Contents
The views expressed and any
forward-looking statements are as of April 30, 2012, unless otherwise noted, and are those of the Fund managers and/or Wells Fargo Funds Management, LLC. Discussions of individual securities, or the markets generally, or any Wells Fargo Advantage
Fund are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances
in the market. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.
NOT FDIC INSURED
¡
NO BANK
GUARANTEE
¡
MAY LOSE VALUE
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2
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Wells Fargo Advantage Income Opportunities Fund
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Letter to Shareholders
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Karla M. Rabusch,
President
Wells Fargo Advantage Funds
The financial
markets throughout most of the past year may best be described as a risk-on/risk-off trading environment in response to the uncertainty about the sustainability of the U.S. economic recovery and ongoing concerns about the Greek debt crisis and the
overall health of the eurozone.
Many global economies showed some signs of improvement during the 12-month period, but the path was uneven. The U.S. continued to be primarily affected by the pace of job growth and the
health of housing market, while the eurozone remained focused on the ongoing sovereign debt concerns.
Dear Valued Shareholder:
We are pleased to provide you with this annual report for the
Wells Fargo Advantage Income Opportunities Fund
for the 12-month period that ended April 30, 2012.
The financial markets throughout most of the past year may best be described as a risk-on/risk-off trading environment in response to
the uncertainty about the sustainability of the U.S. economic recovery and ongoing concerns about the Greek debt crisis and the overall health of the eurozone. When volatility and uncertainty were high, investors sold riskier assets such as
high-beta
1
equities, commodities, emerging markets securities, and
high-yield bonds in preference for the relative safety of U.S. Treasuries. In periods of low volatility, investor risk tolerance dramatically rose and investors sought out the higher yield and return potential of those riskier investments.
During the first quarter of 2012, investor sentiment appeared to be more positive and balanced than earlier in the year. This recent shift in
sentiment was the result of improvement in the global macroeconomic backdrop, which we believe contributed to a less volatile market environment and more stable earnings growth expectations. These developments seemed to encourage investors to
refocus on underlying fundamentals, sparking the first-quarter 2012 equity rally that was led by stocks and sectors that were shunned at times in 2011, notably retail and higher-growth information technology namesespecially within the U.S.
markets.
The S&P 500 Index
2
and the Russell 3000
®
Index
3
which measure the broad U.S. equity marketposted total returns of 4.76% and 3.40%, respectively, for the
reporting period. By comparison, the Barclays U.S. Aggregate Bond Index
4
, representing the
universe of U.S. investment-grade bonds, returned 7.54%, and the BofA Merrill Lynch U.S. High Yield Master II Blended
Index
5
, which is composed of U.S. non-investment-grade corporate bonds, returned 5.12% for the 12-month period.
The global economic recovery modestly improved during the period.
Many global economies showed some signs of improvement during the 12-month period, but the path was uneven. The U.S. continued to be primarily affected by the pace of job growth and the health of housing
market, while the eurozone remained focused on the ongoing sovereign debt concerns.
The U.S. Bureau of Economic Analysis reported that U.S.
gross domestic product (GDP) grew at a modest 1.3% annual rate in the second quarter of 2011 and a 1.8% annual rate during the third quarter of 2011. It then accelerated to an annual growth rate of 3.0% in the fourth quarter of 2011, reigniting
hopes of a sustainable economic recovery. Those hopes were buoyed further by the preliminary estimate of first-quarter 2012 GDP, which remained positive with a 1.9% annual rate. While few economists now believe that the U.S. economy is in danger of
sliding back into recession, many continue to expect a tepid economic growth environment throughout 2012.
1.
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Beta measures fund volatility relative to general market movements. It is a standardized measure of systematic risk in comparison to a specified index. The benchmark beta
is 1.00 by definition. Beta is based on historical performance and does not represent future results.
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Letter to Shareholders
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Wells Fargo Advantage Income Opportunities Fund
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3
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Within the eurozone, GDP grew at an annualized rate of 1.5% for 2011, which was modestly weaker from a year
earlier when eurozone GDP was reported at an annualized rate of 2.0% in the fourth quarter of 2010. Considering the fiscal challenges that faced European countries throughout 2011stemming primarily from the re-emergence of the Greek debt
crisismost economists expected weaker economic conditions in 2011. While several steps have been taken by the International Monetary Fund and the European Central Bank (ECB) to address the ongoing fiscal challenges in Europe, economic
conditions within many countries in the eurozone are likely to remain weak throughout 2012.
Central banks across the globe
remain committed to accommodative policies.
With inflation in check, the U.S. Federal Reserve (Fed) held its target range for the federal
funds ratea proxy for short-term interest ratessteady at 0% to 0.25%. Following its August 9, 2011, meeting, the Federal Open Market Committee (FOMC) issued a statement explaining that economic conditions were likely to warrant
exceptionally low levels for the federal funds rate through at least mid-2013a timetable that was later revised to late 2014 following the FOMC meeting on January 25, 2012. Additionally, in September 2011, the Fed launched yet another
stimulus programdubbed Operation Twistthat was designed to keep intermediate- and longer-term yields relatively low. By keeping longer-term yields low, lending activity may potentially spark business investments and home
purchases that, in turn, may provide support for a more sustainable economic recovery.
The ECB also continued to maintain an accommodative
monetary policy throughout the period, primarily in an effort to stave off the contagion risk stemming from the ongoing concerns about the potential of Greece defaulting on its sovereign bonds. Fortunately, Greece received another bailout and was
able to restructure its outstanding debt in February 2012, which seemed to alleviate near-term contagion risks and the possibility of the euro currency collapsing. However, the debt agreement does not fully address longer-term structural issues that
affect not only Greece but several other countries across the eurozone. Recognizing the drag the persistent sovereign debt crisis has had on financial stability across the eurozone, the ECB introduced additional liquidity into the European banking
system through its Long-Term Refinancing Operation (LTRO). The LTRO program effectively encourages European banks to buy sovereign bonds of the eurozone governments, helping to push yields lower on bonds from financially fragile countries like Spain
and Italy. This type of activity helps reduce the near-term risk that those countries would experience funding issues. From a global credit market perspective, this additional liquidity further aims to help alleviate fears of contagion and may cause
risk premiums to declinewe believe an encouraging scenario for equities and high-yield bonds.
Recent events have not
altered our message to shareholders.
The heightened volatility of the past 12 months and lingering uncertainties about the outlook going
forward have left many investors questioning their resolve
2.
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The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index with each
stocks weight in the index proportionate to its market value. You cannot invest directly in an index.
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3.
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The Russell 3000
®
Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. You cannot invest directly in an index.
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4.
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The Barclays U.S. Aggregate Bond Index is composed of the Barclays Government/Credit Index and the Mortgage-Backed Securities Index and includes U.S. Treasury issues,
agency issues, corporate bond issues, and mortgage-backed securities. You cannot invest directly in an index.
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4
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Wells Fargo Advantage Income Opportunities Fund
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Letter to Shareholders
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and their investments. Yet, it is precisely at such times that the market may present opportunitiesas well as challengesfor prudent investors. For many investors, simply building and
maintaining a well-diversified
6
investment plan focused on clear
financial objectives is the best long-term strategy.
Thank you for choosing to invest with
Wells Fargo Advantage Funds
. We appreciate
your confidence in us and remain committed to helping you meet your financial needs. For current information about your fund investments, contact your investment professional, visit our Web site at
wellsfargoadvantagefunds.com
, or call us
directly at
1-800-222-8222
. We are available 24 hours a day, 7 days a week.
Sincerely,
Karla M. Rabusch
President
Wells Fargo Advantage Funds
5.
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The BofA Merrill Lynch U.S. High Yield Master II Blended Index is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred interest
bonds and payment-in kind securities. Issues included in the index have maturities of one year or more and have a credit rating lower than BBB-/Baa3, but are not in default. The BofA Merrill Lynch U.S. High Yield Master II Blended Index limits any
individual issuer to a maximum of 2% benchmark exposure. You cannot invest directly in an index.
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6.
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Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
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Performance Highlights (Unaudited)
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Wells Fargo Advantage Income Opportunities Fund
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5
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Investment objective
The Fund seeks a high level of current income. Capital appreciation is a secondary objective.
Adviser
Wells Fargo Funds Management, LLC
Sub-adviser
Wells Capital Management Incorporated
Portfolio managers
Niklas Nordenfelt, CFA
Phillip Susser
Fund inception
February 26, 2003
Average annual total returns
1
(%) as of April 30, 2012
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6 Months*
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1 year
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5 year
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Since
inception
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Based on market value
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10.79
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10.03
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5.51
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8.07
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Based on net asset value (NAV) per share
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6.96
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6.16
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4.84
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7.87
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*
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Returns for periods of less than one year are not annualized.
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Figures quoted represent past performance, which is no guarantee of future results and do not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sales of fund
shares.
Investment return and principal value of an investment will fluctuate so that an investors shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the
performance data quoted and assumes the reinvestment of dividends and capital gains. To obtain performance information current to the most recent month-end, please call 1.800.730.6001.
The Adviser has committed through May 31, 2013, to waive fees and/or reimburse expenses to the extent necessary to limit the Funds borrowing expenses to an amount that is 5 basis points lower
than what the borrowing expenses would have been if the Fund had not redeemed its Auction Market Preferred Shares. The Funds gross and net expense ratios for the year ended April 30, 2012 are 1.35% and 1.03%, respectively. Without these
reductions, the Funds returns would have been lower.
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Comparison of NAV vs. market value since inception
2
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The Fund is leveraged through a secured debt borrowing facility and may issue preferred shares. The use of
leverage results in certain risks including, among others, the likelihood of greater volatility of net asset value and the market price of common shares. Derivatives involve additional risks including interest rate risk, credit risk, the risk of
improper valuation and the risk of non-correlation to the relevant instruments they are designed to hedge or to closely track. Bond fund values fluctuate in response to the financial condition of individual issuers, general market and economic
conditions, and changes in interest rates. In general, when interest rates rise, bond fund values fall and investors may lose principal value. High-yield securities have a greater risk of default and tend to be more volatile than higher-rated debt
securities.
1.
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Total returns based on market value are calculated assuming a purchase of common stock at the closing market price prior to the first days opening market price and a
sale at the last days closing market price for the period reported. Total returns based on NAV are calculated based on the NAV at the beginning of the period and end of period. Dividends and distributions are assumed for the purposes of these
calculations to be reinvested at prices obtained under the Funds Automatic Dividend Reinvestment Plan. Total returns do not reflect brokerage commissions or sales charges. If these charges were included, the returns would be lower.
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2.
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This chart does not reflect any brokerage commissions or sales charges.
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6
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Wells Fargo Advantage Income Opportunities Fund
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Performance Highlights (Unaudited)
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Investment income
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Interest
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$
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73,841,641
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Dividends
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115,583
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Income from affiliated securities
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26,958
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Total investment income
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73,984,182
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Expenses
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Advisory fee
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5,430,088
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Administration fee
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452,507
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Custody and accounting fees
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56,764
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Professional fees
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58,088
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Shareholder report expenses
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103,563
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Trustees fees and expenses
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12,001
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Transfer agent fees
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34,089
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Interest expense
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535,819
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Secured borrowing fees
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2,380,556
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Other fees and expenses
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38,716
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Total expenses
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9,102,191
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Less: Fee waivers and/or expense reimbursements
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(2,113,550
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)
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Net expenses
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6,988,641
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Net investment income
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66,995,541
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REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
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Net realized gains on investments
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7,371,101
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Net change in unrealized gains (losses) on investments
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(33,221,928
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)
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Net realized and unrealized gains (losses) on investments
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(25,850,827
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)
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Net increase in net assets resulting from operations
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$
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41,144,714
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The accompanying notes are an integral part of these financial statements.
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Statement of Changes in Net Assets
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Wells Fargo Advantage Income Opportunities Fund
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21
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Year Ended
April 30, 2012
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Year Ended
April 30, 2011
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Operations
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Net investment income
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$
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66,995,541
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$
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71,471,543
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Net realized gains on investments
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7,371,101
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16,218,514
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Net change in unrealized gains (losses) on investments
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(33,221,928
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)
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13,087,291
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Distributions to preferred shareholders from net investment income
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0
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(38,826
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)
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Net increase in net assets resulting from operations
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41,144,714
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100,738,522
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Distributions to common shareholders from net investment income
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(71,940,314
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)
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(71,414,400
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)
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Capital share transactions
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Net asset value of common shares issued under the Automatic Dividend Reinvestment Plan
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4,753,429
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4,381,191
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Total increase (decrease) in net assets
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(26,042,171
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)
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33,705,313
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Net assets applicable to common shareholders
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Beginning of period
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709,849,658
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676,144,345
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End of period
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$
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683,807,487
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$
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709,849,658
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Overdistributed net investment income
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$
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(6,076,636
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)
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$
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(3,721,910
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)
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The accompanying notes are an integral part of these financial statements.
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22
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Wells Fargo Advantage Income Opportunities Fund
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Statement of Cash FlowsYear Ended April 30, 2012
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Cash flows from operating activities:
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Net increase in net assets resulting from operations
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$
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41,144,714
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Adjustments to reconcile net increase in net assets from operations to net cash provided by operating
activities:
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Purchase of investment securities
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(386,526,289
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)
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Proceeds from disposition of investment securities
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416,370,574
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Amortization
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(3,092,928
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)
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Purchase of short-term investment securities, net
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(32,692,651
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)
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Decrease in dividends and interest receivable
|
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|
2,340,618
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Decrease in receivable for securities sold
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|
|
7,099,677
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Decrease in principal paydown receivable
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|
884,753
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Decrease in other assets
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26,955
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Decrease in payable for securities purchased
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|
(4,290,208
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)
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Increase in advisory fee payable
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|
170,190
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Decrease in due to other related parties
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(2,412
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)
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Increase in accrued expenses and other liabilities
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|
104,490
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Unrealized depreciation on investments
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|
33,221,928
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Net realized gains on investments
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|
(7,371,101
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)
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|
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Net cash provided by operating activities
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|
67,388,310
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Cash flows from financing activities:
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|
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Cash distributions paid on common shares
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|
(67,145,649
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)
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Decrease in secured borrowing
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|
(242,661
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)
|
|
|
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|
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Net cash used in financing activities
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|
(67,388,310
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)
|
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|
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Net increase in cash
|
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|
0
|
|
|
|
|
|
|
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Cash:
|
|
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|
|
Beginning of period
|
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$
|
0
|
|
|
|
|
|
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End of period
|
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$
|
0
|
|
|
|
|
|
|
|
|
Supplemental cash disclosure:
|
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|
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Cash paid for interest
|
|
$
|
481,770
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|
|
|
|
|
|
|
|
Supplemental non-cash financing disclosure:
|
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|
|
|
Reinvestment of dividends
|
|
$
|
4,753,429
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
|
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Financial Highlights
|
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Wells Fargo Advantage Income Opportunities Fund
|
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|
23
|
|
(For a common share outstanding throughout each period)
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Year Ended April 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
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|
2008
|
|
Net asset value, beginning of period
|
|
$
|
10.11
|
|
|
$
|
9.69
|
|
|
$
|
7.37
|
|
|
$
|
12.32
|
|
|
$
|
14.26
|
|
Net investment income
|
|
|
0.95
|
1
|
|
|
1.02
|
1
|
|
|
1.06
|
1
|
|
|
1.35
|
1
|
|
|
1.64
|
1
|
Net realized and unrealized gains (losses) on investments
|
|
|
(0.37
|
)
|
|
|
0.42
|
|
|
|
2.41
|
|
|
|
(4.91
|
)
|
|
|
(1.85
|
)
|
Distributions to preferred shareholders from net investment income
|
|
|
0.00
|
|
|
|
(0.00
|
)
1,2
|
|
|
(0.01
|
)
1
|
|
|
(0.08
|
)
1
|
|
|
(0.37
|
)
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.58
|
|
|
|
1.44
|
|
|
|
3.46
|
|
|
|
(3.64
|
)
|
|
|
(0.58
|
)
|
Distributions to common shareholders from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(1.02
|
)
|
|
|
(1.02
|
)
|
|
|
(1.08
|
)
|
|
|
(1.31
|
)
|
|
|
(1.36
|
)
|
Tax basis return of capital
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.06
|
)
1
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common shareholders
|
|
|
(1.02
|
)
|
|
|
(1.02
|
)
|
|
|
(1.14
|
)
|
|
|
(1.31
|
)
|
|
|
(1.36
|
)
|
Net asset value, end of period
|
|
$
|
9.67
|
|
|
$
|
10.11
|
|
|
$
|
9.69
|
|
|
$
|
7.37
|
|
|
$
|
12.32
|
|
Market value, end of period
|
|
$
|
10.29
|
|
|
$
|
10.38
|
|
|
$
|
9.63
|
|
|
$
|
7.30
|
|
|
$
|
11.71
|
|
Total return based on market value
3
|
|
|
10.03
|
%
|
|
|
19.68
|
%
|
|
|
49.84
|
%
|
|
|
(25.48
|
)%
|
|
|
(11.07
|
)%
|
Ratios to average net assets (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.35
|
%
|
|
|
1.44
|
%
|
|
|
1.79
|
%
|
|
|
3.09
|
%
|
|
|
1.21
|
%
|
Net expenses
|
|
|
1.03
|
%
|
|
|
1.09
|
%
|
|
|
1.13
|
%
|
|
|
2.30
|
%
|
|
|
1.21
|
%
|
Interest expense
4
|
|
|
0.08
|
%
|
|
|
0.11
|
%
|
|
|
0.02
|
%
|
|
|
0.79
|
%
|
|
|
0.00
|
%
|
Net investment income
5
|
|
|
9.89
|
%
|
|
|
10.55
|
%
|
|
|
11.81
|
%
|
|
|
14.35
|
%
|
|
|
9.81
|
%
|
Supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
25
|
%
|
|
|
42
|
%
|
|
|
108
|
%
|
|
|
88
|
%
|
|
|
102
|
%
|
Net assets of common shareholders, end of period (000s omitted)
|
|
|
$683,807
|
|
|
|
$709,850
|
|
|
|
$676,144
|
|
|
|
$508,602
|
|
|
|
$849,573
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000s omitted)
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Asset coverage per $1,000 of borrowing, end of period
|
|
|
$3,973
|
|
|
|
$4,088
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Liquidation value of Preferred Shares, end of period (000s omitted)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
196,000
|
|
|
$
|
196,000
|
|
|
$
|
490,000
|
|
Asset coverage ratio for Preferred Shares, end of period
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
394
|
%
|
|
|
315
|
%
|
|
|
272
|
%
|
1.
|
Calculated based on average common shares outstanding
|
2.
|
Amount is less than $0.005.
|
3.
|
Total return is calculated assuming a purchase of common stock on the first day and a sale on the last day of the period reported. Dividends and distributions, if any, are
assumed for purposes of these calculations to be reinvested at prices obtained under the Funds Automatic Dividend Reinvestment Plan. Total return does not reflect brokerage commissions or sales charges.
|
4.
|
Interest expense ratio relates to interest associated with borrowings and/or leverage transactions.
|
5.
|
The net investment income ratio reflects any distributions paid to preferred shareholders.
|
The accompanying notes are an integral part of these financial statements.
|
|
|
|
|
24
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Notes to Financial Statements
|
1. ORGANIZATION
Wells Fargo
Advantage Income Opportunities Fund (the Fund) was organized as a statutory trust under the laws of the state of Delaware on December 3, 2002 and is registered as a diversified closed-end management investment company under the
Investment Company Act of 1940, as amended. The primary investment objective of the Fund is to seek a high level of current income. The Fund may, as a secondary objective, also seek capital appreciation to the extent consistent with its investment
objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies, which are consistently followed in the preparation of the financial statements of the Fund, are in conformity with U.S. generally accepted accounting principles
which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Securities valuation
Fixed income securities with original maturities exceeding 60 days are valued based on evaluated prices received from an independent pricing service approved
by the Board of Trustees which may utilize both transaction data and market information such as yield, prices of securities of comparable quality, coupon rate, maturity, type of issue, trading characteristics and other market data. If valuations are
not available from the pricing service or values received are deemed not representative of market value, values will be obtained from a third party broker-dealer or determined based on the Funds Fair Value Procedures.
Debt securities of sufficient credit quality with original maturities of 60 days or less generally are valued at amortized cost which approximates fair
value. The amortized cost method involves valuing a security at its cost, plus accretion of discount or minus amortization of premium over the period until maturity.
Investments in equity securities are valued each business day as of the close of regular trading on the New York Stock Exchange, which is usually 4:00 p.m. (Eastern Time). Securities which are traded on a
national or foreign securities exchange are valued at the last reported sales price, except that securities listed on The Nasdaq Stock Market, Inc. (Nasdaq) are valued at the Nasdaq Official Closing Price (NOCP), and if no
NOCP is available, then at the last reported sales price. If no sales price is shown on the Nasdaq, the bid price will be used. In the absence of any sale of securities listed on the Nasdaq, and in the case of other securities (including U.S.
Government obligations, but excluding debt securities maturing in 60 days or less), the price will be deemed stale and the valuations will be determined in accordance with the Funds Fair Value Procedures.
Investments in open-end mutual funds are valued at net asset value.
Investments which are not valued using any of the methods discussed above, are valued at their fair value, as determined by procedures established in good faith and approved by the Board of Trustees. The
Board of Trustees has established a Valuation Committee comprised of the Trustees and has delegated to it the authority to take any actions regarding the valuation of portfolio securities that the Valuation Committee deems necessary in determining
the fair value of portfolio securities, unless the responsibility has been delegated to the Management Valuation Team of Wells Fargo Funds Management, LLC (Fund Management). The Board of Trustees retains the authority to make or ratify
any valuation decisions or approve any changes to the Fair Value Procedures as it deems appropriate. On a quarterly basis, the Board of Trustees considers for ratification any valuation actions taken by the Valuation Committee or the Management
Valuation Team.
Valuations of fair valued securities are compared to the next actual sales price when available, or other appropriate market
information to assess the continued appropriateness of the fair valuation methodology used. These securities are fair valued on a day-to-day basis, taking into consideration changes to appropriate market information and any significant changes to
the input factors considered in the valuation process until there is a readily available price provided on the exchange or by an independent pricing service. Valuations received from an independent pricing service or broker quotes are periodically
validated by comparisons to most recent trades and valuations provided by other independent pricing services in addition to the review of prices by the adviser and/or sub-adviser. Unobservable inputs
|
|
|
|
|
|
|
Notes to Financial Statements
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
25
|
|
used in determining fair valuations are identified based on the type of security, taking into consideration factors utilized by market participants in valuing the investment, knowledge about the
issuer and the current market environment.
When-issued transactions
The Fund may purchase securities on a forward commitment or when-issued basis. The Fund records a when-issued transaction on the trade date and
will segregate assets in an amount at least equal in value to the Funds commitments to purchase when-issued securities. Securities purchased on a when-issued basis are marked-to-market daily and the Fund begins earning interest on the
settlement date. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract.
Term loans
The Fund may invest in term loans. The loans are marked-to-market
daily and the Fund begins earning interest when the loans are funded. The loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. The Fund assumes the credit risk of the borrower and there could be
potential loss to the Fund in the event of default by the borrower.
Credit default swaps
The Fund may be subject to credit risk in the normal course of pursuing its investment objectives. The Fund may enter into credit default swap contracts for
hedging or speculative purposes to provide or receive a measure of protection against default on a referenced entity, obligation or index or for investment gains. Credit default swaps involve an exchange of a stream of payments for protection
against the loss in value of an underlying security or index. Under the terms of the swap, one party acts as a guarantor (referred to as the seller of protection) and receives a periodic stream of payments, provided that there is no credit
event
,
from another party (referred to as the buyer of protection) that is a fixed percentage applied to a notional principal amount over the term of the swap. An index credit default swap references all the names in the index, and if a
credit event is triggered, the credit event is settled based on that names weight in the index. A credit event includes bankruptcy, failure to pay, obligation default, obligation acceleration, repudiation/moratorium, and restructuring. The
Fund may enter into credit default swaps as either the seller of protection or the buyer of protection. As the seller of protection, the Fund is subject to investment exposure on the notional amount of the swap and has assumed the risk of default of
the underlying security or index. As the buyer of protection, the Fund could be exposed to risks if the seller of the protection defaults on its obligation to perform, or if there are unfavorable changes in the fluctuation of interest rates. The
maximum potential amount of future payments (undiscounted) that the Fund as the seller of protection could be required to make under the credit default swap contract would be an amount equal to the notional amount of the swap contract. The
Funds maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk is mitigated by having a master netting arrangement between the Fund and the
counterparty and by having the counterparty post collateral to cover the Funds exposure to the counterparty.
If the Fund is the seller of
protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will pay to the buyer of protection the notional amount of the swap and take delivery of the referenced obligation or underlying securities
comprising the referenced index. If the Fund is the buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will receive from the seller of protection the notional amount of the swap and
deliver the referenced obligation or underlying securities comprising the referenced index.
Any premiums paid or received on the transactions are
recorded as an asset or liability on the Statement of Assets and Liabilities and amortized. The value of the swap contract is marked-to-market daily based on quotations from an independent pricing service or market makers and any change in value is
recorded as an unrealized gain or loss. Periodic payments made or received are recorded as realized gains or losses. In addition, payments received or made as a result of a credit event or termination of the contract are recognized as realized gains
or losses.
Certain credit default swap contracts entered into by the Fund provide for conditions that result in events of default or termination
that enable the counterparty to the agreement to cause an early termination of the transactions under those agreements. Any election by the counterparty to terminate early may impact the amounts reported on the financial statements.
|
|
|
|
|
26
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Notes to Financial Statements
|
Security transactions and income recognition
Securities transactions are recorded on a trade date basis. Realized gains or losses are reported on the basis of identified cost of securities delivered.
Interest income is accrued daily and bond discounts are accreted and premiums are amortized daily based on the effective interest method. To the
extent debt obligations are placed on non-accrual status, any related interest income may be reduced by writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied
procedures. If the issuer subsequently resumes interest payments or when the collectability of interest is reasonably assured, the debt obligation is removed from non accrual status.
Dividend income is recognized on the ex-dividend date.
Distributions to shareholders
Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-dividend date. Such
distributions are determined in conformity with income tax regulations, which may differ from generally accepted accounting principles.
The
timing and character of distributions made during the period from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. To the extent that these differences are permanent in
nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment. Temporary differences do not require reclassifications. The primary permanent differences causing such reclassification are due to bond
premium and consent fees. At April 30, 2012, as a result of permanent book-to-tax differences, the following reclassification adjustments were made on the Statement of Assets and Liabilities:
|
|
|
Overdistributed
Net Investment
Income
|
|
Accumulated
Net Realized
Losses on
Investments
|
$2,590,047
|
|
$(2,590,047)
|
Federal and other taxes
The Fund intends to continue to qualify as a regulated investment company by distributing substantially all of its investment company taxable income and any net realized capital gains (after reduction for
capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provision for federal income taxes was required.
The Funds income and federal excise tax returns and all financial records supporting those returns for the prior three fiscal years are subject to examination by the federal and Delaware revenue
authorities. Management has analyzed the Funds tax positions taken on federal, state, and foreign tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
Under the recently enacted
Regulated Investment Company Modernization Act of 2010
, the Fund is permitted to carry forward capital losses
incurred in taxable years which began after December 22, 2010 for an unlimited period. However, any losses incurred are 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. Post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than be considered all
short-term as under previous law. In addition, the Fund may elect to defer any portion of a post-October capital loss or qualified late-year ordinary loss to the first day of the following taxable year. A post-October capital loss is the greatest of
the net capital loss, net short-term capital loss or net long-term capital loss for the portion of the taxable year after October 31. A qualified late-year ordinary loss is the net loss comprised of (a) net gain or loss from the sale or other
disposition of capital assets for the portion of the taxable year after October 31, and (b) other ordinary income or loss for the portion of the taxable year after December 31.
|
|
|
|
|
|
|
Notes to Financial Statements
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
27
|
|
At April 30, 2012, net capital loss carryforwards, which are available to offset future net realized
capital gains, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-enactment
Capital Loss Expiration
|
|
2015
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
$6,603,920
|
|
$
|
15,525,027
|
|
|
$
|
130,598,584
|
|
|
$
|
155,329,141
|
|
3. FAIR VALUATION MEASUREMENTS
Fair value measurements of investments are determined within a framework that has established a fair value hierarchy based upon the various data inputs utilized in determining the value of the Funds
investments. The three-level hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to significant unobservable inputs (Level 3). The Funds
investments are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The inputs are summarized into three broad levels as follows:
n
|
|
Level 1 quoted prices in active markets for identical securities
|
n
|
|
Level 2 other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
|
n
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
|
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing
in those securities.
As of April 30, 2012, the inputs used in valuing the Funds assets, which are carried at fair value, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Securities
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Total
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
622,157
|
|
|
$
|
0
|
|
|
$
|
9,671
|
|
|
$
|
631,828
|
|
Preferred stocks
|
|
|
1,269,350
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,269,350
|
|
Convertible debentures
|
|
|
0
|
|
|
|
3,184,688
|
|
|
|
0
|
|
|
|
3,184,688
|
|
Corporate bonds and notes
|
|
|
0
|
|
|
|
748,940,743
|
|
|
|
0
|
|
|
|
748,940,743
|
|
Term loans
|
|
|
0
|
|
|
|
77,046,759
|
|
|
|
5,611,506
|
|
|
|
82,658,265
|
|
Yankee corporate bonds and notes
|
|
|
0
|
|
|
|
22,530,995
|
|
|
|
0
|
|
|
|
22,530,995
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment companies
|
|
|
44,569,135
|
|
|
|
0
|
|
|
|
0
|
|
|
|
44,569,135
|
|
|
|
$
|
46,460,642
|
|
|
$
|
851,703,185
|
|
|
$
|
5,621,177
|
|
|
$
|
903,785,004
|
|
Further details on the major security types listed above can be found in the Portfolio of Investments.
Transfers in and transfers out are recognized at the end of the reporting period. For the year ended April 30, 2012, the Fund did not have any
significant transfers into/out of Level 1 and Level 2.
4. TRANSACTIONS WITH AFFILIATES
Advisory fee
Funds Management,
an indirect wholly owned subsidiary of Wells Fargo & Company (Wells Fargo), is the adviser to the Fund and is entitled to receive a fee at an annual rate of 0.60% of the Funds average daily total assets. Total assets
consist of the net assets of the Fund plus borrowings or other leverage for investment purposes to the extent excluded in calculating net assets. Funds Management has committed through May 31, 2013 to waive fees and/or reimburse expenses to the
extent necessary to limit the Funds borrowing expenses to an amount that is 5 basis points lower than
|
|
|
|
|
28
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Notes to Financial Statements
|
what the borrowing expenses would have been if the Fund had not redeemed its Auction Market Preferred Shares (Preferred Shares). Funds Management contractually waived its advisory fee
in the amount of $2,113,550 for the year ended April 30, 2012.
Funds Management has retained the services of a sub-adviser to provide daily
portfolio management to the Fund. The fee for sub-advisory services is borne by Funds Management. Wells Capital Management Incorporated, an affiliate of Funds Management, is the sub-adviser to the Fund and is entitled to receive a fee from Funds
Management at an annual rate of 0.40% of the Funds average daily total assets.
Administration fee
Funds Management also serves as the administrator to the Fund providing the Fund with facilities, equipment and personnel. Funds Management is entitled to
receive an annual administration fee from the Fund equal to 0.05% of the Funds average daily total assets.
5. CAPITAL
SHARE TRANSACTIONS
The Fund has authorized capital of 100,000,000 shares with no par value. For the year ended April 30, 2012 and the
year ended April 30, 2011, the Fund issued 487,572 and 450,459 shares, respectively.
The Fund no longer has any Preferred Shares
outstanding.
6. BORROWINGS
The Fund has borrowed $230 million through a secured debt financing agreement administered by a major financial institution (the Facility). The Facility has a commitment amount of $230 million
which expires on February 25, 2013, at which point it may be renegotiated and potentially renewed for another one-year term. At April 30, 2012, the Fund had secured borrowings outstanding in the amount of $230,054,049 (including accrued
interest and usage and commitment fees payable).
The Funds borrowings under the Facility are generally charged interest at a rate
based on the rates of the commercial paper notes issued to fund the Funds borrowings or at the London Interbank Offered Rate (LIBOR) plus 1.0%. During the year ended April 30, 2012, an effective interest rate of 0.23% was incurred on the
borrowings. Interest expense of $535,819, representing 0.08% of the Funds average daily net assets, was incurred during the year ended April 30, 2012.
The Fund has pledged all of its assets to secure the borrowings and currently pays, on a monthly basis, a usage fee at an annual rate of 0.40% of the daily average outstanding principal amount of borrowings
and commitment fee at an annual rate of 0.40% of the product of (i) the daily average outstanding principal amount of borrowings and (ii) 1.02. Prior to February 27, 2012, both the usage fee and commitment fee were charged at an
annual rate of 0.50%. The secured borrowing fees on the Statement of Operations of $2,380,556 represents the usage fee, commitment fee and structuring fees. For the year ended April 30, 2012, the Fund paid structuring fees in the amount of
$118,212.
7. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, excluding U.S. Government obligations (if any) and short-term securities were $270,699,486 and $217,264,855, respectively, for the year ended April 30, 2012.
8. DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid was $71,940,314 and $71,453,226 of ordinary income for the years ended April 30, 2012 and April 30, 2011, respectively.
As of April 30, 2012, the components of distributable earnings on a tax basis were as follows:
|
|
|
|
|
Undistributed
Ordinary
Income
|
|
Unrealized
Gains (Losses)
|
|
Capital Loss
Carryforward
|
$41,469
|
|
$16,164,444
|
|
$(308,056,672)
|
|
|
|
|
|
|
|
Notes to Financial Statements
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
29
|
|
9. INDEMNIFICATION
Under the Funds organizational documents, the officers and directors are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the
normal course of business, the Fund may enter into contracts with service providers that contain a variety of indemnification clauses. The Funds maximum exposure under these arrangements is dependent on future claims that may be made against
the Fund and, therefore, cannot be estimated.
10. NEW ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11, which amends FASB ASC Topic 210,
Balance Sheet
, creates new disclosure requirements which require entities to disclose both gross and net information for derivatives and
other financial instruments that are either offset in the Statement of Assets and Liabilities or subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements are effective for interim and annual reporting
periods beginning on or after January 1, 2013. Management is currently assessing the potential impact, in addition to expanded financial statement disclosure, that may result from adopting this ASU.
In May 2011, FASB issued ASU No. 2011-04
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
.
ASU No. 2011-04 amends FASB ASC Topic 820,
Fair Value Measurements
, to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. The ASU is effective
prospectively for interim and annual periods beginning after December 15, 2011. Management expects that adoption of the ASU will result in additional disclosures in the financial statements, as applicable.
In April 2011, FASB issued ASU No. 2011-03
Reconsideration of Effective Control for Repurchase Agreements
. ASU No. 2011-03 amends FASB ASC
Topic 860,
Transfers and Servicing
, specifically the criteria required to determine whether a repurchase agreement (repo) and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. ASU
No. 2011-03 changes the assessment of effective control by focusing on the transferors contractual rights and obligations and removing the criterion to assess its ability to exercise those rights or honor those obligations. This could
result in changes to the way entities account for certain transactions including repurchase agreements, mortgage dollar rolls and reverse repurchase agreements. The ASU will become effective on a prospective basis for new transfers and modifications
to existing transactions as of the beginning of the first interim or annual period beginning on or after December 15, 2011. Management has evaluated the impact of adopting the ASU and expects no significant changes.
11. SUBSEQUENT DISTRIBUTIONS
The Fund declared the following distributions to common shareholders:
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
|
Net Investment Income
|
April 20, 2012
|
|
May 15, 2012
|
|
June 1, 2012
|
|
$0.0850
|
May 18, 2012
|
|
June 13, 2012
|
|
July 2, 2012
|
|
$0.0770
|
June 22, 2012
|
|
July 16, 2012
|
|
August 1, 2012
|
|
$0.0770
|
These distributions are not reflected in the accompanying financial statements.
|
|
|
|
|
30
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Report of Independent Registered Public Accounting Firm
|
BOARD OF TRUSTEES AND SHAREHOLDERS OF WELLS FARGO ADVANTAGE
INCOME OPPORTUNITIES FUND:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of
the Wells Fargo Advantage Income Opportunities Fund (the Fund) as of April 30, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years or periods in the
two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Funds management. Our
responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 2012, by
correspondence with custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly,
in all material respects, the financial position of the Wells Fargo Advantage Income Opportunities Fund as of April 30, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the years or periods in
the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
June 22, 2012
|
|
|
|
|
|
|
Other Information (Unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
31
|
|
TAX INFORMATION
For the fiscal year ended April 30, 2012, $68,325,879 has been
designated as interest-related dividends for nonresident alien shareholders pursuant to Section 871 of the Internal Revenue Code.
PROXY VOTING INFORMATION
A
description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-222-8222, visiting our Web site at
wellsfargoadvantagefunds.com
, or visiting the SEC Web site at
sec.gov
. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge
on the Funds Web site at
wellsfargoadvantagefunds.com
or by visiting the SEC Web site at
sec.gov
.
PORTFOLIO HOLDINGS INFORMATION
The complete portfolio holdings for the Fund are publicly available on the Funds Web site (
wellsfargoadvantagefunds.com
) on a monthly, 30-day or
more delayed basis. The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q, which is available without charge by visiting the SEC Web site at
sec.gov
. In
addition, the Funds Form N-Q may be reviewed and copied at the SECs Public Reference Room in Washington, DC, and at regional offices in New York City, at 233 Broadway, and in Chicago, at 175 West Jackson Boulevard, Suite 900. Information
about the Public Reference Room may be obtained by calling 1-800-SEC-0330.
|
|
|
|
|
32
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Other Information (Unaudited)
|
BOARD OF TRUSTEES
The following table provides basic information about the Board of Trustees (the Trustees) and Officers of the Fund. Each of the Trustees and Officers listed below acts in identical capacities for
the Wells Fargo Advantage family of funds, which consists of 137 funds comprising the Wells Fargo Funds Trust, Wells Fargo Variable Trust, Wells Fargo Master Trust, and four closed-end funds, including the Fund (collectively the Fund
Complex). All of the Trustees are also Members of the Audit and Governance Committees of each Trust in the Fund Complex. The mailing address of each Trustee and Officer is 525 Market Street, 12th Floor, San Francisco, CA 94105. The Board of
Trustees is classified into three classes of which one is elected annually. Each Trustee serves a three-year term concurrent with the class from which the Trustee is elected. Each Officer serves an indefinite term.
Independent Trustees
|
|
|
|
|
|
|
Name and
Year of Birth
|
|
Position Held and
Length of Service
|
|
Principal Occupations During Past Five Years
|
|
Other
Directorships During
Past Five Years
|
Peter G. Gordon
(Born 1942)
|
|
Trustee, since 2010; Chairman, since 2010 (Lead Trustee since 2010)
|
|
Co-Founder, Retired Chairman, President and CEO of Crystal Geyser Water Company. Trustee Emeritus, Colby College
|
|
Asset Allocation Trust
|
Isaiah Harris, Jr.
(Born 1952)
|
|
Trustee, since 2010
|
|
Retired. Prior thereto, President and CEO of BellSouth Advertising and Publishing Corp. from 2005 to 2007, President and CEO of BellSouth
Enterprises from 2004 to 2005 and President of BellSouth Consumer Services from 2000 to 2003. Emeritus member of the Iowa State University Foundation Board of Governors. Emeritus Member of the Advisory Board of Iowa State University School of
Business. Mr. Harris is a certified public accountant.
|
|
CIGNA Corporation; Deluxe Corporation; Asset Allocation Trust
|
Judith M. Johnson
(Born 1949)
|
|
Trustee, since 2010
|
|
Retired. Prior thereto, Chief Executive Officer and Chief Investment Officer of Minneapolis Employees Retirement Fund from 1996 to 2008. Ms.
Johnson is an attorney, certified public accountant and a certified managerial accountant.
|
|
Asset Allocation Trust
|
Leroy Keith, Jr.
(Born 1939)
|
|
Trustee, since 2003
|
|
Chairman, Bloc Global Services (development and construction). Trustee of the Evergreen Funds from 1983 to 2010. Former Managing Director,
Almanac Capital Management (commodities firm), former Partner, Stonington Partners, Inc. (private equity fund), former Director, Obagi Medical Products Co. and former Director, Lincoln Educational Services.
|
|
Trustee, Virtus Fund Complex (consisting of 40 portfolios as of 12/31/11); Asset Allocation Trust
|
David F. Larcker
(Born 1950)
|
|
Trustee, since 2010
|
|
James Irvin Miller Professor of Accounting at the Graduate School of Business, Stanford University, Director of Corporate Governance Research
Program and Senior Faculty of The Rock Center for Corporate Governance since 2006. From 2005 to 2008, Professor of Accounting at the Graduate School of Business, Stanford University. Prior thereto, Ernst & Young Professor of Accounting at The
Wharton School, University of Pennsylvania from 1985 to 2005.
|
|
Asset Allocation Trust
|
Olivia S. Mitchell
(Born 1953)
|
|
Trustee, since 2010
|
|
International Foundation of Employee Benefit Plans Professor, Wharton School of the University of Pennsylvania since 1993. Director of
Whartons Pension Research Council and Boettner Center on Pensions & Retirement Research, and Research Associate at the National Bureau of Economic Research. Previously, Cornell University Professor from 1978 to 1993.
|
|
Asset Allocation Trust
|
|
|
|
|
|
|
|
Other Information (Unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
33
|
|
|
|
|
|
|
|
|
Name and
Year of Birth
|
|
Position Held and
Length of Service
|
|
Principal Occupations During Past Five Years
|
|
Other
Directorships During
Past Five Years
|
Timothy J. Penny
(Born 1951)
|
|
Trustee, since 2010
|
|
President and CEO of Southern Minnesota Initiative Foundation, a non-profit organization, since 2007 and Senior Fellow at the Humphrey Institute
Policy Forum at the University of Minnesota since 1995. Member of the Board of Trustees of NorthStar Education Finance, Inc., a non-profit organization, since 2007.
|
|
Asset Allocation Trust
|
Michael S. Scofield
(Born 1943)
|
|
Trustee, since 2003
|
|
Served on the Investment Company Institutes Board of Governors and Executive Committee from 2008-2011 as well the Governing Council of the
Independent Directors Council from 2006-2011 and the Independent Directors Council Executive Committee from 2008-2011. Chairman of the IDC from 2008-2010. Institutional Investor (Fund Directions) Trustee of Year in 2007. Trustee of the Evergreen
Funds (and its predecessors) from 1984 to 2010. Chairman of the Evergreen Funds from 2000-2010. Former Trustee of the Mentor Funds. Retired Attorney, Law Offices of Michael S. Scofield and former Director and Chairman, Branded Media Corporation
(multi-media branding company).
|
|
Asset Allocation Trust
|
Donald C. Willeke
(Born 1940)
|
|
Trustee, since 2010
|
|
Principal of the law firm of Willeke & Daniels. General Counsel of the Minneapolis Employees Retirement Fund from 1984 until its
consolidation into the Minnesota Public Employees Retirement Association on June 30, 2010. Director and Vice Chair of The Free Trust (non-profit corporation). Director of the American Chestnut Foundation
(non-profit corporation).
|
|
Asset Allocation Trust
|
Officers
|
|
|
|
|
|
|
Name and
Year of Birth
|
|
Position Held and
Length of Service
|
|
Principal Occupations During Past Five Years
|
|
|
Karla M. Rabusch
(Born 1959)
|
|
President, since 2010
|
|
Executive Vice President of Wells Fargo Bank, N.A. and President of Wells Fargo Funds Management, LLC since 2003. Senior Vice President and
Chief Administrative Officer of Wells Fargo Funds Management, LLC from 2001 to 2003.
|
|
|
C. David Messman
(Born 1960)
|
|
Secretary, since 2010; Chief Legal Counsel, since 2010
|
|
Senior Vice President and Secretary of Wells Fargo Funds Management, LLC since 2001. Vice President and Managing Senior Counsel of Wells Fargo
Bank, N.A. since 1996.
|
|
|
Kasey Phillips
(Born 1970)
|
|
Treasurer, since 2005
|
|
Senior Vice President of Wells Fargo Funds Management, LLC since 2009. Senior Vice President of Evergreen Investment Management Company, LLC
from 2006 to 2010. Treasurer of the Evergreen Funds from 2005 to 2010.
|
|
|
David Berardi
(Born 1975)
|
|
Assistant Treasurer, since 2009
|
|
Vice President of Wells Fargo Funds Management, LLC since 2009. Vice President of Evergreen Investment Management Company, LLC from 2008 to
2010. Assistant Vice President of Evergreen Investment Services, Inc. from 2004 to 2008. Manager of Fund Reporting and Control for Evergreen Investment Management Company, LLC from 2004 to 2010.
|
|
|
Jeremy DePalma
(Born 1974)
|
|
Assistant Treasurer, since 2005
|
|
Senior Vice President of Wells Fargo Funds Management, LLC since 2009. Senior Vice President of Evergreen Investment Management Company, LLC
from 2008 to 2010. Vice President, Evergreen Investment Services, Inc. from 2004 to 2007. Head of the Fund Reporting and Control Team within Fund Administration from 2005 to 2010.
|
|
|
Debra Ann Early
(Born 1964)
|
|
Chief Compliance Officer, since 2010
|
|
Chief Compliance Officer of Wells Fargo Funds Management, LLC since 2007. Chief Compliance Officer of Parnassus Investments from 2005 to 2007.
Chief Financial Officer of Parnassus Investments from 2004 to 2007 and Senior Audit Manager of PricewaterhouseCoopers LLP from 1998 to 2004.
|
|
|
|
|
|
|
|
34
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Other Information (Unaudited)
|
BOARD CONSIDERATION OF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS:
Under Section 15 of the Investment Company Act of 1940 (the 1940 Act), the Board of Trustees (the Board) of Wells Fargo Advantage
Income Opportunities Fund (the Fund), all the members of which have no direct or indirect interest in the investment advisory and sub-advisory agreements and are not interested persons of the Fund, as defined in the 1940 Act
(the Independent Trustees), must determine whether to approve the continuation of the Funds investment advisory and sub-advisory agreements. In this regard, at an in person meeting held on March 29-30, 2012 (the
Meeting), the Board reviewed and re-approved: (i) an investment advisory agreement with Wells Fargo Funds Management, LLC (Funds Management) and (ii) an investment sub-advisory agreement with Wells Capital Management
Incorporated (Wells Capital Management) for the Fund. The investment advisory agreement with Funds Management and the investment sub-advisory agreement with Wells Capital Management are collectively referred to as the Advisory
Agreements.
At the Meeting, the Board considered the factors and reached the conclusions described below relating to the selection of Funds
Management and Wells Capital Management and the continuation of the Advisory Agreements. Prior to the Meeting, the Trustees conferred extensively among themselves and with representatives of Funds Management about these matters. The Board also met
throughout the year and received information that was useful to them in considering the continuation of the Advisory Agreements. The Independent Trustees were assisted in their evaluation of the Advisory Agreements by independent legal counsel, from
whom they received separate legal advice and with whom they met separately from Funds Management.
In providing information to the Board, Funds
Management and Wells Capital Management were guided by a detailed set of requests submitted by the Independent Trustees independent legal counsel on their behalf at the start of the Boards annual contract renewal process earlier in 2012.
In approving the Advisory Agreements, the Board did not identify any particular information or consideration that was all-important or controlling, and each Trustee likely attributed different weights to various factors.
Nature, extent and quality of services
The Board received and considered various information regarding the nature, extent and quality of services provided to the Fund by Funds Management and Wells Capital Management under the Advisory Agreements.
The Board also received and considered, among other things, information about the background and experience of senior management of Funds Management, and the qualifications, backgrounds, tenures and responsibilities of the portfolio managers
primarily responsible for the day-to-day portfolio management of the Fund.
The Board evaluated the ability of Funds Management and Wells Capital
Management, based on their respective financial condition, resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory, and supervisory personnel. The Board further considered
the compliance programs and compliance records of Funds Management and Wells Capital Management. In addition, the Board took into account the administrative services provided to the Fund by Funds Management and its affiliates.
The Boards decision to approve the continuation of the Advisory Agreements was based on a comprehensive evaluation of information provided to it. In
considering these matters, the Board considered not only the specific information presented in connection with the Meeting, but also the knowledge gained over time through interaction with Funds Management and Wells Capital Management about various
topics, including Funds Managements oversight of service providers. The above factors, together with those referenced below, are some of the most important, but not necessarily all, factors considered by the Board in concluding that the
nature, extent and quality of the investment advisory services provided to the Fund by Funds Management and Wells Capital Management supported the re-approval of the Advisory Agreements. Although the Board considered the continuation of the Advisory
Agreements for the Fund as part of the larger process of considering the continuation of the advisory agreements for all of the funds in the complex, its decision to continue the Advisory Agreements for the Fund was ultimately made on a fund-by-fund
basis.
Fund performance and expenses
The Board considered the performance results for the Fund over various time periods ended December 31, 2011. The Board also considered these results in comparison to the median performance of a universe of
relevant funds (the Universe) that was determined by Lipper Inc. (Lipper) to be similar to the Fund, and in comparison to the Funds benchmark index and to other comparative data. Lipper is an independent provider of
investment company data. The
|
|
|
|
|
|
|
Other Information (Unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
35
|
|
Board received a description of the methodology used by Lipper to select the funds in the Universe. The Board noted that, except for the five-year period, the performance of the Fund was higher
than the median performance of the Universe for the other periods under review. The Board also noted that the Fund outperformed its benchmark for the all the periods under review.
The Board received and considered information regarding the Funds contractual advisory fee and net operating expense ratio and its various components, including actual management fees (which reflect
fee waivers, if any), transfer agent, custodian and other non-management fees. The Board also considered the ratio in comparison to the median ratio of an expense Universe and a narrower expense group of funds (each, an Expense Group)
that was determined by Lipper to be similar to the Fund. The Board received a description of the methodology used by Lipper to select the funds in the Funds Expense Group. The Board noted that the net operating expense ratio of the Fund was
lower than the Funds Expense Groups median net operating expense ratio.
Based on the above-referenced considerations and other
factors, the Board concluded that the overall performance and expense structure of the Fund supported the re-approval of the Advisory Agreements for the Fund.
Investment advisory and sub-advisory fee rates
The Board reviewed and considered
the contractual investment advisory fee rate that is payable by the Fund to Funds Management for investment advisory services (the Advisory Agreement Rate), both on a stand-alone basis and on a combined basis with the Funds
administration fee rate. The Board took into account the separate administrative and other services covered by the administration fee rate. The Board also reviewed and considered the contractual investment sub-advisory fee rate that is payable by
Funds Management to Wells Capital Management for investment sub-advisory services (the Sub-Advisory Agreement Rate). In addition, the Board reviewed and considered the existing fee waiver/cap arrangements applicable to the Advisory
Agreement Rate and considered the Advisory Agreement Rate after taking the waivers/caps into account (the Net Advisory Rate).
The
Board received and considered information comparing the Advisory Agreement Rate and Net Advisory Rate with that of other funds in the Funds Expense Group median. The Board noted that the Advisory Agreement Rate and Net Advisory Rate for the
Fund were lower than the median rates of the Funds Expense Group.
The Board also received and considered information about the nature and
extent of services offered and fee rates charged by Funds Management and Wells Capital Management to other types of clients. In this regard, the Board received information about differences between the services, and the compliance, reporting, and
other legal burdens and risks of providing investment advice to registered funds and those associated with providing advice to non-registered fund clients such as collective funds or institutional separate accounts.
The Board determined that the Advisory Agreement Rate for the Fund, both before and after waivers, was reasonable in light of the Funds Expense Group
information, the net expense ratio commitments, the services covered by the Advisory Agreements and other information provided. The Board also reviewed and considered the Sub-Advisory Agreement Rate and concluded that the Sub-Advisory Agreement Rate
was reasonable in light of the services covered by the sub-advisory agreement and other information provided.
Profitability
The Board received and considered a profitability analysis of Funds Management, as well as an analysis of the profitability to the collective
Wells Fargo businesses that provide services to the Fund. It considered that the information provided to it was necessarily estimated, and that the profitability information provided to it, especially on a fund-by-fund basis, did not necessarily
provide a precise tool for evaluating the appropriateness of the Funds Advisory Agreement Rate in isolation. It noted that the levels of profitability reported on a fund-by-fund basis varied widely, depending on, among other things, the size
and type of fund. The Board concluded that the profitability reported by Funds Management was not unreasonable.
The Board did not consider
separate profitability information with respect to Wells Capital Management, because, as an affiliate of Funds Management, its profitability information was subsumed in the collective Wells Fargo profitability analysis provided by Funds Management.
|
|
|
|
|
36
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Other Information (Unaudited)
|
Economies of scale
The Board considered that, in light of the fact that the Fund was not making a continuous offering of its shares, the likelihood of realizing economies of scale following the Funds initial offering was
relatively low, although the Board determined to continue to monitor the Funds expense ratio and the profitability of the investment advisory agreement to Funds Management in light of future growth of the Fund.
Other benefits to Funds Management and Wells Capital Management
The Board received and considered information regarding potential fall-out or ancillary benefits received by Funds Management and its affiliates, including Wells Capital Management, as a result
of their relationship with the Fund. Ancillary benefits could include, among others, benefits directly attributable to the relationship of Funds Management and Wells Capital Management with the Fund and benefits potentially derived from an increase
in Funds Managements and Wells Capital Managements business as a result of their relationship with the Fund (such as the ability to market to shareholders other financial products offered by Funds Management and its affiliates, including
Wells Capital Management).
Other factors and broader review
As discussed above, the Board reviews detailed materials received from Funds Management and Wells Capital Management annually as part of the re-approval process under Section 15 of the 1940 Act and also
reviews and assesses information about the quality of the services that the Fund receives throughout the year. In this regard, the Board has reviewed reports of Funds Management at each of its quarterly meetings, which include, among other things,
portfolio reviews and performance reports. In addition, the Board confers with portfolio managers at various times throughout the year.
Conclusion
After considering the above-described factors and based on its
deliberations and its evaluation of the information described above, the Board unanimously approved the continuation of the Advisory Agreements for an additional one-year period.
|
|
|
|
|
|
|
Automatic Dividend Reinvestment Plan
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
37
|
|
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All common shareholders are eligible to
participate in the Automatic Dividend Reinvestment Plan (the Plan). Pursuant to the Plan, unless a common shareholder is ineligible or elects otherwise, all cash dividends and capital gains distributions are automatically reinvested by
Computershare Trust Company, N.A., as agent for shareholders in administering the Plan (Plan Agent), in additional common shares of the Fund. Whenever the Fund declares an ordinary income dividend or a capital gain dividend (collectively
referred to as dividends) payable either in shares or in cash, nonparticipants in the Plan will receive cash, and participants in the Plan will receive the equivalent in shares of common shares. The shares are acquired by the Plan Agent
for the participants account, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Fund (newly issued common shares) or (ii) by purchase of
outstanding common shares on the open-market (open-market purchases) on the NYSE Amex or elsewhere. If, on the payment date for any dividend or distribution, the net asset value per share of the common shares is equal to or less than the market
price per common share plus estimated brokerage commissions (market premium), the Plan Agent will invest the amount of such dividend or distribution in newly issued shares on behalf of the participant. The number of newly issued common
shares to be credited to the participants account will be determined by dividing the dollar amount of the dividend by the net asset value per share on the date the shares are issued, provided that the maximum discount from the then current
market price per share on the date of issuance may not exceed 5%. If on the dividend payment date the net asset value per share is greater than the market value or market premium (market discount), the Plan Agent will invest the dividend
amount in shares acquired on behalf of the participant in open-market purchases. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in shares
or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agents open-market purchases in connection with the reinvestment of dividends. The automatic reinvestment of dividends
and distributions will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such dividends. All correspondence concerning the Plan should be directed to the Plan Agent at P.O. Box
43010, Providence, Rhode Island 02940-3010 or by calling 1-800-730-6001.
|
|
|
|
|
38
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
List of Abbreviations
|
The following is a list of common abbreviations for terms and entities which may have appeared in this report.
ACB
|
Agricultural Credit Bank
|
ADR
|
American Depository Receipt
|
ADS
|
American Depository Shares
|
AGC-ICC
|
Assured Guaranty Corporation - Insured Custody Certificates
|
AGM
|
Assured Guaranty Municipal
|
AMBAC
|
American Municipal Bond Assurance Corporation
|
AMT
|
Alternative Minimum Tax
|
BAN
|
Bond Anticipation Notes
|
BHAC
|
Berkshire Hathaway Assurance Corporation
|
CAB
|
Capital Appreciation Bond
|
CCAB
|
Convertible Capital Appreciation Bond
|
CDA
|
Community Development Authority
|
CDO
|
Collateralized Debt Obligation
|
COP
|
Certificate of Participation
|
DRIVER
|
Derivative Inverse Tax-Exempt Receipts
|
DW&P
|
Department of Water & Power
|
DWR
|
Department of Water Resources
|
ECFA
|
Educational & Cultural Facilities Authority
|
EDA
|
Economic Development Authority
|
EDFA
|
Economic Development Finance Authority
|
ETF
|
Exchange-Traded Fund
|
FFCB
|
Federal Farm Credit Bank
|
FGIC
|
Financial Guaranty Insurance Corporation
|
FHA
|
Federal Housing Authority
|
FHLB
|
Federal Home Loan Bank
|
FHLMC
|
Federal Home Loan Mortgage Corporation
|
FICO
|
The Financing Corporation
|
FNMA
|
Federal National Mortgage Association
|
FSA
|
Farm Service Agency
|
GBP
|
Great British Pound
|
GDR
|
Global Depository Receipt
|
GNMA
|
Government National Mortgage Association
|
HCFR
|
Healthcare Facilities Revenue
|
HEFA
|
Health & Educational Facilities Authority
|
HEFAR
|
Higher Education Facilities Authority Revenue
|
HFA
|
Housing Finance Authority
|
HFFA
|
Health Facilities Financing Authority
|
IBC
|
Insured Bond Certificate
|
IDA
|
Industrial Development Authority
|
IDAG
|
Industrial Development Agency
|
IDR
|
Industrial Development Revenue
|
KRW
|
Republic of Korea Won
|
LIBOR
|
London Interbank Offered Rate
|
LIQ
|
Liquidity Agreement
|
LLC
|
Limited Liability Company
|
LLP
|
Limited Liability Partnership
|
MBIA
|
Municipal Bond Insurance Association
|
MFHR
|
Multi-Family Housing Revenue
|
MSTR
|
Municipal Securities Trust Receipts
|
MUD
|
Municipal Utility District
|
NATL-RE
|
National Public Finance Guarantee Corporation
|
PCFA
|
Pollution Control Finance Authority
|
PCR
|
Pollution Control Revenue
|
PFA
|
Public Finance Authority
|
PFFA
|
Public Facilities Financing Authority
|
PFOTER
|
Puttable Floating Option Tax-Exempt Receipts
|
plc
|
Public Limited Company
|
PUTTER
|
Puttable Tax-Exempt Receipts
|
R&D
|
Research & Development
|
RDA
|
Redevelopment Authority
|
RDFA
|
Redevelopment Finance Authority
|
REIT
|
Real Estate Investment Trust
|
ROC
|
Reset Option Certificates
|
SAVRS
|
Select Auction Variable Rate Securities
|
SBA
|
Small Business Authority
|
SFHR
|
Single Family Housing Revenue
|
SFMR
|
Single Family Mortgage Revenue
|
SPA
|
Standby Purchase Agreement
|
SPDR
|
Standard & Poors Depositary Receipts
|
STRIPS
|
Separate Trading of Registered Interest and Principal Securities
|
TAN
|
Tax Anticipation Notes
|
TIPS
|
Treasury Inflation-Protected Securities
|
TRAN
|
Tax Revenue Anticipation Notes
|
TCR
|
Transferable Custody Receipts
|
TTFA
|
Transportation Trust Fund Authority
|
TVA
|
Tennessee Valley Authority
|
XLCA
|
XL Capital Assurance
|
This page is
intentionally left blank.
This page is intentionally left
blank.
Transfer Agent, Registrar, Shareholder Servicing
Agent & Dividend Disbursing Agent
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
1-800-730-6001
Web site: wellsfargoadvantagefunds.com
Wells Fargo Funds Management, LLC, is a subsidiary of Wells Fargo & Company and is an affiliate of Wells Fargo & Companys
broker/dealer subsidiaries.
NOT FDIC INSURED
¡
NO BANK
GUARANTEE
¡
MAY LOSE VALUE
© 2012 Wells Fargo Funds Management, LLC. All rights reserved.
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209716 06-12
AIO/AR156 04-12
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