Company Guarantee, 7.875%, 5/1/2012 | | | 108,000 |
|
| | | TOTAL | | | 305,000 |
|
| | | Media - Cable--2.0% | | | |
| 150,000 | | Charter Communications Holdings II, Sr. Note, 10.25%, 9/15/2010 | | | 151,875 |
| 150,000 | 1,2 | Kabel Deutschland GMBH, Sr. Note, 10.625%, 7/1/2014 | | | 162,750 |
| 100,000 | 1,2 | Unity Media Gmbh, Sr. Note, 10.375%, 2/15/2015 | | | 102,500 |
| 50,000 | | Videotron Ltee, Sr. Note, 6.375%, 12/15/2015 | | | 49,250 |
|
| | | TOTAL | | | 466,375 |
|
| | | CORPORATE BONDS--continued | | | |
| | | Media - Non-Cable--8.9% | | | |
$ | 50,000 | | Advanstar Communications, Company Guarantee, Series B, 12.00%, 2/15/2011 | | $ | 53,125 |
| 75,000 | | Advanstar, Inc., Company Guarantee, Series B, 15.00%, 10/15/2011 | | | 79,312 |
| 82,445 | | Affinity Group Holding, Inc., Sr. Note, 10.875%, 2/15/2012 | | | 79,559 |
| 50,000 | | Affinity Group, Inc., Sr. Sub. Note, 9.00%, 2/15/2012 | | | 50,500 |
| 100,000 | | CBD Media Holdings, Sr. Note, 9.25%, 7/15/2012 | | | 102,500 |
| 100,000 | | DIRECTV Holdings LLC, Sr. Note, 6.375%, 6/15/2015 | | | 98,250 |
| 119,000 | | Dex Media West LLC, Sr. Sub. Note, Series B, 9.875%, 8/15/2013 | | | 131,644 |
| 150,000 | | Dex Media, Inc., Discount Bond, 0/9.00%, 11/15/2013 | | | 128,250 |
| 100,000 | | Echostar DBS Corp., Sr. Note, 6.625%, 10/1/2014 | | | 96,625 |
| 75,000 | | Houghton Mifflin Co., Sr. Disc. Note, 0/11.50%, 10/15/2013 | | | 64,125 |
| 125,000 | 1,2 | Intelsat Bermuda Ltd., Sr. Disc. Note, 0/9.25%, 2/1/2015 | | | 91,250 |
| 75,000 | | Intelsat Subsidiary Holding Co. Ltd., Sr. Note, 8.625%, 1/15/2015 | | | 78,375 |
| 50,000 | | Lamar Media Corp., Sr. Sub. Note, 6.625%, 8/15/2015 | | | 48,875 |
| 75,000 | | NBC Acqusition Corp., Sr. Disc. Note, 0/11.00%, 3/15/2013 | | | 53,531 |
| 50,000 | | Nebraska Book Co., Inc., Sr. Sub. Note, 8.625%, 3/15/2012 | | | 45,812 |
| 175,000 | | PanAmSat Holding Corp., Discount Bond, 11/1/2014 | | | 127,312 |
| 50,000 | | Primedia, Inc., Sr. Note, 8.875%, 5/15/2011 | | | 48,375 |
| 50,000 | 1,2 | Quebecor Media Inc., Sr. Unsecd. Note, 7.75%, 3/15/2016 | | | 51,500 |
| 75,000 | 1,2 | R.H. Donnelley Corp., Sr. Disc. Note, 6.875%, 1/15/2013 | | | 70,125 |
| 75,000 | 1,2 | R.H. Donnelley Corp., Sr. Disc. Note, 6.875%, 1/15/2013 | | | 70,125 |
| 50,000 | 1,2 | R.H. Donnelley Corp., Sr. Note, 8.875%, 1/15/2016 | | | 51,688 |
| 75,000 | 1,2 | Rainbow National Services LLC, Sr. Sub. Note, 10.375%, 9/1/2014 | | | 84,563 |
| 50,000 | | Readers Digest Association, Inc., Sr. Note, Series 144A, 6.50%, 3/1/2011 | | | 49,000 |
| 50,000 | 1,2 | Southern Graphics Systems, Inc., Sr. Sub. Note, 12.00%, 12/15/2013 | | | 53,000 |
| 125,000 | 1,2 | WDAC Subsidiary Corp., Sr. Note, 8.375%, 12/1/2014 | | | 124,688 |
| 100,000 | 1,2 | XM Satellite Radio, Inc., Sr. Note, 9.75%, 5/1/2014 | | | 101,000 |
|
| | | TOTAL | | | 2,033,109 |
|
| | | Metals & Mining--0.7% | | | |
| 75,000 | | Aleris International, Inc., Sr. Secd. Note, 10.375%, 10/15/2010 | | | 82,687 |
| 75,000 | 1,2 | Novelis, Inc., Sr. Note, 7.50%, 2/15/2015 | | | 73,125 |
|
| | | TOTAL | | | 155,812 |
|
| | | Packaging--2.5% | | | |
| 75,000 | | Ball Corp., Sr. Note, 6.625%, 3/15/2018 | | | 73,031 |
| 100,000 | | Berry Plastics Corp., Company Guarantee, 10.75%, 7/15/2012 | | | 109,500 |
| 100,000 | 1,2 | Covalence Specialty Materials Corp., Sr. Sub. Note, 10.25%, 3/1/2016 | | | 103,500 |
| 50,000 | 1,2 | Crown Americas LLC, Sr. Note, 7.75%, 11/15/2015 | | | 51,625 |
| 75,000 | | Greif Brothers Corp., Sr. Sub. Note, 8.875%, 8/1/2012 | | | 79,875 |
| | | CORPORATE BONDS--continued | | | |
| | | Packaging--continued | | | |
$ | 100,000 | | Owens-Illinois, Inc., Sr. Note, 7.35%, 5/15/2008 | | $ | 101,000 |
| 50,000 | 1,2 | Plastipak Holdings, Sr. Note, 8.50%, 12/15/2015 | | | 50,750 |
|
| | | TOTAL | | | 569,281 |
|
| | | Paper--2.4% | | | |
| 75,000 | | Abitibi-Consolidated, Inc., Sr. Note, 8.375%, 4/1/2015 | | | 76,125 |
| 125,000 | | Graphic Packaging International Corp., Sr. Sub. Note, 9.50%, 8/15/2013 | | | 121,875 |
| 100,000 | | Jefferson Smurfit Corp., Company Guarantee, 7.50%, 6/1/2013 | | | 93,750 |
| 75,000 | | MDP Acquisitions PLC, 9.625%, 10/1/2012 | | | 79,500 |
| 50,000 | | Mercer International, Inc., 9.25%, 2/15/2013 | | | 46,625 |
| 100,000 | | NewPage Corp., Sr. Sub. Note, 12.00%, 5/1/2013 | | | 109,000 |
| 50,000 | | Tembec Industries, Inc., 8.50%, 2/1/2011 | | | 30,500 |
|
| | | TOTAL | | | 557,375 |
|
| | | Pharmaceuticals--0.2% | | | |
| 50,000 | 1,2 | Angiotech Pharmaceuticals, Inc., Sr. Sub. Note, 7.75%, 4/1/2014 | | | 50,500 |
|
| | | Restaurants--1.0% | | | |
| 50,000 | 1,2 | Dave & Buster’s, Inc., Sr. Note, 11.25%, 3/15/2014 | | | 50,750 |
| 50,000 | 1,2 | El Pollo Loco, Inc., Sr. Note, 11.75%, 11/15/2013 | | | 52,000 |
| 75,000 | | Landry’s Seafood Restaurants, Inc., Sr. Note, Series B, 7.50%, 12/15/2014 | | | 72,375 |
| 50,000 | 1,2 | NPC International, Inc., Sr. Sub. Note, 9.50%, 5/1/2014 | | | 50,750 |
|
| | | TOTAL | | | 225,875 |
|
| | | Retailers--1.6% | | | |
| 50,000 | 1,2 | AutoNation, Inc., Sr. Note, 7.00%, 4/15/2014 | | | 50,500 |
| 100,000 | | Couche-Tard Financing Corp., Sr. Sub. Note, 7.50%, 12/15/2013 | | | 102,250 |
| 73,000 | | FTD, Inc., Sr. Sub. Note, 7.75%, 2/15/2014 | | | 72,361 |
| 75,000 | | Penney (J.C.) Co., Inc., Note, 9.00%, 8/1/2012 | | | 86,173 |
| 50,000 | | United Auto Group, Inc., Company Guarantee, 9.625%, 3/15/2012 | | | 53,438 |
|
| | | TOTAL | | | 364,722 |
|
| | | Services--1.1% | | | |
| 32,000 | | CB Richard Ellis Services, Inc., Sr. Note, 9.75%, 5/15/2010 | | | 34,720 |
| 49,000 | | Global Cash Access LLC, Sr. Sub. Note, 8.75%, 3/15/2012 | | | 52,736 |
| 50,000 | 1,2 | HydroChem Industrial Services, Sr. Sub. Note, 9.25%, 2/15/2013 | | | 49,875 |
| 100,000 | | Insurance Automotive Auctions, Inc., Sr. Note, 11.00%, 4/1/2013 | | | 105,500 |
|
| | | TOTAL | | | 242,831 |
|
| | | Technology--3.6% | | | |
| 75,000 | | Activant Solutions, Inc., Sr. Note, 10.50%, 6/15/2011 | | | 82,767 |
| 50,000 | 1,2 | Activant Solutions, Inc., Sr. Sub. Note, 9.50%, 5/1/2016 | | | 51,125 |
| 75,000 | | Freescale Semiconductor, Inc., Sr. Note, 7.125%, 7/15/2014 | | | 77,250 |
| | | CORPORATE BONDS--continued | | | |
| | | Technology--continued | | | |
$ | 50,000 | | MagnaChip Semiconductor S.A., Sr. Sub. Note, 8.00%, 12/15/2014 | | $ | 46,875 |
| 50,000 | 1,2 | SERENA Software, Inc., Sr. Sub. Note, 10.375%, 3/15/2016 | | | 53,375 |
| 75,000 | 1,2 | SS&C Technologies, Inc., Sr. Sub. Note, 11.75%, 12/1/2013 | | | 81,000 |
| 49,000 | | Smart Modular Technologies, Inc., Sr. Secd. Note, 10.49%, 4/1/2012 | | | 51,205 |
| 100,000 | 1,2 | SunGard Data Systems, Inc., Sr. Note, 9.125%, 8/15/2013 | | | 107,250 |
| 50,000 | 1,2 | SunGard Data Systems, Inc., Sr. Sub. Note, 10.25%, 8/15/2015 | | | 54,000 |
| 100,000 | | UGS Corp., Sr. Sub. Note, 10.00%, 6/1/2012 | | | 109,750 |
| 100,000 | | Xerox Corp., Sr. Note, 9.75%, 1/15/2009 | | | 109,250 |
|
| | | TOTAL | | | 823,847 |
|
| | | Textile--0.5% | | | |
| 50,000 | | Phillips Van Heusen Corp., Sr. Note, 8.125%, 5/1/2013 | | | 52,875 |
| 50,000 | | Warnaco Group, Inc., Sr. Note, 8.875%, 6/15/2013 | | | 52,875 |
|
| | | TOTAL | | | 105,750 |
|
| | | Transportation--1.3% | | | |
| 50,000 | 1,2 | Hertz Corp., Sr. Note, 8.875%, 1/1/2014 | | | 53,375 |
| 100,000 | 1,2 | Hertz Corp., Sr. Sub. Note, 10.50%, 1/1/2016 | | | 111,125 |
| 125,000 | | Stena AB, Sr. Note, 9.625%, 12/1/2012 | | | 135,313 |
|
| | | TOTAL | | | 299,813 |
|
| | | Utility - Electric--4.4% | | | |
| 50,000 | | CMS Energy Corp., Sr. Note, 6.875%, 12/15/2015 | | | 50,000 |
| 50,000 | | CMS Energy Corp., Sr. Note, 7.50%, 1/15/2009 | | | 51,438 |
| 75,000 | | Edison Mission Holding Co., Sr. Note, 7.73%, 6/15/2009 | | | 77,156 |
| 100,000 | | Edison Mission Holding Co., Sr. Note, 9.875%, 4/15/2011 | | | 113,250 |
| 94,190 | 1,2 | FPL Energy National Wind, Note, 6.125%, 3/25/2019 | | | 91,380 |
| 50,000 | 1,2 | Mirant North America LLC, Sr. Note, 7.375%, 12/31/2013 | | | 50,438 |
| 50,000 | | NRG Energy, Inc., Sr. Note, 7.25%, 2/1/2014 | | | 50,375 |
| 50,000 | | NRG Energy, Inc., Sr. Note, 7.375%, 2/1/2016 | | | 50,563 |
| 50,000 | | Nevada Power Co., 6.50%, 4/15/2012 | | | 50,610 |
| 50,000 | | Nevada Power Co., Mtg. Note, Series L, 5.875%, 1/15/2015 | | | 48,420 |
| 65,000 | | Nevada Power Co., Second Mortgage Notes, 9.00%, 8/15/2013 | | | 71,712 |
| 50,000 | | Northwestern Corp., Note, 5.875%, 11/1/2014 | | | 49,451 |
| 100,000 | | PSEG Energy Holdings, Sr. Note, 10.00%, 10/1/2009 | | | 110,500 |
| 50,000 | | Reliant Resources, Inc., Sr. Secd. Note, 9.50%, 7/15/2013 | | | 51,000 |
| 50,000 | | Sierra Pacific Resources, Sr. Note, Series WI, 6.75%, 8/15/2017 | | | 49,627 |
| 50,000 | | TECO Energy, Inc., Sr. Note, 6.75%, 5/1/2015 | | | 51,250 |
|
| | | TOTAL | | | 1,017,170 |
|
| | | CORPORATE BONDS--continued | | | |
| | | Utility - Natural Gas--6.0% | | | |
$ | 75,000 | | AmeriGas Partners LP, Sr. Unsecd. Note, 7.25%, 5/20/2015 | | $ | 75,000 |
| 50,000 | 1,2 | Atlas Pipeline Partners LP, Sr. Note, 8.125%, 12/15/2015 | | | 51,875 |
| 100,000 | | El Paso Corp., 6.75%, 5/15/2009 | | | 99,875 |
| 50,000 | | El Paso Corp., Sr. Note, 7.80%, 8/1/2031 | | | 49,750 |
| 125,000 | | Holly Energy Partners LP, Sr. Note, 6.25%, 3/1/2015 | | | 118,438 |
| 75,000 | | Inergy LP, Sr. Note, 6.875%, 12/15/2014 | | | 71,250 |
| 50,000 | | Pacific Energy Partners LP, Sr. Note, 6.25%, 9/15/2015 | | | 48,250 |
| 75,000 | | Pacific Energy Partners LP, Sr. Note, 7.125%, 6/15/2014 | | | 76,125 |
| 50,000 | 1,2 | SemGroup LP, Sr. Note, 8.75%, 11/15/2015 | | | 51,250 |
| 50,000 | | Semco Energy, Inc., Sr. Note, 7.125%, 5/15/2008 | | | 50,716 |
| 50,000 | 1,2 | Southern Star Central Corp., Sr. Note, 6.75%, 3/1/2016 | | | 50,125 |
| 225,000 | | Tennessee Gas Pipeline, Bond, 8.375%, 6/15/2032 | | | 249,755 |
| 75,000 | 1,2 | Transcontinental Gas Pipe Corp., Sr. Note, 6.40%, 4/15/2016 | | | 74,906 |
| 100,000 | | Williams Cos., Inc., Note, 7.625%, 7/15/2019 | | | 105,500 |
| 175,000 | | Williams Cos., Inc., Note, 7.875%, 9/1/2021 | | | 187,250 |
|
| | | TOTAL | | | 1,360,065 |
|
| | | Wireless Communications--2.1% | | | |
| 50,000 | | Centennial Cellular Corp., Floating Rate Note - Sr. Note, 10.74%, 1/1/2013 | | | 52,500 |
| 75,000 | | Centennial Communications Corp., Sr. Note, 10.00%, 1/1/2013 | | | 78,375 |
| 75,000 | | New Skies Satellites NV, Sr. Sub. Note, 9.125%, 11/1/2012 | | | 81,188 |
| 125,000 | | Rogers Wireless, Inc., Floating Rate Note - Sr. Secured Note, 8.035%, 12/15/2010 | | | 129,375 |
| 50,000 | | Rogers Wireless, Inc., Sr. Secd. Note, 7.50%, 3/15/2015 | | | 52,875 |
| 75,000 | | Rogers Wireless, Inc., Sr. Sub. Note, 8.00%, 12/15/2012 | | | 79,125 |
|
| | | TOTAL | | | 473,438 |
|
| | | Wireline Communications--2.5% | | | |
| 75,000 | | AT&T Corp., Sr. Note, 9.75%, 11/15/2031 | | | 89,031 |
| 75,000 | 1,2 | Nordic Telephone Co. Holdings APS, Sr. Note, 8.875%, 5/1/2016 | | | 78,000 |
| 300,000 | | Qwest Corp., Note, 8.875%, 3/15/2012 | | | 330,000 |
| 75,000 | | Valor Telecommunications Enterprises, Sr. Note, 7.75%, 2/15/2015 | | | 78,375 |
|
| | | TOTAL | | | 575,406 |
|
| | | TOTAL CORPORATE BONDS (IDENTIFIED COST $20,698,018) | | | 20,987,772 |
|
Shares or
Principal
Amount | | | | | Value |
|
| | | COMMON STOCKS--0.3% | | | |
| | | Food & Beverage--0.2% | | | |
| 2,490 | | B&G Foods, Inc. | | $ | 37,275 |
|
| | | Industrial - Other--0.1% | | | |
| 17,689 | 1,3 | ACP Holdings Corp., Warrants | | | 29,629 |
|
| | | TOTAL COMMON STOCKS (IDENTIFIED COST $37,342) | | | 66,904 |
|
| | | PREFERRED STOCK--0.8% | | | |
| | | Retailers--0.8% | | | |
| 150 | | General Nutrition Centers Holding Co., Exchangeable Pfd. Stock, Series A
(IDENTIFIED COST $150,900) | | | 165,375 |
|
| | | MUTUAL FUND--3.4% | | | |
| 115,394 | 4 | High Yield Bond Portfolio (IDENTIFIED COST $776,626) | | | 778,907 |
|
| | | REPURCHASE AGREEMENT--3.3% | | | |
$ | 757,000 | | Interest in $3,400,000,000 joint repurchase agreement 4.79%, dated 4/28/2006 under which Bank of America N.A. will repurchase a U.S. Government Agency security maturing on 2/1/2036 for $3,401,357,167 on 5/1/2006. The market value of the underlying security at the end of the period was $3,468,000,001. (AT COST) | | | 757,000 |
|
| | | TOTAL INVESTMENTS--99.5%
(IDENTIFIED COST $22,419,886)5 | | | 22,755,958 |
|
| | | OTHER ASSETS AND LIABILITIES--NET--0.5% | | | 123,969 |
|
| | | TOTAL NET ASSETS--100% | | $ | 22,879,927 |
|
Note: The categories of investments are shown as a percentage of total net assets at April 30, 2006.
Federated Institutional Trust (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of three portfolios. The financial statements included herein are only those of Federated Institutional High Yield Bond Fund (the “Fund”). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder’s interest is limited to the portfolio in which shares are held. The primary investment objective of the Fund is to seek high current income.
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP) in the United States of America.
The Fund generally values fixed income and short-term securities according to prices furnished by an independent pricing service, except that securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost, which approximates fair market value. Prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities. Listed equity securities are valued at the last sale price or official closing price reported on a national securities exchange. If unavailable, the security is generally valued at the mean between the last closing bid and asked prices. Investments in other open-end regulated investment companies are valued at net asset value. Securities for which no quotations are readily available are valued at fair value as determined in accordance with procedures established by and under general supervision of the Board of Trustees (the “Trustees”).
It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund’s custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
With respect to agreements to repurchase U.S. government securities and cash items, the Fund treats the repurchase agreement as an investment in the underlying securities and not as an obligation of the other party to the repurchase agreement. Other repurchase agreements are treated as obligations of the other party secured by the underlying securities. Nevertheless, the insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub custodian for investment companies and other clients advised by the Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Distributions of net investment income are declared daily and paid monthly. Non-cash dividends included in dividend income, if any, are recorded at fair value.
All premiums and discounts on fixed income securities are amortized/accreted for financial statement purposes.
It is the Fund’s policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary.
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. In some cases, the issuer of restricted securities has agreed to register such securities for resale, at the issuer’s expense either upon demand by the Fund or in connection with another registered offering of the securities. Many restricted securities may be resold in the secondary market in transactions exempt from registration. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. The Fund’s restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under general supervision of the Trustees.
Additional information on restricted securities, excluding securities purchased under Rule 144A that have been deemed liquid by the Trustees, held at April 30, 2006, is as follows:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
Investment transactions are accounted for on a trade date basis. Realized gains and losses from investment transactions are recorded on an identified cost basis.
At April 30, 2006, the cost of investments for federal tax purposes was $22,465,878. The net unrealized appreciation of investments for federal tax purposes was $290,080. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $633,718 and net unrealized depreciation from investments for those securities having an excess of cost over value of $343,638.
Federated Investment Management Company, the Fund’s investment adviser (the “Adviser”), receives for its services an annual investment adviser fee equal to 0.40% of the Fund’s average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/or reimbursement at any time at its sole discretion. For the six months ended April 30, 2006, the Adviser voluntarily waived $45,260 of its fee and voluntarily reimbursed $90,433 of other operating expenses.
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. FAS may voluntarily choose to waive any portion of its fee. FAS can modify or terminate this voluntary waiver at any time at its sole discretion. For the six months ended April 30, 2006, the net fee paid to FAS was 0.549% of average aggregate daily net assets of the Fund.
The Fund imposes a 2.00% redemption fee to shareholders of the Fund who redeem shares held for 90 days or less. Shares acquired by reinvestment of dividends or distributions of the Fund, or purchased pursuant to the Systematic Investment Program or withdrawn pursuant to the Systematic Withdrawal Program, will not be subject to the redemption fee. All redemption fees are recorded by the Fund as paid-in-capital. For the six months ended April 30, 2006, the redemption fees amounted to $553.
Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Affiliated holdings are mutual funds which are managed by the Adviser or an affiliate of the Adviser. The Adviser has agreed to reimburse the Fund for certain investment adviser fees as a result of transactions in other mutual funds. Transactions with affiliated companies during the six months ended April 30, 2006 are as follows:
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations (and in-kind contributions), for the six months ended April 30, 2006, were as follows:
Beginning in October, 2003, Federated Investors, Inc. and various subsidiaries thereof (including the advisers and distributor for various investment companies, collectively, “Federated”), along with various investment companies sponsored by Federated (“Funds”) were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the Securities and Exchange Commission (“SEC”), the Office of the New York State Attorney General (“NYAG”), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay for the benefit of fund shareholders additional disgorgement and a civil money penalty in the aggregate amount of an additional $72 million. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.
As required by the Act, the Fund’s Board has reviewed the Fund’s investment advisory contract. The Board’s decision to approve the contract reflects the exercise of its business judgment on whether to continue the existing arrangements. During its review of the contract, the Board considers many factors, among the most material of which are: the Fund’s investment objectives; the Adviser’s management philosophy, personnel, processes, and investment and operating strategies; long term performance; the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry; the range of comparable fees for similar funds in the mutual fund industry; the range and quality of services provided to the Fund and its shareholders by the Federated organization in addition to investment advisory services; and the Fund’s relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charge.
In its decision to appoint or renew the Adviser, the Board is mindful of the potential disruptions of the Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognizes that most shareholders have invested in the Fund on the strength of the Adviser’s industry standing and reputation and in the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board’s “selection” or approval of the Adviser must reflect the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board also considers the compensation and benefits received by the Adviser. This includes fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute fund trades, as well as advisory fees. In this regard, the Board is aware that various courts have interpreted provisions of the Act and have indicated in their decisions that the following factors may be relevant to an Adviser’s fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the Fund; the Adviser’s cost of providing the services; the extent to which the Adviser may realize “economies of scale” as the Fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser’s relationship with the Fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the Adviser’s service and fee. The Fund’s Board is aware of these factors and is guided by them in its review of the Fund’s advisory contract to the extent they are appropriate and relevant, as discussed further below.
The Board considers and weighs these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and is assisted in its deliberations by the advice of independent legal counsel. In this regard, the Board requests and receives substantial and detailed information about the Fund and the Federated organization. Federated provides much of this information at each regular meeting of the Board, and furnishes additional reports in connection with the particular meeting at which the Board’s formal review of the advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: the Adviser’s investment philosophy, personnel, and processes; operating strategies; the Fund’s short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities (if any); the nature and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated’s responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The evaluation process is evolutionary, reflecting continually developing considerations. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace. For the past year, the Board concluded that the nature, quality and scope of services provided the fund by the Adviser and its affiliates was satisfactory.
With respect to the Fund’s performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be particularly useful, given the high degree of competition in the mutual fund business. The Board focuses on comparisons with other similar mutual funds (rather than non-mutual fund products or services) because, simply put, they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund’s investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund’s ability to deliver competitive performance when compared to its peer group may be a useful indicator of how the Adviser is executing on the Fund’s investment program, which would in turn assist the Board in reaching a conclusion that the nature, extent, and quality of the Adviser’s investment management services are such as to warrant continuation of the advisory contract.
For the period ending December 31, 2004, the Fund’s performance for the one year period was above the median of the relevant peer group. During the year ending December 31, 2004, the Fund’s investment advisory fee after waivers and expense reimbursements, if any, was below the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
The Board also receives financial information about Federated, including reports on the compensation and benefits Federated derives from its relationships with the Federated funds. These reports cover not only the fees under the advisory contracts, but also fees received by Federated’s subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds’ administrator). The reports also discuss any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades as well as waivers of fees and/or reimbursements of expenses. In order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waive fees and/or reimburse expenses. Although the Board considers the costs incurred and the profitability of the Federated organization as a whole, it does not evaluate, on a fund-by-fund basis, Federated’s “profitability” and/or “costs” (which would include an assessment as to whether “economies of scale” would be realized if the fund were to grow to some sufficient size). In the Board’s view, the cost of performing advisory services on a fund-specific basis is both difficult to estimate satisfactorily and a relatively minor consideration in its overall evaluation. Analyzing isolated funds would require constructed allocations of the costs of shared resources and operations based on artificial assumptions that are inconsistent with the existing relationships within a large and diversified family of funds that receive advisory and other services from the same organization. In addition, the availability of the exchange privilege among funds in the Federated family makes consideration of the overall cost and profitability of Federated more relevant than that of individual funds. Based upon this review, the Board is satisfied that the costs incurred in, as well as the profitability realized from, managing the Fund and the other Federated Funds are appropriate. Although the Board is always interested in discovering any genuine “economies of scale,” its experience has been that such “economies” are likely to arise only when a fund grows dramatically, and becomes and remains very large in size. Even in these instances, purchase and redemption activity, as well as the presence of expense limitations (if any), may offset any perceived economies. As suggested above, the Board considers the information it receives about the Fund’s performance and expenses as compared to an appropriate set of similar competing funds to be more relevant.
The Board bases its decision to approve an advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above are relevant to every Federated fund, nor does the Board consider any one of them to be determinative. With respect to the factors that are relevant, the Board’s decision to approve the contract reflects its determination that Federated’s performance and actions provide a satisfactory basis to support the decision to continue the existing arrangements.
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund’s portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available through Federated’s website. Go to FederatedInvestors.com, select “Products,” select the “Prospectuses and Regulatory Reports” link, then select the Fund to access the link to Form N-PX. This information is also available from the EDGAR database on the SEC’s website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of the Federated Investors website at FederatedInvestors.com by clicking on “Portfolio Holdings” and selecting the name of the Fund, or by selecting the name of the Fund and clicking on “Portfolio Holdings.” You must register on the website the first time you wish to access this information.
Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund’s prospectus, which contains facts concerning its objective and policies, management fees, expenses, and other information.
In an effort to reduce costs and avoid duplicate mailings, the Fund intend to deliver a single copy of certain documents to each household in which more than one shareholder of the Fund resides (so-called “householding”), as permitted by applicable rules. The Fund’s “householding” program covers its/their Prospectus and Statement of Additional Information, and supplements to each, as well as Semi-Annual and Annual Shareholder Reports and any Proxies or information statements. Shareholders must give their written consent to participate in the “householding” program. The Fund is also permitted to treat a shareholder as having given consent (“implied consent”) if (i) shareholders with the same last name, or believed to be members of the same family, reside at the same street address or receive mail at the same post office box, (ii) the Fund gives notice of its intent to “household” at least sixty (60) days before it begins “householding” and (iii) none of the shareholders in the household have notified the Fund or their agent of the desire to “opt out” of “householding.” Shareholders who have granted written consent, or have been deemed to have granted implied consent, can revoke that consent and opt out of “householding” at any time: shareholders who purchased shares through an intermediary should contact their representative; other shareholders may call the Fund at 1-800-341-7400.
Federated is a registered mark of Federated Investors, Inc.
2006 ©Federated Investors, Inc.
