An affiliated investment is an investment in which
the Fund owns at least 5% of the outstanding voting shares of the issuer or as a result of other relationships, such as the Fund and the issuer having the same investment manager. Transactions with issuers that were either affiliated persons of the
Fund at the beginning of the period or the end of the period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Investments in unaffiliated securities, at value (cost $760,638,726)
|
|
$
|
757,907,551
|
|
|
Investments in affiliated securities, at value (cost $17,633,191)
|
|
|
17,633,191
|
|
|
Cash
|
|
|
1,939,995
|
|
|
Receivable for investments sold
|
|
|
58,556
|
|
|
Receivable for interest
|
|
|
10,706,735
|
|
|
Prepaid expenses and other assets
|
|
|
20,855
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
788,266,883
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Secured borrowing payable
|
|
|
230,000,000
|
|
|
Payable for investments purchased
|
|
|
8,036,370
|
|
|
Payable for Fund shares redeemed
|
|
|
674,160
|
|
|
Advisory fee payable
|
|
|
396,177
|
|
|
Dividends payable
|
|
|
3,637,115
|
|
|
Administration fee payable
|
|
|
33,015
|
|
|
Accrued expenses and other liabilities
|
|
|
1,210,071
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
243,986,908
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
544,279,975
|
|
|
|
|
|
|
|
|
|
|
|
Net assets consist of
|
|
|
|
|
|
Paid-in capital
|
|
$
|
598,009,168
|
|
|
Total distributable loss
|
|
|
(53,729,193
|
)
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
544,279,975
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
|
|
|
|
Based on $544,279,975 divided by 60,994,032 shares issued and outstanding (100,000,000 shares
authorized)
|
|
|
$8.92
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
Wells Fargo Income Opportunities Fund | 21
Statement of operations—six months ended October 31, 2019 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
Interest
|
|
$
|
23,388,103
|
|
|
Income from affiliated securities
|
|
|
102,307
|
|
|
Dividends
|
|
|
15
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
23,490,425
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Advisory fee
|
|
|
2,373,474
|
|
|
Administration fee
|
|
|
197,789
|
|
|
Custody and accounting fees
|
|
|
15,627
|
|
|
Professional fees
|
|
|
44,360
|
|
|
Shareholder report expenses
|
|
|
51,419
|
|
|
Trustees’ fees and expenses
|
|
|
10,743
|
|
|
Transfer agent fees
|
|
|
18,439
|
|
|
Interest expense
|
|
|
3,522,128
|
|
|
Other fees and expenses
|
|
|
37,599
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6,271,578
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
17,218,847
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses) on investments
|
|
|
|
|
|
Net realized losses on investments
|
|
|
(2,057,801
|
)
|
|
Net change in unrealized gains (losses) on investments
|
|
|
1,790,954
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on investments
|
|
|
(266,847
|
)
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
16,952,000
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
22 | Wells Fargo Income Opportunities Fund
Statement of changes in net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
October 31, 2019
(unaudited)
|
|
|
Year ended
April 30, 2019
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
17,218,847
|
|
|
$
|
37,947,790
|
|
|
Net realized gains (losses) on investments
|
|
|
(2,057,801
|
)
|
|
|
1,421,870
|
|
|
Net change in unrealized gains (losses) on investments
|
|
|
1,790,954
|
|
|
|
(2,577,006
|
)
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
16,952,000
|
|
|
|
36,792,654
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholders from
|
|
|
|
|
|
|
|
|
|
Net investment income and net realized gains
|
|
|
(22,035,256
|
)
|
|
|
(39,840,972
|
)
|
|
Tax basis return of capital
|
|
|
0
|
|
|
|
(5,846,040
|
)
|
|
|
|
|
|
|
|
Total distributions to shareholders
|
|
|
(22,035,256
|
)
|
|
|
(45,867,012
|
)
|
|
|
|
|
|
|
|
|
|
Capital share transactions
|
|
|
Cost of shares repurchased
|
|
|
(16,971,932
|
)
|
|
|
(45,633,195
|
)
|
|
|
|
|
|
|
|
Total decrease in net assets
|
|
|
(22,055,188
|
)
|
|
|
(54,527,553
|
)
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
Beginning of period
|
|
|
566,335,163
|
|
|
|
620,862,716
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
544,279,975
|
|
|
$
|
566,335,163
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
Wells Fargo Income Opportunities Fund | 23
Statement of cash flows—six months ended October 31, 2019 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
16,952,000
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net increase in net assets from operations to net cash provided by operating
activities:
|
|
|
|
|
|
Purchase of long-term securities
|
|
|
(108,170,749
|
)
|
|
Proceeds from the sales of long-term securities
|
|
|
134,339,703
|
|
|
Amortization
|
|
|
(359,722
|
)
|
|
Purchases and sales of short-term securities, net
|
|
|
(11,226,302
|
)
|
|
Decrease in receivable for investments sold
|
|
|
246,688
|
|
|
Decrease in receivable for interest
|
|
|
1,078,702
|
|
|
Increase in prepaid expenses and other assets
|
|
|
(16,124
|
)
|
|
Increase in payable for investments purchased
|
|
|
7,661,370
|
|
|
Increase in advisory fee payable
|
|
|
2,887
|
|
|
Increase in administration fee payable
|
|
|
241
|
|
|
Decrease in trustee’s fee and expenses payable
|
|
|
(2,260
|
)
|
|
Increase in accrued expenses and other liabilities
|
|
|
1,051,224
|
|
|
Net realized losses on investments
|
|
|
2,057,801
|
|
|
Net change in unrealized gains (losses) on investments
|
|
|
(1,790,954
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
41,824,505
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Cost of shares repurchased
|
|
|
(16,692,672
|
)
|
|
Decrease in overdraft due to custodian bank
|
|
|
(1,026,800
|
)
|
|
Cash distributions paid
|
|
|
(22,165,038
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(39,884,510
|
)
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
1,939,995
|
|
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
Beginning of period
|
|
$
|
0
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,939,995
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash disclosure
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,490,773
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
24 | Wells Fargo Income Opportunities Fund
Financial highlights
(For a share outstanding throughout each period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
October 31, 2019
(unaudited)
|
|
|
Year ended April 30
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Net asset value, beginning of period
|
|
|
$8.98
|
|
|
|
$9.00
|
|
|
|
$9.31
|
|
|
|
$8.56
|
|
|
|
$9.75
|
|
|
|
$10.04
|
|
|
Net investment income
|
|
|
0.28
|
1
|
|
|
0.57
|
1
|
|
|
0.60
|
1
|
|
|
0.74
|
1
|
|
|
0.77
|
1
|
|
|
0.77
|
1
|
|
Net realized and unrealized gains (losses) on investments
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.23
|
)
|
|
|
0.81
|
|
|
|
(1.14
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.26
|
|
|
|
0.55
|
|
|
|
0.37
|
|
|
|
1.55
|
|
|
|
(0.37
|
)
|
|
|
0.53
|
|
|
Distributions to shareholders from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.35
|
)
|
|
|
(0.59
|
)
|
|
|
(0.62
|
)
|
|
|
(0.79
|
)
|
|
|
(0.82
|
)
|
|
|
(0.82
|
)
|
|
Tax basis return of capital
|
|
|
0.00
|
|
|
|
(0.09
|
)
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to shareholders
|
|
|
(0.35
|
)
|
|
|
(0.68
|
)
|
|
|
(0.68
|
)
|
|
|
(0.80
|
)
|
|
|
(0.82
|
)
|
|
|
(0.82
|
)
|
|
Anti-dilutive effect of shares repurchased
|
|
|
0.03
|
|
|
|
0.11
|
|
|
|
0.00
|
2
|
|
|
0.00
|
2
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Net asset value, end of period
|
|
|
$8.92
|
|
|
|
$8.98
|
|
|
|
$9.00
|
|
|
|
$9.31
|
|
|
|
$8.56
|
|
|
|
$9.75
|
|
|
Market value, end of period
|
|
|
$8.19
|
|
|
|
$8.09
|
|
|
|
$8.07
|
|
|
|
$8.64
|
|
|
|
$7.76
|
|
|
|
$8.93
|
|
|
Total return based on market value3
|
|
|
5.70
|
%
|
|
|
9.29
|
%
|
|
|
1.24
|
%
|
|
|
22.55
|
%
|
|
|
(3.47
|
)%
|
|
|
2.59
|
%
|
|
Ratios to average net assets (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses4
|
|
|
2.24
|
%
|
|
|
2.15
|
%
|
|
|
1.68
|
%
|
|
|
1.40
|
%
|
|
|
1.30
|
%
|
|
|
1.23
|
%
|
|
Net expenses4
|
|
|
2.24
|
%
|
|
|
2.12
|
%
|
|
|
1.63
|
%
|
|
|
1.23
|
%
|
|
|
1.10
|
%
|
|
|
0.96
|
%
|
|
Net investment income
|
|
|
6.15
|
%
|
|
|
6.38
|
%
|
|
|
6.53
|
%
|
|
|
8.15
|
%
|
|
|
8.76
|
%
|
|
|
7.85
|
%
|
|
Supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
12
|
%
|
|
|
16
|
%
|
|
|
33
|
%
|
|
|
43
|
%
|
|
|
25
|
%
|
|
|
33
|
%
|
|
Net assets, end of period (000s omitted)
|
|
|
$544,280
|
|
|
|
$566,335
|
|
|
|
$620,863
|
|
|
|
$656,517
|
|
|
|
$607,437
|
|
|
|
$692,169
|
|
|
Borrowings outstanding, end of period (000s omitted)
|
|
|
$230,000
|
|
|
|
$231,027
|
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
Asset coverage per $1,000 of borrowing, end of period
|
|
|
$3,366
|
|
|
|
$3,451
|
|
|
|
$3,699
|
|
|
|
$3,854
|
|
|
|
$3,641
|
|
|
|
$4,009
|
|
|
1
|
Calculated based upon average 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 the purposes of these calculations to be reinvested at prices obtained under the Fund’s Automatic Dividend Reinvestment Plan. Total return does not reflect brokerage commissions
that a shareholder would pay on the purchase and the sale of shares.
|
|
4
|
Ratios include interest expense relating to interest associated with borrowings and/or leverage transactions as follows:
|
|
|
|
|
|
|
|
Six months ended October 31, 2019 (unaudited)
|
|
|
1.26
|
%
|
|
Year ended April 30, 2019
|
|
|
1.19
|
%
|
|
Year ended April 30, 2018
|
|
|
0.74
|
%
|
|
Year ended April 30, 2017
|
|
|
0.48
|
%
|
|
Year ended April 30, 2016
|
|
|
0.37
|
%
|
|
Year ended April 30, 2015
|
|
|
0.10
|
%
|
The accompanying notes are an integral part of these financial
statements.
Wells Fargo Income Opportunities Fund | 25
Notes to financial statements (unaudited)
1. ORGANIZATION
Wells Fargo 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 “1940 Act”). As an investment company, the Fund follows the accounting
and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies.
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
All investments are valued each
business day as of the close of regular trading on the New York Stock Exchange (generally 4 p.m. Eastern Time), although the Fund may deviate from this calculation time under unusual or unexpected circumstances.
Debt securities are valued at the evaluated bid price provided by an independent pricing service (e.g. taking into account various factors, including yields, maturities,
or credit ratings) or, if a reliable price is not available, the quoted bid price from an independent broker-dealer.
Equity securities that are listed on a foreign
or domestic exchange or market are valued at the official closing price or, if none, the last sales price. If no sale occurs on the principal exchange or market that day, a fair value price will be determined in accordance with the Fund’s
Valuation Procedures.
Investments in registered open-end investment companies 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 in good faith by the Board of Trustees of the
Fund. 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 or
appropriate, including determining the fair value of portfolio securities, unless the determination has been delegated to the Wells Fargo Asset Management Pricing Committee at Wells Fargo Funds Management, LLC (“Funds Management”). The
Board of Trustees retains the authority to make or ratify any valuation decisions or approve any changes to the Valuation Procedures as it deems appropriate. On a quarterly basis, the Board of Trustees receives reports on any valuation actions taken
by the Valuation Committee or the Wells Fargo Asset Management Pricing Committee which may include items for ratification.
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 Fund’s commitment 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.
Loans
The Fund may invest in direct debt instruments which are interests in
amounts owed to lenders by corporate or other borrowers. The loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. Investments in loans may be in the form of participations in loans or
assignments of all or a portion of loans from third parties. When the Fund purchases participations, it generally has no rights to enforce compliance with terms of the loan agreement with the borrower. As a result, the Fund assumes the credit risk
of both the borrower and the lender that is selling the participation. When the Fund purchases assignments from lenders, it acquires direct rights against the borrower on the loan and may enforce compliance by the borrower with the terms of the loan
agreement. Loans may include fully funded term loans or unfunded loan commitments, which are contractual obligations for future funding.
Security
transactions and income recognition
Securities transactions are recorded on a trade date basis. Realized gains or losses are recorded on the basis of identified
cost.
26 | Wells Fargo Income Opportunities Fund
Notes to financial statements (unaudited)
Interest income is accrued daily and bond discounts are accreted and premiums are amortized daily.
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 been
determined to be doubtful based on consistently applied procedures and the fair value has decreased. 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
Under a monthly distribution plan, the Fund
pays distributions to shareholders at an annual minimum fixed rate of 8% based on the Fund’s average monthly net asset value per share over the prior 12 months. The monthly distributions may be sourced from income, paid-in capital, and/or capital gains, if any. To the extent that sufficient investment income is not available on a monthly basis, the Fund may distribute paid-in capital
and/ or capital gains, if any, in order to maintain its managed distribution level.
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 accordance with income tax regulations and may differ from U.S. generally accepted accounting principles. Dividend sources are
estimated at the time of declaration. The tax character of distributions is determined as of the Fund’s fiscal year end. Therefore, a portion of the Fund’s distributions made prior to the Fund’s fiscal year end may be categorized as a
tax return of capital at year end.
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 Fund’s 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 Fund’s 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.
As of
October 31, 2019, the aggregate cost of all investments for federal income tax purposes was $781,853,757 and the unrealized gains (losses) consisted of:
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains
|
|
$
|
37,022,852
|
|
|
|
|
|
Gross unrealized losses
|
|
|
(43,335,867
|
)
|
|
|
|
|
Net unrealized losses
|
|
$
|
(6,313,015
|
)
|
As of April 30, 2019, the Fund had capital loss carryforwards which consisted of $23,776,420 in short-term capital losses and
$12,080,578 in long-term capital losses.
As of April 30, 2019, the Fund had current year deferred post-October capital losses consisting of $198,706 in
short-term losses which was recognized on the first day of the current fiscal year.
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 Fund’s 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 unobservable inputs
(Level 3). The Fund’s 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:
|
∎
|
|
Level 1 – quoted prices in active markets for identical securities
|
|
∎
|
|
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates,
prepayment speeds, credit risk, etc.)
|
|
∎
|
|
Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value
of investments)
|
The inputs or methodologies used for valuing investments in securities are not necessarily an indication of the risk associated
with investing in those securities.
Wells Fargo Income Opportunities Fund | 27
Notes to financial statements (unaudited)
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities as
of October 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices
(Level 1)
|
|
|
Other significant
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,361,459
|
|
|
$
|
3,361,459
|
|
|
|
|
|
|
|
|
Materials
|
|
|
628
|
|
|
|
0
|
|
|
|
0
|
|
|
|
628
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
|
0
|
|
|
|
640,485,669
|
|
|
|
0
|
|
|
|
640,485,669
|
|
|
|
|
|
|
|
|
Loans
|
|
|
0
|
|
|
|
31,377,147
|
|
|
|
10,833,974
|
|
|
|
42,211,121
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
0
|
|
|
|
0
|
|
|
|
6,914,385
|
|
|
|
6,914,385
|
|
|
|
|
|
|
|
|
Rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
0
|
|
|
|
475,703
|
|
|
|
0
|
|
|
|
475,703
|
|
|
|
|
|
|
|
|
Yankee corporate bonds and notes
|
|
|
0
|
|
|
|
64,458,586
|
|
|
|
0
|
|
|
|
64,458,586
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment companies
|
|
|
17,633,191
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,633,191
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,633,819
|
|
|
$
|
736,797,105
|
|
|
$
|
21,109,818
|
|
|
$
|
775,540,742
|
|
Additional sector, industry or geographic detail is included in the Portfolio of Investments.
The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
Loans
|
|
|
Preferred
stocks
|
|
|
Total
|
|
|
Balance as of April 30, 2019
|
|
$
|
0
|
|
|
$
|
4,946,625
|
|
|
$
|
0
|
|
|
$
|
4,946,625
|
|
|
|
|
|
|
|
|
Accrued discounts (premiums)
|
|
|
0
|
|
|
|
3,728
|
|
|
|
0
|
|
|
|
3,728
|
|
|
|
|
|
|
|
|
Realized gains (losses)
|
|
|
0
|
|
|
|
192
|
|
|
|
0
|
|
|
|
192
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
|
|
(2,445,120
|
)
|
|
|
(1,418,000
|
)
|
|
|
1,516,822
|
|
|
|
(2,346,298
|
)
|
|
|
|
|
|
|
|
Purchases
|
|
|
5,806,579
|
|
|
|
9,544,561
|
|
|
|
5,397,563
|
|
|
|
20,748,703
|
|
|
|
|
|
|
|
|
Sales
|
|
|
0
|
|
|
|
(19,328
|
)
|
|
|
0
|
|
|
|
(19,328
|
)
|
|
|
|
|
|
|
|
Transfers into Level 3
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
0
|
|
|
|
(2,223,804
|
)
|
|
|
0
|
|
|
|
(2,223,804
|
)
|
|
|
|
|
|
|
|
Balance as of October 31, 2019
|
|
$
|
3,361,459
|
|
|
$
|
10,833,974
|
|
|
$
|
6,914,385
|
|
|
$
|
21,109,818
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to securities still held at October 31, 2019
|
|
$
|
(2,445,120
|
)
|
|
$
|
(815,054
|
)
|
|
$
|
1,516,822
|
|
|
$
|
(1,743,352
|
)
|
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 Fund’s 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 March 6, 2020 to waive fees and/or reimburse expenses to the extent necessary to limit the Fund’s
borrowing expenses to an amount that is 0.05% lower than what the borrowing expenses would have been if the Fund had not redeemed its Auction Market Preferred Shares. For the six months ended October 31, 2019, the Fund did not need to waive any fees
or reimburse any expenses.
Funds Management has retained the services of a subadviser to provide daily portfolio management to the Fund. The fee for subadvisory
services is borne by Funds Management. Wells Capital Management Incorporated, an affiliate of Funds Management and an indirect wholly owned subsidiary of Wells Fargo, is the subadviser to the Fund and is entitled to receive a fee from Funds
Management at an annual rate of 0.40% of the Fund’s average daily total assets.
28 | Wells Fargo Income Opportunities Fund
Notes to financial statements (unaudited)
Administration fee
Funds Management also serves as the administrator to the Fund, providing the Fund with a wide range of administrative services necessary to the operation of the Fund.
Funds Management is entitled to receive an annual administration fee from the Fund equal to 0.05% of the Fund’s average daily total assets.
Interfund
transactions
The Fund may purchase or sell portfolio investment securities to certain other Wells Fargo affiliates pursuant to Rule
17a-7 under the 1940 Act and under procedures adopted by the Board of Trustees. The procedures have been designed to ensure that these interfund transactions, which do not incur broker commissions, are
effected at current market prices.
5. CAPITAL SHARE TRANSACTIONS
The
Fund has authorized capital of 100,000,000 shares with no par value. For the six months ended October 31, 2019 and the year ended April 30, 2019, the Fund did not issue any shares.
On November 9, 2018, the Fund announced a renewal of its open-market share repurchase program (the “Buyback Program”). Under the Buyback Program, the Fund
was authorized to repurchase up to 10% of its outstanding shares in open market transactions during the period beginning on January 1, 2019 and ending on December 31, 2019. The Fund’s Board of Trustees delegated to Funds Management
full discretion to administer the Buyback Program, including the determination of the amount and timing of repurchases in accordance with the best interests of the Fund and subject to applicable legal limitations. During the six months ended
October 31, 2019, the Fund purchased 2,081,915 of its shares on the open market at a total cost of $16,971,932 (weighted average price per share of $8.62). The weighted average discount of these repurchased shares was 9.58%.
6. BORROWINGS
The Fund has borrowed $230,000,000 through a revolving
credit facility administered by a major financial institution (the “Facility”). The Facility has a commitment amount of $230,000,000 with no specific contract expiration date but the Facility can be terminated upon 180 days’ notice.
The Fund is charged interest at London Interbank Offered Rate (LIBOR) plus 0.70% and a commitment fee of 0.30% of the average daily unutilized amount of the commitment which may be waived if the amount drawn on the Facility is over 75% of the
committed amount. The financial institution holds a security interest in all the assets of the Fund as collateral for the borrowing. Based on the nature of the terms of the Facility and comparative market rates, the carrying amount of the borrowings
at October 31, 2019 approximates its fair value. If measured at fair value, the borrowings would be categorized as a Level 2 under the fair value hierarchy.
During the six months ended October 31, 2019, the Fund had average borrowings outstanding of $230,000,000 at an average interest rate of 3.05% and paid interest in
the amount of $3,522,128, which represents 1.26% of its average daily net assets (on an annualized basis).
7. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, excluding U.S. government obligations (if any) and short-term securities, for the six months ended October 31, 2019 were
$94,581,791 and $99,784,064, respectively.
As of October 31, 2019, the Fund had unfunded term loan commitments of $4,471,375.
8. INDEMNIFICATION
Under the Fund’s organizational documents, the
officers and Trustees have been granted certain indemnification rights against certain liabilities that may arise out of performance of their duties to the Fund. At a meeting held on November 21-22, 2019, the Board of Trustees of the Fund approved a
proposal to authorize the Fund to enter into a separate agreement with each Trustee that would convert indemnification rights currently existing under the Fund’s organizational documents into contractual rights that could not be changed in the
future without the consent of the Trustee. Additionally, in the normal course of business, the Fund may enter into contracts with service providers that contain a variety of indemnification clauses. The Fund’s maximum exposure under these
arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated.
9. NEW ACCOUNTING PRONOUNCEMENTS
In August 2018, FASB issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820)
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 updates the disclosure requirements for fair value measurements by modifying or removing certain
disclosures and adding certain new disclosures. The
Wells Fargo Income Opportunities Fund | 29
Notes to financial statements (unaudited)
amendments are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted. Management has adopted the removal and modification of disclosures early, as permitted, and will adopt the additional new disclosures at the effective date.
In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change
for securities held at a discount and discounts will continue to be accreted to the maturity date of the security. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018 and for
interim periods within those fiscal years. During the current reporting period, management of the Fund adopted the change in accounting policy which did not have a material impact to the Fund’s financial statements.
10. SUBSEQUENT DISTRIBUTIONS
Under the managed distribution plan, the Fund
declared the following distributions to common shareholders:
|
|
|
|
|
|
|
|
|
Declaration date
|
|
Record date
|
|
Payable date
|
|
Per share amount
|
|
|
|
|
|
|
October 25, 2019
|
|
November 13, 2019
|
|
December 2, 2019
|
|
$0.05898
|
|
|
|
|
|
|
November 22, 2019
|
|
December 13, 2019
|
|
January 2, 2020
|
|
$0.05902
|
These distributions are not reflected in the accompanying financial statements.
30 | Wells Fargo Income Opportunities Fund
Other information (unaudited)
PROXY VOTING INFORMATION
A description of the policies and procedures used to determine how to vote proxies relating to portfolio securities is available, upon request, by calling 1-800-222-8222, visiting our website at wfam.com, or visiting the SEC website at sec.gov. Information regarding how the
proxies related to portfolio securities were voted during the most recent 12-month period ended June 30 is available on the website at wfam.com or by visiting the SEC website at sec.gov.
BOARD OF TRUSTEES AND OFFICERS
The following table provides basic information about the Board of Trustees (the “Trustees”) and Officers of the Fund. Each of the Trustees and Officers1 listed below acts in identical capacities for each fund in the Wells Fargo family of funds, which consists of 150 mutual 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”). 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 or longer
|
|
Current other
public company or
investment
company
directorships
|
|
|
|
Class I - Non-Interested Trustees to serve until 2020 Annual Meeting of
Shareholders
|
|
|
|
|
|
|
Isaiah Harris, Jr.
(Born
1952)
|
|
Trustee,
since 2010;
Audit Committee Chairman, since 2019
|
|
Retired. Chairman of the Board of CIGNA Corporation since 2009, and Director since 2005. From 2003 to 2011, Director of Deluxe Corporation. 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. Advisory Board Member, Palm Harbor Academy (private school). Advisory Board Member, Child Evangelism Fellowship (non-profit). Mr. Harris is a certified public accountant (inactive status).
|
|
CIGNA Corporation
|
|
|
|
|
|
|
David F. Larcker
(Born
1950)
|
|
Trustee,
since
2010
|
|
James Irvin Miller Professor of Accounting at the Graduate School of Business, Stanford University, Director of the Corporate Governance Research
Initiative 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.
|
|
N/A
|
|
|
|
|
|
|
Olivia S. Mitchell
(Born
1953)
|
|
Trustee,
since 2010;
Nominating and Governance Committee Chair, since 2018
|
|
International Foundation of Employee Benefit Plans Professor, Wharton School of the University of Pennsylvania since 1993. Director of Wharton’s
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.
|
|
N/A
|
|
|
|
Class II - Non-Interested Trustees to serve until 2021 Annual Meeting of
Shareholders
|
|
|
|
|
|
|
William R. Ebsworth (Born 1957)
|
|
Trustee,
since 2015
|
|
Retired. From 1984 to 2013, equities analyst, portfolio manager, research director and chief investment officer at Fidelity Management and Research
Company in Boston, Tokyo, and Hong Kong, and retired in 2013 as Chief Investment Officer of Fidelity Strategic Advisers, Inc. where he led a team of investment professionals managing client assets. Prior thereto, Board member of Hong Kong Securities
Clearing Co., Hong Kong Options Clearing Corp., the Thailand International Fund, Ltd., Fidelity Investments Life Insurance Company, and Empire Fidelity Investments Life Insurance Company. Audit Committee Chair and Investment Committee Chair of the
Vincent Memorial Hospital Endowment (non-profit organization). Mr. Ebsworth is a CFA® charterholder.
|
|
N/A
|
32 | Wells Fargo Income Opportunities Fund
Other information (unaudited)
|
|
|
|
|
|
|
|
|
Name and
year of birth
|
|
Position held and
length of service
|
|
Principal occupations during past five years or longer
|
|
Current other
public company or
investment
company
directorships
|
|
|
|
|
|
|
Jane A. Freeman (Born 1953)
|
|
Trustee,
since 2015;
Chair Liaison,
since 2018
|
|
Retired. From 2012 to 2014 and 1999 to 2008, Chief Financial Officer of Scientific Learning Corporation. From 2008 to 2012, Ms. Freeman provided consulting services related
to strategic business projects. Prior to 1999, Portfolio Manager at Rockefeller & Co. and Scudder, Stevens & Clark. Board member of the Harding Loevner Funds from 1996 to 2014, serving as both Lead Independent Director and
chair of the Audit Committee. Board member of the Russell Exchange Traded Funds Trust from 2011 to 2012 and the chair of the Audit Committee. Ms. Freeman is a Board Member of The Ruth Bancroft Garden
(non-profit organization). She is also an inactive Chartered Financial Analyst.
|
|
N/A
|
|
|
|
|
|
|
Judith M. Johnson (Born 1949)
|
|
Trustee,
since 2010; Audit Committee Chairman, from 2010 to 2018
|
|
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.
|
|
N/A
|
|
|
|
Class III - Non-Interested Trustees to serve until 2019 Annual Meeting of Shareholders
|
|
|
|
|
|
|
Timothy J. Penny (Born 1951)
|
|
Trustee,
since 2010; Chairman, since 2018
|
|
President and Chief Executive Officer of Southern Minnesota Initiative Foundation, a non-profit organization, since 2007. Member of the Board of
Trustees of NorthStar Education Finance, Inc., a non-profit organization, since 2007.
|
|
N/A
|
|
|
|
|
|
|
James G. Polisson (Born 1959)
|
|
Trustee,
since 2018
|
|
Retired. Chief Marketing Officer, Source (ETF) UK Services, Ltd, from 2015 to 2017. From 2012 to 2015, Principal of The Polisson Group, LLC, a management consulting, corporate advisory and
principal investing company. Chief Executive Officer and Managing Director at Russell Investments, Global Exchange Traded Funds from 2010 to 2012. Managing Director of Barclays Global Investors from 1998 to 2010 and Global Chief Marketing Officer
for iShares and Barclays Global Investors from 2000 to 2010. Trustee of the San Francisco Mechanics’ Institute, a non-profit organization, from 2013 to 2015. Board member of the Russell Exchange Traded
Fund Trust from 2011 to 2012. Director of Barclays Global Investors Holdings Deutschland GmbH from 2006 to 2009. Mr. Polisson is an attorney and has a retired status with the Massachusetts and District of Columbia Bar Associations.
|
|
N/A
|
|
|
|
|
|
|
Pamela Wheelock2 (Born 1959)
|
|
Trustee,
since January 2020; previously Trustee from January 2018 to July 2019
|
|
Board member of the Destination Medical Center Economic Development Agency, Rochester, Minnesota since 2019. Acting Commissioner, Minnesota Department of Human Services, July 2019 through
September 2019. Human Services Manager (part-time), Minnesota Department of Human Services, October 2019 through December 2019. Chief Operating Officer, Twin Cities Habitat for Humanity from 2017 to 2019. Vice President of University Services,
University of Minnesota from 2012 to 2016. Prior thereto, on the Board of Directors, Governance Committee and Finance Committee for the Minnesota Philanthropy Partners (Saint Paul Foundation) from 2012 to 2018, Interim Chief Executive Officer of
Blue Cross Blue Shield of Minnesota from 2011 to 2012, Chairman of the Board from 2009 to 2012 and Board Director from 2003 to 2015. Vice President, Leadership and Community Engagement, Bush Foundation, Saint Paul, Minnesota (a private foundation)
from 2009 to 2011. Executive Vice President and Chief Financial Officer, Minnesota Sports and Entertainment from 2004 to 2009 and Senior Vice President from 2002 to 2004. Executive Vice President of the Minnesota Wild Foundation from 2004 to 2008.
Commissioner of Finance, State of Minnesota, from 1999 to 2002. Currently Board Chair of the Minnesota Wild Foundation since 2010.
|
|
N/A
|
Wells Fargo Income Opportunities Fund | 33
Other information (unaudited)
Officers
|
|
|
|
|
|
Name and
year of birth
|
|
Position held and
length of service
|
|
Principal occupations during past five years or longer
|
|
|
|
|
|
Andrew Owen
(Born
1960)
|
|
President,
since
2017
|
|
Executive Vice President of Wells Fargo & Company and Head of Affiliated Managers, Wells Fargo Asset Management, since 2014. In addition,
Mr. Owen is currently President, Chief Executive Officer and Director of Wells Fargo Funds Management, LLC since 2017. Prior thereto, Executive Vice President responsible for marketing, investments and product development for Wells Fargo Funds
Management, LLC, from 2009 to 2014.
|
|
|
|
|
|
Jeremy DePalma1
(Born 1974)
|
|
Treasurer,
since
2012
|
|
Senior Vice President of Wells Fargo Funds Management, LLC since 2009. Senior Vice President of Evergreen Investment Management Company, LLC from 2008 to
2010 and head of the Fund Reporting and Control Team within Fund Administration from 2005 to 2010.
|
|
|
|
|
Michelle Rhee3
(Born 1966)
|
|
Chief Legal Officer,
since 2019
|
|
Secretary of Wells Fargo Funds Management, LLC, Chief Legal Counsel of Wells Fargo Asset Management and Assistant General Counsel of Wells Fargo Bank, N.A.
since 2018. Associate General Counsel and Managing Director of Bank of America Corporation from 2004 to 2018.
|
|
|
|
|
Catherine Kennedy4
(Born 1969)
|
|
Secretary,
since 2019
|
|
Vice President of Wells Fargo Funds Management, LLC and Senior Counsel of the Wells Fargo Legal Department since 2010. Vice President and Senior Counsel of
Evergreen Investment Management Company, LLC from 1998 to 2010.
|
|
|
|
|
Michael H. Whitaker
(Born 1967)
|
|
Chief Compliance Officer,
since 2016
|
|
Chief Compliance Officer of Wells Fargo Asset Management since 2016. Senior Vice President and Chief Compliance Officer for Fidelity Investments from 2007
to 2016.
|
|
|
|
|
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. Manager
of Fund Reporting and Control for Evergreen Investment Management Company, LLC from 2004 to 2010.
|
|
1
|
Jeremy DePalma acts as Treasurer of 86 funds and Assistant Treasurer of 64 funds in the Fund Complex.
|
|
2
|
Ms. Wheelock was re-appointed to the Board effective January 1, 2020.
|
|
3
|
Michelle Rhee became Chief Legal Officer effective October 22, 2019.
|
|
4
|
Catherine Kennedy became Secretary effective October 22, 2019.
|
34 | Wells Fargo Income Opportunities Fund
Other information (unaudited)
BOARD CONSIDERATION OF INVESTMENT ADVISORY AND
SUB-ADVISORY AGREEMENTS:
Wells Fargo Income Opportunities Fund
Under the Investment Company Act of 1940 (the “1940 Act”), the Board of Trustees (the “Board”) of Wells Fargo Income Opportunities Fund (the
“Fund”) must determine whether to approve the continuation of the Fund’s investment advisory and sub-advisory agreements. In this regard, at an in-person
meeting held on May 2-22, 2019 (the “Meeting”), the Board, 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”), reviewed and 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 (the “Sub-Adviser”), an affiliate of Funds Management. The investment advisory agreement with Funds Management and the investment sub-advisory agreement with the Sub-Adviser 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 the Sub-Adviser and the continuation of the Advisory Agreements. Prior to the Meeting, including at an in-person meeting in April 2019, the Trustees conferred extensively among themselves and with representatives of Funds Management about these matters. Also, the Board has adopted a team-based approach, with each
team consisting of a sub-set of Trustees, to assist the full Board in the discharge of its duties in reviewing investment performance and other matters throughout the year. 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.
In providing information to the Board, Funds Management and the Sub-Adviser were guided by a detailed set of requests for
information submitted to them by independent legal counsel on behalf of the Independent Trustees at the start of the Board’s annual contract renewal process earlier in 2019. In considering and approving the Advisory Agreements, the Trustees
considered the information they believed relevant, including but not limited to the information discussed below. 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 the Sub-Adviser about various topics. In this regard, the Board reviewed reports of Funds Management at each of its quarterly meetings, which included, among other
things, portfolio reviews and investment performance reports. In addition, the Board and the teams mentioned above confer with portfolio managers at various times throughout the year. The Board did not identify any particular information or
consideration that was all-important or controlling, and each individual Trustee may have attributed different weights to various factors.
After its deliberations, the Board unanimously approved the continuation of the Advisory Agreements and determined that the compensation payable to Funds Management and
the Sub-Adviser is reasonable. The Board considered the continuation of the Advisory Agreements for the Fund as part of its consideration of agreements for funds across the complex, but its approvals were made
on a fund-by-fund basis. The following summarizes a number of important, but not necessarily all, factors considered by the Board in support of its approvals.
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 the Sub-Adviser under the Advisory Agreements. This information included, among other
things, a summary of the background and experience of senior management of Wells Fargo Asset Management (“WFAM”), of which Funds Management and the Sub-Adviser are a part, a summary of investments
made in the business of WFAM, a summary of certain organizational and personnel changes involving Funds Management and the Sub-Adviser, and a description of Funds Management’s and the Sub-Adviser’s business continuity planning programs and of their approaches to data privacy and cybersecurity. The Board considered the additional services provided to the Fund due to the fact that the Fund is
a closed-end fund, including, but not limited to, leverage management and monitoring, evaluating, and, where appropriate, making recommendations with respect to the Fund’s trading discount, share
repurchase program, and distribution rates, as well as shareholder relations activities. The Board also considered the qualifications, background, tenure and responsibilities of each 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 the Sub-Adviser 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 the Sub-Adviser. In addition, the Board took into account the full range of services provided to the Fund by Funds Management and its affiliates.
Wells Fargo Income Opportunities Fund | 35
Other information (unaudited)
Fund investment performance and expenses
The Board considered the investment performance results for the Fund over various time periods ended December 31, 2018. The Board considered these results in
comparison to the investment performance of funds in a Universe that was determined by Broadridge Inc. (“Broadridge”) to be similar to the Fund (the “Universe”), and in comparison to the Fund’s benchmark index and to other
comparative data. The Board received a description of the methodology used by Broadridge to select the funds in the performance Universe. The Board noted that the investment performance of the Fund was higher than the average performance of the
Universe for all periods under review except for the period since inception. The Board also noted that the performance of the Fund was higher than or in range of its benchmark, the ICE BofAML U.S. High Yield Index, for all periods under review.
The Board also received and considered information regarding the Fund’s net operating expense ratio and its various components, including actual management fees, and
custodian and other non-management fees. The Board considered this ratio in comparison to the median ratio of funds in an expense group that was determined by Broadridge to be similar to the Fund (the
“Group”). Broadridge is an independent provider of investment company data. The Board received a description of the methodology used by Broadridge to select the funds in the expense Group and an explanation of how funds comprising expense
groups and their expense ratios may vary from year-to-year. Based on the Broadridge reports, the Board noted that the net operating expense ratio of the Fund was lower
than the median net operating expense ratio of the expense Group.
The Board took into account the Fund’s investment performance and expense information provided
to it among the factors considered in deciding to re-approve the Advisory Agreements.
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 Fund’s contractual administration fee rate (the “Management Rate”). The Board also reviewed and considered the
contractual investment sub-advisory fee rate that is payable by Funds Management to the Sub-Adviser for investment sub-advisory
services (the “Sub-Advisory Agreement Rate”).
Among other information reviewed by the Board was a comparison of the
Management Rate of the Fund with those of other funds in the expense Group at a common asset level. The Board noted that the Management Rate of the Fund was lower than the average rate for the Fund’s expense Group.
The Board also received and considered information about the portion of the total advisory fee that was retained by Funds Management after payment of the fee to the Sub-Adviser for sub-advisory services. In assessing the reasonableness of this amount, the Board received and evaluated information about the nature and extent of
responsibilities retained and risks assumed by Funds Management and not delegated to or assumed by the Sub-Adviser, and about Funds Management’s on-going oversight
services. Given the affiliation between Funds Management and the Sub-Adviser, the Board ascribed limited relevance to the allocation of the advisory fee between them.
Based on its consideration of the factors and information it deemed relevant, including those described here, the Board determined that the Advisory Agreement Rate and
the Sub-Advisory Agreement Rate was reasonable.
Profitability
The Board received and considered information concerning the profitability of Funds Management, as well as the profitability of both WFAM and Wells Fargo & Co.
(“Wells Fargo”) from providing services to the fund family as a whole. The Board noted that the Sub-Adviser’s profitability information with respect to providing services to the Fund and other
funds in the family was subsumed in the WFAM and Wells Fargo profitability analysis.
Funds Management reported on the methodologies and estimates used in calculating
profitability, including a description of the methodology used to allocate certain expenses. Among other things, the Board noted that the levels of profitability reported on a
fund-by-fund basis varied widely, depending on factors such as the size, type and age of fund. Based on its review, the Board did not deem the profits reported by Funds
Management, WFAM or Wells Fargo from services provided to the Fund to be at a level that would prevent it from approving the continuation of the Advisory Agreements.
Economies of scale
The Board received and considered information about the
potential for Funds Management to experience economies of scale in the provision of management services, the difficulties of calculating economies of scale on an individual fund level, and the extent to which potential scale benefits are shared with
shareholders. The Board noted that the Fund is not engaged in a continuous offering that could help its assets grow, and that, as is typical of closed-end funds, there are no breakpoints in the
36 | Wells Fargo Income Opportunities Fund
Other information (unaudited)
Management Rate. Although the Fund would not share in any potential economies of scale through
contractual breakpoints, the Board noted that Funds Management shares potential economies of scale from its management business in a variety of ways, including through fee waiver and expense reimbursement arrangements, services that benefit
shareholders, competitive management fee rates set at the outset without regard to breakpoints, and investments in the business intended to enhance services available to shareholders.
The Board concluded that Funds Management’s arrangements with respect to the Fund constituted a reasonable approach to sharing potential economies of scale with the
Fund and its shareholders. The Board also noted that it would have opportunities to revisit the Management Rate as part of future contract reviews.
Other
benefits to Funds Management and the Sub-Adviser
The Board received and considered information regarding potential “fall-out” or ancillary benefits received by Funds Management and its affiliates, including the Sub-Adviser, as a result of their relationships with the Fund.
Ancillary benefits could include, among others, benefits directly attributable to other relationships with the Fund and benefits potentially derived from an increase in Funds Management’s and the
Sub-Adviser’s business as a result of their relationships with the Fund. The Board also reviewed information about soft dollar credits earned and utilized by the
Sub-Adviser and commissions earned by affiliated brokers from portfolio transactions.
Based on its consideration of the
factors and information it deemed relevant, including those described here, the Board did not find that any ancillary benefits received by Funds Management and its affiliates, including the Sub-Adviser, were
unreasonable.
Conclusion
At the Meeting, 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 and determined that the compensation payable to Funds Management and the Sub-Adviser is reasonable.
Wells Fargo Income Opportunities Fund | 37
Automatic dividend reinvestment plan
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 common shares. The shares are acquired by the Plan Agent for the participant’s 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 participant’s 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 (“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 Agent’s 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 505000, Louisville, Kentucky 40233 or by calling 1-800-730-6001.
38 | Wells Fargo Income Opportunities Fund
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Transfer Agent, Registrar, Shareholder Servicing
Agent & Dividend Disbursing Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233
1-800-730-6001
Website: wfam.com
Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are
not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker-dealer and Member FINRA).
This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a
recommendation for any specific investment, strategy, or plan.
INVESTMENT PRODUCTS: NOT FDIC INSURED ◾ NO BANK GUARANTEE ◾ MAY LOSE VALUE
© 2019 Wells Fargo & Company. All rights reserved.
408252 12-19
SIO/SAR148 10-19