The summary of the Fund’s investments in
securities and other financial instruments by inputs used to value the Fund’s investments as of December 31, 2021 is as follows:
circumstances of Level
3 securities are frequently monitored to determine if fair valuation measures continue to apply.
The Fund’s policy
with respect to offsetting is that, absent an event of default by the counterparty or a termination of
the agreement, the master agreement does not result in an offset of reported amounts of financial assets and financial liabilities
in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability
of the right to offset may vary by jurisdiction.
The Fund’s derivative
contracts held at December 31, 2021, if any, are not accounted for as hedging instruments under GAAP and are disclosed in the Schedule
of Investments together with the related counterparty.
As a purchaser of put options,
the Fund pays a premium for the right to sell to the seller of the put option the underlying
security at a specified price. The seller of the put has the obligation to purchase the underlying security upon exercise
at the exercise price. If the price of the underlying security declines, the Fund would
realize a gain upon sale
or exercise. If the price of the underlying security increases or stays the same, the Fund would realize a loss upon sale or at
the expiration date, but only to the extent of the premium paid.
If a written call option
is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether there has been
a realized gain or loss. If a written put option is exercised, the premium reduces the cost basis of the security. In the case
of call options, the exercise prices are referred to as “in-the-money,” “at-the-money,” and “out-of-the-money,”
respectively. The Fund may write (a) in-the-money call options when the Adviser expects that the price of the underlying security
will remain stable or decline during the option period, (b) at-the-money call options when the Adviser expects that the price of
the underlying security will remain stable, decline, or advance moderately during the option period, and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the call option will be greater than the appreciation
in the price of the underlying security above the exercise price. By writing a call option, the
Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise
price of the option. Out-of-the-money, at-the-money, and in-the-money put options (the reverse of call options as to the relation
of exercise price to market price) may be utilized in the same market environments that
such call options are used in equivalent transactions. Option positions at December 31, 2021 are reflected within the Schedule
of Investments.
The Fund’s volume
of activity in equity options contracts during the year ended December 31, 2021 had an average monthly market value of approximately
$38,468,694.
At December 31, 2021, the
Fund’s derivative liabilities (by type) are as follows:
The following table presents the Fund’s
derivative liabilities by counterparty net of the related collateral segregated by the Fund for the benefit of the counterparty
as of December 31, 2021:
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.
The Fund declares and pays
monthly 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. Distributions during the year may be made
in excess of required distributions. 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 shareholders
of the Fund’s 5.000% Series B Cumulative Preferred Shares (Series B Preferred) are accrued on a daily basis and are determined
as described in Note 5.
The tax character of distributions
paid during the years ended December 31, 2021 and 2020 was as follows:
At December 31, 2021, the
components of accumulated earnings/losses on a tax basis were as follows:
At December 31, 2021, the
Fund had net long term capital loss carryforwards for federal income tax purposes which
are available to reduce future required distributions of net capital gains to shareholders. The Fund is permitted to carry
capital losses forward for an unlimited period. Capital losses that are carried forward will retain their character as either short
term or long term capital losses.
The Fund utilized $29,894,914
of the capital loss carryforward for the year ended December 31, 2021.
At December 31, 2021, the
temporary differences between book basis and tax basis unrealized depreciation were primarily due to deferral of losses from wash
sales for tax purposes, and adjustments on investments in partnerships.
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 year ended December 31, 2021, the Fund accrued $45,000 in accounting
fees in the Statement of Operations.
The Board has authorized
the repurchase of its common shares in the open market when the shares are trading at a discount of 7.5% or more (or such other
percentage as the Board may determine from time to time) from the NAV of the shares. During the years ended December 31, 2021 and
2020, the Fund repurchased and retired 2,143,897 and 9,290,549 of its common shares at an investment of $7,496,031 and $32,610,136
and an average discount of approximately 11.85% and 13.28% from its NAV, respectively.
The Fund’s Declaration
of Trust, as amended, authorizes the issuance of an unlimited number of $0.001 par value
Preferred Shares. The Series B Preferred are callable at any time at the liquidation value of $25 per share plus accrued
and unpaid dividends. The Board has authorized the repurchase of the Series B Preferred in the open
market at prices less than the $25 liquidation value per share. At December 31, 2021, 3,459,899 Series B Preferred were
outstanding and accrued dividends amounted to $60,068.
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 holders of Preferred Shares 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.
Opinion on the Financial
Statements
We have audited the accompanying
statement of assets and liabilities, including the schedule of investments, of GAMCO Global Gold, Natural Resources & Income
Trust (the "Fund") as of December 31, 2021, the related statement of operations for the year ended December 31, 2021,
the statement of changes in net assets attributable to common shareholders for each
of the two years in the period ended December 31, 2021, including the related notes, and the financial highlights for each of the
five years in the period ended December 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 December 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 December 31, 2021 and the
financial highlights for each of the five years in the period ended December 31, 2021 in conformity with accounting principles
generally accepted in the United States of America.
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 December 31, 2021 by correspondence with the custodian and brokers;
when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide
a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, New York
February 28, 2022
We have served as the auditor of one or more
investment companies in the Gabelli/GAMCO Fund Complex since 1986.
GAMCO
Global Gold, Natural Resources & Income Trust
Additional
Fund Information (Unaudited)
The following includes information
that is incorporated by reference in the Fund’s Registration Statement and is
also a summary of certain changes during the most recent fiscal year ended December 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 objectives or policies
that have not been approved by shareholders or in the principal risk factors associated with an investment in the Fund.
SUMMARY OF FUND EXPENSES
The following table shows
the Fund’s expenses, including preferred shares offering 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 December 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 |
$1.00 (b) |
Annual
Expenses (as a percentage of net assets
attributable to common shares) |
Percentages
of Net Assets
Attributable to Common Shares |
| Management
Fees |
1.14 | %(c) |
| Other Expenses |
0.26 | %(c) |
| Total Annual Expenses |
1.40 | % |
| Dividends on Preferred
Shares |
0.72 | %(d) |
| Total Annual Expenses
and Dividends on Preferred Shares |
2.12 | % |
| (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 $1.00 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.” |
GAMCO
Global Gold, Natural Resources & Income Trust
Additional
Fund Information (Continued) (Unaudited)
| (c) | The Investment Adviser’s fee is 1.00% annually
of the Fund’s average weekly net assets, with no deduction for the
liquidation preference of any preferred shares. Consequently, since 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
are higher than if the Fund did not utilize a leveraged capital structure. “Other Expenses” are based on estimated
amounts for the current year.” |
| (d) | Dividends on Preferred Shares represent the estimated
annual distributions on the existing preferred shares outstanding. |
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—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 | |
$22 | |
$66 | |
$114 | |
$226 |
| * | *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): $14, $44, $77,
and $169.
The Fund's common shares
are listed on the NYSE American under the trading or "ticker" symbol "GGN." The Fund's Series B Cumulative
Preferred Shares are listed on the NYSE American under the ticker symbol " GGN PrB." 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 14.05% and a discount as low as (25.36)%.
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.
GAMCO
Global Gold, Natural Resources & Income Trust
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 |
| March 31,
2020 | |
$4.45 | |
$2.06 | |
$4.31 | |
$2.76 | |
3.25% | |
(25.36)% |
| June 30, 2020 | |
$3.52 | |
$2.71 | |
$3.56 | |
$3.11 | |
(1.12)% | |
(12.86)% |
| September 30, 2020 | |
$3.77 | |
$3.36 | |
$4.32 | |
$3.89 | |
(12.73)% | |
(13.63)% |
| December 31, 2020 | |
$3.58 | |
$3.27 | |
$4.05 | |
$3.75 | |
(11.60)% | |
(12.80)% |
| March 31, 2021 | |
$3.73 | |
$3.37 | |
$4.21 | |
$3.78 | |
(11.40)% | |
(10.85)% |
| June 30, 2021 | |
$4.29 | |
$3.52 | |
$4.25 | |
$3.97 | |
0.94% | |
(11.33)% |
| September 30, 2021 | |
$4.08 | |
$3.67 | |
$4.00 | |
$3.67 | |
2.00% | |
0.00% |
| December 31, 2021 | |
$4.02 | |
$3.65 | |
$4.02 | |
$3.73 | |
0.00% | |
(2.14)% |
The last reported price
for our common shares on December 31, 2021 was $3.75 per share. As of December 31, 2021, the net asset value per share of the Fund’s
common shares was $3.91 Accordingly, the Fund’s common shares traded at a discount to net asset value of (4.09)% on December
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 December 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.
GAMCO
Global Gold, Natural Resources & Income Trust
Additional
Fund Information (Continued) (Unaudited)
GAMCO Global
Gold, Natural Resources & Income Trust
Financial Highlights
Selected data for a common share of
beneficial interest outstanding throughout each year.
| | |
Year
Ended December 31, | |
| | |
2016 | | |
2015 | | |
2014 | | |
2013 | | |
2012 | |
| Operating
Performance: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
asset value, beginning of year | |
$ | 5.34 | | |
$ | 7.35 | | |
$ | 9.94 | | |
$ | 13.26 | | |
$ | 14.70 | |
| Net
investment income | |
| 0.03 | | |
| 0.02 | | |
| 0.03 | | |
| 0.07 | | |
| 0.11 | |
| Net
realized and unrealized gain/(loss) on investments, securities sold short, written options, and foreign currency transactions | |
| 1.15 | | |
| (1.15 | ) | |
| (1.51 | ) | |
| (1.89 | ) | |
| (0.01 | ) |
| Total
from investment operations | |
| 1.18 | | |
| (1.13 | ) | |
| (1.48 | ) | |
| (1.82 | ) | |
| 0.10 | |
| Distributions
to Preferred Shareholders: (a) | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
investment income | |
| (0.00 | )(b) | |
| (0.00 | )(b) | |
| (0.02 | ) | |
| (0.00 | )(b) | |
| (0.00 | )(b) |
| Net
realized gain | |
| — | | |
| — | | |
| — | | |
| (0.05 | ) | |
| (0.07 | ) |
| Return
of capital | |
| (0.04 | ) | |
| (0.04 | ) | |
| (0.02 | ) | |
| — | | |
| — | |
| Total
distributions to preferred shareholders | |
| (0.04 | ) | |
| (0.04 | ) | |
| (0.04 | ) | |
| (0.05 | ) | |
| (0.07 | ) |
| Net
increase/(decrease) in net assets attributable to common shareholders resulting from operations | |
| 1.14 | | |
| (1.17 | ) | |
| (1.52 | ) | |
| (1.87 | ) | |
| 0.03 | |
| Distributions
to Common Shareholders: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
investment income | |
| (0.04 | ) | |
| (0.02 | ) | |
| — | | |
| (0.06 | ) | |
| (0.02 | ) |
| Net
realized gain | |
| — | | |
| — | | |
| — | | |
| (0.75 | ) | |
| (1.36 | ) |
| Return
of capital | |
| (0.80 | ) | |
| (0.82 | ) | |
| (1.08 | ) | |
| (0.63 | ) | |
| (0.24 | ) |
| Total
distributions to common shareholders | |
| (0.84 | ) | |
| (0.84 | ) | |
| (1.08 | ) | |
| (1.44 | ) | |
| (1.62 | ) |
| Fund
Share Transactions: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Increase
in net asset value from issuance of common shares | |
| 0.04 | | |
| — | | |
| 0.01 | | |
| 0.01 | | |
| 0.15 | |
| Increase
in net asset value from repurchase of common shares | |
| 0.00 | (b) | |
| 0.00 | (b) | |
| — | | |
| 0.00 | (b) | |
| — | |
| Increase
in net asset value from repurchase of preferred shares and transaction fees | |
| 0.00 | (b) | |
| 0.00 | (b) | |
| 0.00 | (b) | |
| 0.01 | | |
| — | |
| Offering
costs for preferred shares charged to paid-in capital | |
| — | | |
| — | | |
| — | | |
| (0.03 | ) | |
| — | |
| Adjustments
to offering costs for preferred shares credited to paid-in capital | |
| — | | |
| — | | |
| 0.00 | (b) | |
| — | | |
| — | |
| Total
Fund share transactions | |
| 0.04 | | |
| 0.00 | (b) | |
| 0.01 | | |
| (0.01 | ) | |
| 0.15 | |
| Net
Asset Value, End of Year | |
$ | 5.68 | | |
$ | 5.34 | | |
$ | 7.35 | | |
$ | 9.94 | | |
$ | 13.26 | |
| NAV
total return † | |
| 22.67 | % | |
| (17.59 | )% | |
| (17.23 | )% | |
| (14.62 | )% | |
| 1.36 | % |
| Market
value, end of year | |
$ | 5.30 | | |
$ | 4.75 | | |
$ | 7.00 | | |
$ | 9.02 | | |
$ | 12.80 | |
| Investment
total return †† | |
| 29.39 | % | |
| (22.14 | )% | |
| (13.01 | )% | |
| (19.51 | )% | |
| 1.82 | % |
GAMCO
Global Gold, Natural Resources & Income Trust
Additional
Fund Information (Continued) (Unaudited)
GAMCO Global
Gold, Natural Resources & Income Trust
Financial Highlights (Continued)
Selected data for a common share of
beneficial interest outstanding throughout each year.
| | |
Year
Ended December 31, | |
| | |
2016 | | |
2015 | | |
2014 | | |
2013 | | |
2012 | |
| Ratios
to Average Net Assets and Supplemental Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
assets including liquidation value of preferred shares, end of year (in 000’s) | |
$ | 853,079 | | |
$ | 691,468 | | |
$ | 920,538 | | |
$ | 1,152,361 | | |
$ | 1,428,491 | |
| Net
assets attributable to common shares, end of year (in 000’s) | |
$ | 764,312 | | |
$ | 601,745 | | |
$ | 828,027 | | |
$ | 1,057,668 | | |
$ | 1,329,599 | |
| Ratio
of net investment income to average net assets attributable to common shares | |
| 0.44 | % | |
| 0.30 | % | |
| 0.21 | % | |
| 0.59 | % | |
| 0.33 | % |
| Ratio
of operating expenses to average net assets attributable to common shares | |
| 1.32 | %(c)(d) | |
| 1.29 | %(c) | |
| 1.24 | % | |
| 1.20 | % | |
| 1.22 | % |
| Ratio
of operating expenses to average net assets including liquidation value of preferred shares | |
| 1.18 | %(c)(d) | |
| 1.15 | %(c) | |
| 1.14 | % | |
| 1.11 | % | |
| 1.12 | % |
| Portfolio
turnover rate | |
| 198.4 | % | |
| 36.0 | % | |
| 87.4 | % | |
| 83.7 | % | |
| 47.4 | % |
| Preferred
Shares: | |
| | | |
| | | |
| | | |
| | | |
| | |
| 5.000%
Series B Cumulative Preferred Shares | |
| | | |
| | | |
| | | |
| | | |
| | |
| Liquidation
value, end of year (in 000’s) | |
$ | 88,767 | | |
$ | 89,724 | | |
$ | 92,512 | | |
$ | 94,693 | | |
| — | |
| Total
shares outstanding (in 000’s) | |
| 3,551 | | |
| 3,589 | | |
| 3,700 | | |
| 3,788 | | |
| — | |
| Liquidation
preference per share | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
| — | |
| Average
market value (e) | |
$ | 23.81 | | |
$ | 22.03 | | |
$ | 21.28 | | |
$ | 21.00 | | |
| — | |
| Asset
coverage per share | |
$ | 240 | | |
$ | 193 | | |
$ | 249 | | |
$ | 304 | | |
| — | |
| Asset
coverage | |
| 961 | % | |
| 771 | % | |
| 995 | % | |
| 1,217 | % | |
| — | |
| † | Based
on net asset value per share, adjusted for reinvestment of distributions at the net asset
value per share on the ex-dividend dates. |
| †† | Based
on market value per share, adjusted for reinvestment of distributions at prices obtained
under the Fund’s dividend reinvestment plan. |
| (a) | Calculated
based upon 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 the years ended December 31, 2016 and 2015, there was no impact on the
expense ratios. |
| (d) | The
Fund incurred dividend expenses on securities sold short. If this expense had not been
incurred, the expense ratios for the year ended December 31, 2016 would have been 1.31%
attributable to common shares, and 1.17% including liquidation value of preferred shares. |
| (e) | Based
on weekly prices. |
CHANGES OCCURRING DURING
THE PRIOR FISCAL PERIOD
The
following information is a summary of certain changes during the most recent fiscal year ended December 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.
GAMCO
Global Gold, Natural Resources & Income Trust
Additional
Fund Information (Continued) (Unaudited)
INVESTMENT OBJECTIVES
AND POLICIES
Investment Objectives
The Fund’s primary
investment objective is to provide a high level of current income. The Fund’s secondary investment objective is to seek capital
appreciation consistent with the Fund’s strategy and its primary objective. Under normal market conditions, the Fund will
attempt to achieve its objectives by investing at least 80% of its assets
in equity securities of companies principally engaged in the gold industry and the natural resources industries. The Fund will
invest at least 25% of its assets in the equity securities of companies principally engaged in the gold industry, which
includes companies principally engaged in the exploration, mining, fabrication, processing,
distribution or trading of gold or the financing, managing, controlling or operating of companies engaged in “gold-related”
activities. In addition, the Fund will invest at least 25% of its assets in the equity securities of companies principally
engaged in the group of industries that constitute the natural resources industries, which include companies principally engaged
in the exploration, production or distribution of natural resources, such as gas, oil, paper, food and agriculture, forestry products,
metals (other than gold) and minerals as well as related transportation
companies and equipment manufacturers. The Fund may invest in the securities of companies located anywhere in the world.
Under normal market conditions, the Fund will invest at least 40% of its assets in the securities of issuers located in at least
three countries other than the United States. For this purpose an issuer
will be treated as located outside the United States if it is either organized or headquartered outside the United States and has
a substantial portion of its operations or sales outside the United States. Equity securities may include common stocks,
preferred stocks, convertible securities, warrants, depository receipts and
equity interests in trusts and other entities. Other Fund investments may include investment companies, securities of issuers
subject to reorganization or other risk arbitrage investments, certain derivative instruments, debt (including obligations of the
United States government) and money market instruments. The Fund may invest up to 10% of its total assets in securities rated below
investment grade by recognized statistical rating agencies or unrated securities
of comparable quality, including securities of issuers in default, which are likely to have the lowest rating. These securities,
which may be preferred shares 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 securities
considered by the Investment Adviser to be of comparable quality, are commonly
referred to as “junk bonds” or “high yield” securities.
As part of its investment
strategy, the Fund intends to generate gains through an option strategy of writing (selling)
covered call options on equity securities in its portfolio. When the Fund sells a covered call option, it generates gains
in the form of the premium paid by the buyer of the call option, but the Fund forgoes the opportunity
to participate in any increase in the value of the underlying equity security above the exercise price of the option.
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Investment Methodology of the Fund
In selecting securities for the Fund, the Investment
Adviser normally considers the following factors, among others:
| ● | The industry of the issuer of a security; |
| ● | the potential of the Fund to earn gains from writing
covered call options on such securities; |
| ● | the interest or dividend income generated by the securities; |
| ● | the potential for capital appreciation of the securities; |
| ● | the prices of the securities relative to comparable
securities; |
| ● | whether the securities are entitled to the benefits
of call protection or other protective covenants; |
| ● | the existence of any anti-dilution protections or
guarantees of the security; and |
| ● | the number and size of investments of the portfolio
as to issuers. |
The Investment Adviser’s
investment philosophy with respect to selecting investments in the gold industry and the
natural resources industries is to emphasize quality and value, as determined by such factors as asset quality, balance sheet leverage,
management ability, reserve life, cash flow, and commodity hedging exposure. In addition, in making stock selections, the
Investment Adviser looks for securities that it believes may have a superior yield as well as capital gains potential.
Current Investment
Practices
Gold
Industry Concentration. Under normal market conditions the Fund will invest at least 25% of its assets in the
equity securities of Gold Companies. “Gold Companies” are those Companies that are principally engaged in the
gold industry, which includes companies principally engaged in the exploration, mining, fabrication, processing,
distribution or trading of gold, or the financing, managing, controlling or operating of companies engaged in “gold-related”
activities. The Fund’s investments in Gold Companies will generally be in the common equity
of Gold Companies, but the Fund may also invest in other securities of Gold Companies, such as preferred stocks, securities
convertible into common stocks, and securities such as rights and warrants that have common stock characteristics.
In selecting investments
in Gold Companies for the Fund, the Investment Adviser will focus on stocks that are undervalued, but which appear to have favorable
prospects for growth. Factors considered in this determination will include
capitalization per ounce of gold production, capitalization per ounce of recoverable reserves, quality of management and
ability to create shareholder wealth. Because most of the world’s gold production is outside of
the United States, the Fund may have a significant portion of its investments in Gold Companies in securities of foreign
issuers, including those located in developed as well as emerging markets. The percentage of Fund assets invested in particular
countries or regions will change from time to time based on the Investment Adviser’s judgment. Among other things, the Investment
Adviser will consider the economic stability and economic outlook of these countries and regions. See “Risk Factors and Special
Considerations—Industry Risks.”
Natural Resources Industries
Concentration. Under normal market conditions, the Fund will invest at least 25%
of its assets in equity securities of Natural Resources Companies. “Natural Resources Companies” are those that
are principally engaged in the group of industries that constitute the natural resources industries, which include companies principally
engaged in the exploration, production or distribution of energy or natural
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resources, such as gas,
oil, paper, food and agriculture, forestry products, metals (other than gold) and minerals as well as related transportation companies
and equipment manufacturers.”
Principally engaged, as
used in this Annual Report, means a company that derives at least 50% of its revenues or earnings or devotes at least 50% of its
assets to gold or natural resources related activities, as the case may be.
Covered Calls and Other
Option Transactions. The Fund intends to generate gains through an option strategy which
will normally consist of writing (selling) call options on equity securities in its portfolio (“covered calls”), but
may, in amounts up to 15% of the Fund’s assets, consist of writing uncovered call options on additional amounts of such securities
beyond the amounts held in its portfolio, on other securities not held in its portfolio, on indices comprised of Gold Companies
or Natural Resources Companies or on exchange traded funds comprised of such issuers and also may consist of writing put options
on securities in its portfolio. Writing a covered call is the selling of an option contract entitling the buyer to purchase an
underlying security that the Fund owns, while writing an uncovered call is the selling of such a contract entitling the buyer to
purchase a security the Fund does not own or in an amount in excess of the amount the Fund owns. When the Fund sells a call option,
it generates gains in the form of the premium paid by the buyer of the call option, but the Fund forgoes the opportunity to participate
in any increase in the value of the underlying equity security above the exercise price of the option. The writer of the
call option has the obligation, upon exercise of the option, to deliver the underlying security or currency upon payment of the
exercise price during the option period.
A put option is the reverse
of a call option, giving the buyer the right, in return for a premium, to sell the underlying security
to the writer, at a specified price, and obligating the writer to purchase the underlying security from the holder at that
price. When the Fund sells a put option, it generates gains in the form of the premium paid by the buyer of the put option, but
the Fund will have the obligation to buy the underlying security at the exercise price if the price of the security decreases below
the exercise price of the option.
If the Fund has written
a call option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing
a call option with the same terms 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 with the same terms 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 will realize a profit from a closing transaction if the price of the transaction is less than the premium it received from
writing the option or is more than the premium it paid to purchase the option; the Fund will realize a loss from a closing
transaction if the price of the transaction is more than the premium it received from writing the
option or is less than the premium it 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 of the option. Gains and losses on investments in options depend, in part, on
the ability of the Investment Adviser to predict correctly
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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 that provides a secondary market for an option with the same terms or in a private transaction.
Although the Fund will generally purchase or write 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, in which case 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.
When
the Fund writes an uncovered call option or put option, it will segregate liquid assets with its custodian in an amount equal to
the amount, adjusted daily, by which such option is in the money or will treat the unsegregated amount as borrowings.
Although the Investment
Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund’s writing and purchasing of
put and call options, there can be no assurance that the Fund will succeed in any option-writing program it undertakes. See “Risk
Factors and Special Considerations—Risks Associated with Covered Calls and Other Options.”
Foreign
Securities. Because many of the world’s Gold Companies and Natural Resources Companies
are located outside of the United States, the Fund may have a significant
portion of its investments in securities of foreign issuers, which are generally denominated in foreign currencies. See
“Risk Factors and Special Considerations—Foreign Securities Risk.”
The Fund may also purchase
sponsored American Depository Receipts (“ADRs”) or U.S. dollar denominated securities of foreign issuers. ADRs are
receipts issued by U.S. banks or trust companies in respect of securities of foreign issuers held on deposit for use in the U.S.
securities markets.
Emerging
Markets. The Fund may invest without limit in securities of emerging market issuers. These
securities may be U.S. dollar denominated or non-U.S. dollar denominated, including emerging market country currency denominated.
An “emerging market” country is any country that is considered to be an emerging or developing country by the International
Bank for Reconstruction and Development (the “World Bank”).
Emerging market countries
generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries
located in Western Europe.
Registered Investment Companies.
The Fund may invest in registered investment companies in accordance with the 1940 Act, to the extent consistent with the Fund’s
investment objectives, including exchange traded funds that concentrate in investments in the gold or natural resources industries.
The 1940 Act generally prohibits the Fund from investing more than 5% of its assets in any one other investment company or more
than 10% of its assets in all other investment companies. However, many exchange-traded funds are exempt from these limitations.
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Illiquid
Investments. The Fund may invest up to 15% of its net assets in securities for which there
is no readily available trading market or that are otherwise 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, as amended, and the rules and regulations promulgated thereunder (the “Securities
Act”), and securities eligible for resale pursuant to Rule 144A thereunder, written OTC options, repurchase agreements with
maturities in excess of seven days, certain loan participation interests,
fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), and other securities whose disposition is restricted under the federal securities laws. 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 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.
Income
Securities. The Fund may invest in other equity securities that are expected to periodically accrue or generate income for
their holders such as common and preferred stocks of issuers that have historically paid periodic
dividends or otherwise made distributions to stockholders. 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.
In
addition, the Fund also may invest in fixed income securities such as convertible securities, 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 of an applicable exemptive order, will not be affiliated with the Investment Adviser. 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.
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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. Although the Fund may invest in all types of obligations of agencies and instrumentalities
of the United States government, the Fund currently intends to invest only in obligations of government sponsored instrumentalities
that are supported by the “full faith and credit” of the U.S. government.
When Issued, Delayed Delivery
Securities and Forward Commitments. The Fund may enter into forward commitments for the purchase or sale of securities, including
on a “when issued” or “delayed delivery” basis, in excess of customary settlement periods for the type
of security involved. In some cases, a forward commitment may be conditioned
upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt
restructuring (i.e., a when, as and if issued security). When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future,
generally a month or more after the date of the commitment. While it will only enter into a forward
commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date
if it is deemed advisable.
Securities
purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund
prior to the settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its outstanding forward commitments.
Short
Sales. The Fund may make short sales as a form of hedging to offset potential declines
in long positions in the same or similar securities, including short sales against the box. The short sale of a security is considered
a speculative investment technique. At the time of the sale, the Fund will
own, or have the immediate and unconditional right to acquire at no additional cost, identical or similar securities or establish
a hedge against a security of the same issuer which may involve additional cost, such as an “in the money” warrant.
Short sales “against
the box” are subject to special tax rules, one of the effects of which may be to accelerate the recognition of income by
the Fund. Other than with respect to short sales against the box, the Fund will limit short sales of securities to not more than
5% of the Fund’s assets. When the Fund makes a short sale, it must deliver the security to the broker-dealer through which
it made the short sale in order to satisfy its obligation to deliver the security upon conclusion of the sale.
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
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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 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.
Convertible
Securities. A convertible security is a bond, debenture, corporate note, preferred stock
or other securities that may be exchanged or converted into a prescribed
amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified
price or formula. Before 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
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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. See “Risk Factors and Special Considerations— Convertible Securities
Risk.”
Non-Investment
Grade Securities. The Fund may invest up to 10% of its assets in securities rated below
investment grade by recognized statistical rating agencies or unrated securities
of comparable quality. The prices of these lower grade securities are more sensitive to negative developments, such as a
decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Securities
of below investment grade quality—those securities rated below “Baa”
by Moody’s or below “BBB” by S&P (or unrated securities of comparable quality)—are predominantly speculative
with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater
risk of default. Securities rated below investment grade commonly are referred to as “junk bonds” or “high yield”
securities.
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 securities. In addition,
such non-investment grade securities and 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 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 bonds 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
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historical lows and there
have been recent inflationary price movements; therefore, it is likely that interest rates will rise in the future.
The
Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies
involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant
financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial
and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually
high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments
or the prospects for a successful reorganization or similar action. In
any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or part of its investment
or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As part of its investments
in non-investment grade securities, the Fund may invest without limit 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 issuers 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, 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.
Fixed income securities,
including non-investment grade securities and comparable unrated securities, frequently
have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security
with a lower yielding security, thus resulting in a decreased return for the Fund.
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.
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Other
Derivative Instruments. The Fund may also utilize other types of derivative instruments,
primarily for hedging or risk management purposes. These instruments include futures, forward contracts, options on such contracts
and interest rate, total return and other kinds of swaps. These investment management techniques generally will not be considered
senior securities if the Fund establishes in a segregated account cash or other liquid
securities or sets aside assets on the accounting records equal to the Fund’s obligations in respect of such techniques.
For a further description of such derivative instruments, see below.
Leveraging.
The Fund may use leverage, including as a result of any issuances of preferred shares or notes, 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—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. See “Risk Factors and Special Considerations—Special
Risks Related to Preferred 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.
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
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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, 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.
On October 28, 2020, the
SEC adopted new regulations governing the use of derivatives by registered investment companies
(“Rule 18f-4”). The Fund will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented,
Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into, eliminate the asset segregation framework currently
used by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with
the limits would result in a statutory violation and require funds whose
use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive derivatives
risk management program and appoint a derivatives risk manager.
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.
Portfolio
Turnover. The Fund will buy and sell securities to accomplish its investment objectives.
The investment policies of the Fund, including its strategy of writing covered call options on securities in its portfolio, are
expected to result in portfolio turnover that is higher than that of many investment companies, and may be higher than 100%. For
the years ending December 31, 2021, and December 31, 2020, the portfolio turnover rates were 96% and 88%, respectively.
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
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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.
Interest Rate Transactions
The Fund may enter into
interest rate swap or cap transactions to manage its borrowing costs, as well as to increase income. The use of interest rate swaps
and caps is a highly specialized activity that involves investment techniques
and risks different from those associated with ordinary portfolio security transactions. In an interest rate swap, the Fund
would agree to pay to the other party to the interest rate swap (which is known as the “counterparty”)
periodically a fixed rate payment in exchange for the counterparty agreeing to pay to the fund periodically a variable rate
payment that is intended to approximate the Fund’s variable rate payment obligation on
its borrowings (or the Fund’s potential variable payment obligations on fixed rate preferred shares that may have
certain variable rate features). In an interest rate cap, the Fund would pay a premium to the counterparty to
the interest rate cap and, to the extent that a specified variable rate index exceeds a predetermined fixed rate, would
receive from the counterparty payments of the difference based on the notional amount of such cap. Interest rate swap and cap transactions
introduce additional risk because the Fund would remain obligated to pay interest or preferred shares dividends when due even if
the counterparty defaulted. Depending on the general state of short term interest rates and the returns on the Fund’s portfolio
securities at that point in time, such a default could negatively affect the Fund’s ability to make interest payments or
dividend payments on the preferred shares. In addition, at the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement
will not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the Fund’s ability
to make interest payments or dividend payments on the preferred shares. To the extent there is a decline in interest rates, the
value of the interest rate swap or cap could decline, resulting in a decline in the asset coverage for the borrowings or preferred
shares. A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. If the Fund fails to maintain the required asset coverage on any outstanding
preferred shares or fails to comply with other covenants, the Fund may be required
to prepay some or all of such borrowings or redeem some or all of these shares. Any such prepayment or redemption would
likely result in the Fund seeking to terminate early all or a portion of any swap or cap transactions. Early termination of a swap
could result in a termination payment by the Fund to the counterparty, while early termination of a cap could result in a termination
payment to the Fund.
The
Fund may enter into equity contract for difference swap transactions, for the purpose of increasing the income of the Fund. In
an equity contract for difference swap, a set of future cash flows is exchanged between two counterparties. One of these cash flow
streams will typically be based on a reference interest rate combined with the performance of a notional value of shares
of a stock. The other will be based on the performance of the shares of a stock. Depending on the general state of short term interest
rates and the returns on the Fund’s portfolio securities at the time a swap transaction reaches its scheduled termination
date, there is a risk that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction.
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The
Fund will usually enter into swaps or caps on a net basis; that is, the two payment streams will be netted out in a cash settlement
on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. The Fund intends to segregate or earmark cash
or liquid assets a value at least equal to the value of the Fund’s net payment obligations under any swap transaction,
marked to market daily. The Fund will monitor any such swap with a view to ensuring that the Fund remains
in compliance with all applicable regulatory, investment policy and tax requirements.
If the Fund writes (sells)
a credit default swap or credit default index swap, then the Fund will, during the term of
the swap agreement, designate on its books and records in connection with such transaction liquid assets or cash with a value at
least equal to the full notional amount of the contract.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investors should consider the following
risk factors and special considerations associated with investing in the Fund:
Market Risk
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
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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 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 also 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.
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 have 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, the vaccine
produced by Johnson & Johnson is currently authorized for emergency use, and the U.S. Food and Drug Administration (“FDA”)
has granted full approval to the vaccines produced by Pfizer-BioNTech and
Moderna, which will now be marketed as Comirnaty and Spikevax, respectively. 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. Various factors could lead people to continue to self-isolate
and not participate
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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 downturn
or recession in the United States and other major 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 the Fund’s common shares 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 the Fund’s common shareholders; |
| ● | 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 the Fund invests; |
| ● | increased risk of companies in which the Fund invests
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 the Fund invests being disproportionally
impacted by governmental action aimed at slowing the spread of COVID-19 or mitigating its economic effects; |
| ● | 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.
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Total Return Risk
The
Fund utilizes several investment management techniques in an effort to generate positive total return. The risks of these techniques,
such as option writing, leverage, concentration in certain industries, and investing in emerging markets, are described in the
following paragraphs. Taken together these and other techniques represent a risk that the Fund will experience a negative
total return even in market environments that are generally positive and that the Fund’s returns, both positive and negative,
may be more volatile than if the Fund did not utilize these investment
techniques.
Industry Risks
Industry
Risks. The Fund’s investments will be concentrated in the gold and natural resources
industries. Because the Fund is concentrated in these industries, it may
present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in
the gold or natural resources industries would have a larger impact on the Fund than on an investment company that does not concentrate
in such industries.
The
Fund invests in equity securities of Gold Companies. Equity securities of Gold Companies may experience greater volatility
than companies not involved in the gold industry. Investments related to gold are considered speculative
and are affected by a variety of worldwide economic, financial and political factors. The price of gold, which has experienced
substantial increases in recent periods, may fluctuate sharply, including substantial decreases, over short periods of time due
to changes in inflation or expectations regarding inflation in various countries, the availability of supplies of gold,
changes in industrial and commercial demand, gold sales by governments, central banks or international agencies, investment speculation,
monetary and other economic policies of various governments and government
restrictions on private ownership of gold. In times of significant inflation or great economic uncertainty, Gold Companies have
historically outperformed securities markets generally. However, in times of stable economic growth, traditional equity and debt
investments could offer greater appreciation potential and the value of gold and the prices of equity securities of Gold Companies
may be adversely affected, which could in turn affect the Fund’s returns. Some Gold Companies hedge, to varying degrees,
their exposure to declines in the price of gold. Such hedging limits a Gold Company’s ability to benefit
from future rises in the price of gold. The Investment Adviser’s judgments about trends in the prices of securities
of Gold Companies may prove to be incorrect. It is possible that the performance of securities of Gold Companies may lag the performance
of other industries or the broader market as a whole.
The
Fund invests in equity securities of Natural Resources Companies. A downturn in the indicated natural resources industries
would have a larger impact on the Fund than on an investment company that does not invest significantly
in such industries. Such industries can be significantly affected by the supply of and demand for the indicated commodities
and related services, exploration and production spending, government regulations, world events and economic conditions. The oil,
gas, paper, food and agriculture, forestry products, metals (other than
gold) and minerals industries can be significantly affected by events relating to international political developments,
the success of exploration projects, commodity prices, and tax and government regulations. The stock prices of Natural Resources
Companies, some of which have experienced substantial price increases in recent periods, may also experience greater price volatility
than other types of common stocks. Securities issued by Natural Resources Companies are sensitive to changes in the prices of,
and in supply and demand for, the indicated commodities. The value of securities issued by Natural Resources Companies may be affected
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by changes in overall market
movements, changes in interest rates, or factors affecting a particular industry or commodity, such as weather, embargoes, tariffs,
policies of commodity cartels and international economic, political and regulatory developments. The Investment Adviser’s
judgments about trends in the prices of these securities and commodities may prove to be incorrect. It is possible that the performance
of securities of Natural Resources Companies may lag the performance of other industries or the broader market as a whole.
Supply
and Demand Risk. A decrease in the production of or exploitation of gold, gas, oil, paper,
food and agriculture, forestry products, metals (other than gold) or minerals or a decrease in the volume of such commodities available
for transportation, mining, processing, storage or distribution may adversely impact the financial
performance of the Fund’s investments. Production declines and volume decreases could be caused by various factors, including
catastrophic events affecting production, depletion of resources, labor difficulties, environmental proceedings, increased regulations,
equipment failures and unexpected maintenance problems, import supply disruption, increased competition from alternative
energy sources or commodity prices.
Sustained
declines in demand for the indicated commodities could also adversely affect the financial performance of Gold Companies
and Natural Resources Companies over the long term. Factors which could lead to a decline in demand include economic recession
or other adverse economic conditions, higher fuel taxes or governmental regulations, increases in fuel economy, consumer shifts
to the use of alternative fuel sources, changes in commodity prices, or weather.
Depletion
and Exploration Risk. Many Gold Companies and Natural Resources Companies are either engaged
in the production or exploitation of the particular commodities or are engaged in transporting, storing, distributing and processing
such commodities. To maintain or increase their revenue level, these companies or their customers need to maintain or expand their
reserves through exploration of new sources of supply, through the development
of existing sources, acquisitions, or long term contracts to acquire reserves. The financial performance of Gold Companies
and Natural Resources Companies may be adversely affected if they, or the companies
to whom they provide products or services, are unable to cost effectively acquire additional products or reserves sufficient to
replace the natural decline.
Regulatory
Risk. Gold Companies and Natural Resources Companies may be subject to extensive government
regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental
and safety controls, and in some cases the prices they may charge for the products and services they provide. Various governmental
authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject
to administrative, civil and criminal penalties, including civil fines,
injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future, which would likely increase
compliance costs and may adversely affect the financial performance of Gold Companies and Natural Resources Companies.
Commodity
Pricing Risk. The operations and financial performance
of Gold Companies and Natural Resources Companies may be directly affected by the prices of
the indicated commodities, especially those Gold Companies and Natural
Resources Companies for whom the commodities they own are significant assets. Commodity prices fluctuate for many reasons, including
changes in market and economic conditions, levels of domestic production, impact of governmental regulation and taxation,
the availability of transportation systems and, in the case of oil and gas companies in particular, conservation measures and the
impact of weather.
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Volatility of commodity
prices, which may lead to a reduction in production or supply, may also negatively affect the performance of Gold Companies and
Natural Resources Companies which are solely involved in the transportation, processing, storing, distribution or marketing of
commodities. Volatility of commodity prices may also make it more difficult
for Gold Companies and Natural Resources Companies to raise capital to the extent the market perceives that their performance
may be directly or indirectly tied to commodity prices.
Oil and Natural Gas Price
Volatility Risk.
Worldwide crude oil and
natural gas prices and markets historically have been volatile and may continue to be volatile
in the future. Prices for crude oil and natural gas are subject to wide fluctuations in response to relatively minor changes
in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors that are beyond
our control. These factors include, but are not limited to, increases in supplies from United States shale production, international
political conditions, including uprisings and political unrest in the Middle East and Africa, the domestic and foreign supply of
crude oil and natural gas, actions by members of Organization of the Petroleum Exporting Countries (“OPEC”), other
allied producing countries (collectively with OPEC members, “OPEC+”) and other state-controlled oil companies to agree
upon and maintain crude oil price and production controls, the level of consumer demand that is impacted by economic growth rates,
weather conditions, domestic and foreign governmental regulations and taxes, the price and availability of alternative fuels, technological
advances affecting energy consumption, the health of international economic and credit markets, and changes in the level of demand
resulting from global or national health epidemics and concerns, such as the ongoing COVID-19 pandemic. In addition, various factors,
including the effect of federal, state and foreign regulation of production and transportation, general economic conditions, changes
in supply due to drilling by other producers and changes in demand may adversely affect our ability to market our crude oil and
natural gas production.
A combination of factors,
including a substantial decline in global demand for crude oil caused by the COVID-19 pandemic
and subsequent mitigation efforts, as well as market concerns about the ability of OPEC+ to agree on a perceived need to
implement production cuts in response to weaker worldwide demand, caused an unprecedented
decline in crude oil and natural gas prices during the first six months of 2020. Although crude oil prices have improved
since December 31, 2020, adverse economic effects caused by the COVID-19 pandemic, as well as the various other factors described
above, could result in additional price declines. These and other developments may adversely impact the Fund and its performance.
Cybersecurity
Risks. Natural Resources Companies have experienced attempts to breach their operating
systems and other similar incidents in the past, which have resulted in shutdowns and/or disruptions in their operations. For example,
in May 2021, a U.S. fuel pipeline operator was the target of a ransomware attack, which resulted in the shutdown of a massive oil
pipeline system that supplies the eastern United States. Natural Resources Companies may continue to be subject to attempts to
gain unauthorized access to or through their operating systems. Any system failure, cybersecurity breach, ransomware attack or
other system disruption could interrupt or delay operations and impact a Natural Resources Company’s ability to manage its
operations and report financial performance, which could have a materially
adverse effect on existing and future business. These and other developments may adversely impact the value of the Fund’s
investments in Natural Resources Companies.
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Climate
Change Risk. Climate change and regulations intended to control its impact may affect the
value of the Fund’s investments. The Fund’s current evaluation is that the near term effects of climate change and
climate change regulation on the Fund’s investments are not material, but the Fund cannot predict the long term impacts on
the Fund or its investments from climate change or related regulations. The ongoing political focus on climate change has resulted
in various treaties, laws and regulations which are intended to limit carbon emissions. The Fund believes these laws being enacted
or proposed may cause energy costs at properties owned by the real estate investment trusts (“REITs”) or other real
estate companies in which the Fund invests to increase. The Fund does not expect the direct impact of such increases to be material
to the value of its investments, because the increased costs either would be the responsibility of tenants or operators of properties
owned by the REITs or other real estate companies in which the Fund invests, or, in the longer term, passed through and paid by
the customers of such properties. There can be no assurance that climate change will not have a material adverse effect on the
properties, operations or business of the Fund’s investments in REITs and other real estate companies.
The physical effects of
climate change could have a material adverse effect on the properties, operations and business of the Fund’s investments
in REITs and other real estate companies in certain geographical locations. To the extent climate change causes changes in weather
patterns, properties in these markets could experience increases in storm
intensity, flooding and rising sea levels. Over time, these conditions could result in declining demand for the buildings
owned by certain REITs and other real estate companies in which the Fund invests, or the inability of such REITs or other real
estate companies to operate such buildings at all.
Risks Associated with
Covered Calls and Other Option Transactions
There
are several risks associated with transactions in options on securities. For example, there are significant differences
between the securities and options markets that could result in an imperfect correlation between these markets, causing a given
covered call option transaction not to achieve its objectives. A decision as to whether, when and how to use covered calls (or
other options) involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful because of
market behavior or unexpected events. The use of options may require the
Fund to sell portfolio securities at inopportune times or for prices other than current market values, may limit the amount
of appreciation the Fund can realize on an investment, or may cause the Fund to hold a security it might otherwise sell. As the
writer of a covered call option, the Fund forgoes, during the option’s
life, the opportunity to profit from increases in the market value of the security covering the call option above the exercise
price of the call option, but has retained the risk of loss should the price of the underlying security decline. Although such
loss would be offset in part by the option premium received, in a situation in which the price of a particular stock on which the
Fund has written a covered call option declines rapidly and materially or in which prices in general on all or a substantial portion
of the stocks on which the Fund has written covered call options decline rapidly and materially, the Fund could sustain material
depreciation or loss in its net assets to the extent it does not sell the
underlying securities (which may require it to terminate, offset or otherwise cover its option position as well). The writer
of an option has no control over the time when it may be required to fulfill
its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise
price.
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There
can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Reasons for the absence
of a liquid secondary market for exchange-traded options include the following: (i) there may be insufficient trading interest;
(ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances
may interrupt normal operations on an exchange; (v) the trading facilities of an exchange or the Options Clearing Corporation (the
“OCC”) may not be adequate to handle current trading volume; or (vi) the relevant exchange could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options).
If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist.
However, outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue
to be exercisable in accordance with their terms. The Fund’s ability to terminate OTC options may be more limited than with
exchange-traded options and may involve the risk that counterparties participating
in such transactions will not fulfill their obligations. If the Fund were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.
The hours of trading for
options may not conform to the hours during which the underlying securities are traded. To
the extent that the options markets close before the markets for the underlying securities, significant price and rate movements
can take place in the underlying markets that cannot be reflected in the options markets. Call options are marked to market
daily and their value will be affected by changes in the value of and dividend rates of the underlying common stocks, an increase
in interest rates, changes in the actual or perceived volatility of the stock market and the underlying common stocks and the remaining
time to the options’ expiration. Additionally, the exercise price of an option may be adjusted downward before the option’s
expiration as a result of the occurrence of certain corporate events affecting
the underlying equity security, such as extraordinary dividends, stock splits, merger or other extraordinary distributions
or events. A reduction in the exercise price of an option would reduce the Fund’s capital appreciation potential on the underlying
security.
Limitation
on Covered Call Writing Risk. The number of covered call options the Fund can write is
limited by the number of shares of common stock the Fund holds. Furthermore, the Fund’s covered call options and other options
transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on
which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the
same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through
one or more brokers. As a result, the number of covered call options that the Fund may write or purchase may be affected by options
written or purchased by it and other investment advisory clients of the Investment Adviser. An exchange, board of
trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with
Uncovered Calls
There
are special risks associated with uncovered option writing which expose the Fund to potentially significant loss. As the
writer of an uncovered call option, the Fund has no risk of loss should the price of the underlying security decline, but bears
unlimited risk of loss should the price of the underlying security increase above the
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exercise price until the
Fund covers its exposure. As with writing uncovered calls, the risk of writing uncovered put options is substantial. The writer
of an uncovered put option bears a risk of loss if the value of the underlying instrument
declines below the exercise price. Such loss could be substantial if there is a significant decline in the value of the
underlying instrument.
For combination writing,
where the Fund writes both a put and a call on the same underlying instrument, the potential risk is unlimited. If a secondary
market in options were to become unavailable, the Fund could not engage in losing transactions and would remain obligated until
expiration or assignment.
Equity Risk
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 less than the net asset value of the Fund
at the time the shareholder invested in the Fund, even after taking into account any reinvestment of distributions.
Leverage Risk
The
Fund currently uses financial leverage for investment purposes by issuing preferred shares and is also permitted to use other types
of financial leverage, such as through the issuance of debt securities or additional preferred shares and borrowing from financial
institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional 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 of December 31, 2021, the amount of leverage represented
approximately 13% of the Fund’s net assets.
The Fund’s leveraged
capital structure creates special risks not associated with unleveraged funds having a similar investment objective and policies.
These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the
asset coverage for the preferred shares. Such volatility may increase the likelihood of the Fund having to sell investments in
order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities,
or to redeem preferred shares or repay debt, when it may be disadvantageous
to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to
raise cash to redeem preferred shares or otherwise de-leverage so as to
maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The
use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund.
To the extent that the Fund employs leverage in its investment operations, the Fund is subject to substantial risk of loss. The
Fund cannot assure you that borrowings or the issuance of preferred shares or notes will result in a higher yield or return to
the holders of the common shares. Also, since the Fund utilizes leverage, a decline in net asset value could affect the ability
of
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the Fund to make common share distributions
and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code.
Any decline in the net asset
value of the Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of
the Fund’s portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common
shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in
the market price for the common shares. The Fund might be in danger of
failing to maintain the required asset coverage of its borrowings, notes or preferred shares or of losing its ratings on
its notes or preferred shares or, in an extreme case, the Fund’s current investment
income might not be sufficient to meet the distribution or interest requirements on its preferred shares, borrowings or notes.
In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption or repayment
of some or all of the preferred shares, borrowings or notes.
Preferred
Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common
shares to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net
rate of return on the Fund’s investment portfolio, the benefit of
leverage to the holders of the common shares would be reduced. If the dividend rate on the preferred shares or the interest
rate on the notes plus the management fee annual rate of 1.00% exceeds the net rate of return on the Fund’s portfolio, the
leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares
or notes. If the Fund has insufficient investment income and gains, all
or a portion of the distributions to preferred shareholders or interest payments to note holders would come from the common
shareholders’ capital. Such distributions and interest payments reduce the net assets attributable to common shareholders.
In addition, the Fund would
pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the
preferred shares or notes, including the advisory fees on the incremental assets attributable to the preferred shares or notes.
Holders of preferred shares
and notes may have different interests than holders of common shares and
may at times have disproportionate influence over the Fund’s affairs. As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or securities representing
debt, such as notes) 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 (i.e., for every dollar of indebtedness outstanding, the
Fund is required to have at least three dollars of assets) and exceeds
200% of the amount of preferred shares and debt outstanding (i.e., for every dollar in liquidation preference of preferred stock
outstanding, the Fund is required to have two dollars of assets), which is referred to as the “asset coverage” required
by the 1940 Act. In the event the Fund fails to maintain an asset coverage of 100% for any notes outstanding for
certain periods of time, the 1940 Act requires that either an event of default be declared or that the holders of such notes
have the right to elect a majority of the Fund’s Trustees until asset coverage recovers to 110%. In addition, holders of
preferred shares, voting separately as a single class, have the right (subject to the rights of noteholders) to elect two members
of the Board at all times and in the event dividends become two full years in arrears would have the right to elect a majority
of the Trustees until such arrearage is completely eliminated. In addition, preferred shareholders have class voting rights on
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certain matters, including
changes in fundamental investment restrictions and conversion of the Fund to open-end status, and accordingly can veto any such
changes. Further, interest on notes would be payable when due and if the Fund does not pay interest when due, it will trigger an
event of default and the Fund expects to be restricted from declaring dividends and making other distributions with respect to
common shares and preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority in principal
amount of a series of outstanding notes or the trustee will be able to declare the principal amount of that series of notes immediately
due and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring distributions on,
or repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of declaring distributions
on preferred shares). The Fund’s common shares are structurally subordinated as to income and residual value to any preferred
shares or notes in the Fund’s capital structure, in terms of priority
to income and payment in liquidation.
Restrictions imposed on
the declarations and payment of dividends or other distributions to the holders of the Fund’s
common shares and preferred shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund’s
ability to maintain its qualification as a RIC for U.S. federal income tax purposes. While the Fund intends to redeem its
preferred shares or notes to the extent necessary to enable the Fund to
distribute its income as required to maintain its qualification as a RIC under the Code, there can be no assurance that such actions
can be effected in time to meet the Code requirements.
Portfolio
Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain
attractive credit quality ratings for preferred shares or borrowings, the Fund must comply with investment quality, diversification
and other guidelines established by the relevant rating agencies. These guidelines could affect portfolio decisions and
may be more stringent than those imposed by the 1940 Act. In the event that a rating on the Fund’s preferred shares or notes
is lowered or withdrawn by the relevant rating agency, the Fund may also
be required to redeem all or part of its outstanding preferred shares or notes, and the common shares of the Fund will lose the
potential benefits associated with a leveraged capital structure.
Impact
on Common Shares. Assuming that leverage will (1) be equal in amount to approximately 13% of the Fund’s total net assets
(the Fund’s average amount of outstanding financial leverage during the fiscal year ended December 31, 2021), and
(2) charge interest or involve dividend payments at a projected blended annual average leverage dividend or interest rate of 5.00%,
(the average dividend rate on the Fund’s outstanding financial leverage
during the fiscal year ended December 31, 2021) then the total return generated by the Fund’s portfolio (net of estimated
expenses) must exceed approximately 0.64% of the Fund’s total net assets in order to cover such interest or dividend payments
and other expenses specifically related to leverage. Of course, these numbers
are merely estimates, used for illustration. Actual dividend rates, interest or payment rates may vary frequently and may be significantly
higher or lower than the rate estimated above. The following table is furnished in response to requirements of the SEC.
It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised
of net investment income of the Fund, realized gains or losses of the Fund and changes in the value of the securities held in the
Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily
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indicative of the investment
portfolio returns experienced or expected to be experienced by the Fund. These
assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio
returns experienced or expected to be experienced by the Fund. The table further
reflects leverage representing 13% of the Fund’s net assets (the Fund’s average amount of outstanding financial leverage
during the fiscal year ended December 31, 2021), the Fund’s current projected blended annual average leverage dividend
or interest rate of 5.00% (the average dividend rate on the Fund’s
outstanding financial leverage during the fiscal year ended December 31, 2021), a base management fee at an annual rate of 1.00%
of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses attributable
to any outstanding preferred shares of 0.01% of the Fund’s net assets attributable to common shares.
| Assumed Return
on Portfolio (Net of Expenses) | |
| (10 | )% | |
| (5 | )% | |
| 0 | % | |
| 5 | % | |
| 10 | % |
| Corresponding Return
to Common Shareholder | |
| (12.32 | )% | |
| (6.60 | )% | |
| (0.88 | )% | |
| 4.83 | % | |
| 10.55 | % |
Common share total return
is composed of two elements—the common share distributions paid by the Fund (the amount of which is largely determined by
the taxable income of the Fund (including realized gains or losses) after paying interest on any debt and/or dividends on any preferred
shares) and unrealized gains or losses on the value of the securities the
Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy
total return. For example, to assume a total return of 0% the Fund must assume that the income it receives on its investments is
entirely offset by expenses and losses in the value of those investments.
• Market Discount Risk. As described below in “Market
Discount Risk,” common shares of closed-end funds often trade at a discount to their net asset values and the Fund’s
common shares may trade at such a discount. This risk may be greater for investors expecting to sell their common shares of the
Fund soon after completion of a public offering. The common shares of the Fund are designed primarily for long-term investors and
investors in the shares should not view the Fund as a vehicle for trading purposes.
Foreign Securities
Risk
Because many of the world’s
Gold Companies and Natural Resources Companies are located outside of the United
States, the Fund may have a significant portion of its investments in securities that are traded in foreign markets and that are
not subject to the requirements of the U.S. securities laws, markets and accounting requirements. Investments in the securities
of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of
domestic issuers and such securities may be more volatile than those of issuers located in the United States. Foreign companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies. The governments of certain countries may prohibit
or impose substantial restrictions on foreign investments in their capital markets or in certain industries, and there may be greater
levels of price volatility in
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foreign markets. Foreign
securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in
the United States. Dividend and interest income may be subject to withholding and other foreign taxes, which may adversely affect
the net return on such investments. There may be difficulty in obtaining
or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain
countries. In addition, with respect to certain countries, there are risks of
expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets
of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not
be eligible for the special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign
issuers classified as passive foreign investment companies may be subject to additional taxation risk.
There may be less publicly
available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume
than U.S. securities markets and some foreign company securities are less
liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected
by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations.
Foreign markets also have different clearance and settlement procedures that
could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the
Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities
can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased
costs of maintaining the custody of foreign securities.
Investments
in foreign securities will expose the Fund to the direct or indirect consequences of political, social or economic changes
in the countries that issue the securities or in which the issuers are located. Certain countries in which the Fund may invest
have historically experienced, and may continue to experience, high rates of inflation,
high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and
extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty and instability.
The cost of servicing external debt will generally be adversely affected by rising international interest rates because many external
debt obligations bear interest at rates which are adjusted based upon international interest rates.
The Fund also may purchase
ADRs or U.S. dollar-denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or trust companies in respect
of securities of foreign issuers held on deposit for use in the U.S. securities markets. While ADRs may not necessarily be denominated
in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may
also apply to ADRs. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered
depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts, or to pass
through to them any voting rights with respect to the deposited securities.
EMU and Redenomination
Risk
As the European debt crisis
progressed, the possibility of one or more Eurozone countries exiting the European Monetary
Union (“EMU”), or even the collapse of the Euro as a common currency, arose, creating significant volatility at times
in currency and financial markets generally. The effects of the collapse of the Euro, or of the exit of one or more countries
from the EMU, on the U.S. and global economies and securities markets are
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impossible
to predict, and any such events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio.
Any partial or complete dissolution of the EMU could have significant adverse effects on currency and financial markets, and on
the values of the Fund’s portfolio investments. If one or more EMU countries were to stop using the Euro as its primary
currency, the Fund’s investments in such countries may be redenominated into a different or newly adopted currency. As a
result, the value of those investments could decline significantly and
unpredictably. In addition, securities or other investments that are redenominated may be subject to foreign currency risk, liquidity
risk and valuation risk to a greater extent than similar investments currently denominated in Euros. To the extent a currency used
for redenomination purposes is not specified in respect of certain EMU-related investments, or should the Euro cease to
be used entirely, the currency in which such investments are denominated
may be unclear, making such investments particularly difficult to value or dispose of. The Fund may incur additional expenses to
the extent it is required to seek judicial or other clarification of the denomination or value of such securities.
Eurozone Risk
A number of countries in
the EU have experienced, and may continue to experience, severe economic and financial
difficulties. In particular, many EU nations are susceptible to economic risks associated with high levels of debt, notably
due to investments in sovereign debt of countries such as Greece, Italy, Spain, Portugal, and Ireland.
As a result, financial markets in the EU have been subject to increased volatility and declines in asset values and liquidity.
Responses to these financial problems by European governments, central banks, and others, including austerity measures and
reforms, may not work, may result in social unrest, and may limit future growth
and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their
debt could have additional adverse effects on economies, financial markets, and asset valuations around the world. Greece,
Ireland, and Portugal have already received one or more “bailouts”
from other Eurozone member states, and it is unclear how much additional funding they will require or if additional Eurozone member
states will require bailouts in the future. One or more other countries may also abandon the euro and/or withdraw from the
EU, placing its currency and banking system in jeopardy. The impact of
these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching.
Brexit Risk
On
January 31, 2020, the United Kingdom officially withdrew from the EU, commonly referred to as “Brexit”. Following
a transition period, the United Kingdom and the EU signed a Trade and Cooperation Agreement (“UK/ EU Trade Agreement”),
which came into full force on May 1, 2021 and set out the foundation of the economic and legal framework for trade between the
United Kingdom and the EU. As the UK/EU Trade Agreement is a new legal framework, the implementation of the UK/EU Trade Agreement
may result in uncertainty in its application and periods of volatility in both the United Kingdom and wider European markets. The
United Kingdom’s exit from the EU is expected to result in additional trade costs and disruptions in this trading relationship.
Furthermore, there is the possibility that either party may impose tariffs on trade in the future in the event that regulatory
standards between the EU and the UK diverge. The terms of the future relationship may cause continued uncertainty in the global
financial markets, and adversely affect our ability, and the ability of our portfolio companies, to execute our respective
strategies and to receive attractive returns.
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In particular, currency
volatility may mean that our returns and the returns of our portfolio companies will be adversely
affected by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency
hedging. Potential declines in the value of the British Pound and/or the euro against other currencies, along with the potential
downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of any of our portfolio
companies located in the United Kingdom or Europe.
In
addition, certain European countries have experienced negative interest rates on certain fixed-income instruments. A negative
interest rate policy is an unconventional central bank monetary policy tool where nominal target interest rates are set with a
negative value (i.e., below zero percent) intended to help create self-sustaining growth in the local economy. Negative interest
rates may result in heightened market volatility and may detract from the Fund’s performance to the extent the Fund is exposed
to such interest rates. Among other things, these developments have adversely affected the value and exchange rate of the euro
and pound sterling, and may continue to significantly affect the economies
of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such countries,
other countries that depend on EU countries for significant amounts of
trade or investment, or issuers with exposure to debt issued by certain EU countries.
To the extent the Fund has
exposure to European markets or to transactions tied to the value of the euro, these events
could negatively affect the value and liquidity of the Fund’s investments. All of these developments may continue to significantly
affect the economies of all EU countries, which in turn may have a material adverse effect on the Fund’s investments in such
countries, other countries that depend on EU countries for significant amounts of trade or investment, or issuers with exposure
to debt issued by certain EU countries.
Emerging Markets Risk
The Fund may invest without
limit in securities of issuers whose primary operations or principal trading market are located in an “emerging market.”
An “emerging market” country is any country that is considered to be an emerging or developing country by the World
Bank. The considerations noted above in “Foreign Securities Risk” are
generally intensified for investments in emerging market countries. Emerging market countries typically have economic and
political systems that are less fully developed, and can be expected to be less stable than those of more developed countries.
Investing in securities of companies in emerging markets may entail special risks relating
to potential political and economic instability and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment, the lack of hedging instruments and restrictions on repatriation of capital invested. Economies
of such countries can be subject to rapid and unpredictable rates of inflation
or deflation. Emerging securities markets are substantially smaller, less developed, less liquid and more volatile than
the major securities markets. The limited size of emerging securities markets and limited trading volume compared to the volume
of trading in U.S. securities could cause prices to be erratic for reasons apart
from factors that affect the quality of the securities. For example, limited market size may cause prices to be unduly influenced
by traders who control large positions. Adverse publicity and investors’ perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities, especially in these markets. Other risks include
high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries,
as well as a high concentration of investors and financial intermediaries;
overdependence on exports, including gold and natural resources exports, making these economies vulnerable to changes in commodity
prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal
systems; and
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less reliable securities
custodial services and settlement practices. Certain emerging markets may also face other
significant internal or external risks, including the risk of war and civil unrest. For all of these reasons, investments
in emerging markets may be considered speculative.
Frontier Markets Risk
Frontier countries generally
have smaller economies or less developed capital markets than traditional emerging markets,
and, as a result, the risks of investing in emerging market countries are magnified in frontier countries. The economies
of frontier countries are less correlated to global economic cycles than those of their more developed counterparts and their markets
have low trading volumes and the potential for extreme price volatility and
illiquidity. This volatility may be further heightened by the actions of a few major investors. For example, a substantial increase
or decrease in cash flows of mutual funds investing in these markets could significantly affect local stock prices and,
therefore, the NAV of Fund’s common shares. These factors make investing in frontier
countries significantly riskier than in other countries and any one of them could cause the NAV of a fund’s shares
to decline.
Governments
of many frontier countries in which the Fund may invest may exercise substantial influence over many aspects of the private
sector. In some cases, the governments of such frontier countries may own or control certain
companies. Accordingly, government actions could have a significant effect on economic conditions in a frontier country
and on market conditions, prices and yields of securities in the Fund’s portfolio. Moreover, the economies of frontier countries
may be heavily dependent upon international trade and, accordingly, have been and may continue to be, adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions
in the countries with which they trade.
Foreign Currency Risk
The Fund expects to invest in companies
whose securities are denominated or quoted in currencies other than U.S.
dollars or have significant operations or markets outside of the United States. In such instances, the Fund will be exposed to
currency risk, including the risk of fluctuations in the exchange rate between U.S. dollars (in which the Fund’s
shares are denominated) and such foreign currencies, the risk of currency devaluations and the risks of non-exchangeability and
blockage. As non-U.S. securities may be purchased with and payable in currencies of countries other than the U.S. dollar, the
value of these assets measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Fluctuations in currency rates may adversely affect
the ability of the Investment Adviser to acquire such securities at advantageous prices and may also adversely affect the
performance of such assets.
Certain non-U.S. currencies,
primarily in developing countries, have been devalued in the past and might face devaluation
in the future. Currency devaluations generally have a significant and adverse impact on the devaluing country’s economy in
the short and intermediate term and on the financial condition and results of companies’ operations in that country. Currency
devaluations may also be accompanied by significant declines in the values and liquidity of equity and debt securities of affected
governmental and private sector entities generally. To the extent that affected companies have obligations denominated in
currencies other than the devalued currency, those companies may also have
difficulty in meeting those obligations under such circumstances, which in turn
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could have an adverse effect
upon the value of the Fund’s investments in such companies. There can be no assurance that current or future developments
with respect to foreign currency devaluations will not impair the Fund’s
investment flexibility, its ability to achieve its investment objectives or the value of certain of its foreign currency
denominated investments.
Tax Consequences of Foreign Investing
The Fund’s transactions
in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income
or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. This
treatment could increase or decrease the Fund’s ordinary income distributions to you, and
may cause some or all of the Fund’s previously distributed income to be classified as a return of capital. In certain
cases, the Fund may make an election to treat gain or loss attributable to certain investments as capital gain or loss.
Market Discount Risk
The
Fund is a non-diversified, closed-end management investment company. Whether investors will realize gains or losses upon
the sale of securities of the Fund will depend upon the market price of the securities at the time
of sale, which may be less or more than the Fund’s net asset value per share or the liquidation value of any Fund
preferred shares issued. Since the market price of any additional securities the Fund may issue will be affected by such factors
as the Fund’s dividend and distribution levels (which are in turn affected by expenses), dividend
and distribution stability, net asset value, market liquidity, the relative demand for and supply of such securities in
the market, general market and economic conditions and other factors beyond the control of the Fund, we cannot predict whether
any such securities will trade at, below or above net asset value or at, below or
above their public offering price or at, below or above their liquidation value, as applicable. For example, common shares
of closed-end funds often trade at a discount to their net asset values and the Fund’s common shares may trade at such a
discount. This risk may be greater for investors expecting to sell their securities of the Fund soon after the completion of a
public offering for such securities. The risk of a market price discount from net asset value is separate and in addition to the
risk that net asset value itself may decline. The Fund’s securities are designed primarily for long term investors, and investors
in the shares should not view the Fund as a vehicle for trading purposes.
Common Stock Risk
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 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.
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Convertible Securities
Risk
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.
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, mandatory convertible securities
include features which render them more sensitive to price changes of their |
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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 and recent inflationary price movements. 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 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.
Income Risk
The income shareholders
receive from the Fund is expected to be based primarily on income the Fund earns from its investment strategy of writing covered
calls and dividends and other distributions received from its investments.
If the Fund’s covered call strategy fails to generate sufficient income or the distribution rates or yields of the
Fund’s holdings decrease, shareholders’ income from the Fund could decline.
Distribution Risk for Equity Income Portfolio
Securities
In
selecting equity income securities in which the Fund will invest, the Investment Adviser will consider the issuer’s history
of making regular periodic distributions (i.e., dividends) to its equity holders. An issuer’s history of paying dividends
or other distributions, however, does not guarantee that the issuer will continue to pay dividends
or other distributions in the future. The dividend income stream associated with equity income securities generally is not
guaranteed and will be subordinate to payment obligations of the issuer on its debt and
other liabilities. Accordingly, an issuer may forgo paying dividends on its equity securities. In addition, because in most instances
issuers are not obligated to make periodic distributions to the holders of their equity securities, such distributions or
dividends generally may be discontinued at the issuer’s discretion.
Special Risks Related to Preferred Securities
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
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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 Trustees 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 federal income tax or securities laws. As with call provisions, a redemption by the issuer may negatively impact
the return of the security held by the Fund.
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 paying securities will increase
as interest rates fall and decrease as interest rates rise.
The Fund may be subject
to a greater risk of rising interest rates due to the current period of historically low interest
rates and recent inflationary price movements.. The magnitude of these fluctuations in the market price of bonds and other
income or dividend paying securities is generally greater for those securities with longer maturities. Fluctuations in the market
price of the Fund’s investments will not affect interest income derived from instruments
already owned by the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money if short-term
or long-term interest rates rise sharply in a manner not anticipated by Fund management. To the extent the Fund invests in securities
that may be prepaid at the option of the obligor, the sensitivity of such securities to changes in interest rates may increase
(to the detriment of the Fund) when interest rates rise. Moreover, because
rates on certain floating rate securities typically reset only periodically, changes in prevailing interest rates (and particularly
sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that
it invests in floating rate securities. These basic principles
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also apply to U.S. government
securities. A security backed by the “full faith and credit” of the U.S. government is guaranteed only as to its stated
interest rate and face value at maturity, not its current market price. Just like
other income or dividend paying securities, government-guaranteed securities will fluctuate in value when interest rates
change.
The Fund’s use of
leverage will tend to increase the Fund’s interest rate risk. The Fund may invest in variable and
floating rate instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments,
but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise
as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will
not increase in value if interest rates decline. The Fund also may invest in inverse floating rate securities, which may decrease
in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate securities with similar
credit quality. To the extent the Fund holds variable or floating rate instruments, a decrease (or, in the case of inverse floating
rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which
may adversely affect the net asset value of the Fund’s common shares.
Rising
interest rates may also adversely affect the financial performance of Gold Companies and Natural Resources Companies by increasing
their costs of capital. This may reduce their ability to execute acquisitions or expansion projects in a cost-effective
manner. The risks associated with rising interest rates are heightened given the historically low interest rate environment as
of the date of this Annual Report. The Fund may be subject to a greater risk of rising interest rates due to the current period
of historically low interest rates and recent inflationary price movements.
There is a possibility that interest rates may rise, which would likely drive down the prices of income- or dividend-paying
securities.
During
periods of declining interest rates, the issuer of a preferred stock or fixed income security may be able to exercise an
option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower yielding securities.
This is known as call or prepayment risk. Preferred stock and debt securities frequently have call features that allow the
issuer to redeem the securities prior to their stated maturities. An issuer may redeem such
a security if the issuer can refinance it at a lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. During periods of rising interest rates, the average life of certain types of securities may be extended
because of slower than expected principal payments. This may prolong the length of time the security pays a below market interest
rate, increase the security’s duration and reduce the value of the security. This is known as extension risk.
Inflation Risk
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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Deflation Risk
Deflation
risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation
of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness
of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
Illiquid Investments Risk
Although
the Fund expects that its portfolio will primarily be comprised of liquid securities, the Fund may invest up to 15% of its assets
in unregistered securities and otherwise illiquid investments. Unregistered securities are securities that cannot be sold
publicly in the United States without registration under the Securities Act. An illiquid
investment is a security or other investment that cannot be disposed of within seven days in the ordinary course of business
at approximately the value at which the Fund has valued the investment. Unregistered securities often can be resold only in privately
negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act. Considerable
delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s proceeds upon sale
may be reduced by the costs of registration or underwriting discounts.
The difficulties and delays associated with such transactions could result in the Fund’s inability to realize a favorable
price upon disposition of unregistered securities, and at times might make
disposition of such securities impossible. In addition, the Fund may be unable to sell other illiquid investments when it desires
to do so, resulting in the Fund obtaining a lower price or being required to retain the investment. Illiquid investments generally
must be valued at fair value, which is inherently less precise than utilizing market values for it desires to do so, resulting
in the Fund obtaining a lower price or being required to retain the investment. liquid investments, and may lead to differences
between the price at which a security is valued for determining the Fund’s net asset value and the price the Fund
actually receives upon sale.
Investment Companies
The Fund may invest in the
securities of other investment companies, including exchange traded funds, to the extent
permitted by law. To the extent the Fund invests in the common equity of investment companies, the Fund will bear its ratable
share of any such investment company’s expenses, including management fees. The Fund will also remain obligated to pay management
fees to the Investment Adviser with respect to the assets invested in the securities of other investment companies. In these circumstances
holders of the Fund’s common shares will be in effect subject to duplicative investment expenses.
Special Risks of Derivative Transactions
The
Fund may participate in derivative transactions. Such transactions entail certain execution, market, liquidity, hedging
and tax risks. Participation in the options or futures markets, in currency exchange transactions and in other derivatives transactions
involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the
Investment Adviser’s prediction of movements in the direction of the securities, foreign currency, interest rate or other
referenced instruments or markets is inaccurate, the consequences to the
Fund may leave the Fund in a worse position than if it had not used such strategies. Risks inherent in the use of options,
foreign currency, futures contracts and options on futures contracts, securities indices
and foreign currencies include:
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dependence on the Investment Adviser’s
ability to predict correctly movements in the direction of the relevant measure;
imperfect correlation between the price
of the derivative instrument and movements in the prices of the referenced assets;
the fact that skills needed to use these
strategies are different from those needed to select portfolio securities;
the possible absence of a liquid secondary market
for any particular instrument at any time;
the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences;
the possible inability of
the Fund to purchase or sell a security or instrument at a time that otherwise would be favorable for it to do so, or the possible
need for the Fund to sell a security or instrument at a disadvantageous time due to a need for the Fund to maintain “cover”
or to segregate securities in connection with the hedging techniques; and
the creditworthiness of
counterparties.
Options, futures contracts,
swaps contracts, and options thereon and forward contracts on securities and currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism
and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the ability of the
Fund to act upon economic events occurring in the foreign markets during non-business hours in the United States, (iv) the imposition
of different exercise and settlement terms and procedures and margin requirements
than in the United States, and (v) less trading volume. Exchanges on which options, futures, swaps and options on futures
or swaps are traded may impose limits on the positions that the Fund may take in certain circumstances.
Many OTC derivatives are
valued on the basis of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative
and the price which the same dealers would actually be willing to pay for such derivative should the Fund wish or be forced to
sell such position may be materially different. Such differences can result in an overstatement of the Fund’s net asset value
and may materially adversely affect the Fund in situations in which the
Fund is required to sell derivative instruments. Exchange-traded derivatives and OTC derivative transactions submitted for
clearing through a central counterparty have become subject to minimum
initial and variation margin requirements set by the relevant clearinghouse, as well as possible margin requirements mandated by
the SEC or the Commodity Futures Trading Commission (the “CFTC”). These regulators also have broad discretion to impose
margin requirements on non-cleared OTC derivatives. These margin requirements will increase the overall costs for the Fund.
While hedging can reduce
or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative
and the underlying security, and there can be no assurance that the Fund’s hedging transactions will be effective.
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Derivatives may give rise
to a form of leverage and may expose the Fund to greater risk and increase its costs. Recent legislation calls for new regulation
of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation
may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance
of derivatives.
Forward
Foreign Currency Exchange Contracts. There is no independent limit on the Fund’s
ability to invest in foreign currency exchange contracts. The use of forward currency contracts may involve certain risks, including
the failure of the counterparty to perform its obligations under the contract and that the use of forward contracts may not serve
as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices of the
currencies hedged or used for cover.
Counterparty
Risk. The Fund will be subject to credit risk with respect to the counterparties to the
derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under
a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery
under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or
may obtain no recovery in such circumstances.
The counterparty risk for
cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes
substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under
the contract as each party to a trade looks only to the clearing organization
for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing
organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount
of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the
Fund’s clearing broker. In addition, cleared derivative transactions
benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.
Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a
counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms
of the contract (whether or not bona fide) or because of a credit or liquidity
problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with
longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a
single or small group of counterparties.
Non-Investment Grade
Securities
The Fund may invest in securities
rated below investment grade by recognized statistical rating agencies or unrated
securities of comparable quality. The prices of these lower grade securities are more sensitive to negative developments,
such as a decline in the issuer’s revenues or a general economic downturn, than are the
prices of higher grade securities. Securities of below investment grade quality—those securities rated below “Baa”
by Moody’s or below “BBB” by S&P (or unrated securities of comparable quality)—are predominantly
speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater
risk of default. Securities rated below investment grade commonly are referred to as “junk bonds” or “high yield”
securities and generally pay a premium above the yields of U.S. government securities or securities of investment grade issuers
because they are subject to greater risks than these securities. These risks,
which reflect their speculative character, include the following:
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greater volatility;
greater credit risk and risk of default;
potentially greater sensitivity to general economic
or industry conditions;
potential lack of attractive resale opportunities (illiquidity); and
additional expenses to seek recovery from issuers
who default.
In addition, the prices
of these lower grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or
a general economic downturn, than are the prices of higher grade securities. Lower
grade securities tend to be less liquid than investment grade securities. The market value of lower grade securities may
be more volatile than the market value of investment grade securities and generally tends to reflect
the market’s perception of the creditworthiness of the issuer and short term market developments to a greater extent than
investment grade securities, which primarily reflect fluctuations in general levels of interest rates.
Ratings are relative, subjective,
and not absolute standards of quality. Securities ratings are based largely on the issuer’s historical financial condition
and the rating agencies’ analysis at the time of rating. Consequently, the rating assigned to any particular security is
not necessarily a reflection of the issuer’s current financial condition.
The
Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies
involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant
financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial
and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually
high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments
or the prospects for a successful reorganization or similar action. In
any reorganization or liquidation proceeding relating to a portfolio investment, the Fund may lose all or part of its investment
or may be required to accept collateral with a value less than the amount of the Fund’s initial investment.
As a part of its investments
in lower grade securities, the Fund may invest in securities of issuers in default. The Fund will invest in securities of issuers
in default only when the Investment Adviser believes that such issuers will honor their obligations, emerge from bankruptcy protection
and the value of these securities will appreciate. By investing in the 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 these
securities will not otherwise appreciate.
In addition to using statistical
rating agencies and other sources, the Investment Adviser will also perform its own analysis of issuers 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, 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.
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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.
Fixed income securities,
including non-investment grade securities and comparable unrated securities, frequently
have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining interest rates, the Fund may have to replace the security
with a lower yielding security, thus resulting in a decreased return for the Fund.
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.
Dependence on Key Personnel
The Investment Adviser is
dependent upon the expertise of Mr. Mario J. Gabelli. If the Investment Adviser were to lose the services of Mr. Gabelli, it could
be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his
death, resignation, retirement or inability to act on behalf of the Investment Adviser.
The Fund is dependent upon
the expertise of Vincent Hugonnard-Roche as the sole option strategist on the Fund’s portfolio management team. If the Fund
were to lose the services of Mr. Roche, it could be temporarily adversely affected until a suitable replacement could be found.
Long Term Objective; Not a Complete Investment
Program
The Fund is intended for
investors seeking a high level of current income. The Fund is not meant to provide a vehicle for those who wish to exploit short
term swings in the stock market. An investment in shares of the Fund should not be considered a complete investment program. Each
shareholder should take into account the Fund’s investment objectives as well as the shareholder’s other investments
when considering an investment in the Fund.
Management Risk
The Fund is subject to management
risk because it is an actively managed portfolio. The Investment Adviser will
apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee
that these will produce the desired results.
Non-Diversified Status
The
Fund is classified as a “non-diversified” investment company under the 1940 Act, which means the Fund is not
limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. As
a non-diversified investment company, the Fund may invest in the securities of individual issuers to a greater
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degree than a diversified
investment company. As a result, the Fund may be more vulnerable to events affecting a single issuer and therefore, subject to
greater volatility than a fund that is more broadly diversified. Accordingly, an investment in the Fund may present greater risk
to an investor than an investment in a diversified company.
Market Disruption and
Geopolitical Risk
The occurrence of events
similar to those in recent years, such as localized wars, instability, new and ongoing pandemics (such as COVID-19), epidemics
or outbreaks of infectious diseases in certain parts of the world, natural/environmental disasters, terrorist attacks in the United
States and around the world, social and political discord, debt crises sovereign debt downgrades, increasingly strained relations
between the United States and a number of foreign countries, new and continued political unrest in various countries, the exit
or potential exit of one or more countries from the EU or the EMU, continued changes in the balance of political power among and
within the branches of the U.S. government, government shutdowns, among others, may result in market volatility,
may have long term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties in
the United States and worldwide.
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, may in the future result in additional government shutdowns, which could have a material adverse effect
on the Fund’s investments and operations. In addition, the Fund’s ability to raise additional capital in the future
through the sale of securities could be materially affected by a government shutdown. Additional and/or
prolonged U.S. 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.
While the extreme volatility
and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007 and 2008 had, until the
recent coronavirus (COVID-19) outbreak, generally subsided, uncertainty and periods of volatility still remain, and risks to a
robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect
the value, volatility and liquidity of dividend and interest paying securities.
Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund’s
performance or impair the Fund’s ability to achieve its investment objective.
The
occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Fund’s
portfolio. The Fund does not know how long the securities markets may be impacted by similar events and cannot predict the effects
of similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other
market disruptions will not have other material and adverse implications.
As
previously discussed, Brexit has led to volatility in the financial markets of the UK and more broadly across Europe and may also
lead to weakening in consumer, corporate and financial confidence in such markets. The decision made in the British referendum
may also lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in
the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on
the ability of the Fund and its investments to execute its respective strategies and to receive attractive returns. In particular,
currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may
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make
it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the
value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdom’s
sovereign credit rating, may also have an impact on the performance of portfolio
companies or investments located in the UK or Europe. In light of the above, no definitive assessment can currently be made
regarding the impact that Brexit will have on the Fund, its investments or its organization more generally.
In addition, the rules dealing
with the U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS
and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial
changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax
rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their
taxes on a temporary basis subject to “sunset” provisions, the elimination
or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest
and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction
of net operating losses, certain preferential rates of taxation on certain dividends and certain business income derived by non-corporate
taxpayers in comparison to other ordinary income recognized by such taxpayers,
and significant changes to the international tax rules. In addition, the Biden administration has indicated that it intends
to modify key aspects of the Code, including by increasing corporate and individual tax rates. The effect of these and other changes
is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund’s shares and their indirect
effect on the value of the Fund’s assets, the Fund’s shares or market conditions generally.
Regulation and Government
Intervention Risk
The
global financial crisis has led the U.S. government and certain foreign governments to take a number of unprecedented actions designed
to support certain financial institutions and segments of the financial markets that experienced extreme volatility, and in some
cases a lack of liquidity, including through direct purchases of equity and debt securities. Federal, state and other governments
and certain foreign governments and their regulatory agencies or self-regulatory organizations may take legislative and
regulatory actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments,
in ways that are unforeseeable. Such legislation or regulation may change the way in which the Fund is regulated and could limit
or preclude the Fund’s ability to achieve its investment objectives.
The SEC and its staff are
also reportedly engaged in various initiatives and reviews that seek to improve and modernize the regulatory structure governing
investment companies. These efforts appear to be focused on risk identification
and controls in various areas, including embedded leverage through the use of derivatives and other trading practices, cybersecurity,
liquidity, valuation, enhanced regulatory and public reporting requirements and the evaluation of systemic risks. Any new
rules, guidance or regulatory initiatives resulting from these efforts could increase the Fund’s expenses and impact its
returns to shareholders or, in the extreme case, impact or limit its use
of various portfolio management strategies or techniques and adversely impact the Fund.
On October 28, 2020, the
SEC adopted new regulations governing the use of derivatives by registered investment companies
(“Rule 18f-4”). The Fund will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented,
Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into,
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eliminate the asset segregation
framework currently used by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure
to comply with the limits would result in a statutory violation and require
funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive
derivatives risk management program and appoint a derivatives risk manager.
In
the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related
consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case
of transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation
of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation
and/or where consumers are perceived as not having had an opportunity to
exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding common
shares of a closed-end investment company such as the Fund and a large
financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors.
Changes
enacted by the current presidential administration could significantly impact the regulation of financial markets in the
United States. Areas subject to potential change, amendment or repeal include trade and foreign policy, corporate tax rates, energy
and infrastructure policies, the environment and sustainability, criminal and social
justice initiatives, immigration, healthcare and the oversight of certain federal financial regulatory agencies and the
Federal Reserve. Certain of these changes can, and have, been effectuated through executive order. For example, the current administration
has taken steps to address the COVID-19 pandemic, rejoin the Paris climate accord of 2015, cancel the Keystone XL pipeline and
change immigration enforcement priorities. Other potential changes that could be pursued by the current presidential administration
could include an increase in the corporate income tax rate; changes to
regulatory enforcement priorities; and spending on clean energy and infrastructure. It is not possible to predict which,
if any, of these actions will be taken or, if taken, their effect on the
economy, securities markets or the financial stability of the United States. The Fund may be affected by governmental action
in ways that are not foreseeable, and there is a possibility that such actions could have a significant
adverse effect on the Fund and its ability to achieve its investment objective.
Additional risks arising
from the differences in expressed policy preferences among the various constituencies in the branches of the U.S. government have
led in the past, and may lead in the future, to short term or prolonged policy impasses, which could, and have, resulted in shutdowns
of the U.S. federal government. U.S. federal government shutdowns, especially
prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers
to raise capital in the securities markets. Any of these effects could
have an adverse impact on companies in the Fund’s portfolios and consequently on the value of their securities and
the Fund’s net asset values.
LIBOR Risk
The
Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (“LIBOR”) to determine
payment obligations, financing terms, hedging strategies or investment value. The Fund’s investments may pay interest at
floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund may also obtain financing at
floating rates based on LIBOR. Derivative instruments utilized by the Fund may also reference LIBOR.
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In July 2017, the head of
the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. LIBOR can
no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling, euro, Swiss franc and
Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published or are no longer
be representative, and after June 30, 2023, the overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR settings will
cease to be published or will no longer be representative. Various financial
industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities
and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate, which is intended to replace the U.S. dollar
LIBOR). Neither the effect of the LIBOR transition process nor its ultimate success can yet be known.
At this time, no consensus
exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with
the Alternative Reference Rates Committee, a steering committee comprised
of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate
(“SOFR”). Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be
established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all
contracts with LIBOR as the referenced rate and how this will impact the
cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may
fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect
the return on, value of and market for securities linked to such rates.
Neither the effect of the LIBOR transition
process nor its ultimate success can yet be known. The transition process
might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against,
instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where
LIBOR is no longer available by providing for an alternative rate-setting
methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to
replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty
regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Moreover,
these alternative rate-setting provisions may not be designed for regular use in an environment where LIBOR ceases to be published,
and may be an ineffective fallback following the discontinuation of LIBOR.
In
addition, a liquid market for newly-issued instruments that use a reference rate other than LIBOR still may be developing.
There may also be challenges for the Fund to enter into hedging transactions against such newly-issued instruments until a market
for such hedging transactions develops. All of the aforementioned may adversely affect the Fund’s performance or net asset
value.
Legislation Risk
At any time after the date
of this Annual Report, legislation may be enacted that could negatively affect the assets of the Fund. Legislation or regulation
may change the way in which the Fund itself is regulated. The Investment Adviser cannot predict the effects of any new governmental
regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect
the Fund’s ability to achieve its investment objective.
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Reliance on Service
Providers Risk
The Fund must rely upon
the performance of service providers to perform certain functions, which may include functions
that are integral to the Fund’s operations and financial performance. Failure by any service provider to carry out
its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations
to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Fund’s
performance and returns to shareholders. The termination of the Fund’s relationship with any service provider, or any delay
in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could have a material
adverse effect on the Fund’s performance and returns to shareholders.
Cyber Security Risk
The Fund and its service
providers are susceptible to cyber security risks that include, among other things, theft, unauthorized
monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks;
unauthorized access to relevant systems, compromises to networks or devices that the Fund and its service providers use to service
the Fund’s operations; or operational disruption or failures in the physical infrastructure or operating systems that
support the Fund and its service providers. Cyber attacks are becoming increasingly common and more sophisticated, and may be perpetrated
by computer hackers, cyber-terrorists or others engaged in corporate espionage. Cyber attacks against or security breakdowns of
the Fund or its service providers may adversely impact the Fund and its stockholders, potentially resulting in,
among other things, financial losses; the inability of Fund stockholders to transact business and the Fund to process transactions;
inability to calculate the Fund’s NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational
damage, reimbursement or other compensation costs; and/or additional compliance costs. The Fund may incur additional costs
for cyber security risk management and remediation purposes. In addition, cyber security risks may also impact issuers of securities
in which the Fund invests, which may cause the Fund’s investment in such issuers to lose value. There have been a number
of recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well
as cyberattacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure
to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations
and hostile foreign governments. Although service providers typically have policies and procedures, business continuity plans and/or
risk management systems intended to identify and mitigate cyber incidents, there are inherent limitations in such plans and systems
including the possibility that certain risks have not been identified.
Furthermore, the Fund cannot control the cyber security policies, plans and systems put in place by its service providers
or any other third parties whose operations may affect the Fund or its shareholders. There can be no assurance that the Fund or
its service providers will not suffer losses relating to cyber attacks or other information security breaches in the future.
Because technology is consistently
changing, new ways to carry out cyber attacks are always developing. Therefore,
there is a chance that some risks have not been identified or prepared for, or that an attack may not be detected, which
puts limitations on the Fund’s ability to plan for or respond to a cyber attack. In addition to deliberate
cyber attacks, unintentional cyber incidents can occur, such as the inadvertent release of confidential information by the
Fund or its service providers. Like other funds and business enterprises, the Fund and its service providers are subject to the
risk of cyber incidents occurring from time to time.
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Misconduct of Employees and of Service Providers
Risk
Misconduct or misrepresentations
by employees of the Investment Adviser or the Fund’s service providers could
cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions that exceed authorized
limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in
any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses
could also result from actions by the Fund’s service providers, including, without limitation, failing to recognize trades
and misappropriating assets. In addition, employees and service providers
may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including
limiting the Fund’s business prospects or future marketing activities. Despite the Investment Adviser’s due
diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially
undermining the Investment Adviser’s due diligence efforts. As a result, no assurances can be given that the due diligence
performed by the Investment Adviser will identify or prevent any such misconduct.
Portfolio Turnover Risk
The Fund’s annual
portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered
a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in
an increased realization of net short term capital gains by the Fund which, when distributed to common shareholders, will be taxable
as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Legal, Tax and Regulatory Risk
Legal, tax and regulatory
changes could occur that may have material adverse effects on the Fund or its shareholders. For example, the regulatory and tax
environment for derivative instruments in which the Fund may participate is evolving, and such changes in the regulation or taxation
of derivative instruments may have material adverse effects on the value of derivative instruments held by the Fund and the ability
of the Fund to pursue its investment strategies. Similarly, the Biden administration has indicated that it intends to modify key
aspects of the Code, including by increasing corporate and individual tax rates. Changes to the U.S. federal tax laws and interpretations
thereof could adversely affect an investment in the Fund.
We cannot assure you what
percentage of the distributions paid on the Fund’s shares, if any, will consist of tax-advantaged
qualified dividend income or long term capital gains or what the tax rates on various types of income will be in future
years.
To
qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, meet
certain asset diversification tests, derive in each taxable year at least 90% of its gross income from certain prescribed
sources and distribute for each taxable year at least 90% of its “investment company taxable income.” Statutory limitations
on distributions on the common shares if the Fund fails to satisfy the 1940 Act’s
asset coverage requirements could jeopardize the Fund’s ability to meet such distribution requirements. While the
Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary in
order to maintain compliance with such asset coverage requirements, there can be no assurance that such
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actions
can be effected in time to meet the Code requirements. If for any taxable year the Fund does not qualify as a RIC, all of
its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions would be taxable as
ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The resulting corporate
taxes would materially reduce the Fund’s net assets and the amount of cash available for distribution to shareholders. For
a more complete discussion of these and other U.S. federal income tax considerations.
Investment Dilution Risk
The Fund’s investors
do not have preemptive rights to any shares the Fund may issue in the future. The Fund’s Agreement and Declaration of Trust
authorizes it to issue an unlimited number of shares. The Board may make certain amendments to the Agreement and Declaration of
Trust. After an investor purchases shares, the Fund may sell additional
shares or other classes of shares in the future or issue equity interests in private offerings. To the extent the Fund issues additional
equity interests after an investor purchases its shares, such investor’s percentage ownership interest in the Fund
will be diluted.
Anti-Takeover Provisions
The Fund’s Governing Documents
include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund
to an open-end fund.
Investment Restrictions
The Fund has adopted certain
fundamental investment policies designed to limit 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). Should the Fund decide to issue additional series of preferred shares in the future, it may become
subject to rating agency guidelines that are more limiting than its fundamental investment policies in order to obtain and maintain
a desired rating on its preferred shares.
Special Risks to Holders of Preferred Shares
Illiquidity
Prior to Exchange Listing. Prior to an offering,
there will be no public market for any series of fixed rate preferred shares. In the event any series of fixed rate preferred shares
are issued, we expect to apply to list such shares on a national securities exchange, which
will likely be the NYSE or the NYSE American. However, during an initial period, which is not expected to exceed 30 days after
the date of its initial issuance, such shares may not be listed on any securities exchange. During such period, the underwriters
may make a market in such shares, though they will have no obligation to
do so. Consequently, an investment in such shares may be illiquid during such period. Preferred shares not intended to be listed
on an exchange may be illiquid as long as they are outstanding.
Market
Price Fluctuation. Fixed rate preferred shares
may trade at a premium to or discount from liquidation value for various reasons, including changes in interest rates, perceived
credit quality and other factors.
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Special Risks to Holders of Notes
An investment in our notes
is subject to special risks. Our notes are not likely to be listed on an exchange or automated
quotation system. We cannot assure you that any market will exist for our notes or if a market does exist, whether it will provide
holders with liquidity. Broker-dealers that maintain a secondary trading market for the notes are not required to maintain this
market, and the Fund is not required to redeem notes if an attempted secondary market sale fails because of a lack of buyers.
To the extent that our notes trade, they may trade at a price either higher or lower than their principal amount depending on interest
rates, the rating (if any) on such notes and other factors.
Special Risks of Notes to Holders of Preferred
Shares
As provided in the 1940
Act, and subject to compliance with the Fund’s investment limitations, the Fund may issue notes. In the event the Fund were
to issue such securities, the Fund’s obligations to pay dividends or make 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 interest payments due and owing with respect to its outstanding notes. Accordingly, the Fund’s
issuance of notes 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.
Special Risks to Holders of Notes and Preferred
Shares
Common
Share Repurchases. Repurchases of common shares by the Fund may reduce the asset coverage
of the notes and preferred shares, which could adversely affect their liquidity or market prices.
Common
Share Distribution Policy. In the event the Fund does not generate a total return from
dividends and interest received and net realized capital gains in an amount
at least equal to its distributions for a given year, the Fund may return capital as part of its distribution. This would
decrease the asset coverage per share with respect to the Fund’s
notes or preferred shares, which could adversely affect their liquidity or market prices.
For
the fiscal year ended December 31, 2021, the Fund made distributions of $0.36 per common share, a portion of which constituted
a return of capital. The composition of each distribution is estimated based on earnings as of the record date for the distribution.
The actual composition of each distribution may change based on the Fund’s investment activity through the end of the calendar
year.
Credit
Quality Ratings. The Fund may obtain credit
quality ratings for its preferred shares or notes; however, it is not required to do so and may issue preferred shares or notes
without any rating. If rated, the Fund does not impose any minimum rating necessary to issue
such preferred shares or notes. In order to obtain and maintain attractive
credit quality ratings for preferred shares or notes, if desired, the Fund’s portfolio must satisfy over-collateralization
tests established by the relevant rating agencies. These tests are more difficult to satisfy to the extent the Fund’s portfolio
securities are of lower credit quality, longer maturity or not diversified by issuer and industry.
These guidelines could affect
portfolio decisions and may be more stringent than those imposed by the 1940 Act. A rating (if any) by a rating agency does not
eliminate or necessarily mitigate the risks of investing in our preferred
shares or notes, and a rating may not fully or accurately reflect all of the securities’ credit risks. A
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rating
(if any) does not address liquidity or any other market risks of the securities being rated. A rating agency could downgrade the
rating of our notes or preferred shares, which may make such securities less liquid in the secondary market. If a rating
agency downgrades the rating assigned to notes or preferred shares, we may alter our portfolio or redeem the preferred securities
or notes under certain circumstances.
Special Risk to Holders of Subscription
Rights
There is a risk that changes
in market conditions may result in the underlying common or preferred shares purchasable upon exercise of the subscription rights
being less attractive to investors at the conclusion of the subscription period. This may reduce or eliminate the value of the
subscription rights. Investors who receive subscription rights may find
that there is no market to sell rights they do not wish to exercise. If investors exercise only a portion of the rights,
the number of common or preferred shares issued may be reduced, and the common or preferred shares may trade at less favorable
prices than larger offerings for similar securities.
Regulated Investment Company Status Risk
Securities issued by certain
issuers in which the Fund invests which are or become pass-through entities (such as Canadian Royalty Trusts, which may be grantor
trusts for U.S. federal income tax purposes) may not produce “qualified”
income for purposes of determining the Fund’s compliance with the tax rules applicable to regulated investment companies.
To the extent that the Fund holds such securities indirectly through investments in a taxable
subsidiary formed by the Fund, those securities may produce “qualified” income. However, the net return to the
Fund on such investments would be reduced to the extent that the subsidiary is subject to corporate income taxes. The Fund intends
to monitor its investments with the objective of maintaining its continued qualification
as a RIC. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund’s current or accumulated
earnings and profits.
Additional Investment Policies
Canadian
Royalty Trusts. The Fund may invest in equity
interests in Canadian Royalty Trusts. A Canadian Royalty Trust is a royalty trust whose securities
are generally listed on a Canadian securities exchange and which controls
an underlying company whose business is the acquisition, exploitation, production and sale of oil and natural gas. These trusts
generally pay out to unitholders the majority of the cash flow that they receive from the production and sale of underlying
oil and natural gas reserves. The amount of distributions paid on a Canadian Royalty Trust’s units will vary from time to
time based on production levels, commodity prices, royalty rates and certain expenses, deductions and costs, as well as on the
distribution payout ratio policy adopted. As a result of distributing the
bulk of its cash flow to unitholders, the ability of a Canadian Royalty Trust to finance internal growth through exploration is
limited. Therefore, Canadian Royalty Trusts typically grow through acquisition of additional oil and gas properties or producing
companies with proven reserves of oil and gas, funded through the issuance of additional equity or, where the trust is able, additional
debt.
Canadian Royalty Trusts,
like other types of Natural Resources Companies, are exposed to pricing risk, supply and demand risk and depletion and exploration
risk with respect to their underlying commodities, among other risks. An investment in units of Canadian Royalty Trusts involves
some risks which differ from an investment
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in common stock of a corporation,
including increased liability for the obligations of the trust. There are certain regulatory and tax risks associated with an investment
in Canadian Royalty Trusts resulting from reliance on beneficial Canadian
incentive programs and tax laws that may be changed in the future. In addition, securities of certain Canadian Royalty Trusts may
not be qualifying assets for the Fund’s asset diversification requirements.
Master
Limited Partnerships (“MLPs”). MLPs in which the Fund intends to invest will
be limited partnerships (or limited liability companies treated as partnerships for federal income tax purposes), the units of
which will generally be listed and traded on a U.S. securities exchange. MLPs normally derive income and gains from
the exploration, development, mining or production, processing, refining, transportation (including pipeline transporting
gas, oil, or products thereof), or the marketing of mineral or natural resources. MLPs generally have two classes of owners, the
general partner and limited partners. When investing in an MLP, the Fund intends to purchase publicly traded common units issued
to limited partners of the MLP. The general partner typically controls the operations and management of the MLP. MLPs are typically
structured such that common units and general partner interests have first
priority to receive quarterly cash distributions up to an established minimum amount (“minimum quarterly distributions”
or “MQD”). Common and general partner interests also accrue arrearages in distributions to the extent the MQD
is not paid. Once common and general partner interests have been paid,
subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable
cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally
on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the
business in a manner that results in distributions paid per common unit
surpassing specified target levels.
MLPs, like other types of
Natural Resources Companies, are exposed to pricing risk, supply and demand risk and depletion and exploration risk with respect
to their underlying commodities, among other risks. An investment in MLP units involves some risks which differ from an investment
in the common stock of a corporation. Holders of MLP units have limited control and voting rights on matters affecting the partnership.
In addition, there are certain tax risks associated with an investment
in MLP units and conflicts of interest may exist between common unit holders and the general partner, including those arising
from incentive distribution payments.
Risk
Arbitrage. The Fund may invest up to 10% of its assets at the time of investment in securities
pursuant to “risk arbitrage” strategies or in other investment funds managed pursuant to such strategies. Risk arbitrage
investments are made in securities of companies for which a tender or exchange offer has been made or announced
and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced
if, in the judgment of the Investment Adviser, there is a reasonable prospect of
total return significantly greater than the brokerage and other transaction expenses involved. Risk arbitrage strategies
attempt to exploit merger activity to capture the spread between current market values of securities and their values after successful
completion of a merger, restructuring or similar corporate transaction. Transactions associated with risk arbitrage strategies
typically involve the purchases or sales of securities in connection with announced
corporate actions which may include, but are not limited to, mergers, consolidations, acquisitions, transfers of assets, tender
offers, exchange offers, re-capitalizations, liquidations, divestitures, spin-offs and similar transactions. However, a
merger or other restructuring or tender or exchange offer anticipated by the Fund and in which it holds an arbitrage position may
not be completed on the terms contemplated or within the time frame anticipated, resulting in losses to the Fund.
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In general, securities which
are the subject of such an offer or proposal sell at a premium to their historic market price immediately prior to the announcement
of the offer but may trade at a discount or premium to what the stated or appraised value of the security would be if the contemplated
transaction were approved or consummated. Such investments may be advantageous
when the discount significantly overstates the risk of the contingencies involved; significantly undervalues the securities, assets
or cash to be received by shareholders as a result of the contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or proposal of greater value. The evaluation of such contingencies
requires unusually broad knowledge and experience on the part of the Investment Adviser which must appraise not only the
value of the issuer and its component businesses as well as the assets or securities to be received as a result
of the contemplated transaction but also the financial resources and business motivation behind the offer and/or the dynamics
and business climate when the offer or proposal is in process. Since such investments are ordinarily short term in nature, they
will tend to increase the turnover ratio of the Fund, thereby increasing its brokerage and other transaction expenses. Risk arbitrage
strategies may also involve short selling, options hedging and other arbitrage
techniques to capture price differentials.
Derivative Instruments
Options.
The Fund may, from time to time, subject to guidelines of the Board of Trustees and the limitations set forth in the prospectus,
purchase or sell (i.e., write) options on securities, securities indices and foreign currencies which are listed on a national
securities exchange or in the over-the-counter (“OTC”) market, as a means of achieving additional return or of hedging
the value of the Fund’s portfolio.
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 or currency 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
or currency 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.
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 option on the same instrument as the call option
written where the exercise price of the call option held is (i) equal to or less than the exercise price of the call option
written or (ii) greater than the exercise price of the call option 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 option on the same instrument
as the put option written where the exercise price of the put option held is equal to or greater than the exercise price
of the put option written.
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
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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, and any gain resulting from the repurchase of a call option may also be
wholly or partially offset by unrealized depreciation 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 correctly predict 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 that provides a secondary market for an option of the same series or in a private transaction. Although
the Fund will generally purchase or write 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, in
which case 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.
Options
on Securities Indices. The Fund may purchase and sell securities index options. One effect
of such transactions may be to hedge all or part of the Fund’s securities holdings against a general decline in the securities
market or a segment of the securities market. Options on securities indices are similar to options on
stocks except that, rather than the right to take or make delivery of stock at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities
index upon which the option is based is greater than, in the case of a call option, or less than, in the case of a put option,
the exercise price of the option.
The Fund’s successful
use of options on indices depends upon its ability to predict the direction of the market and is subject to various additional
risks. The correlation between movements in the index and the price of the securities being hedged against is imperfect and the
risk from imperfect correlation increases as the composition of the Fund diverges from the composition of the relevant index. Accordingly,
a decrease in the value of the securities being hedged against may not be wholly offset by a gain on the exercise or sale of a
securities index put option held by the Fund.
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Options
on Foreign Currencies. Instead of purchasing or selling currency futures (as described
below), the Fund may attempt to accomplish similar objectives by purchasing put or call options on currencies or by writing put
options or call options on currencies either on exchanges or in OTC markets. A put option gives the Fund the right to sell a currency
at the exercise price until the option expires. A call option gives the Fund the right to purchase a currency at the exercise price
until the option expires. Both types of options serve to insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. The Fund’s use of options on currencies will be subject to the same limitations as
its use of options on securities, described above and in the prospectus. Currency options may be subject to position limits that
may limit the ability of the Fund to fully hedge its positions by purchasing the options.
As in the case of interest
rate futures contracts and options thereon, described below, the Fund may hedge against the risk of a decrease or increase in the
U.S. dollar value of a foreign currency denominated debt security that
the Fund owns or intends to acquire by purchasing or selling options contracts, futures contracts or options thereon with
respect to a foreign currency other than the foreign currency in which such debt security is denominated, where the values of such
different currencies (vis-à-vis the U.S. dollar) historically have a high degree of positive correlation.
Futures
Contracts and Options on Futures. The Fund may
purchase and sell financial futures contracts and options thereon which are traded on a commodities
exchange or board of trade for certain hedging, yield enhancement and risk
management purposes. A financial futures contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future. These futures contracts and related
options may be on debt securities, financial indices, securities indices, U.S. government securities and foreign currencies.
It is anticipated that these
investments, if any, will be made by the Fund primarily for the purpose of hedging against changes in the value of its portfolio
securities and in the value of securities it intends to purchase. Such investments will only be made if they are economically appropriate
to the reduction of risks involved in the management of the Fund. In this regard, the Fund may enter into futures contracts or
options on futures for the purchase or sale of securities indices or other
financial instruments including but not limited to U.S. government securities.
A “sale” of
a futures contract (or a “short” futures position) means the assumption of a contractual obligation to
deliver the securities underlying the contract at a specified price at a specified future time. A “purchase” of a futures
contract (or a “long” futures position) means the assumption of a contractual obligation to acquire the securities
underlying the contract at a specified price at a specified future time. Certain futures contracts, including stock and
bond index futures, are settled on a net cash payment basis rather than by the sale and delivery of the securities underlying the
futures contracts.
No consideration will be
paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund
will be required to deposit with the broker an amount of cash or cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the exchange or board of trade on which the contract is traded and brokers
or members of such board of trade may charge a higher amount). This amount is known as the “initial margin” and is
in the nature of a performance bond or good faith deposit on the contract.
Subsequent payments, known as “variation margin,” to and from the broker will be made daily as the
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price
of the index or security underlying the futures contract fluctuates. At any time prior to the expiration of the futures
contract, the Fund may elect to close the position by taking an opposite position, which will operate to terminate its existing
position in the contract.
An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified
exercise price at any time prior to the expiration of the option.
Upon exercise of an option,
the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of
the accumulated balance in the writer’s futures margin account attributable to that contract, which represents the amount
by which the market price of the futures contract exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option on the futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option purchased is fixed at the point of sale, there are no daily cash payments by the purchaser
to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change
would be reflected in the net assets of the Fund.
Futures
and options on futures entail certain risks, including but not limited to the following: no assurance that futures contracts
or options on futures can be offset at favorable prices, possible reduction of the yield of the Fund due to the use of hedging,
possible reduction in value of both the securities hedged and the hedging instrument,
possible lack of liquidity due to daily limits on price fluctuations, imperfect correlation between the contracts and the
securities being hedged, losses from investing in futures transactions that are potentially unlimited
and the segregation requirements described below.
Interest
Rate Futures Contracts and Options Thereon. The Fund may purchase or sell interest rate
futures contracts to take advantage of or to protect the Fund against fluctuations
in interest rates affecting the value of debt securities which the Fund holds or intends to acquire. For example, if interest rates
are expected to increase, the Fund might sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund’s portfolio securities. Such a sale would have an effect
similar to selling an equivalent value of the Fund’s portfolio securities.
If interest rates increase, the value of the Fund’s portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate
thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish
similar results by selling debt securities with longer maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk management technique allows the Fund to
maintain a defensive position without having to sell its portfolio securities.
Similarly, the Fund may
purchase interest rate futures contracts when it is expected that interest rates may decline. The purchase of futures contracts
for this purpose constitutes a hedge against increases in the price of
debt securities (caused by declining interest rates), which the Fund intends to acquire. Since fluctuations in the value
of appropriately selected futures contracts should approximate that of the debt securities that will be purchased, the Fund can
take advantage of the anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund can make its intended purchase of the debt securities in the cash market and liquidate its futures
position.
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The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the
pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying
debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Fund is not fully invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The purchase of a put option
on a futures contract is similar to the purchase of protective put options on portfolio securities. The Fund will purchase a put
option on a futures contract to hedge the Fund’s portfolio against the risk
of rising interest rates and consequent reduction in the value of portfolio securities.
The writing of a call option
on a futures contract constitutes a partial hedge against declining prices of the securities that are deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Fund’s
portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of
the securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against
any increase in the price of debt securities that the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund’s
losses from options on futures it has written may to some extent be reduced or increased by changes in the value of its portfolio
securities.
Currency
Futures and Options Thereon. Generally, foreign currency futures contracts and options
thereon are similar to the interest rate futures contracts and options thereon discussed previously. By entering into currency
futures and options thereon, the Fund will seek to establish the rate at which it will be entitled to exchange U.S. dollars
for another currency at a future time. By selling currency futures, the Fund will seek to establish the number of dollars it will
receive at delivery for a certain amount of a foreign currency. In this way, whenever the Fund anticipates a decline in the value
of a foreign currency against the U.S. dollar, the Fund can attempt to “lock in” the U.S. dollar value of some or
all of the securities held in its portfolio that are denominated in that currency.
By purchasing currency futures, the Fund can establish the number of dollars it will be required to pay for a specified amount
of a foreign currency in a future month. Thus, if the Fund intends to buy securities in the future and expects the U.S.
dollar to decline against the relevant foreign currency during the period before the purchase is effected, the Fund can attempt
to “lock in” the price in U.S. dollars of the securities it intends to acquire.
The purchase of options
on currency futures will allow the Fund, for the price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell
(in the case of a put option) a futures contract at a specified price at any time during the period before the option expires.
If the Investment Adviser, in purchasing an option, has been correct in its judgment concerning the direction in which the price
of a foreign currency would move against the U.S. dollar, the Fund may exercise the option and thereby take a futures position
to hedge against the risk it had correctly anticipated or close out the option position at a gain that will offset, to some extent,
currency exchange losses otherwise suffered by
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the Fund. If exchange rates
move in a way the Fund did not anticipate, however, the Fund will have incurred the expense
of the option without obtaining the expected benefit; any such movement in exchange rates may also thereby reduce rather than enhance
the Fund’s profits on its underlying securities transactions.
Securities
Index Futures Contracts and Options Thereon. Purchases or sales of securities index futures
contracts are used for hedging purposes to attempt to protect the Fund’s current or intended investments from broad
fluctuations in stock or bond prices. For example, the Fund may sell securities index futures contracts in anticipation
of or during a market decline to attempt to offset the decrease in market value of the Fund’s securities portfolio that might
otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on
the futures position. When the Fund is not fully invested in the securities market
and anticipates a significant market advance, it may purchase securities index futures contracts in order to gain rapid
market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund intends to purchase. As
such purchases are made, the corresponding positions in securities index futures contracts will be closed out. The Fund may write
put and call options on securities index futures contracts for hedging purposes.
Forward
Foreign Currency Exchange Contracts. Subject to guidelines of the Board of Trustees, the
Fund may enter into forward foreign currency exchange contracts to protect the value of its portfolio against uncertainty in the
level of future currency exchange rates between a particular foreign currency and the U.S. dollar or between foreign currencies
in which its securities are or may be denominated. The Fund may enter into such contracts on a spot (i.e., cash) basis at the rate
then prevailing in the currency exchange market or on a forward basis by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date
of the contract at a price set on the date of the contract. Forward currency contracts (i) are traded in a market conducted directly
between currency traders (typically, commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements and (iii) are typically consummated without
payment of any commissions. The Fund, however, may enter into forward currency
contracts requiring deposits or involving the payment of commissions.
The
dealings of the Fund in forward foreign exchange are limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of one forward foreign currency for another currency
with respect to specific receivables or payables of the Fund accruing in connection with the purchase and sale of its portfolio
securities or its payment of distributions. Position hedging is the purchase or sale of one forward
foreign currency for another currency with respect to portfolio security positions denominated or quoted in the foreign
currency to offset the effect of an anticipated substantial appreciation or depreciation, respectively, in the value of the currency
relative to the U.S. dollar. In this situation, the Fund also may, for example, enter into
a forward contract to sell or purchase a different foreign currency for a fixed U.S. dollar amount when it is believed that
the U.S. dollar value of the currency to be sold or bought pursuant to the forward contract will fall or rise, as the case may
be, whenever there is a decline or increase, respectively, in the U.S. dollar value of the currency in which its portfolio securities
are denominated (this practice being referred to as a “cross-hedge”).
In hedging a specific transaction, the
Fund may enter into a forward contract with respect to either the currency in which the transaction is denominated or another
currency deemed appropriate by the Investment Adviser. The
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amount the Fund may invest
in forward currency contracts is limited to the amount of its aggregate investments in foreign currencies.
The use of forward currency
contracts may involve certain risks, including the failure of the counterparty to perform its obligations under the contract, and
such use may not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts
and the prices of the currencies hedged or used for cover. The Fund will only enter into forward currency contracts with parties
that the Investment Adviser believes to be creditworthy institutions.
Under current interpretations
of the SEC and its staff under the 1940 Act, the Fund must segregate with its custodian
liquid assets, or engage in other SEC or staff approved measures, to “cover” open positions in certain types of derivative
instruments. The purpose of these requirements is to prevent the Fund from incurring excessive leverage through such instruments.
In the case of futures and forward contracts, for example, that are not
required as a result of one or more contractual arrangements to settle for cash only in an amount equal to the change in
value of the contract over its term but rather may settle through physical delivery or in the notional amount,
the Fund must segregate liquid assets equal to such contract’s full notional value while it has an open long position, or
is equal to the market value of the contract in the case of an open short position. With respect to contracts that the Fund is
contractually obligated to settle for cash in an amount equal to the change in value of the contract, the Fund needs to segregate
liquid assets only in an amount equal to the Fund’s unpaid mark to market obligation rather than the entire notional
amount. This is because the Fund’s maximum potential obligation at that point in time is its net unpaid mark to market obligation
rather than the full notional amount.
Additional Risks Relating
to Derivative Investments
Counterparty
Risk. The Fund will be subject to credit risk with respect to the counterparties to the
derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under
a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery
under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or
may obtain no recovery in such circumstances.
The counterparty risk for
cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes
substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under
the contract as each party to a trade looks only to the clearing organization
for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing
organization, or its members, will satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount
of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the
Fund’s clearing broker. In addition, cleared derivative transactions
benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.
Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Fund to the risk that a
counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms
of the contract (whether or not bona fide) or because of a credit or liquidity
problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with
longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a
single or small group of counterparties.
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Failure
of Futures Commission Merchants and Clearing Organizations Risk. The Fund may deposit
funds required to margin open positions in the derivative instruments
subject to the Commodity Exchange Act with a clearing broker registered as a “futures commission merchant” (“FCM”).
The Commodity Exchange Act requires an FCM to segregate all funds received from customers with respect to any orders for
the purchase or sale of U.S. domestic futures contracts and cleared swaps from the FCM’s proprietary assets. Similarly,
the Commodity Exchange Act requires each FCM to hold in a separate secure
account all funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts
and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other
property received by a clearing broker from its customers are held by the clearing broker on a commingled basis in an omnibus
account and may be invested by the clearing broker in certain instruments permitted under the applicable regulation. There is
a risk that assets deposited by the Fund with any swaps or futures clearing broker as margin for futures contracts may, in certain
circumstances, be used to satisfy losses of other clients of the Fund’s clearing broker. In addition, the assets of the
Fund may not be fully protected in the event of the clearing broker’s bankruptcy, as the Fund would be limited to recovering
only a pro rata share of all available funds segregated on behalf of the clearing broker’s combined domestic customer accounts.
Similarly,
the Commodity Exchange Act requires a clearing organization approved by the CFTC as a derivatives clearing organization
to segregate all funds and other property received from a clearing member’s clients in connection with domestic futures,
swaps and options contracts from any funds held at the clearing organization to support the clearing member’s proprietary
trading. Nevertheless, with respect to futures contracts and options on futures, a clearing organization may use assets of a non-defaulting
customer held in an omnibus account at the clearing organization to satisfy losses in that account resulting from the default by
another customer on its payment obligations that leads to the clearing member’s default to the clearing organization. As
a result, in the situation of a double default by a customer of the Fund’s clearing member and the clearing member itself
with respect to payment obligations on the customer’s futures or options on futures, there is a risk that the Fund’s
assets in an omnibus account with the clearing organization may be used to satisfy losses from the double default and that the
Fund may not recover the full amount of any such assets.
Dodd-Frank
Act Risk. Title VII of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act) (the “Derivatives Title”) imposed a new regulatory structure on derivatives markets, with
particular emphasis on swaps and security-based swaps (collectively “swaps”), which are subject to oversight by the
CFTC and by the SEC, respectively. The regulatory framework covers a broad range of swap market participants, including banks,
non-banks, credit unions, insurance companies, broker-dealers and investment advisers.
The SEC, other U.S. regulators,
and to a lesser extent the CFTC (the “Regulators”) still are in the process of adopting regulations, making determinations
and providing guidance to implement the Derivatives Title, though certain aspects of the new regulatory structure are substantially
complete. Until the Regulators complete their rulemaking efforts, the full extent to which the Derivatives Title and the rules
adopted thereunder will impact the Funds is unclear. It is possible that the continued development of this new regulatory structure
for swaps may jeopardize certain trades and/or trading strategies that may be employed by the Fund, or at least make them more
costly.
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Current
regulations require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps
and index credit default swaps (together, “Covered Swaps”). Together, these new regulatory
requirements change a fund’s trading of Covered Swaps. With respect to mandatory central clearing, each Fund is now required
to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation
margin to the Fund’s clearing broker in order to enter into and maintain positions
in Covered Swaps. With respect to mandatory exchange trading, the Fund may be required to become a participant of a type of execution
platform called a swap execution facility (“SEF”) or may be required to access the SEF through an intermediary
(such as an executing broker) in order to be able to trade Covered Swaps for the Fund. In either scenario, the Fund may incur additional
legal and compliance costs and transaction fees. Just as with the other regulatory changes imposed as a result of the implementation
of the Derivatives Title, the increased costs and fees associated with trading Covered Swaps may jeopardize certain trades and/or
trading strategies that may be employed by the Fund, or at least make them more costly.
Additionally,
the Regulators have finalized regulations with a phased implementation that may require swap dealers to collect from, and post
to, the Fund variation margin (and initial margin, if the Fund exceeds a specified exposure threshold) for uncleared derivatives
transactions in certain circumstances. U.S. federal banking regulators
have also finalized regulations that would impose upon swap dealers new capital requirements. The CFTC and SEC have adopted capital
requirements for swap dealers, and the SEC has finalized its uncleared margin rules. Such requirements may make certain types of
trades and/or trading strategies more costly or impermissible.
There may be market dislocations
due to uncertainty during the implementation period of any new regulation and the Fund cannot know how the derivatives market will
adjust to new regulations. Until the Regulators complete the rulemaking process for the Derivatives Title, it is unknown the extent
to which such risks may materialize.
Legal
and Regulatory Risk. At any time after the date hereof, legislation or additional regulations
may be enacted that could negatively affect the assets of the Fund. Changing approaches to regulation may have a negative impact
on the securities in which the Fund invests. Legislation or regulation may also change the way in which the Fund itself is regulated.
There can be no assurances that future legislation, regulation or deregulation will not have a material adverse effect on the Fund
or will not impair the ability of the Fund to achieve its investment objectives. In addition, as new rules and regulations resulting
from the passage of the Dodd-Frank Act are implemented and new international
capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Investment
Adviser expects. Whether the Fund achieves its investment objectives may depend on, among other things, whether the Investment
Adviser correctly forecasts market reactions to this and other legislation. In the event the Investment Adviser incorrectly forecasts
market reaction, the Fund may not achieve its investment objectives.
Special
Risk Considerations Relating to Futures and Options Thereon. The Fund’s ability to
establish and close out positions in futures contracts and options thereon will be subject to the development and maintenance of
liquid markets. Although the Fund generally will purchase or sell only those futures contracts and options thereon for which there
appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. In the event no liquid market exists for a particular futures contract
or option thereon in which the Fund maintains a position, it will not be
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possible to effect a closing
transaction in that contract or to do so at a satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the underlying securities until the option expires or is
exercised or, in the case of a purchased option, exercise the option. In the case of a futures contract or an option thereon which
the Fund has written and which the Fund is unable to close, the Fund would
be required to maintain margin deposits on the futures contract or option thereon and to make variation margin payments
until the contract is closed.
Successful use of futures
contracts and options thereon and forward contracts by the Fund is subject to the ability of the Investment Adviser to predict
correctly movements in the direction of interest and foreign currency rates. If the Investment Adviser’s expectations are
not met, the Fund will be in a worse position than if a hedging strategy had not been pursued. For example, if the Fund has hedged
against the possibility of an increase in interest rates that would adversely affect the price of securities in its portfolio and
the price of such securities increases instead, the Fund will lose part
or all of the benefit of the increased value of its securities because it will have offsetting losses in its futures positions.
In addition, in such situations, if the Fund has insufficient cash to meet daily variation margin requirements, it may have to
sell securities to meet the requirements. These sales may be, but will not necessarily be, at increased prices that reflect the
rising market. The Fund may have to sell securities at a time when it is disadvantageous to do so.
Additional
Risks of Foreign Options, Futures Contracts, Options on Futures Contracts and Forward Contracts. Options,
futures contracts and options thereon and forward contracts on securities and currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the U.S., may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by: (i) other
complex foreign political, legal and economic factors; (ii) lesser availability than in the U.S. of data on which to make trading
decisions; (iii) delays in the Fund’s ability to act upon economic events occurring in the foreign markets during non-business
hours in the U.S.; (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in
the U.S.; and (v) lesser trading volume.
Exchanges on which options,
options on futures and forward contracts are traded may impose limits on the positions that the Fund may take in certain circumstances.
Swaps.
The Fund may enter into total rate of return, credit default or other types of swaps and related derivatives
for the purpose of hedging and risk management. These transactions generally provide for the transfer from one counterparty
to another of certain risks inherent in the ownership of a financial asset such as a common stock or debt instrument. Such
risks include, among other things, the risk of default and insolvency of the obligor of such asset, the risk that the credit of
the obligor or the underlying collateral will decline or the risk that the common stock of the underlying issuer will decline in
value. The transfer of risk pursuant to a derivative of this type may be complete or partial, and may be for the life of the related
asset or for a shorter period. These derivatives may be used as a risk
management tool for a pool of financial assets, providing the Fund with the opportunity to gain or reduce exposure to one or more
reference securities or other financial assets (each, a “Reference Asset”) without actually owning or selling
such assets in order, for example, to increase or reduce a concentration risk or to diversify a portfolio. Conversely, these derivatives
may be used by the Fund to reduce exposure to an owned asset without selling it.
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Because the Fund would not
own the Reference Assets, the Fund may not have any voting rights with respect to the Reference Assets, and in such cases all decisions
related to the obligors or issuers of the Reference Assets, including whether to exercise certain remedies, will be controlled
by the swap counterparties.
Total rate of return swaps
and similar derivatives are subject to many risks, including the possibility that the market will move in a manner or direction
that would have resulted in gain for the Fund had the swap or other derivative not been utilized (in which case it would have been
better had the Fund not engaged in the interest rate hedging transactions), the risk of imperfect correlation between the risk
sought to be hedged and the derivative transactions utilized, the possible
inability of the counterparty to fulfill its obligations under the swap and potential illiquidity of the hedging instrument utilized,
which may make it difficult for the Fund to close out or unwind one or more hedging transactions.
Total rate of return swaps
and related derivatives present certain legal, tax and market uncertainties that present risks in entering into such arrangements.
There is currently little or no case law or litigation characterizing total rate of return swaps or related derivatives, interpreting
their provisions, or characterizing their tax treatment.
If the Fund writes (sells)
a credit default swap or credit default index swap, then the Fund will, during the term of
the swap agreement, designate on its books and records in connection with such transaction liquid assets or cash with a value at
least equal to the full notional amount of the contract.
Regulation of Certain Options,
Currency Transactions and Other Derivative Transactions as Swaps or Security-Based Swaps. The Dodd-Frank Act includes provisions
that comprehensively regulate the OTC (i.e., not exchange-traded) derivatives
markets for the first time. This regulation requires that certain of the options, currency transactions and other derivative
transactions entered into by the Fund be regulated as swaps by the CFTC or as security-based swaps by the SEC.
The
Dodd-Frank Act generally requires swaps and security-based swaps to be submitted for clearing to regulated clearing
organizations (the so-called “clearing mandate”), unless an exemption from clearing applies. Swaps and
security-based swaps that are submitted for clearing will be subject to minimum initial and variation margin
requirements set by the relevant clearing organization, as well as possible CFCT- or SEC-mandated margin requirements.
Accordingly, dealers of swaps and security-based swaps (usually large commercial banks or other financial institutions) as
well as other market participants will be required to post margin to the clearing organizations through which their
swaps and/or security-based swaps are cleared. The CFTC, SEC and other U.S.
regulators also are required to impose margin requirements on uncleared swap and uncleared security- based swap
transactions. These changes with respect to clearing and margin likely will increase a dealer’s costs, and those
increased costs are expected to be passed through, at least partially, to market participants, including any Fund that uses
swaps or security-based swaps.
The
Dodd-Frank Act also requires many swaps and security-based swaps that are currently executed on a bilateral basis in the
OTC market to be executed through a regulated securities, futures, or swap exchange or execution
facility if those transactions are subject to the clearing mandate. Once such requirements become effective, it may be more difficult
and costly for the Funds to continue to enter into customized swap or security-based swap transactions on a bilateral basis.
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In
addition, dealers and major participants in the OTC market are required to register with the CFTC and/or the SEC. Registered dealers
and major participants are subject to minimum capital and margin requirements, business conduct standards, disclosure requirements,
reporting and recordkeeping requirements, position limits, limitations on conflicts of interest, and other regulatory burdens.
These requirements may increase the overall costs for dealers and major participants in the OTC market, and such increased
costs are likely to be passed through, at least partially, to market participants, including any Fund that utilizes these instruments.
The cumulative effects of
the Dodd-Frank Act on swap and security-based swap transactions and on participants in the derivatives market remain uncertain.
Limitations
on the Purchase and Sale of Futures Contracts and Options on Futures Contracts. Subject
to the guidelines of the Board, the Fund may engage in “commodity interest” transactions (generally, transactions
in futures, certain options, certain currency transactions and certain
types of swaps) only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance
with the rules and regulations of the CFTC. CFTC Rule 4.5, upon which the Fund relies to avoid having its adviser register with
the CFTC as a “commodity pool operator,” imposes certain commodity interest trading restrictions on the Fund. These
trading restrictions permit the Fund to engage in commodity interest transactions
that include (i) “bona fide hedging” transactions, as that term is defined and interpreted by the CFTC and its staff,
without regard to the percentage of the Fund’s assets committed to margin and option premiums and (ii) non-bona fide hedging
transactions, provided that the Fund not enter into such non-bona fide hedging transactions if, immediately thereafter, either
(a) the sum of the amount of initial margin deposits on the Fund’s existing futures or swaps positions and option or swaption
premiums would exceed 5% of the market value of the Fund’s liquidating value, after taking into account unrealized profits
and unrealized losses on any such transactions, or (b) the aggregate net notional value of the Fund’s commodity interest
transactions would not exceed 100% of the market value of the Fund’s liquidating value, after taking into account unrealized
profits and unrealized losses on any such transactions. In addition to meeting one of the foregoing trading limitations, the Fund
may not market itself as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets. If the
Investment Adviser were required to register as a commodity pool operator with respect to the Fund, compliance with additional
registration and regulatory requirements would increase Fund expenses. Other potentially adverse regulatory initiatives could
also develop.
Commodities-Linked
Equity Derivative Instrument Risk. The Fund may invest in structured notes that are linked
to one or more underlying commodities. Such structured notes provide exposure to the investment returns of physical commodities
without actually investing directly in physical commodities. Such structured notes in which the Fund expects to invest are hybrid
instruments that have substantial risks, including risk of loss of all or a significant
portion of their principal value. Because the payouts on these notes are linked to the price change of the underlying commodities,
these investments are subject to market risks that relate to the movement of prices in the commodities markets. They may also be
subject to additional special risks that do not affect traditional equity
and debt securities that may be greater than or in addition to the risks of derivatives in general, including risk of loss of interest,
risk of loss of principal, lack of liquidity and risk of greater volatility.
Risk
of Loss of Interest. If payment of interest on a structured note or other hybrid instrument
is linked to the value of a particular commodity, futures contract, index or other economic variable, the Fund might not receive
all (or a portion) of the interest due on its investment if there is a loss in value of the underlying instrument.
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Risk
of Loss of Principal. To the extent that the amount of the principal to be repaid upon
maturity is linked to the value of a particular commodity, futures contract, index or other economic variable, the Fund might not
receive all or a portion of the principal at maturity of the investment. At any time, the risk of loss associated with a particular
instrument in the Fund’s portfolio may be significantly higher than 50% of the value of the investment.
Lack
of Secondary Market. A liquid secondary market
may not exist for the specially created hybrid instruments the Fund buys, which may make it difficult for the Fund to sell them
at an acceptable price or accurately value them.
Risk
of Greater Volatility. The value of the commodities-linked
equity derivative investments the Fund buys may fluctuate significantly because the values of the underlying investments to which
they are linked are themselves extremely volatile. Additionally, economic leverage will increase
the volatility of these hybrid instruments, as they may increase or decrease
in value more quickly than the underlying commodity index, futures contract or other economic variable.
The Investment Adviser is Not Registered
as a Commodity Pool Operator. The Investment Adviser has claimed an exclusion from the definition of the term “commodity
pool operator” under the Commodity Exchange Act.
Risks
of Currency Transactions. Currency transactions are also subject to risks different from
those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and manipulation, or exchange restrictions imposed
by governments. These forms of governmental action can result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full
currency exposure and incurring transaction costs.
Repurchase
Agreements. The Fund may enter into repurchase agreements. A repurchase agreement is an
instrument under which the purchaser (i.e., the Fund) acquires a debt security
and the seller agrees, at the time of the sale, to repurchase the obligation at a mutually agreed upon time and price, thereby
determining the yield during the purchaser’s holding period. This
results in a fixed rate of return insulated from market fluctuations during such period. The underlying securities are ordinarily
U.S. Treasury or other government obligations or high quality money market
instruments. The Fund will require that the value of such underlying securities, together with any other collateral held by the
Fund, always equals or exceeds the amount of the repurchase obligations of the counter party. The Fund’s risk is primarily
that, if the seller defaults, the proceeds from the disposition of the underlying securities and other collateral for the seller’s
obligation are less than the repurchase price. If the seller becomes insolvent, the Fund might be delayed in or prevented from
selling the collateral. In the event of a default or bankruptcy by a seller,
the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase price, the Fund will experience a loss.
The Investment Adviser,
acting under the supervision of the Board of Trustees of the Fund, 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
subject to repurchase agreements to
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ensure that the value is
maintained at the required level. The Fund will not enter into repurchase agreements with the Investment Adviser or any of its
affiliates.
If
the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the
United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances,
there may be a restriction on the Fund’s ability to sell the collateral and the Fund would suffer a loss.
Loans
of Portfolio Securities. Consistent with applicable
regulatory requirements and the Fund’s investment restrictions, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions, provided that such loans are callable at any time
by the Fund (subject to notice provisions described below), and are at
all times collateralized by cash or cash equivalents which are maintained at all times in an amount equal to at least 100%
of the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive
the income on the loaned securities while at the same time earning interest on
the cash amounts deposited as collateral, which will be invested in short term highly liquid obligations. The Fund will
not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state
in which its shares are qualified for sale. The Fund’s loans of portfolio securities will be collateralized in accordance
with applicable regulatory requirements, which means that “cash equivalents” accepted as collateral will be
limited to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or irrevocable letters of
credit issued by a bank (other than the Fund’s bank lending agent, if any, or a borrower of the
Fund’s portfolio securities or any affiliate of such bank or borrower) which qualifies as a custodian bank for an
investment company under the 1940 Act, and no loan will cause the value of all loaned securities to exceed 20% of the value of
the Fund’s total assets. The Fund’s ability to lend portfolio securities may be limited by rating agency guidelines
(if any).
A loan may generally be
terminated by the borrower on one business days’ notice, or by the Fund at any time thereby
requiring the borrower to redeliver the borrowed securities within the normal and customary settlement time for securities
transactions. If the borrower fails to deliver the loaned securities within the normal and customary settlement time for securities
transactions, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement
cost over the value of the collateral pledged by the borrower. As with any extensions of credit, there are risks of delay in recovery
and in some cases even loss of rights in the collateral should the borrower
of the securities violate the terms of the loan or fail financially. However, these loans of portfolio securities will only be
made to firms deemed by the Investment Adviser to be creditworthy and when the income which can be earned from such loans justifies
the attendant risks. The Board will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination
of the loan, the borrower is required to return the securities to the Fund.
Any gain or loss in the market price during the loan period would inure to the Fund.
The risks associated with
loans of portfolio securities are substantially similar to those associated with repurchase agreements. Thus, if the counterparty
to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the
Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund’s ability to sell the
collateral and the Fund would suffer a loss. Moreover, because the Fund will reinvest any cash collateral it receives, as described
above, the Fund is subject to the risk that the value of the investments it makes will decline and result in losses to the Fund.
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These losses, in extreme
circumstances such as the 2007-2009 financial crisis, could be substantial and have a significant adverse impact on the Fund and
its shareholders.
When voting or consent rights
which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be
delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect
on the Fund’s investment in such loaned securities. The Fund will
pay reasonable finder’s, administrative and custodial fees in connection with a loan of its securities, and may also
pay fees to one or more securities lending agents and/or pay other fees or rebates to borrowers.
When Issued, Delayed Delivery
Securities and Forward Commitments. The Fund may enter into forward commitments for the purchase or sale of securities, including
on a “when issued” or “delayed delivery” basis, in excess of customary settlement periods for the type
of security involved. In some cases, a forward commitment may be conditioned
upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt
restructuring (i.e., a when, as and if issued security). When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future,
generally a month or more after the date of the commitment. While it will only enter into a forward
commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date
if it is deemed advisable by the Investment Adviser.
Securities purchased under a forward
commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date.
INVESTMENT RESTRICTIONS
The Fund operates under
the following restrictions that constitute fundamental policies under the 1940 Act and that,
except as otherwise noted, cannot be changed without the affirmative vote of the holders of a majority of the outstanding
voting securities of the Fund voting together as a single class (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares). In addition, pursuant to the Statements
of Preferences, the affirmative vote of the holders of a majority of the outstanding preferred shares of the Fund voting
as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the preferred shares, as a single
class, represented at a meeting at which more than 50% of the Fund’s outstanding preferred shares are represented or (ii)
more than 50% of the outstanding preferred shares), is also required to
change a fundamental policy. Except as otherwise noted, all percentage limitations set forth below apply immediately after a purchase
or initial investment and any subsequent change in any applicable percentage resulting from market fluctuations does not require
any action.
other than with respect
to its concentrations in Gold Companies and Natural Resources Companies, invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of issuers in any particular industry. This restriction does not apply
to investments in U.S. government securities and investments in the gold
industry and the natural resources industries;
purchase commodities or commodity contracts
if such purchase would result in regulation of the Fund as a commodity pool operator;
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purchase or sell real estate, provided
the Fund may invest in securities and other instruments secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein;
make loans of money or other property, except that (i) the
Fund may acquire debt obligations of any type (including through extensions of credit), enter into repurchase agreements and lend
portfolio assets and (ii) the Fund may, up to 20% of the Fund’s total assets, lend money or other property to other investment
companies advised by the Investment Adviser pursuant to a common lending program to the extent permitted
by applicable law;
borrow money, except to the extent permitted
by applicable law;
issue senior securities, except to the extent
permitted by applicable law; or
underwrite securities of
other issuers, except insofar as the Fund may be deemed an underwriter under applicable
law in selling portfolio securities; provided, however, this restriction shall not apply to securities of any investment
company organized by the Fund that are to be distributed pro rata as a dividend to its shareholders.
In addition, the Fund’s
investment objectives and its policies of investing at least 25% of its assets in normal circumstances in Gold Companies and in
Natural Resource Companies are fundamental policies. Unless specifically
stated as such, no policy of the Fund is fundamental and each policy may be changed by the Board of Trustees without shareholder
approval. The percentage and ratings limitations stated herein and in the
Prospectus 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.
The Fund interprets investment restriction
(1), above, to mean that the Fund will not concentrate its investments in a particular industry, as that term is used in the 1940
Act, except that the Fund will concentrate its investments in (a) companies
principally engaged in the natural resources industries (defined in the Prospectus as “Natural Resources Companies”)
and (b) companies principally engaged in the gold industry (defined in the Prospectus as “Gold Companies”).
The SEC staff currently takes the position that investment of 25% or more of a fund’s total assets in one or more issuers
conducting their principal activities in the same industry or group of industries constitutes
concentration; this position forms the basis for the Fund’s fundamental policies of investment of at least 25% of
its assets in normal circumstances in Natural Resources Companies and in Gold Companies. The Fund
also interprets investment restriction (1) to permit investment without limit in the following: securities of the U.S. government
and its agencies or instrumentalities; tax-exempt securities of state, territory, possession or municipal governments and their
authorities, agencies, instrumentalities or political subdivisions; and repurchase agreements collateralized by any such
obligations.
With respect to investment
restriction (5), the 1940 Act permits the Fund to borrow money in amounts of up to one-third of the Fund’s total assets from
banks for any purpose, and to borrow up to 5% of the Fund’s total assets from banks or other lenders for temporary purposes.
The Fund’s total assets include the amounts being borrowed. To limit
the risks attendant to borrowing, the 1940 Act requires the Fund to maintain at all times an “asset coverage”
of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the value of the Fund’s total assets
(including amounts borrowed), minus liabilities other than borrowings, bears to the aggregate amount of all borrowings. Borrowing
money to increase portfolio holdings is known as “leveraging.”
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Certain trading practices
and investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject
to the 1940 Act restrictions. In accordance with SEC staff guidance and interpretations, when the Fund engages in certain such
transactions, other than reverse repurchase agreements, the Fund, instead of maintaining asset coverage of at least 300%, may segregate
or earmark liquid assets, or enter into an offsetting position, in an amount
at least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements
of the SEC). From the outset of the transaction, in accordance with 1940 Act Release 10666, “Securities Trading Practices
of Registered Investment Companies” (April 18, 1979), for reverse repurchase agreements, the Fund will segregate the full
amount of the Fund’s actual or potential cash payment obligations that the Fund will owe at settlement. The investment restriction
in (5) above will be interpreted to permit the Fund to (a) engage in trading practices and investments that may be considered to
be borrowing or to involve leverage to the extent permitted by the 1940
Act, (b) segregate or earmark liquid assets or enter into offsetting positions in accordance with SEC staff guidance and
interpretations, (c) engage in securities lending in accordance with SEC staff guidance and interpretations and (d) settle securities
transactions within the ordinary settlement cycle for such transactions. Practices and investments that may involve leverage but
are not considered to be borrowings are not subject to the policy.
With respect to investment
restriction (6), under the 1940 Act, the Fund may issue senior securities (which may be stock, such as preferred shares, and/or
securities representing debt, such as notes) 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 (measured by liquidation value) and debt outstanding, which
is referred to as the “asset coverage” required by the 1940 Act. The 1940 Act also generally restricts the Fund
from declaring cash distributions on, or repurchasing, common or preferred shares unless outstanding debt securities have an asset
coverage of 300% (200% in the case of declaring distributions on preferred shares), or from declaring cash distributions on, or
repurchasing, common shares unless preferred shares have an asset coverage of 200% (in each case, after giving effect to such distribution
or repurchase).
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MANAGEMENT
OF THE FUND