UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number          811-02151          

 

Bancroft Fund Ltd.


(Exact name of registrant as specified in charter)

 

One Corporate Center
Rye, New York 10580-1422


(Address of principal executive offices) (Zip code)

 

Jane D. O’Keeffe
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580-1422


(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 1-800-422-3554

 

Date of fiscal year end: October 31

 

Date of reporting period: October 31, 2021

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

 

 

 

Item 1. Reports to Stockholders.

(a) The Report to Shareholders is attached herewith.

 

 

Bancroft Fund Ltd. 

Annual Report — October 31, 2021

 

(Y)our Portfolio Management Team 

       
  Thomas H. Dinsmore, CFA James A. Dinsmore, CFA  
 

BS, Wharton School
of Business

MA, Fairleigh Dickinson
University

BA, Cornell University

MBA, Rutgers University

 

 

To Our Shareholders,

 

For the fiscal year ended October 31, 2021, the net asset value (NAV) total return of the Bancroft Fund Ltd. was 27.1% compared with total returns of 33.0% and 26.2% for the Bloomberg ICE BofA U.S. Convertibles Index and the Bloomberg Balanced U.S. Convertibles Index, respectively. The total return for the Fund’s publicly traded shares was 35.6%. The Fund’s NAV per share was $33.08, while the price of the publicly traded shares closed at $30.07 on the NYSE American. See page 3 for additional performance information.

 

Enclosed are the financial statements, including the schedule of investments, as of October 31, 2021.

 

Investment Objective and Strategy (Unaudited)

 

The Fund’s primary investment objective is to provide income and the potential for capital appreciation, which objectives the Fund considers to be relatively equal over the long term due to the nature of the securities in which it invests. The Fund invests primarily in convertible and equity securities.

 

 

 

 

 

 

 

 

As permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s annual and semiannual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Fund’s website (www.gabelli.com), and you will be notified by mail each time a report is posted and provided with a website link to access the report. If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. To elect to receive all future reports on paper free of charge, please contact your financial intermediary, or, if you invest directly with the Fund, you may call 800-422-3554 or send an email request to info@gabelli.com.

 

 

 

 

Performance Discussion (Unaudited)

 

Looking back over Bancroft’s Fiscal Year 2021, there were a few distinct periods that played an important role in performance. The year started off with a very strong first quarter beginning in calendar Q4 of 2020 as equities and convertibles moved sharply higher. Issuance was very strong during the fiscal year with 158 new issues with a cumulative capitalization of over $93 billion.

 

The second quarter saw significant weakness as premium to conversion value became a bit stretched and the market began to shift away from growth and towards value. We started to see some pushback from investors on pricing in March, and terms improved. Importantly, with investors focused on the primary market there was some weakness in the pricing of existing issues. This proved to be a great opportunity for us to add to positions in companies that we know well at more attractive terms.

 

The third quarter bounced back and the last quarter of fiscal 2021 was volatile but ended relatively flat. The convertible market offered us unique access to growth, as well as companies that have seen years of demand pulled forward as the world adjusts to working and attending school remotely. Volatility returned to the markets with concerns over inflation and interest rates moving higher. This has called into question some of the valuations that have been given to certain fast growing tech companies, causing both equity and convert indices to be somewhat volatile.

 

Among our stronger performing positions for the year were: Cloudflare, Inc. 0.750%, 5/15/25 (1.8% of net assets as of October 31, 2021). The company operates a cloud platform that delivers a range of network services to businesses; Impinj, Inc. 2.000%, 12/15/26 (1.8%) operates a cloud connectivity platform; and Perficient, Inc. 1.25% 8/1/25 (2.3%) the company is an IT consulting firm helping their clients understand and implement high quality and efficient software solutions.

 

Some of the weaker holdings in the portfolio included Bandwidth, Inc. 0.25%, 3/1/26 (1.0%), which operates as cloud based software powered communications platform as a services (CPaaS); the company operates in two segments, CPaaS and Other; Lending Tree, Inc. 0.625% of 6/1/22 (No longer held as of October 31, 2021) through its subsidiary, LT Intermediate Company, LLC, operates online consumer platform in the United States; and Esperion Therapeutics, Inc. 4% 11/15/25 (no longer held as of October 31, 2021), is a pharmaceutical company that develops and commercializes medicines for the treatment of patients with elevated low density lipoprotein cholesterol in the United States and internationally.

 

We appreciate your continued confidence and trust.

 

2

 

 

Comparative Results 

Average Annual Returns through October 31, 2021 (a) (Unaudited)

 

    1 Year   3 year   5 year   10 year   Since
Inception
(4/20/71)
Bancroft Fund Ltd.                    
NAV Total Return (b)     27.11 %     21.63 %     16.96 %     12.49 %     9.53 %
Investment Total Return (c)     35.57       25.71       16.87       13.71       10.22  
Bloomberg ICE BofA U.S. Convertibles Index (d)     32.95       24.16       18.58       14.03       N/A (e)
Bloomberg Balanced U.S. Convertibles Index (d)     26.22       19.81       14.02       10.32       N/A (f)

 

(a) The Fund’s fiscal year ends on October 31.

(b) Total returns and average annual returns reflect changes in the NAV per share, reinvestment of distributions at NAV on the ex-dividend date for the period beginning November 2015, and are net of expenses. For the period December 2008 through October 2015, distributions were reinvested on the payable date using market prices. For the period May 2006 through November 2008, distributions were reinvested on the payable date using NAV. Total returns and average annual returns were adjusted for the 1987 tender offering (no adjustments were made for the 1982 and 2007 tender offers nor for the 1987 or 2003 rights offerings). Since inception return is based on an initial NAV of $22.92. NAV total returns would have been lower had Gabelli Funds, LLC (the Adviser) not reimbursed certain expenses of the Fund.

(c) Total returns and average annual returns reflect changes in closing market values on the NYSE American and reinvestment of distributions. Total returns and average annual returns were adjusted for the 1987 tender offering (no adjustments were made for the 1982 and 2007 tender offers nor for the 1987 or 2003 rights offerings). Since inception return is based on an initial offering price of $25.00.

(d) The Bloomberg ICE BofA U.S. Convertibles Index is a market value weighted index of all dollar denominated convertible securities that are exchangeable into U.S. equities that have a market value of more than $50 million. The Bloomberg Balanced U.S. Convertibles Index is a market value weighted index that tracks the performance of publicly placed, dollar denominated convertible securities that are between 40% and 80% sensitive to movements in their underlying common stocks. Dividends and interest income are considered reinvested. You cannot invest directly in an index.

(e) The Bloomberg ICE BofA U.S. Convertibles Index inception date is December 31, 1994.
(f) The Bloomberg Balanced U.S. Convertibles Index inception date is January 1, 2003.

 

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing.

 

Returns represent past performance and do not guarantee future results. Investment returns and the principal value of an investment will fluctuate. The Fund’s use of leverage may magnify the volatility of net asset value changes versus funds that do not employ leverage. When shares are sold, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit www.gabelli.com for performance information as of the most recent month end.

 

3

 

 

COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN 

BANCROFT FUND LTD (INVESTMENT TOTAL RETURN), BLOOMBERG ICE BOFA U.S. CONVERTIBLES
INDEX & BLOOMBERG BALANCED U.S. CONVERTIBLES INDEX (Unaudited)

 

Average Annual Total Returns*
  1 Year 5 Year 10 Year
Investment 35.57% 16.87% 13.71%

 

 

 

* Past performance is not predictive of future results. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

 

4

 

 

Summary of Portfolio Holdings (Unaudited)

 

The following tables present portfolio holdings as a percent of total investments as of October 31, 2021:

 

Bancroft Fund Ltd.        
Computer Software and Services 23.7%   Real Estate Investment Trusts 2.7 %
Health Care 11.5%   Diversified Industrial 2.7 %
U.S. Government Obligations 8.4%   Automotive 2.0 %
Business Services 7.2%   Entertainment 1.9 %
Financial Services 6.2%   Consumer Products 1.8 %
Security Software 5.9%   Automotive: Parts and Accessories 1.5 %
Consumer Services 4.8%   Airlines 1.3 %
Communications Equipment 4.7%   Equipment and Supplies 0.8 %
Energy and Utilities 4.3%   Transportation 0.7 %
Semiconductors 4.1%   Agriculture 0.6 %
Telecommunications 3.2%     100.0 %

 

The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (the SEC) for the first and third quarters of each fiscal year on Form N-PORT. Shareholders may obtain this information at www.gabelli.com or by calling the Fund at 800-GABELLI (800-422-3554). The Fund’s Form N-PORT is available on the SEC’s website at www.sec.gov and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.

 

Proxy Voting

 

The Fund files Form N-PX with its complete proxy voting record for the twelve months ended June 30, no later than August 31 of each year. A description of the Fund’s proxy voting policies, procedures, and how each Fund voted proxies relating to portfolio securities is available without charge, upon request, by (i) calling 800-GABELLI (800-422-3554); (ii) writing to The Gabelli Funds at One Corporate Center, Rye, NY 10580-1422; or (iii) visiting the SEC’s website at www.sec.gov.

 

5

 

 

Bancroft Fund Ltd. 

Schedule of Investments — October 31, 2021

 

 

Principal
Amount
        Cost     Market
Value
 
        CONVERTIBLE CORPORATE BONDS — 76.9%          
        Airlines — 1.3%                
$ 1,465,000     JetBlue Airways Corp.,                
        0.500%, 04/01/26(a)   $ 1,482,597     $ 1,414,042  
  980,000     Southwest Airlines Co.,                
        1.250%, 05/01/25     1,046,987       1,379,350  
              2,529,584       2,793,392  
                         
        Automotive — 2.0%                
  3,500,000     Ford Motor Co.,                
        Zero Coupon,                
        03/15/26(a)     3,891,770       4,157,604  
                         
        Business Services — 6.6%                
  1,265,000     2U Inc.,                
        2.250%, 05/01/25     1,253,186       1,618,864  
  935,000     Avalara Inc.,                
        0.250%, 08/01/26(a)     934,627       981,080  
  1,450,000     BigCommerce Holdings Inc.,                
        0.250%, 10/01/26(a)     1,479,210       1,441,478  
  1,700,000     Perficient Inc.,                
        1.250%, 08/01/25     1,700,000       4,118,250  
  310,000     Repay Holdings Corp.,                
        Zero Coupon,                
        02/01/26(a)     310,000       287,798  
        Shift4 Payments Inc.                
  1,000,000     Zero Coupon,                
        12/15/25(a)     1,316,776       1,089,400  
  390,000     0.500%, 08/01/27(a)     402,218       360,984  
        Square Inc.                
  500,000     0.500%, 05/15/23     519,937       1,635,312  
  1,000,000     0.250%, 11/01/27(a)     1,024,860       1,213,151  
  1,075,000     Upwork Inc.,                
        0.250%, 08/15/26(a)     1,084,551       1,156,063  
              10,025,365       13,902,380  
                         
        Communications Equipment — 4.7%                
  2,835,000     InterDigital Inc.,                
        2.000%, 06/01/24     2,832,357       3,070,659  
  2,000,000     Kaleyra Inc.,                
        6.125%, 06/01/26(a)     2,006,383       2,066,216  
  2,000,000     Lumentum Holdings Inc.,                
        0.500%, 12/15/26     2,113,777       2,185,000  
  2,500,000     Radius Global Infrastructure Inc.,                
        2.500%, 09/15/26(a)     2,500,000       2,579,082  
              9,452,517       9,900,957  
                         
        Computer Software and Services — 23.7%          
  1,500,000     Bandwidth Inc.,                
        0.250%, 03/01/26     1,514,040       1,750,939  
        Blackline Inc.                
  700,000     0.125%, 08/01/24     701,160       1,247,124  
Principal
Amount
        Cost     Market
Value
 
$ 1,235,000     Zero Coupon,                
        03/15/26(a)   $ 1,235,000     $ 1,265,284  
        Cloudflare Inc.                
  635,000     0.750%, 05/15/25     635,000       3,300,794  
  155,000     Zero Coupon,                
        08/15/26(a)     155,000       195,867  
        Coupa Software Inc.                
  835,000     0.125%, 06/15/25     851,265       1,303,686  
  1,260,000     0.375%, 06/15/26     1,257,263       1,385,278  
  3,000,000     CSG Systems International Inc.,                
        4.250%, 03/15/36     3,022,610       3,108,900  
  1,000,000     Dropbox Inc.,                
        Zero Coupon,                
        03/01/28(a)     1,084,173       1,093,642  
  1,985,000     Everbridge Inc.,                
        0.125%, 12/15/24     2,003,587       3,024,997  
  2,015,000     i3 Verticals LLC,                
        1.000%, 02/15/25     1,992,089       1,846,244  
  1,915,000     Limelight Networks Inc.,                
        3.500%, 08/01/25     1,779,437       1,711,688  
  1,690,000     LivePerson Inc.,                
        0.750%, 03/01/24     1,668,673       2,492,750  
  1,500,000     Match Group Financeco 3 Inc.,                
        2.000%, 01/15/30(a)     1,503,553       2,940,000  
  1,000,000     MercadoLibre Inc.,                
        2.000%, 08/15/28     984,073       3,388,921  
  2,250,000     PAR Technology Corp.,                
        2.875%, 04/15/26     2,101,107       3,745,922  
  2,090,000     Progress Software Corp.,                
        1.000%, 04/15/26(a)     2,094,202       2,246,664  
        PROS Holdings Inc.                
  500,000     1.000%, 05/15/24     463,023       448,708  
  1,205,000     2.250%, 09/15/27     1,205,000       1,221,629  
  1,500,000     Q2 Holdings Inc.,                
        0.750%, 06/01/26     1,554,348       1,665,438  
  2,000,000     Splunk Inc.,                
        1.125%, 09/15/25     2,082,885       2,617,005  
  950,000     Varonis Systems Inc.,                
        1.250%, 08/15/25     958,048       2,068,055  
        Vocera Communications Inc.                
  900,000     1.500%, 05/15/23     925,586       1,587,539  
  1,280,000     0.500%, 09/15/26(a)     1,264,318       1,476,921  
  1,650,000     Workiva Inc.,                
        1.125%, 08/15/26     1,668,309       3,262,414  
              34,703,749       50,396,409  
                         
        Consumer Products — 1.8%                
  950,000     Callaway Golf Co.,                
        2.750%, 05/01/26     1,013,819       1,638,888  


 

See accompanying notes to financial statements.

 

6

 

 

Bancroft Fund Ltd. 

Schedule of Investments (Continued) — October 31, 2021

 

 

Principal
Amount
        Cost     Market
Value
 
        CONVERTIBLE CORPORATE BONDS (Continued)  
        Consumer Products (Continued)                
$ 470,000     Cracker Barrel Old Country Store Inc.,                
        0.625%, 06/15/26(a)   $ 470,000     $ 461,402  
  645,000     Farfetch Ltd.,                
        3.750%, 05/01/27     665,187       1,669,776  
              2,149,006       3,770,066  
                         
        Consumer Services — 4.8%                
  950,000     National Vision Holdings Inc.,                
        2.500%, 05/15/25     959,035       1,961,283  
  1,360,000     NCL Corp. Ltd.,                
        5.375%, 08/01/25     1,750,916       2,272,121  
        Royal Caribbean Cruises Ltd.                
  395,000     4.250%, 06/15/23     424,327       534,762  
  620,000     2.875%, 11/15/23(a)     620,000       777,736  
  620,000     Shopify Inc.,                
        0.125%, 11/01/25     620,000       789,725  
  2,030,000     Stride Inc.,                
        1.125%, 09/01/27     1,840,260       2,038,120  
  1,880,000     Wayfair Inc.,                
        0.625%, 10/01/25     1,931,204       1,861,369  
              8,145,742       10,235,116  
                         
        Diversified Industrial — 1.2%                
  750,000     Chart Industries Inc.,                
        1.000%, 11/15/24(a)     751,376       2,278,702  
  315,000     John Bean Technologies Corp.,                
        0.250%, 05/15/26(a)     315,000       341,873  
              1,066,376       2,620,575  
                         
        Energy and Utilities — 1.9%                
  1,065,000     Bloom Energy Corp.,                
        2.500%, 08/15/25     1,098,725       2,187,297  
  2,200,000     Cheniere Energy Inc.,                
        4.250%, 03/15/45     1,454,507       1,896,346  
              2,553,232       4,083,643  
                         
        Entertainment — 1.9%                
        DISH Network Corp.                
  1,500,000     Zero Coupon,                
        12/15/25(a)     1,500,000       1,728,795  
  1,000,000     3.375%, 08/15/26     959,534       1,021,336  
  1,410,000     fuboTV Inc.,                
        3.250%, 02/15/26(a)     1,292,027       1,358,958  
              3,751,561       4,109,089  
Principal
Amount
        Cost     Market
Value
 
        Financial Services — 4.4%                
$ 960,000     Digitalbridge Operating Co. LLC,                
        5.750%, 07/15/25(a)(b)   $ 1,159,019     $ 2,916,576  
  1,250,000     Encore Capital Group Inc.,                
        3.250%, 03/15/22     1,237,969       1,510,134  
  1,000,000     Heritage Insurance Holdings Inc.,                
        5.875%, 08/01/37     1,000,000       941,100  
  1,000,000     IIP Operating Partnership LP,                
        3.750%, 02/21/24(a)     1,000,000       4,007,500  
              4,396,988       9,375,310  
                         
        Health Care — 9.1%                
  1,450,000     1Life Healthcare Inc.,                
        3.000%, 06/15/25     1,463,989       1,405,874  
  80,000     Brookdale Senior Living Inc.,                
        2.000%, 10/15/26(a)     80,000       88,735  
  665,000     Coherus Biosciences Inc.,                
        1.500%, 04/15/26     669,465       747,414  
  1,000,000     Collegium Pharmaceutical Inc.,                
        2.625%, 02/15/26     967,858       1,001,875  
  1,000,000     CONMED Corp.,                
        2.625%, 02/01/24     1,009,309       1,717,550  
  1,000,000     Cutera Inc.,                
        2.250%, 03/15/26(a)     1,000,000       1,497,796  
        Dexcom Inc.                
  335,000     0.750%, 12/01/23     335,000       1,270,697  
  975,000     0.250%, 11/15/25     996,388       1,249,513  
  1,830,000     Exact Sciences Corp.,                
        0.375%, 03/15/27     1,853,609       2,078,194  
  1,500,000     Insulet Corp.,                
        0.375%, 09/01/26     1,544,567       2,232,467  
  940,000     Invacare Corp.,                
        4.250%, 03/15/26(a)     940,000       796,763  
  627,000     Pacira BioSciences Inc.,                
        2.375%, 04/01/22     629,081       645,887  
  1,720,000     PetIQ Inc.,                
        4.000%, 06/01/26     1,899,994       2,079,824  
  2,040,000     Tabula Rasa HealthCare Inc.,                
        1.750%, 02/15/26     1,928,012       1,718,700  
  700,000     Travere Therapeutics Inc.,                
        2.500%, 09/15/25     605,360       748,554  
              15,922,632       19,279,843  
                         
        Real Estate Investment Trusts — 1.2%          
  350,000     Braemar Hotels & Resorts Inc.,                
        4.500%, 06/01/26(a)     350,000       391,005  


 

See accompanying notes to financial statements.

 

7

 

 

Bancroft Fund Ltd. 

Schedule of Investments (Continued) — October 31, 2021

 

 

Principal
Amount
        Cost     Market
Value
 
                   
        CONVERTIBLE CORPORATE BONDS (Continued)                
        Real Estate Investment Trusts (Continued)                
$ 310,000     Pebblebrook Hotel Trust,                
        1.750%, 12/15/26   $ 310,000     $ 346,612  
  620,000     Realogy Group LLC/Realogy Co.- Issuer Corp.,                
        0.250%, 06/15/26(a)     626,513       633,323  
  1,110,000     Summit Hotel Properties Inc.,                
        1.500%, 02/15/26     1,136,619       1,192,394  
              2,423,132       2,563,334  
                         
        Security Software — 5.9%                
  1,745,000     Cardlytics Inc.,                
        1.000%, 09/15/25     1,945,922       2,120,081  
  1,500,000     CyberArk Software Ltd.,                
        Zero Coupon, 11/15/24     1,516,069       1,947,150  
  465,000     Nice Ltd.,                
        Zero Coupon, 09/15/25     465,000       548,120  
  798,000     Nice Systems Inc.,                
        1.250%, 01/15/24     811,361       2,711,245  
  2,090,000     Verint Systems Inc.,                
        0.250%, 04/15/26(a)     2,098,975       2,075,652  
  1,475,000     Zscaler Inc.,                
        0.125%, 07/01/25     1,491,416       3,189,196  
              8,328,743       12,591,444  
                         
        Semiconductors — 2.5%                
  1,500,000     Impinj Inc.,                
        2.000%, 12/15/26     1,500,000       3,252,150  
  500,000     Teradyne Inc.,                
        1.250%, 12/15/23     518,245       2,149,875  
              2,018,245       5,402,025  
                         
        Telecommunications — 3.2%                
  2,020,000     8x8 Inc.,                
        0.500%, 02/01/24     2,094,536       2,253,116  
  1,000,000     Harmonic Inc.,                
        2.000%, 09/01/24     1,076,334       1,258,800  
  1,250,000     Infinera Corp.,                
        2.500%, 03/01/27     1,201,360       1,569,985  
  1,315,000     PagerDuty Inc.,                
        1.250%, 07/01/25     1,315,906       1,688,017  
              5,688,136       6,769,918  
                         
        Transportation — 0.7%                
  1,000,000     Atlas Air Worldwide Holdings Inc.,                
        1.875%, 06/01/24     939,483       1,457,500  
                         
        TOTAL CONVERTIBLE CORPORATE BONDS     117,986,261       163,408,605  
                Market  
Shares         Cost     Value  
                   
        CONVERTIBLE PREFERRED STOCKS — 0.8%                
        Agriculture — 0.6%                
  9,000     Bunge Ltd.,                
        4.875%   $ 999,900   $ 1,144,080  
                         
                         
        Business Services — 0.2%                
  809,253     Amerivon Holdings LLC,                
        4.000%(c)     1,294,693       436,035  
  272,728     Amerivon Holdings LLC, common equity units (c)     0       16,364  
              1,294,693       452,399  
        TOTAL CONVERTIBLE PREFERRED STOCKS     2,294,593       1,596,479  
                         
        MANDATORY CONVERTIBLE SECURITIES(d)  — 12.4%                
        Automotive: Parts and Accessories — 1.5%                
  16,300     Aptiv plc, Ser. A,                
        5.500%, 06/15/23     1,645,115       3,149,160  
                         
        Business Services — 0.4%                
  10,500     Clarivate plc, Ser. A,                
        5.250%, 06/01/24     1,050,875       965,475  
                         
        Diversified Industrial — 1.5%                
  15,000     Colfax Corp.,                
        5.750%, 01/15/22     1,556,270       3,130,500  
                         
        Energy and Utilities — 2.4%                
        NextEra Energy Inc.                
  26,675     4.872%, 09/01/22     1,317,030       1,686,393  
  25,500     5.279%, 03/01/23     1,243,125       1,388,985  
  24,860     6.219%, 09/01/23     1,208,196       1,362,328  
  14,800     Spire Inc., Ser. A,                
        7.500%, 03/01/24     749,000       727,568  
              4,517,351       5,165,274  
        Equipment and Supplies — 0.8%                
  1,000     Danaher Corp., Ser. B,                
        5.000%, 04/15/23     1,304,945       1,660,750  
                         
        Financial Services — 1.8%                
  2,375     2020 Cash Mandatory Exchangeable Trust,                
        5.250%, 06/01/23     2,597,983       2,491,392  
  24,000     New York Community Capital Trust V,                
        6.000%, 11/01/51     995,213       1,262,640  
              3,593,196       3,754,032  
        Health Care — 2.4%                
  24,965     Avantor Inc., Ser. A,                
        6.250%, 05/15/22     1,381,621       3,090,168  
  39,115     Elanco Animal Health Inc.,                
        5.000%, 02/01/23     1,893,712       1,982,348  
              3,275,333       5,072,516  


See accompanying notes to financial statements.

 

8

 

 

Bancroft Fund Ltd. 

Schedule of Investments (Continued) — October 31, 2021

 

 

                Market  
Shares         Cost     Value  
                   
        MANDATORY CONVERTIBLE SECURITIES(d) (Continued)                
        Semiconductors — 1.6%                
  2,015     Broadcom Inc., Ser. A,                
        8.000%, 09/30/22   $ 2,068,877   $ 3,379,840  
                         
        TOTAL MANDATORY CONVERTIBLE SECURITIES     19,011,962       26,277,547  
                         
        COMMON STOCKS — 1.5%                
        Business Services — 0.0%                
  485     Clarivate plc†     11,238       11,373  
                         
        Energy and Utilities — 0.0%                
  133     Goodrich Petroleum Corp.†     1,500       2,716  
                         
        Real Estate Investment Trusts — 1.5%            
  18,136     Crown Castle International                
        Corp.(e)     2,110,465       3,269,921  
                         
        TOTAL COMMON STOCKS     2,123,203       3,284,010  
                         
        WARRANTS — 0.0%                
        Energy and Utilities — 0.0%                
  1,135     Goodrich Petroleum Corp.,                
        expire 10/12/26†(c)     0       36,309  

 

Principal                      
Amount                      
                       
        U.S. GOVERNMENT OBLIGATIONS — 8.4%                
$ 17,809,000     U.S. Treasury Bills,                
        0.030% to 0.055%††, 11/12/21 to 03/17/22     17,807,245       17,806,785  
                         
TOTAL INVESTMENTS — 100.0%   $ 159,223,264       212,409,735  
                         
Other Assets and Liabilities (Net)             128,322  
                         
PREFERRED SHARES                
(1,200,000 preferred shares outstanding)             (30,000,000 )
                         
NET ASSETS — COMMON SHARES                
(5,517,786 common shares outstanding)           $ 182,538,057  
                         
NET ASSET VALUE PER COMMON SHARE                
($182,538,057 ÷ 5,517,786 shares outstanding)           $ 33.08  

 

 
(a) Securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

(b) At October 31, 2021, the Fund held an investment in a restricted and illiquid security amounting to $2,916,576 or 1.37% of total investments, which was valued under methods approved by the Board of Trustees as follows:
Acquisition Principal Amount     Issuer   Acquisition Dates   Acquisition Cost     10/31/21 Carrying Value Per Bond  
$ 960,000     Digitalbridge Operating Co. LLC, 5.750%, 07/15/25   07/17/20 - 11/11/20   $ 1,159,019     $ 3,038.1000  

 

(c) Security is valued using significant unobservable inputs and is classified as Level 3 in the fair value hierarchy.

(d) Mandatory convertible securities are required to be converted on the dates listed; they generally may be converted prior to these dates at the option of the holder.

(e) At October 31, 2021, $2,163,600 of the principal amount was pledged as collateral for current or potential holdings.

Non-income producing security.

†† Represents annualized yields at dates of purchase.


See accompanying notes to financial statements.

 

9

 

 

Bancroft Fund Ltd.

 

Statement of Assets and Liabilities  

October 31, 2021

 

Assets:      
Investments, at value (cost $159,223,264)   $ 212,409,735  
Dividends and interest receivable     563,864  
Deferred offering expense     124,477  
Prepaid expenses     699  
Total Assets     213,098,775  
Liabilities:        
Payable to bank     1,090  
Distributions payable     156,771  
Payable for investment advisory fees     119,063  
Payable for payroll expenses     15,172  
Payable for accounting fees     3,750  
Payable for legal and audit fees     96,400  
Payable for shareholder communications     43,864  
Listing fees payable     110,000  
Other accrued expenses     14,608  
Total Liabilities     560,718  
Preferred Shares:        
Series A Cumulative Preferred Shares (5.375%, $25 liquidation value, $0.01 par value, unlimited shares authorized with 1,200,000 shares issued and outstanding)     30,000,000  
         
Net Assets Attributable to Common Shareholders   $ 182,538,057  
         
Net Assets Attributable to Common Shareholders Consist of:        
Paid-in capital   $ 112,975,665  
Total distributable earnings     69,562,392  
Net Assets   $ 182,538,057  
         
Net Asset Value per Common Share:        
($182,538,057 ÷ 5,517,786 shares outstanding at $0.001 par value; unlimited number of shares authorized)   $ 33.08  

Statement of Operations    

For the Year Ended October 31, 2021

 

Investment Income:      
Dividends   $ 1,442,566  
Interest     1,786,922  
Total Investment Income     3,229,488  
Expenses:        
Investment advisory fees     1,397,091  
Trustees’ fees     129,376  
Legal and audit fees     94,730  
Shareholder communications expenses     81,623  
Payroll expenses     66,983  
Accounting fees     45,000  
Shareholder services fees     39,707  
Custodian fees     16,793  
Shelf registration expense     1,105  
Interest expense     655  
Miscellaneous expenses     99,223  
Total Expenses     1,972,286  
Less:        
Expenses paid indirectly by broker (See Note 3)     (1,918 )
Net Expenses     1,970,368  
Net Investment Income     1,259,120  
Net Realized and Unrealized Gain on Investments:        
Net realized gain on investments     22,884,089  
         
Net change in unrealized appreciation/depreciation:        
on investments     18,094,988  
         
Net Realized and Unrealized Gain on Investments     40,979,077  
Net Increase in Net Assets Resulting from Operations     42,238,197  
Total Distributions to Preferred Shareholders     (1,612,500 )
Net Increase in Net Assets Attributable to Common Shareholders Resulting from Operations   $ 40,625,697  


See accompanying notes to financial statements.

 

10

 

 

Bancroft Fund Ltd. 

Statement of Changes in Net Assets Attributable to Common Shareholders 

 

 

    Year Ended
October 31, 2021
    Year Ended
October 31, 2020
 
             
Operations:                
Net investment income   $ 1,259,120     $ 2,220,644  
Net realized gain on investments     22,884,089       16,528,668  
Net change in unrealized appreciation/depreciation on investments     18,094,988       8,202,613  
Net Increase in Net Assets Resulting from Operations     42,238,197       26,951,925  
Distributions to Preferred Shareholders     (1,612,500 )     (1,612,500 )
Net Increase in Net Assets Attributable to Common Shareholders Resulting from Operations     40,625,697       25,339,425  
                 
Distributions to Common Shareholders from accumulated earnings     (17,278,304 )     (9,751,306 )
                 
Fund Share Transactions:                
Net increase in net assets from common shares issued upon reinvestment of distributions     5,662,229       2,505,599  
Net decrease from repurchase of common shares (includes transaction costs)           (726,125 )
Net Increase in Net Assets from Fund Share Transactions     5,662,229       1,779,474  
                 
Net Increase in Net Assets Attributable to Common Shareholders     29,009,622       17,367,593  
                 
Net Assets Attributable to Common Shareholders:                
Beginning of year     153,528,435       136,160,842  
End of year   $ 182,538,057     $ 153,528,435  

 

See accompanying notes to financial statements.

 

11

 

 

Bancroft Fund Ltd. 

Financial Highlights

 

Selected data for a common share of beneficial interest outstanding throughout each year:

 

 

    Year Ended October 31,  
    2021     2020     2019     2018     2017  
Operating Performance:                                        
Net asset value, beginning of year   $ 28.83     $ 25.92     $ 24.22     $ 24.24     $ 22.02  
Net investment income     0.24       0.42       0.44       0.25       0.51  
Net realized and unrealized gain on investments     7.60       4.65       4.05       1.11       3.33  
Total from investment operations     7.84       5.07       4.49       1.36       3.84  
Distributions to Preferred Shareholders: (a)     0.3                                  
Net investment income     (0.04 )     (0.03 )     (0.05 )     (0.19 )     (0.07 )
Net realized gain     (0.26 )     (0.27 )     (0.26 )     (0.12 )     (0.24 )
Total distributions to preferred shareholders     (0.30 )     (0.30 )     (0.31 )     (0.31 )     (0.31 )
Net Increase in Net Assets Attributable to Common Shareholders Resulting from Operations     7.54       4.77       4.18       1.05       3.53  
Distributions to Common Shareholders:                                        
Net investment income     (0.39 )     (0.22 )     (0.45 )     (0.71 )     (0.29 )
Net realized gain     (2.82 )     (1.62 )     (1.95 )     (0.45 )     (0.98 )
Total distributions to common shareholders     (3.21 )     (1.84 )     (2.40 )     (1.16 )     (1.27 )
Fund Share Transactions:                                        
Increase in net asset value from common share transactions           0.02       0.04       0.11        
Decrease in net asset value from common shares issued upon reinvestment of distributions     (0.08 )     (0.04 )     (0.12 )     (0.02 )     (0.03 )
Offering costs and adjustment to offering costs for preferred shares charged to paid-in capital                       (0.00 )(b)     (0.01 )
Total Fund share transactions     (0.08 )     (0.02 )     (0.08 )     0.09       (0.04 )
Net Asset Value Attributable to Common Shareholders, End of Year   $ 33.08     $ 28.83     $ 25.92     $ 24.22     $ 24.24  

    NAV total return † 

    27.11 %     19.55 %     18.41 %     4.58 %     16.29 %
Market value, end of year   $ 30.07     $ 24.63     $ 23.94     $ 20.41     $ 21.90  

    Investment total return †† 

    35.57 %     11.08 %     31.92 %     (1.77 )%     11.75 %
Ratios to Average Net Assets and Supplemental Data:                                        
Net assets including liquidation value of preferred shares, end of year (in 000’s)   $ 212,538     $ 183,528     $ 166,161     $ 153,926     $ 157,254  
Net assets attributable to common shares, end of year (in 000’s)   $ 182,538     $ 153,528     $ 136,161     $ 123,926     $ 127,254  
Ratio of net investment income to average net assets attributable to common shares before preferred share distributions     0.71 %     1.56 %     1.77 %     1.17 %     2.09 %
Ratio of operating expenses to average net assets attributable to common shares (c)(d)     1.11 %     1.24 %     1.33 %     1.22 %     1.28 %
Portfolio turnover rate     33 %     58 %     42 %     43 %     33 %
Cumulative Preferred Shares:                                        
Liquidation value, end of year (in 000’s)   $ 30,000     $ 30,000     $ 30,000     $ 30,000     $ 30,000  
Total shares outstanding (in 000’s)     1,200       1,200       1,200       1,200       1,200  
Liquidation preference per share   $ 25.00     $ 25.00     $ 25.00     $ 25.00     $ 25.00  
Average market value (e)   $ 25.72     $ 25.65     $ 25.36     $ 25.24     $ 25.11  
Asset coverage per share   $ 177.12     $ 152.94     $ 138.47     $ 128.27     $ 131.04  
Asset Coverage     708 %     612 %     554 %     513 %     524 %

 

See accompanying notes to financial statements.

 

12

 

 

Bancroft Fund Ltd. 

Financial Highlights (Continued)

 

 

 

Based on net asset value per share, adjusted for reinvestment of distributions at prices determined under the Fund’s dividend reinvestment plan.

†† Based on market value per share, adjusted for reinvestment of distributions at prices determined under the Fund’s dividend reinvestment plan.

(a) Calculated based on average common shares outstanding on the record dates throughout the years.

(b) Amount represents less than $0.005 per share.

(c) The Fund received credits from a designated broker who agreed to pay certain Fund operating expenses. For all fiscal years presented, there was no impact on the expense ratios.

(d) Ratios of operating expenses to average net assets including liquidation value of preferred shares for the fiscal years ended October 31, 2021, 2020, 2019, 2018, and 2017 were 0.95%, 1.02%, 1.07%, 0.99%, and 1.03%, respectively.

(e) Based on weekly prices.

 

See accompanying notes to financial statements.

 

13

 

 

Bancroft Fund Ltd.
Notes to Financial Statements

 

1. Organization. Bancroft Fund Ltd., currently operates as a diversified closed-end management investment company, organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the 1940 Act). Investment operations commenced in April 1971.

 

The Fund’s primary investment objective is to provide income and the potential for capital appreciation, which objectives the Fund considers to be relatively equal over the long term due to the nature of the securities in which it invests. The Fund invests primarily in convertible and equity securities.

 

2. Significant Accounting Policies. As an investment company, the Fund follows the investment company accounting and reporting guidance, which is part of U.S. generally accepted accounting principles (GAAP) that may require the use of management estimates and assumptions in the preparation of its financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.

 

The global outbreak of the novel coronavirus disease, known as COVID-19, has caused adverse effects on many companies, sectors, nations, regions, and the markets in general, and may continue for an unpredictable duration. The effects of this pandemic may materially impact the value and performance of the Fund, its ability to buy and sell fund investments at appropriate valuations, and its ability to achieve its investment objectives.

 

Security Valuation. Portfolio securities listed or traded on a nationally recognized securities exchange or traded in the U.S. over-the-counter market for which market quotations are readily available are valued at the last quoted sale price or a market’s official closing price as of the close of business on the day the securities are being valued. If there were no sales that day, the security is valued at the average of the closing bid and asked prices or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day. If no bid or asked prices are quoted on such day, the security is valued at the most recently available price or, if the Board of Trustees (the Board) so determines, by such other method as the Board shall determine in good faith to reflect its fair market value. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by Gabelli Funds, LLC (the Adviser).

 

Portfolio securities primarily traded on a foreign market are generally valued at the preceding closing values of such securities on the relevant market, but may be fair valued pursuant to procedures established by the Board if market conditions change significantly after the close of the foreign market, but prior to the close of business on the day the securities are being valued. Debt obligations for which market quotations are readily available are valued at the average of the latest bid and asked prices. If there were no asked prices quoted on such day, the securities are valued using the closing bid price, unless the Board determines such amount does not reflect the securities’ fair value, in which case these securities will be fair valued as determined by the Board. Certain securities are valued principally using dealer quotations. Futures contracts are valued at the closing settlement price of the exchange or board of trade on which the applicable contract is traded. OTC futures and options on futures for which market quotations are readily available will be valued by quotations received from a pricing service or, if no quotations are available from a pricing service, by quotations obtained from one or more dealers in the instrument in question by the Adviser.

 

Securities and assets for which market quotations are not readily available are fair valued as determined by the Board. Fair valuation methodologies and procedures may include, but are not limited to: analysis and review

 

14

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

of available financial and non-financial information about the company; comparisons with the valuation and changes in valuation of similar securities, including a comparison of foreign securities with the equivalent U.S. dollar value American Depositary Receipt securities at the close of the U.S. exchange; and evaluation of any other information that could be indicative of the value of the security.

 

The inputs and valuation techniques used to measure fair value of the Fund’s investments are summarized into three levels as described in the hierarchy below: 

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.); and

Level 3 — significant unobservable inputs (including the Board’s determinations as to the fair value of investments).

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input both individually and in the aggregate that is significant to the fair value measurement. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The summary of the Fund’s investments in securities by inputs used to value the Fund’s investments as of October 31, 2021 is as follows:

 

    Valuation Inputs          
    Level 1
Quoted Prices
    Level 2 Other Significant
Observable Inputs
    Level 3 Significant
Unobservable Inputs (a)
    Total Market Value
at 10/31/21
 
INVESTMENTS IN SECURITIES:                                
ASSETS (Market Value):                                
Convertible Corporate Bonds (b)     —       $ 163,408,605       —       $ 163,408,605  
Convertible Preferred Stocks (b)   $ 1,144,080       —       $ 452,399       1,596,479  
Mandatory Convertible Securities:                                
Financial Services     1,262,640       2,491,392       —         3,754,032  
Other Industries (b)     22,523,515       —         —         22,523,515  
Total Mandatory Convertible Securities     23,786,155       2,491,392       —         26,277,547  
Common Stocks     3,284,010       —         —         3,284,010  
Warrants (b)     —         —         36,309       36,309  
U.S. Government Obligations     —         17,806,785       —         17,806,785  
TOTAL INVESTMENTS IN SECURITIES – ASSETS   $ 28,214,245     $ 183,706,782     $ 488,708     $ 212,409,735  

 

 

(a) The inputs for these securities are not readily available and are derived based on the judgment of the Adviser according to procedures approved by the Board of Trustees.

(b) Please refer to the Schedule of Investments for the industry classifications of these portfolio holdings.

 

During the fiscal year ended October 31, 2021, the Fund did not have transfers into or out of Level 3.

 

The following table reconciles Level 3 investments for the Fund for which significant unobservable inputs were used to determine fair value.

 

15

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

    Balance
as of
10/31/20
  Accrued
discounts/
(premiums)
  Realized
gain/
(loss)
  Net Change
in unrealized
appreciation/
depreciation†
  Purchases   Sales   Transfers
Into
Level 3
  Transfers
Out of
Level 3
  Balance
as of
10/31/21
  Net change
in unrealized
appreciation/
depreciation
during the
period on
Level 3
investments
still held at
10/31/21†
INVESTMENTS IN SECURITIES:                                                                                
ASSETS (Market Value):                                                                                
Convertible Preferred Stocks (a)   $ 452,399       —         —         —         —         —         —         —       $ 452,399       —    
Warrants (a)     0       —         —       $ 36,309       —         —         —         —         36,309     $ 36,309  
TOTAL INVESTMENTS IN SECURITIES   $ 452,399       —         —       $ 36,309       —         —         —         —       $ 488,708     $ 36,309  

 

 

Net change in unrealized appreciation/depreciation on investments is included in the related amounts in the Statement of Operations.

(a) Please refer to the Schedule of Investments for the industry classifications of these portfolio holdings.

 

Additional Information to Evaluate Qualitative Information.

 

General. The Fund uses recognized industry pricing services – approved by the Board and unaffiliated with the Adviser – to value most of its securities, and uses broker quotes provided by market makers of securities not valued by these and other recognized pricing sources. Several different pricing feeds are received to value domestic equity securities, international equity securities, preferred equity securities, and fixed income securities. The data within these feeds are ultimately sourced from major stock exchanges and trading systems where these securities trade. The prices supplied by external sources are checked by obtaining quotations or actual transaction prices from market participants. If a price obtained from the pricing source is deemed unreliable, prices will be sought from another pricing service or from a broker/dealer that trades that security or similar securities.

 

Fair Valuation. Fair valued securities may be common or preferred equities, warrants, options, rights, or fixed income obligations. Where appropriate, Level 3 securities are those for which market quotations are not available, such as securities not traded for several days, or for which current bids are not available, or which are restricted as to transfer. When fair valuing a security, factors to consider include recent prices of comparable securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or cash flow of the issuer, or cost if the preceding factors do not apply. A significant change in the unobservable inputs could result in a lower or higher value in Level 3 securities. The circumstances of Level 3 securities are frequently monitored to determine if fair valuation measures continue to apply.

 

The Adviser reports quarterly to the Board the results of the application of fair valuation policies and procedures. These may include backtesting the prices realized in subsequent trades of these fair valued securities to fair values previously recognized.

 

16

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

Investments in other Investment Companies. The Fund may invest, from time to time, in shares of other investment companies (or entities that would be considered investment companies but are excluded from the definition pursuant to certain exceptions under the 1940 Act) (the Acquired Funds) in accordance with the 1940 Act and related rules. Shareholders in the Fund would bear the pro rata portion of the periodic expenses of the Acquired Funds in addition to the Fund’s expenses. During the fiscal year ended October 31, 2021, the Fund did not incur periodic expenses charged by Acquired Funds.

 

Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments, and other assets and liabilities are translated into U.S. dollars at current exchange rates. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the respective dates of such transactions. Unrealized gains and losses that result from changes in foreign exchange rates and/or changes in market prices of securities have been included in unrealized appreciation/depreciation on investments and foreign currency translations. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions, and the difference between the amounts of interest and dividends recorded on the books of the Fund and the amounts actually received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gain/(loss) on investments.

 

Foreign Securities. The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the inability to repatriate funds, less complete financial information about companies, and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than securities of comparable U.S. issuers.

 

Foreign Taxes. The Fund may be subject to foreign taxes on income, gains on investments, or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable, based upon its current interpretation of tax rules and regulations that exist in the markets in which it invests.

 

Purchase Commitment. Special Purpose Acquisition Companies (SPACs) are publicly traded shell companies that have no operations but intend to merge with or acquire a private company. At October 31, 2021, the Fund has a contingent commitment outstanding with GIGCapital4, a SPAC, to purchase $2,000,000 BigBear Inc., 6.000%, 6/1/26 senior convertible notes if and when GIGCapital4 completes its merger or acquisition of BigBear.

 

Restricted Securities. The Fund may invest up to 20% of its net assets in securities for which the markets are restricted. Restricted securities include securities whose disposition is subject to substantial legal or contractual restrictions. The sale of restricted securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. Securities freely saleable among qualified institutional investors under special rules adopted by the SEC may be treated as liquid if they satisfy liquidity standards established by the Board. The continued liquidity of such securities is not as well assured as that of publicly traded securities,

 

17

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

and accordingly the Board will monitor their liquidity. For the restricted security held as of October 31, 2021, please refer to the Schedule of Investments.

 

Securities Transactions and Investment Income. Securities transactions are accounted for on the trade date with realized gain/(loss) on investments determined by using the identified cost method. Interest income (including amortization of premium and accretion of discount) is recorded on an accrual basis. Premiums and discounts on debt securities are amortized using the effective yield to maturity method or amortized to earliest call date, if applicable. Dividend income is recorded on the ex-dividend date, except for certain dividends from foreign securities that are recorded as soon after the ex-dividend date as the Fund becomes aware of such dividends.

 

Custodian Fee Credits. When cash balances are maintained in the custody account, the Fund receives credits which are used to offset custodian fess. The gross expenses paid under the custody arrangement are included in custodian fees in the Statement of Operations with the corresponding expense offset, if any, shown as “Custodian fee credits.”

 

Distributions to Shareholders. Distributions to common shareholders are recorded on the ex-dividend date. The characterization of distributions to shareholders are based on income and capital gains as determined in accordance with federal income tax regulations, which may differ from income and capital gains as determined under GAAP. These differences are primarily due to differing treatments of income and gains on various investment securities and foreign currency transactions held by the Fund, timing differences, and differing characterizations of distributions made by the Fund. Distributions from net investment income for federal income tax purposes include net realized gains on foreign currency transactions. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, adjustments are made to the appropriate capital accounts in the period when the differences arise. Permanent differences were primarily due to disallowed expenses, reversal of prior year real estate investment trust capital gain, and reclassification of convertible bond premiums at disposition. These reclassifications have no impact on the NAV of the Fund. For the fiscal year ended October 31, 2021, reclassifications were made to decrease paid-in capital by $1,105, with an offsetting adjustment to total distributable earnings.

 

Under the Fund’s current common share distribution policy, the Fund declares and pays quarterly distributions from net investment income, capital gains, and paid-in capital. The actual source of the distribution is determined after the end of the year. Pursuant to this policy, distributions during the year may be made in excess of required distributions. To the extent such distributions are made from current earnings and profits, they are considered ordinary income or long term capital gains. Distributions sourced from paid-in capital should not be considered as dividend yield or the total return from an investment in the Fund. The Board will continue to monitor the Fund’s distribution level, taking into consideration the Fund’s NAV and the financial market environment. The Fund’s distribution policy is subject to modification by the Board at any time.

 

Distributions to 5.375% Series A Preferred Shares are recorded on a daily basis and are determined as described in Note 5.

 

18

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

The tax character of distributions paid during the fiscal years ended October 31, 2021 and 2020 was as follows:

 

    Year Ended
October 31, 2021
  Year Ended
October 31, 2020
    Common   Preferred   Common   Preferred
Distributions paid from:                                
Ordinary income (inclusive of short term capital gains)   $ 5,650,629     $ 527,346     $ 4,305,016     $ 711,888  
Net long term capital gains     11,627,675       1,085,154       5,446,290       900,612  
Total distributions paid   $ 17,278,304     $ 1,612,500     $ 9,751,306     $ 1,612,500  

 

Provision for Income Taxes. The Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). It is the policy of the Fund to comply with the requirements of the Code applicable to regulated investment companies and to distribute substantially all of its net investment company taxable income and net capital gains. Therefore, no provision for federal income taxes is required.

 

As of October 31, 2021, the components of accumulated earnings on a tax basis were as follows:

 

Undistributed long term capital gains   $ 17,487,129  
Net unrealized appreciation on investments     52,232,034  
Other temporary differences*     (156,771 )
Total   $ 69,562,392  

 

 

*       Other temporary differences were due to current year dividends payable.

 

At October 31, 2021, the temporary differences between book basis and tax basis net unrealized appreciation on investments were primarily due to outstanding amortization of bond premium, basis adjustments on investments in partnerships, and deferral of losses from wash sales for tax purposes.

 

The following summarizes the tax cost of investments and the related net unrealized appreciation at October 31, 2021:

 

    Cost   Gross
Unrealized
Appreciation
  Gross
Unrealized
Depreciation
  Net Unrealized
Appreciation
  Investments     $ 160,177,701     $ 55,634,072     $ (3,402,038 )   $ 52,232,034  

 

The Fund is required to evaluate tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Income tax and related interest and penalties would be recognized by the Fund as tax expense in the Statement of Operations if the tax positions were deemed not to meet the more-likely-than-not threshold. For the fiscal year ended October 31, 2021, the Fund did not incur any income tax, interest, or penalties. As of October 31, 2021, the Adviser has reviewed all open tax years and concluded that there was

 

19

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

no impact to the Fund’s net assets or results of operations. The Fund’s federal and state tax returns for the prior three fiscal years remain open, subject to examination. On an ongoing basis, the Adviser will monitor the Fund’s tax positions to determine if adjustments to this conclusion are necessary.

 

3. Investment Advisory Agreement and Other Transactions. The Fund has entered into an investment advisory agreement (the Advisory Agreement) with the Adviser which provides that the Fund will pay the Adviser a fee, computed weekly and paid monthly, equal on an annual basis to 0.80% of the first $100,000,000 of the Fund’s average weekly net assets including the liquidation value of preferred shares and 0.55% of the Fund’s average weekly net assets including the liquidation value of preferred shares in excess of $100,000,000. In accordance with the Advisory Agreement, the Adviser provides a continuous investment program for the Fund’s portfolio and oversees the administration of all aspects of the Fund’s business and affairs.

 

During the fiscal year ended October 31, 2021, the Fund received credits from a designated broker who agreed to pay certain Fund operating expenses. The amount of such expenses paid through this directed brokerage arrangement during this period was $1,918.

 

The cost of calculating the Fund’s NAV per share is a Fund expense pursuant to the Advisory Agreement between the Fund and the Adviser. Under the sub-administration agreement with Bank of New York Mellon, the fees paid include the cost of calculating the Fund’s NAV. The Fund reimburses the Adviser for this service. During the fiscal year ended October 31, 2021, the Fund accrued $45,000 in accounting fees in the Statement of Operations.

 

As per the approval of the Board, the Fund compensates officers of the Fund, who are employed by the Fund and are not employed by the Adviser (although the officers may receive incentive based variable compensation from affiliates of the Adviser). During the fiscal year ended October 31, 2021, the Fund accrued $66,983 in payroll expenses in the Statement of Operations.

 

The Fund pays retainer and per meeting fees to Trustees not affiliated with the Adviser, plus specified amounts to the Lead Trustee and Audit Committee Chairman. Trustees are also reimbursed for out of pocket expenses incurred in attending meetings. Trustees who are directors or employees of the Adviser or an affiliated company receive no compensation or expense reimbursement from the Fund.

 

4. Portfolio Securities. Purchases and sales of securities during the fiscal year ended October 31, 2021, other than short term securities and U.S. Government obligations, aggregated $66,325,718 and $93,086,529, respectively.

 

5. Capital. The Fund is authorized to issue an unlimited number of common shares of beneficial interest (par value $0.01). The Board has authorized the repurchase of its common shares on the open market when the shares are trading at a discount of 10.0% or more (or such other percentage as the Board may determine from time to time) from the NAV of the shares. During the fiscal year ended October 31, 2020, the Fund repurchased and retired 28,028 of its common shares at an investment of $726,125 and an average discount of 13.41%, from its net asset value. During the fiscal year ended October 31, 2021, the Fund did not repurchase any shares.

 

20

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

Transactions in shares of common shares of beneficial interest for the fiscal years ended October 31, 2021 and 2020 were as follows:

 

    Year Ended
October 31, 2021
  Year Ended
October 31, 2021
    Shares   Amount   Shares   Amount
Net increase in net assets from common shares issued upon reinvestment of distributions     192,795     $ 5,662,229       100,024     $ 2,505,599  
Net decrease from repurchase of common shares     —         —         (28,028 )     (726,125 )
Net increase from transactions in Fund shares     192,795     $ 5,662,229       71,996     $ 1,779,474  

 

The Fund has an effective shell registration authorizing the offering of an additional $100 million of common or preferred shares.

 

On August 9, 2016, the Fund issued 1,200,000 shares of Series A Cumulative Preferred Shares (Series A Preferred), receiving $28,834,426, after the deduction of offering expenses and underwriting fees of $1,165,574. The liquidation value of the Series A Preferred is $25 per share. The Series A Preferred has an annual dividend rate of 5.375%. Commencing August 9, 2021 and at any time thereafter, the Fund, at its option, may redeem the Series A Preferred in whole or in part at the redemption price plus an amount equal to the accumulated and unpaid dividends whether or not declared on such shares. In addition, the Board has authorized the repurchase of Series A Preferred Shares in the open market at prices less than the $25 liquidation value per share. During the fiscal years ended October 31, 2020 and October 31, 2021, the Fund did not repurchase any of the Series A Preferred. At October 31, 2021, 1,200,000 Series A Preferred were outstanding and accrued dividends amounted to $156,771.

 

The Fund’s Declaration of Trust, as amended, authorizes the issuance of an unlimited number of Series A Preferred, par value $0.01. The Preferred Shares are senior to the common shares and result in the financial leveraging of the common shares. Such leveraging tends to magnify both the risks and opportunities to common shareholders. Dividends on the Series A Preferred are cumulative. The Fund is required by the 1940 Act and by the Fund’s Statement of Preferences to meet certain asset coverage tests with respect to the Preferred Shares. If the Fund fails to meet these requirements and does not correct such failure, the Fund may be required to redeem, in part or in full, the Preferred Shares at the redemption price of $25 per share plus an amount equal to the accumulated and unpaid dividends whether or not declared on such shares in order to meet these requirements. Additionally, failure to meet the foregoing asset coverage requirements could restrict the Fund’s ability to pay dividends to common shareholders and could lead to sales of portfolio securities at inopportune times. The income received on the Fund’s assets may vary in a manner unrelated to the fixed rates, which could have either a beneficial or detrimental impact on net investment income and gains available to common shareholders.

 

The holders of Preferred Shares generally are entitled to one vote per share held on each matter submitted to a vote of shareholders of the Fund and will vote together with holders of common shares as a single class. The

 

21

 

Bancroft Fund Ltd.
Notes to Financial Statements (Continued)

 

holders of Series A Preferred voting together as a single class also have the right currently to elect two Trustees and, under certain circumstances, are entitled to elect a majority of the Board of Trustees. In addition, the affirmative vote of a majority of the votes entitled to be cast by holders of all outstanding shares of the preferred shares, voting as a single class, will be required to approve any plan of reorganization adversely affecting the preferred stock, and the approval of two-thirds of each class, voting separately, of the Fund’s outstanding voting stock must approve the conversion of the Fund from a closed-end to an open-end investment company. The approval of a majority (as defined in the 1940 Act) of the outstanding preferred shares and a majority (as defined in the 1940 Act) of the Fund’s outstanding voting securities are required to approve certain other actions, including changes in the Fund’s investment objectives or fundamental investment policies.

 

6. Convertible Securities Concentration. It is the Fund’s policy to invest at least 65% of its assets in convertible securities. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convertible securities, but generally less than that of the underlying common stock.

 

7. Indemnifications. The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.

 

8. Subsequent Events. The purchase commitment referred to in Note 2 was satisfied on December 7, 2021. Management has evaluated the impact on the Fund of all subsequent events occurring through the date the financial statements were issued and has determined that there were no other subsequent events requiring recognition or disclosure in the financial statements.

 

22

 

Bancroft Fund Ltd.
Report of Independent Registered Public Accounting Firm

 

To the Board of Trustees and Shareholders of Bancroft Fund Ltd.

 

Opinion on the Financial Statements

 

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Bancroft Fund Ltd. (the “Fund”) as of October 31, 2021, the related statement of operations for the year ended October 31, 2021, the statement of changes in net assets attributable to common shareholders for each of the two years in the period ended October 31, 2021, including the related notes, and the financial highlights for each of the four years in the period ended October 31, 2021 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of October 31, 2021, the results of its operations for the year then ended, the changes in its net assets attributable to common shareholders for each of the two years in the period ended October 31, 2021 and the financial highlights for each of the four years in the period ended October 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

 

The financial statements and the financial highlights of the Fund as of and for the year ended October 31, 2017 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated December 21, 2017 expressed an unqualified opinion on those financial statements and financial highlights.

 

Basis for Opinion

 

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of October 31, 2021 by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

 

/s/PricewaterhouseCoopers LLP
New York, New York
December 22, 2021

 

We have served as the auditor of one or more investment companies in the Gabelli/GAMCO Fund Complex since 1986.

 

23

 

Bancroft Fund Ltd.
Additional Fund Information

 

SUMMARY OF FUND EXPENSES

 

The following table shows the Fund’s expenses as a percentage of net assets attributable to common shares. All expenses of the Fund are borne, directly or indirectly, by the common shareholders. The table is based on the capital structure of the Fund as of October 31, 2021. The purpose of the table and example below is to help you understand all fees and expenses that you, as a holder of common shares, would bear directly or indirectly.

 

Shareholder Transaction Expenses    
Sales Load (as a percentage of offering price)   -% (a)
Offering Expenses Borne by the Fund (excluding Preferred Shares Offering Expenses) (as a percentage of offering price)   -% (a)
Dividend Reinvestment and Voluntary Cash Purchase Plan
Fees
       
Purchase Transactions   $ 1.25 (b)

 

Annual Expenses   Percentages of Net Assets
Attributable to Common Shares
Management Fees   0.78% (c)
Interest Expense   -%
Other Expenses   0.33% (d)
Total Annual Expenses   1.11%
Dividends on Preferred Shares   0.88% (e)
Total Annual Expenses and Dividends on Preferred   1.99%

 

 

(a) If common shares are sold to or through underwriters or dealer managers, a prospectus or prospectus supplement will set forth any applicable sales load and the estimated offering expenses borne by the Fund.

(b) Shareholders participating in the Fund’s automatic dividend reinvestment plan do not incur any additional fees. Shareholders participating in the voluntary cash purchase plan would pay $1.25 plus their pro rata share of brokerage commissions per transaction to purchase shares and just their pro rata share of brokerage commissions per transaction to sell shares. See “Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan.”

(c) The Investment Adviser’s fee is a monthly fee computed at an annual rate of 0.80% of the first $100,000,000 of average weekly net assets and 0.55% of average weekly net assets in excess of $100,000,000 including proceeds attributable to any outstanding preferred shares, with no deduction for the liquidation preference of any preferred shares. Consequently, if the Fund has preferred shares or notes outstanding, all else being equal, the investment management fees and other expenses as a percentage of net assets attributable to common shares will be higher than if the Fund does not utilize a leveraged capital structure.

(d) “Other Expenses” are estimated based on the Fund’s fiscal year ended October 31, 2021.

(e) Dividends on Preferred Shares represent the estimated annual distributions on the existing preferred shares outstanding.

 

24

 

Bancroft Fund Ltd.
Additional Fund Information (Continued) (Unaudited)

 

For a more complete description of the various costs and expenses a common shareholder would bear in connection with the issuance and ongoing maintenance of any preferred shares or notes issued by the Fund, see “Risk Factors and Special Considerations—Special Risks to Holders of Common Shares—Leverage Risk.”

 

The following example illustrates the expenses you would pay on a $1,000 investment in common shares, assuming a 5% annual portfolio total return.* The actual amounts in connection with any offering will be set forth in the Prospectus Supplement if applicable.

 

  1 Year 3 Year 5 Year 10 Year
Total Expenses Incurred $20 $62 $107 $232

 

 

* The example should not be considered a representation of future expenses. The example is based on total Annual Expenses and Dividends on Preferred Shares shown in the table above and assumes that the amounts set forth in the table do not change and that all distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Fund’s actual rate of return may be greater or less than the hypothetical 5% return shown in the example.

 

The example includes Dividends on Preferred Shares. If Dividends on Preferred Shares were not included in the example calculation, the expenses for the 1-, 3-, 5- and 10-year periods in the table above would be as follows (based on the same assumptions as above): $11, $35, $61 and $135.

 

The Fund’s common shares are listed on the NYSE American under the trading or “ticker” symbol “BCV.” The Fund’s Series A Preferred are listed on the NYSE American under the ticker symbol “BCV Pr A.” See “Description of the Securities” in the Prospectus. The Fund’s common shares have historically traded at a discount to the Fund’s net asset value. Over the past ten years, the Fund’s common shares have traded at a premium to net asset value as high as 5.4% and a discount as low as (21.6)%. Any additional series of fixed rate preferred shares or subscription rights issued in the future pursuant to a Prospectus Supplement by the Fund would also likely be listed on the NYSE American.

 

The following table sets forth for the quarters indicated, the high and low sale prices on the NYSE American per share of our common shares and the net asset value and the premium or discount from net asset value per share at which the common shares were trading, expressed as a percentage of net asset value, at each of the high and low sale prices provided.

 

25

 

Bancroft Fund Ltd.
Additional Fund Information (Continued) (Unaudited)

 

    Common Share
Market Price
  Corresponding
Net Asset
Value
(“NAV”) Per
Share
  Corresponding
Premium or
Discount as a %
of NAV
Quarter Ended   High   Low   High   Low   High   Low
January 31, 2020   $26.57   $24.16   $27.02   $26.17   (1.66)%   (7.68)%
April 30, 2020   $27.48   $15.61   $27.80   $19.70   (1.15)%   (20.76)%
July 31, 2020   $26.29   $20.70   $28.83   $23.61   (8.81)%   (12.32)%
October 31, 2020   $27.01   $24.13   $29.77   $28.18   (9.27)%   (14.37)%
January 31, 2021   $32.81   $24.98   $33.81   $28.90   (2.95)%   (13.56)%
April 30, 2021   $35.67   $28.70   $36.08   $31.47   (1.13)%   (8.80)%
July 31, 2021   $32.53   $29.85   $33.17   $30.63   (1.92)%   (2.54)%
October 31, 2021   $31.66   $29.21   $32.62   $31.56   (3.91)%   (7.44)%

 

The last reported price for our common shares on October 31, 2021 was $30.07 per share. As of October 31, 2021, the net asset value per share of the Fund’s common shares was $33.08. Accordingly, the Fund’s common shares traded at a discount to net asset value of 9.1% on October 31, 2021.

 

Unresolved SEC Staff Comments

 

The Fund does not believe that there are any material unresolved written comments, received 180 days or more before October 31, 2021 from the Staff of the SEC regarding any of the Fund’s periodic or current reports under the Securities Exchange Act of 1934 or the Investment Company Act of 1940, or its registration statement.

 

CHANGES OCCURRING DURING THE PRIOR FISCAL PERIOD

 

The following information is a summary of certain changes during the most recent fiscal year ended October 31, 2021. This information may not reflect all of the changes that have occurred since you purchased shares of the Fund.

 

During the Fund’s most recent fiscal year, there were no material changes to the Fund’s investment objective or policies that have not been approved by shareholders or in the principal risk factors associated with an investment in the Fund.

 

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INVESTMENT OBJECTIVES AND POLICIES

 

Investment Objectives

 

The investment objective of the Fund is to provide income and the potential for capital appreciation by investing primarily in convertible securities. Under normal market conditions, the Fund invests at least 65% of its assets (consisting of net assets plus the amount of any borrowing for investment purposes) in convertible securities.

 

Investment Policies

 

The Fund expects that a substantial majority of its assets will consist of convertible securities. The Fund has adopted a non-fundamental investment policy providing that the Fund will invest, under normal market conditions, at least 65% of the value of its assets (consisting of net assets plus the amount of any borrowings for investment purposes) in convertible securities.

 

Convertible securities include debt securities and preferred stocks which are convertible into, or carry the right to purchase, common stock or other equity securities. The debt security or preferred stock may itself be convertible into or exchangeable for equity securities, or the conversion privilege may be evidenced by warrants attached to the security or acquired as part of a unit with the security. A convertible security may also be structured so that it is convertible at the option of the holder or the issuer, or subject to mandatory conversion. The Fund may invest in convertible securities rated in the lower rating categories of the established rating services (“Ba” or lower by Moody’s or “BB” or lower by S&P or unrated debt instruments which are in the judgment of the Fund’s Investment Adviser of equivalent quality. Debt securities rated below investment grade commonly are referred to as “junk bonds.” The average duration of the Fund’s investments in debt securities is expected to vary and the Fund does not target any particular average duration.

 

Under normal market conditions, the remaining 35% or less of the Fund’s assets may be invested in other securities, including common stocks, non-convertible preferred stocks and investment grade debt securities, common stock received upon conversion or exchange of securities, options, warrants, securities of the U.S. government, its agencies and instrumentalities, foreign securities, American Depositary Receipts or repurchase agreements, or they may be held as cash or cash equivalents. The Fund does not intend to participate in derivative transactions other than options transactions as described herein. See “—Certain Investment Practices—Options.” The Fund is not required to sell securities for the purpose of assuring that 65% of its assets are invested in convertible securities.

 

No assurances can be given that the Fund’s objective will be achieved. Neither the Fund’s investment objective nor, except as expressly listed under “Investment Restrictions” in the SAI, any of its policies are fundamental, and each may be modified by the Board without shareholder approval. The percentage and ratings limitations stated herein and in the SAI apply only at the time of investment and are not considered violated as a result of subsequent changes to the value, or downgrades to the ratings, of the Fund’s portfolio investments.

 

Principal Investment Practices and Policies

 

Convertible Securities. The Fund will invest primarily in convertible securities, including bonds, debentures, corporate notes, preferred stock or other securities which may be exchanged or converted into a predetermined

 

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number of the issuer’s underlying common stock during a specified time period. Prior to their conversion, convertible securities have the same overall characteristics as non-convertible debt securities insofar as they generally provide a stable stream of income with generally higher yields than those of equity securities of the same or similar issuers. Convertible securities rank senior to common stock in an issuer’s capital structure. They are of a higher credit quality and entail less risk than an issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.

 

The Fund is also permitted to invest in certain other securities with innovative structures in the convertible securities market. These include “mandatory conversion” securities, which consist of debt securities or preferred stocks that convert automatically into equity securities of the same or a different issuer at a specified date and conversion ratio.

 

The market value of a convertible security may be viewed as comprised of two components: its “investment value,” which is its value based on its yield without regard to its conversion feature; and its “conversion value,” which is its value attributable to the underlying common stock obtainable on conversion. The investment value of a convertible security is influenced by changes in interest rates and the yield of similar non-convertible securities, with investment value declining as interest rates increase and increasing as interest rates decrease. The conversion value of a convertible security is influenced by changes in the market price of the underlying common stock. If, because of a low price of the underlying common stock, the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the convertible security will be increasingly influenced by its conversion value, and the convertible security may sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed income security.

 

Accordingly, convertible securities have unique investment characteristics because (i) they have relatively high yields as compared to common stocks, (ii) they have defensive characteristics since they provide a fixed return even if the market price of the underlying common stock declines, and (iii) they provide the potential for capital appreciation if the market price of the underlying common stock increases.

 

A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision or indenture pursuant to which the convertible security is issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to surrender the security for redemption, convert it into the underlying common stock or sell it to a third party. Before the Fund purchases a convertible security it will review carefully the redemption provisions of the security.

 

Synthetic Convertible Securities The Fund may also invest in “synthetic” convertible securities, which, for purposes of its investment policies, the Fund considers to be convertible securities. A “synthetic” convertible security may be created by the Fund or by a third party by combining separate securities that possess the two principal characteristics of a traditional convertible security: an income producing component and a convertible component. Synthetic convertible securities differ from convertible securities whose conversion privilege may be evidenced by warrants attached to the security or acquired as part of a unit with the security. The income-producing component is achieved by investing in non-convertible, income-producing securities such as

 

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bonds, preferred stocks and money market instruments. The convertible component is achieved by investing in securities or instruments such as warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a single market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Because the “market value” of a synthetic convertible security is the sum of the values of its income-producing component and its convertible component, the value of a synthetic convertible security may respond differently to market fluctuations than a traditional convertible security. The Fund also may purchase synthetic convertible securities created by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity. Convertible structured notes have the attributes of a convertible security; however, the issuer of the convertible note (typically an investment bank), rather than the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated with the underlying investment and the Fund in turn assumes credit risk associated with the issuer of the convertible note.

 

Equity Securities. The Fund invests in equity securities (such as common stock and preferred stock).

 

Common stocks represent the residual ownership interest in the issuer and holders of common stock are entitled to the income and increase in the value of the assets and business of the issuer after all of its debt obligations and obligations to preferred shareholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

 

Equity securities also include preferred stock (whether or not convertible into common stock) and debt securities convertible into or exchangeable for common or preferred stock. Preferred stock has a preference over common stock in liquidation (and generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similarly stated yield characteristics. The market value of preferred stock will also generally reflect whether (and if so when) the issuer may force holders to sell their preferred stock back to the issuer and whether (and if so when) the holders may force the issuer to buy back their preferred stock. Generally speaking, the right of the issuer to repurchase the preferred stock tends to reduce any premium at which the preferred stock might otherwise trade due to interest rate or credit factors, while the right of the holders to require the issuer to repurchase the preferred stock tends to reduce any discount at which the preferred stock might otherwise trade due to interest rate or credit factors. In addition, some preferred stocks are noncumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in noncumulative preferred stocks, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. There is no assurance that dividends or distributions on non-cumulative preferred stocks in which the Fund invests will be declared or otherwise made payable.

 

Income Securities. Income securities include (i) fixed income securities such as bonds, debentures, notes, preferred stock, short term discounted Treasury Bills or certain securities of the U.S. government sponsored instrumentalities, as well as money market open-end funds that invest in those securities, which, in the absence

 

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of an applicable exemptive order, will not be affiliated with the Investment Adviser, and (ii) common stocks of issuers that have historically paid periodic dividends. Fixed income securities obligate the issuer to pay to the holder of the security a specified return, which may be either fixed or reset periodically in accordance with the terms of the security. Fixed income securities generally are senior to an issuer’s common stock and their holders generally are entitled to receive amounts due before any distributions are made to common shareholders. Common stocks, on the other hand, generally do not obligate an issuer to make periodic distributions to holders.

 

The market value of fixed income securities, especially those that provide a fixed rate of return, may be expected to rise and fall inversely with interest rates and in general is affected by the credit rating of the issuer, the issuer’s performance and perceptions of the issuer in the market place. The market value of callable or redeemable fixed income securities may also be affected by the issuer’s call and redemption rights. In addition, it is possible that the issuer of fixed income securities may not be able to meet its interest or principal obligations to holders. Further, holders of non-convertible fixed income securities do not participate in any capital appreciation of the issuer.

 

The Fund may also invest in obligations of government sponsored instrumentalities. Unlike non-U.S. government securities, obligations of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association, are supported by the “full faith and credit” of the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase the agency’s obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities if it is not obligated to do so by law.

 

The Fund also may invest in common stock of issuers that have historically paid periodic dividends or otherwise made distributions to common shareholders. Unlike fixed income securities, dividend payments generally are not guaranteed and so may be discontinued by the issuer at its discretion or because of the issuer’s inability to satisfy its liabilities. Further, an issuer’s history of paying dividends does not guarantee that it will continue to pay dividends in the future. In addition to dividends, under certain circumstances the holders of common stock may benefit from the capital appreciation of the issuer.

 

Common stocks represent the residual ownership interest in the issuer and holders of common stock are entitled to the income and increase in the value of the assets and business of the issuer after all of its debt obligations and obligations to preferred shareholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

 

Non-Investment Grade Securities. The Fund may invest in below investment-grade debt securities, also known as high-yield securities. These securities, which may be preferred stock or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower than “BBB” by S&P or lower than “Baa” by Moody’s (or unrated debt securities of comparable quality) are referred to in the financial press as “junk bonds.”

 

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Generally, such non-investment grade securities and unrated securities of comparable quality offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions, and (ii) are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds. In addition, such comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because such non-investment grade securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issue, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s operating history, financial resources and its sensitivity to economic conditions and trends, the market support for the facility financed by the issue, the perceived ability and integrity of the issuer’s management and regulatory matters.

 

In addition, the market value of non-investment grade securities is more volatile than that of higher quality securities, and the markets in which such lower rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. Moreover, the lack of a liquid trading market may restrict the availability of securities for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell securities at their fair value in order to respond to changes in the economy or the financial markets.

 

Non-investment grade securities and unrated securities of comparable quality also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a feature of fixed-income securities), the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of nonconvertible bonds and preferred stocks moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently. Interest rates are at historical lows and, therefore, it is likely that they will rise in the future.

 

As part of its investments in non-investment grade securities, the Fund may invest in securities of issuers in default. The Fund will make an investment in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations or emerge from bankruptcy protection and the value of these securities will appreciate. By investing in securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of the securities will not otherwise appreciate.

 

In addition to using recognized rating agencies and other sources, the Investment Adviser also performs its own analysis of issues in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management,

 

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responsiveness to business conditions, credit standing and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.

 

Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.

 

The market for non-investment grade and comparable unrated securities has experienced periods of significantly adverse price and liquidity several times, particularly at or around times of economic recession. Past market recessions have adversely affected the value of such securities and the ability of certain issuers of such securities to repay principal and pay interest thereon or to refinance such securities. The market for those securities may react in a similar fashion in the future.

 

Investment Grade Securities. The Fund may also invest in investment grade non-convertible debt securities. Such securities include those rated at “Baa” and higher by Moody’s or at “BBB” and higher by S&P.

 

Leverage. The Fund may use leverage, including as a result of any issuances of preferred shares or notes pursuant to an applicable Prospectus Supplement, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding, as provided in the 1940 Act and subject to certain exceptions. Any such preferred shares may be convertible in accordance with the SEC staff guidelines, which may permit the Fund to obtain leverage at attractive rates. The use of leverage magnifies the impact of changes in net asset value. In addition, if the cost of leverage exceeds the return on the securities acquired with the proceeds of leverage, the use of leverage will diminish rather than enhance the return to the Fund. The use of leverage generally increases the volatility of returns to the Fund. See “Risk Factors and Special Considerations—Special Risks to Holders of Common Shares—Leverage Risk.”.

 

In the event the Fund had both outstanding preferred shares and senior securities representing debt at the same time, the Fund’s obligations to pay dividends or distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and/or interest payments due and owing with respect to its outstanding senior debt securities. Accordingly, the Fund’s issuance of senior securities representing debt would have the effect of creating special risks for the Fund’s preferred shareholders that would not be present in a capital structure that did not include such securities.

 

Additionally, the Fund may enter into derivative transactions that have economic leverage embedded in them. Economic leverage exists when the Fund achieves the right to a return on a capital base that exceeds the investment which the Fund has contributed to the instrument achieving a return. Derivative transactions that the Fund may enter into and the risks associated with them are described elsewhere in this Annual Report. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.

 

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To the extent the terms of such transactions obligate the Fund to make payments, the Fund may earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Fund under the terms of such transactions is represented by the notional amounts of such investments, the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Fund under the terms of such transactions is represented by the market value of the Fund’s current obligations, the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To the extent the terms of such transactions obligate the Fund to deliver particular securities to extinguish the Fund’s obligations under such transactions the Fund may “cover” its obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Fund with available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Fund’s obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act, or considered borrowings subject to the Fund’s limitations on borrowings discussed above, but may create leverage for the Fund. To the extent that the Fund’s obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered “senior securities representing indebtedness” under the 1940 Act and therefore subject to the 300% asset coverage requirement.

 

These earmarking, segregation or cover requirements can result in the Fund maintaining securities positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.

 

Foreign Securities. Although the Fund does not frequently do so, the Fund may invest in securities principally traded in securities markets outside the United States. Foreign investments may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies may be less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets and imposition of withholding taxes on dividend or interest payments.

 

American Depositary Receipts. The Fund may invest in American Depositary Receipts (“ADRs”). Such investment may entail certain risks similar to foreign securities. ADRs are certificates representing an ownership interest in a security or a pool of securities issued by a foreign issuer and deposited with the depositary, typically a bank, and held in trust for the investor. The economies of many of the countries in which the issuer of a security underlying an ADR principally engages in business may not be as developed as the United States’ economy and may be subject to significantly different forces. Political or social instability, expropriation or confiscatory

 

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taxation, and limitations on the removal of funds or other assets could adversely affect the value of the Fund’s investments in such securities. The value of the securities underlying ADRs could fluctuate as exchange rates change between U.S. dollars and the currency of the country in which the foreign company is located. In addition, foreign companies are not registered with the SEC and are generally not subject to the regulatory controls imposed on U.S. issuers and, as a consequence, there is generally less publicly available information about foreign companies than is available about domestic companies. Foreign companies are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies.

 

Emerging Market Countries. The risks described above for foreign securities, including the risks of nationalization and expropriation of assets, are typically increased to the extent that the Fund invests in companies headquartered in developing, or emerging market, countries. Investments in securities of companies headquartered in such countries may be considered speculative and subject to certain special risks. The political and economic structures in many of these countries may be in their infancy and developing rapidly, and such countries may lack the social, political and economic characteristics of more developed countries. Certain of these countries have in the past failed to recognize private property rights and have at times nationalized and expropriated the assets of private companies. Some countries have inhibited the conversion of their currency to another. The currencies of certain emerging market countries have experienced devaluation relative to the U.S. dollar, and future devaluations may adversely affect the value of the Fund’s assets denominated in such currencies. Some emerging market countries have experienced substantial rates of inflation for many years. Continued inflation may adversely affect the economies and securities markets of such countries. In addition, unanticipated political or social developments may affect the value of the Fund’s investments in these countries and the availability of the Fund of additional investments in these countries. The small size, limited trading volume and relative inexperience of the securities markets in these countries may make the Fund’s investments in such countries illiquid and more volatile than investments in more developed countries, and the Fund may be required to establish special custodial or other arrangements before making investments in these countries. There may be little financial or accounting information available with respect to companies located in these countries, and it may be difficult as a result to assess the value or prospects of an investment in such companies

 

Restricted and Illiquid Securities. The Fund may invest up to 20% of its net assets in securities that are illiquid. Illiquid securities include securities legally restricted as to resale, such as commercial paper issued pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) and securities eligible for resale pursuant to Rule 144A thereunder. Section 4(a)(2) and Rule 144A securities may, however, be treated as liquid by the Investment Adviser pursuant to procedures adopted by the Board, which require consideration of factors such as trading activity, availability of market quotations and number of dealers willing to purchase the security. If the Fund invests in Rule 144A securities, the level of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.

 

It may be difficult to sell such securities at a price representing the fair value until such time as such securities may be sold publicly. Where registration is required, a considerable period may elapse between a decision to sell the securities and the time when it would be permitted to sell. Thus, the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund may also acquire securities

 

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through private placements under which it may agree to contractual restrictions on the resale of such securities. Such restrictions might prevent their sale at a time when such sale would otherwise be desirable.

 

Other Investment Practices

 

U.S. Government Obligations. U.S. government securities in which the Fund invests include debt obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an agency or instrumentality of the U.S. government. Some U.S. government securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported only by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government to purchase the agency’s obligations, such as securities of the Federal National Mortgage Association; or (iii) only the credit of the issuer. No assurance can be given that the U.S. government will provide financial support in the future to U.S. government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States. Securities guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or any of its agencies, authorities or instrumentalities; and (ii) participations in loans made to non-U.S. governments or other entities that are so guaranteed. The secondary market for certain of these participations is limited and, therefore, may be regarded as illiquid.

 

Short Sales. Although the Fund does not generally do so, the Fund may make short sales of securities if at the time of sale, the Fund owns or has the right to acquire, with or without payment of further consideration through its ownership of convertible or exchangeable securities or warrants or rights, an equal amount of such securities. In a short sale the Fund does not immediately deliver the securities sold and does not receive the proceeds from the sale. The Fund is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale.

 

To secure its obligation to deliver the securities sold short, the Fund will earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. The Fund will normally close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund. The Fund may, however, close out any short sale of common stock through the conversion or exchange of securities or the exercise of warrants or rights it owns, or through the delivery of common stock already held by the Fund.

 

The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a long position the Fund may have in such security or a security convertible into or exchangeable for such security, or when, for tax or other reasons, the Fund does not want to sell the security it owns. In such case, any future losses in the Fund’s long position should be reduced by a gain in the short position. Conversely, any gain in the long position should be reduced by a loss in the short position. Any gain will be decreased, and any loss will be increased, by the transaction costs incurred by the Fund, including the costs associated with providing collateral to the broker-dealer (usually cash, U.S. government securities or other highly liquid debt securities) and the maintenance of collateral with its custodian.

 

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Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns, either directly or indirectly, and, in the case where the Fund owns convertible securities, changes with the conversion premiums.

 

Warrants. The Fund may invest in warrants. Warrants are, in effect, longer-term call options. They give the holder the right to purchase a given number of shares of a particular company at specified prices within certain periods of time. The purchaser of a warrant expects that the market price of the security will exceed the purchase price of the warrant plus the exercise price of the warrant, thus giving him a profit. Since the market price may never exceed the exercise price before the expiration date of the warrant, the purchaser of the warrant risks the loss of the entire purchase price of the warrant. Warrants generally trade in the open market and may be sold rather than exercised. Warrants are sometimes sold in unit form with other securities of an issuer. Units of warrants and common stock may be employed in financing young, unseasoned companies. The purchase price of a warrant varies with the exercise price of the warrant, the current market value of the underlying security, the life of the warrant and various other investment factors.

 

Lending of Portfolio Securities. Although the Fund does not presently intend to do so, the Fund may lend securities may lend up to 33-1/3% of its total assets. The purpose of such loans, generally, is to permit the borrower to use such securities for delivery to purchasers when such borrower has sold short. If cash collateral is received by the Fund, it is invested in short-term money market securities, and a portion of the yield received in respect of such investment is retained by the Fund. Alternatively, if securities are delivered to the Fund as collateral, the Fund and the borrower negotiate a rate for the loan premium to be received by the Fund for lending its portfolio securities. In either event, the total yield on the Fund’s portfolio is increased by loans of its portfolio securities. The Fund intends to retain record ownership of loaned securities in order to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. Such loans are terminable at any time. The Fund may pay reasonable finder’s, administrative and custodial fees in connection with such loans. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. In determining whether the Fund will lend securities to a particular borrower, the Fund will consider all relevant facts and circumstances, including the creditworthiness of the borrower.

 

Repurchase Agreements. Although the Fund does not presently intend to do so, as part of its strategy for the temporary investment of cash balances, the Fund may enter into repurchase agreements. Repurchase agreements may be seen as loans by the Fund collateralized by underlying securities. Under the terms of a typical repurchase agreement, the Fund acquires an underlying security for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase, and the Fund to resell, the security at an agreed price and time. This arrangement results in a fixed rate of return to the Fund that is not subject to market fluctuations during the holding period. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed in or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible decline in the value of the underlying securities during the period in which it seeks to assert these rights. The Investment Adviser, acting under the supervision of the Board, reviews the creditworthiness of those banks and dealers with which the Fund enters into repurchase agreements to evaluate these risks and monitors on an ongoing basis the value of the securities

 

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subject to repurchase agreements to ensure that the value is maintained at the required level. The Fund does not enter into repurchase agreements with the Investment Adviser or any of its affiliates.

 

Temporary Defensive Investments. When a temporary defensive posture is believed by the Investment Adviser to be warranted (“temporary defensive periods”), the Fund may without limitation hold cash or invest all or a portion of its assets in money market instruments and repurchase agreements in respect of those instruments. The money market instruments in which the Fund may invest are obligations of the U.S. government, its agencies or instrumentalities; commercial paper rated “A-1” or higher by S&P or “Prime-1” by Moody’s; and certificates of deposit and bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation. During temporary defensive periods, the Fund may also invest to the extent permitted by applicable law in shares of money market mutual funds. Money market mutual funds are investment companies and the investments in those companies by the Fund are in some cases subject to certain fundamental investment restrictions and applicable law. As a shareholder in a mutual fund, the Fund will bear its ratable share of its expenses, including management fees, and will remain subject to payment of the fees to the Investment Adviser, with respect to assets so invested. The Fund may find it more difficult to achieve its investment objective during temporary defensive periods.

 

Options. Although the Fund does not presently intend to do so, the Fund may invest up to 5% of its net assets in put options on common stock or market indices and may write covered call options and may purchase call options to close out written covered call options. Many currently traded convertible securities are convertible into common stocks against which call options may be written.

 

A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying security upon payment of the exercise price during the option period.

 

A put option is a contract that gives the holder of the option the right, in return for a premium, to sell to the seller the underlying security at a specified price. The seller of the put option has the obligation to buy the underlying security upon exercise at the exercise price.

 

The Fund will write covered call options in order to receive additional income in the form of premiums which it is paid for writing options, and for hedging purposes in order to protect against possible declines in the market values of the stocks or convertible securities held in its portfolio. A call option is “covered” if the Fund owns the underlying instrument covered by the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other instruments held in its portfolio. A call option is also covered if the Fund holds a call on the same instrument as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written or (ii) greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. government securities or other high-grade short term obligations in a segregated account with its custodian. A put option is “covered” if the Fund maintains cash or other high-grade short term obligations with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same instrument as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written.

 

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If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. However, once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either a closing purchase or sale transaction can be effected when the Fund so desires.

 

The Fund realizes a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund realizes a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. Gains and losses on investments in options depend, in part, on the ability of the Investment Adviser to predict correctly the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of securities underlying the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.

 

An option position may be closed out only on an exchange which provides a secondary market for an option of the same series or in a private transaction. Although the Fund generally purchases or writes only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position.

 

The Fund may also purchase put options on one or more broadly based stock market indices when it wishes to protect all or part of its portfolio securities against a general market decline. The put on the index will increase in value if the level of the index declines; any such increase in value would serve to offset in whole or in part any decline in the value of the Fund’s portfolio.

 

The Fund’s purchase and sale of put options on stock indices will be subject to the same risks described above with respect to transactions in stock options on individual stocks. In addition, the distinctive characteristics of options on indices create certain risks that are not present with stock options.

 

The Fund’s ability to effectively hedge all or a portion of the securities in its portfolio in anticipation of or during a market decline through transactions in put options on stock indices depends on the degree to which price movements in the underlying index correlate with the price movements in the Fund’s portfolio securities. Since the Fund’s portfolio securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, the Fund will bear the risk that the prices of its portfolio securities being hedged will not move in

 

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the same amount as the prices of the Fund’s put options on the stock indices. It is also possible that there may be a negative correlation between the index and the Fund’s portfolio securities which would result in a loss on both such portfolio securities and the put options on stock indices acquired by the Fund.

 

There are several risks associated with transactions in options. For example, there are significant differences between the securities markets and the options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The ability of the Fund to utilize options successfully will depend on the Investment Adviser’s ability to predict pertinent market investments, which cannot be assured. Although the Investment Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund’s writing of put and call options, there can be no assurance that the Fund will succeed in any option-writing program it undertakes.

 

Investment Restrictions. The Fund has adopted certain fundamental investments policies designed to limited investment risk and maintain portfolio diversification. Under the 1940 Act, a fundamental policy may not be changed without the vote of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Fund (voting together as a single class subject to class approval rights of any preferred shares). The Fund may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares, if any.

 

Neither the Fund’s investment objective nor, except as expressly listed under “Investment Restrictions” in the SAI, any of its policies are fundamental, and each may be modified by the Board without shareholder approval.

 

In addition, pursuant to the Fund’s Statement of Preferences for the Series A Preferred Shares, a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund (voting separately as a single class) is also required to change a fundamental policy. See “Investment Restrictions.”.

 

Portfolio Turnover. The Fund will buy and sell securities to accomplish its investment objective. The investment policies of the Fund may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates.

 

Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less). Higher portfolio turnover may decrease the after-tax return to individual investors in the Fund to the extent it results in a decrease of the long term capital gains portion of distributions to shareholders.

 

The Fund anticipates that its annual portfolio turnover rate will generally not exceed 100%. For the fiscal years ended October 31, 2020 and October 31, 2021, the portfolio turnover rates of the Fund were 58% and 33% respectively.

 

Further information on the investment objectives and policies of the Fund is set forth in the SAI.

 

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RISK FACTORS AND SPECIAL CONSIDERATIONS

 

Investors should consider the following risk factors and special considerations associated with investing in the Fund:

 

General Risks

 

Market Risk (Principal). The market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. The value of a security may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Equity securities generally have greater price volatility than fixed income securities. Credit ratings downgrades may also negatively affect securities held by the Fund. Even when markets perform well, there is no assurance that the investments held by the Fund will increase in value along with the broader market.

 

In addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a national or global level. For instance, war, terrorism, market manipulation, government defaults, government shutdowns, political changes or diplomatic developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental disasters can all negatively impact the securities markets, which could cause the Fund to lose value. These events could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and significantly adversely impact the economy. The current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad, such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, has in the past resulted, and may in the future result, in a government shutdown, which could have an adverse impact on the Fund’s investments and operations. Additional and/or prolonged U.S. federal government shutdowns may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Governmental and quasi-governmental authorities and regulators throughout the world have previously responded to serious economic disruptions with a variety of significant fiscal and monetary policy changes, including but not limited to, direct capital infusions into companies, new monetary programs and dramatically lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund’s investments. Any market disruptions could also prevent the Fund from executing advantageous investment decisions in a timely manner. To the extent that the Fund focuses its investments in a region enduring geopolitical market disruption, it will face higher risks of loss, although the increasing interconnectivity between global economies and financial markets can lead to events or conditions in one country, region or financial market adversely impacting a different country, region or financial

 

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market. Thus, investors should closely monitor current market conditions to determine whether the Fund meets their individual financial needs and tolerance for risk.

 

Current market conditions may pose heightened risks with respect to the Fund’s investment in fixed income securities. Interest rates in the U.S. are at or near historically low levels. Any interest rate increases in the future could cause the value of the Fund to decrease. Recently, there have been signs of inflationary price movements. As such, fixed income securities markets may experience heightened levels of interest rate, volatility and liquidity risk.

 

Exchanges and securities markets may close early, close late or issue trading halts on specific securities or generally, which may result in, among other things, the Fund being unable to buy or sell certain securities or financial instruments at an advantageous time or accurately price its portfolio investments.

 

Coronavirus (“COVID-19”) and Global Health Event Risk (Principal). As of the filing date of this Annual Report, there is an outbreak of a highly contagious form of a novel coronavirus known as “COVID-19.” COVID-19 has been declared a pandemic by the World Health Organization and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health emergency in the United States. COVID-19 had a devastating impact on the global economy, including the U.S. economy, and resulted in a global economic recession. Many states issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their economies, many cities, both globally and in the United States, continue to experience, from time to time, surges in the reported number of cases and hospitalizations related to the COVID-19 pandemic. Increases in cases can and has led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, vaccines produced by Moderna and Johnson & Johnson are currently authorized for emergency use, and in August 2021, the U.S. Food and Drug Administration (“FDA”) granted full approval to the vaccines produced by Pfizer-BioNTech, which will now be marketed as Comirnaty. However, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a substantial economic downturn or recession, and our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged economic downtown or recession in the United States and other major

 

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markets. Potential consequences of the current unprecedented measures taken in response to the spread of COVID-19, and current market disruptions and volatility that may impact the Fund include, but are not limited to:

sudden, unexpected and/or severe declines in the market price of our common stock or net asset value;

inability of the Fund to accurately or reliably value its portfolio;

inability of the Fund to comply with certain asset coverage ratios that would prevent the Fund from paying dividends to our common stockholders;

inability of the Fund to pay any dividends and distributions;
  inability of the Fund to maintain its status as a RIC under the Code;

potentially severe, sudden and unexpected declines in the value of our investments;

increased risk of default or bankruptcy by the companies in which we invest;

increased risk of companies in which we invest being unable to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as a going concern;

reduced economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact the continued viability of the companies in which we invest;

companies in which we invest being disproportionally impacted by governmental action aimed at slowing the spread of COVID-19;

limited availability of new investment opportunities; and

general threats to the Fund’s ability to continue investment operations and to operate successfully as a diversified, closed-end investment company.

 

Despite actions of the U.S. federal government and foreign governments, the uncertainty surrounding the COVID-19 pandemic and other factors has contributed to significant volatility and declines in the global public equity markets and global debt capital markets, including the net asset value of the Fund’s shares. These events could have, and/or have had, a significant impact on the Fund’s performance, net asset value, income, operating results and ability to pay distributions, as well as the performance, income, operating results and viability of issuers in which it invests.

 

It is virtually impossible to determine the ultimate impact of COVID-19 at this time. Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates, including following any “second wave,” “third wave” or other intensifying of the pandemic, is uncertain and subject to various factors and conditions. Accordingly, an investment in the Fund is subject to an elevated degree of risk as compared to other market environments.

 

Convertible Securities Risk (Principal). Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.

 

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The value of a convertible security is influenced by the value of the underlying equity security. Convertible debt securities and preferred stocks may depreciate in value if the market value of the underlying equity security declines or if rates of interest increase. In addition, although debt securities are liabilities of a corporation which the corporation is generally obligated to repay at a specified time, debt securities, particularly convertible debt securities, are often subordinated to the claims of some or all of the other creditors of the corporation.

 

Mandatory conversion securities (securities that automatically convert into equity securities at a future date) may limit the potential for capital appreciation and, in some instances, are subject to complete loss of invested capital. Other innovative convertibles include “equity-linked” securities, which are securities or derivatives that may have fixed, variable, or no interest payments prior to maturity, may convert (at the option of the holder or on a mandatory basis) into cash or a combination of cash and equity securities, and may be structured to limit the potential for capital appreciation. Equity-linked securities may be illiquid and difficult to value and may be subject to greater credit risk than that of other convertibles. Moreover, mandatory conversion securities and equity-linked securities have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.

 

Preferred stocks are equity securities in the sense that they do not represent a liability of the corporation. In the event of liquidation of the corporation, and after its creditors have been paid or provided for, holders of preferred stock are generally entitled to a preference as to the assets of the corporation before any distribution may be made to the holders of common stock. Debt securities normally do not have voting rights. Preferred stocks may have no voting rights or may have voting rights only under certain circumstances.

Credit Risk. Credit risk is the risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies that issue convertible securities may be small to medium-size, and they often have low credit ratings. In addition, the credit rating of a company’s convertible securities is generally lower than that of its conventional debt securities. Convertible securities are normally considered “junior” securities—that is, the company usually must pay interest on its conventional debt before it can make payments on its convertible securities. Credit risk could be high for the Fund, because it could invest in securities with low credit quality. The lower a debt security is rated, the greater its default risk. As a result, the Fund may incur cost and delays in enforcing its rights against the issuer.

Market Risk. Although convertible securities do derive part of their value from that of the securities into which they are convertible, they are not considered derivative financial instruments. However, the Fund’s mandatory convertible securities include features which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside risk than traditional convertible securities, but generally less than that of the underlying common stock.

Interest Rate Risk for Convertible Securities. The Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates. There is a possibility that interest rates may rise, which would likely drive down the prices of income or dividend paying securities. These factors increase the risk that market interest rates will rise or continue to rise in the future, with a corresponding decline in the value of convertible securities held by the Fund. Convertible securities are particularly

 

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sensitive to interest rate changes when their predetermined conversion price is much higher than the issuing company’s common stock.

Sector Risk. Sector risk is the risk that returns from the economic sectors in which convertible securities are concentrated will trail returns from other economic sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible securities market in general. These periods have, in the past, lasted for as long as several years. Moreover, the sectors that dominate this market change over time

Dilution Risk. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared, or the issuer enters into another type of corporate transaction that has a similar effect.

 

Synthetic Convertible Instruments Risk (Principal). The value of a synthetic convertible instrument may respond differently to market fluctuations than a convertible security because a synthetic convertible instrument is composed of two or more separate instruments, each with its own market value. In addition, if the value of the underlying common stock or the level of the index involved in the convertible component falls below the exercise price of the warrant or option, the warrant or option may lose all value. Synthetic convertible instruments created by other parties have the same attributes of a convertible security; however, the issuer of the synthetic convertible instrument assumes the credit risk associated with the investment, rather than the issuer of the underlying equity security into which the instrument is convertible. The Fund remains subject to the credit risk associated with the counterparty creating the synthetic convertible instrument.

 

Equity Risk (Principal). Investing in the Fund involves equity risk, which is the risk that the securities held by the Fund will fall in market value due to adverse market and economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate and the particular circumstances and performance of particular companies whose securities the Fund holds. An investment in the Fund represents an indirect economic stake in the securities owned by the Fund, which are for the most part traded on securities exchanges or in the OTC markets. The market value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The net asset value of the Fund may at any point in time be worth less than the amount at the time the shareholder invested in the Fund, even after taking into account any reinvestment of distributions.

 

Inflation Risk (Principal). Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a rise in inflation. As inflation increases, the real value of the Fund’s shares and distributions therefore may decline. In addition, during any periods of rising inflation, dividend rates of any debt securities issued by the Fund would likely increase, which would tend to further reduce returns to common shareholders. Inflation rates may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund shareholders. This risk is greater for fixed-income instruments with longer maturities.

 

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Common Stock Risk (Principal). Common stock of an issuer in the Fund’s portfolio may decline in price for a variety of reasons, including if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Common stock in which the Fund invests is structurally subordinated as to income and residual value to preferred stock, bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater dividend risk than preferred stock or debt instruments of such issuers. In addition, while common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in generating those returns.

 

Preferred Stock Risk (Principal). There are special risks associated with the Fund’s investing in preferred securities, including:

Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer dividends or distributions for a stated period without any adverse consequences to the issuer. If the Fund owns a preferred security that is deferring its dividends or distributions, the Fund may be required to report income for tax purposes although it has not yet received such income.

Non-Cumulative Dividends. Some preferred securities are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid. A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred security held by the Fund determine not to pay dividends or distributions on such security, the Fund’s return from that security may be adversely affected. There is no assurance that dividends or distributions on non-cumulative preferred securities in which the Fund invests will be declared or otherwise made payable.

Subordination. Preferred securities are subordinated to bonds and other debt instruments in an issuer’s capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security instruments.

Liquidity. Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities.

Limited Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may be entitled to elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights.

Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. A redemption by the issuer may negatively impact the return of the security held by the Fund.

 

Warrants and Rights (Non-Principal). The Fund may invest in warrants and rights (including those acquired in units or attached to other securities) which entitle the holder to buy equity securities at a specific price for or at the end of a specific period of time. The Fund will do so only if the underlying equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund’s portfolio.

 

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Investing in rights and warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and thus can be a riskier investment. The value of a right or warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the Fund whose equity underlies the warrant, a change in the perception as to the future price of the underlying security, or any combination thereof. Rights and warrants generally pay no dividends and confer no voting or other rights other than the right to purchase the underlying security.

 

Fixed Income Securities Risks (Principal). Fixed income securities in which the Fund may invest are generally subject to the following risks:

Interest Rate Risk. The market value of bonds and other fixed-income or dividend-paying securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income or dividend payi