NOTES TO FINANCIAL STATEMENTS (Unaudited)
March
31, 2013
1. Organization
The Nuveen Diversified Commodity Fund (the “Fund”) was organized as a Delaware statutory trust on December 7,
2005, to operate as a commodity pool. Nuveen Commodities Asset Management, LLC, the Fund’s manager (“NCAM” or the “Manager”), a wholly-owned subsidiary of Nuveen Investments, Inc. (“Nuveen Investments”), is a
Delaware limited liability company registered as a commodity pool operator with the Commodity Futures Trading Commission (the “CFTC”) and is a member of the National Futures Association (the “NFA”). The Fund commenced operations
on September 27, 2010, with its initial public offering. The Fund operates pursuant to a Second Amended and Restated Trust Agreement dated as of March 30, 2012 (the “Trust Agreement”). The Fund’s shares represent units of fractional
undivided beneficial interest in, and ownership of, the Fund. The Fund’s shares trade on the NYSE MKT under the ticker symbol “CFD.” The Fund is not a mutual fund, a closed-end fund, or any other type of “investment company”
within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
The Manager
has selected its affiliate, Gresham Investment Management LLC (“Gresham LLC”), acting through its Near Term Active division (in that capacity, “Gresham” or the “Commodity Sub-advisor”), to manage the Fund’s
commodity investment strategy and its options strategy. Gresham LLC is a Delaware limited liability company, the successor to Gresham Investment Management, Inc., formed in July 1992. Gresham LLC is registered with the CFTC as a commodity trading
advisor and commodity pool operator, is a member of the NFA and is registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser.
The Manager has selected its affiliate, Nuveen Asset Management, LLC (“Nuveen Asset Management” or the “Collateral Sub-advisor”), to manage the Fund’s collateral invested in cash
equivalents, U.S. government securities and other short-term, high grade debt securities. Nuveen Asset Management is a Delaware limited liability company and is registered with the SEC as an investment adviser.
The Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market
benchmarks. Risk-adjusted total return refers to the income and capital appreciation generated by a portfolio (the combination of which equals its total return) per unit of risk taken, with such risk measured by the volatility of the
portfolio’s total returns over a specific period of time. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures, forward and options contracts to obtain broad exposure to all principal
groups in the global commodity markets. The Fund’s investment strategy has three elements:
|
|
•
|
|
An actively managed portfolio of commodity futures and forward contracts utilizing Gresham’s proprietary Tangible Asset Program
®
, or TAP
®
, a long-only rules-based commodity investment strategy designed to maintain consistent, fully collateralized exposure to commodities as an asset class;
|
|
|
•
|
|
An integrated program of writing commodity call options designed to enhance the risk-adjusted total return of the Fund’s commodity investments
(TAP
®
and the options strategy are collectively referred to as TAP PLUS
SM
); and
|
|
|
•
|
|
A collateral portfolio of cash equivalents, U.S. government securities and other short-term, high grade debt securities.
|
13
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial
statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The presentation of “Unrealized appreciation and depreciation on futures contracts” on the Statements of Financial
Condition has been reclassified to conform to the March 31, 2013 presentation.
The accompanying unaudited financial statements
were prepared in accordance with U.S. GAAP for interim financial information and with the instructions for Form 10-Q and the rules and regulations of the SEC. In the opinion of management, all material adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the
notes thereto should be read in conjunction with the Fund’s financial statements included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2012.
Basis of Accounting
The accompanying financial statements have been prepared in conformity with U.S. GAAP. The preparation of financial statements in
conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Futures Contracts
The Fund invests in commodity futures contracts. Upon execution of a futures contract, the Fund is obligated to deposit cash or eligible securities, also known as “initial margin,” into an
account at its clearing broker. Generally investments in futures contracts also obligate the investor and the clearing broker to settle monies on a daily basis representing changes in the prior days “mark-to-market” of the open contracts.
If the investor has unrealized appreciation the clearing broker would credit the investors account with an amount equal to appreciation and conversely if the investor has unrealized depreciation the clearing broker would debit the investors account
with an amount equal to depreciation. These daily cash settlements are also known as “variation margin.” In lieu of posting variation margin daily, the Fund has deposited cash with the clearing broker, generally representing approximately
twice the required initial margin to cover the initial margin and the daily changes in the market value of its futures investments. Cash held by the clearing broker to cover both margin requirements on open futures contracts is recognized as
“Deposits with brokers” on the Statements of Financial Condition.
During the period the futures contract is open,
changes in the value of the contract are recognized as an unrealized gain or loss by “marking-to-market” on a daily basis to reflect the changes in market value of the contract, which are recognized as a component of “Unrealized
appreciation or depreciation on futures contracts” on the Statements of Financial Condition and “Change in net unrealized appreciation (depreciation) of futures contracts” on the Statements of Operations. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the value of the contract on the closing date and the value of the contract when originally entered into, which is recognized as a component of “Net realized gain (loss)
from futures contracts” on the Statements of Operations.
The Fund expects to invest only in long futures contracts. Some
short futures positions may arise in futures contracts traded on the London Metal Exchange (“LME”) solely as the result of closing existing long LME
14
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
futures positions. For every short LME futures contract outstanding, the Fund had previously entered into a long futures contract. The LME Clearing House is the counterparty for both the long and
short positions.
Risks of investments in commodity futures contracts include possible adverse movement in the price of the
commodities underlying the contracts, the possibility that there may not be a liquid secondary market for the contracts and the possibility that a change in the value of the contract may not correlate with a change in the value of the underlying
commodities.
The average number of futures contracts outstanding during the three months ended March 31, 2013 and the
fiscal year ended December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Average number of futures contracts outstanding*
|
|
|
3,264
|
|
|
|
3,518
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The average number of contracts is calculated based on the absolute aggregate value of outstanding number of contracts at the beginning of the fiscal year and at the
end of each quarter within the current fiscal year.
|
Refer to Note 3 – Derivative Instruments and Hedging Activities within these Notes to Financial Statements for further details on futures contract activity.
Options Contracts
The Fund may write (sell) and purchase options on commodity futures and forward contracts to enhance the Fund’s risk-adjusted total
return. When the Fund writes an option, an amount equal to the premium received is recognized as a component of “Call options written, at value” on the Statements of Financial Condition and is subsequently adjusted to reflect the current
value of the written option until the option expires or the Fund enters into a closing purchase transaction. The changes in value of the options written during the reporting period are recognized as a component of “Change in net unrealized
appreciation (depreciation) of call options written” on the Statements of Operations. When an option is exercised or expires, or the Fund enters into a closing purchase transaction, the difference between the net premium received and any amount
paid at expiration or on executing a closing purchase transaction is recognized as a component of “Net realized gain (loss) from call options written” on the Statements of Operations. The Fund, as writer of an option, has no control over
whether the underlying instrument may be sold (called) and as a result bears the risk of an unfavorable change in the market value of the instrument underlying the written option. There is also the risk the Fund may not be able to enter into a
closing transaction because of an illiquid market. During the three months ended March 31, 2013 and the fiscal year ended December 31, 2012, the Fund wrote call options on futures contracts.
The Fund did not purchase options on futures or forward contracts during the three months ended March 31, 2013 and the fiscal year ended
December 31, 2012. The purchase of options involves the risk of loss of all or part of the cash paid for the options (the premium). The market risk associated with purchasing options is limited to the premium paid. The counterparty credit risk of
purchasing options, however, needs to take into account the current value of the option, as this is the performance expected from the counterparty.
15
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Transactions in call options written were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
|
|
Number of
Contracts
|
|
|
Premiums
Received
|
|
|
Number of
Contracts
|
|
|
Premiums
Received
|
|
|
Outstanding, beginning of period
|
|
|
1,537
|
|
|
$
|
974,047
|
|
|
|
1,657
|
|
|
$
|
1,428,047
|
|
|
Options written
|
|
|
2,632
|
|
|
|
1,195,148
|
|
|
|
12,756
|
|
|
|
8,160,238
|
|
|
Options terminated in closing purchase transactions
|
|
|
(1,685
|
)
|
|
|
(902,222
|
)
|
|
|
(6,408
|
)
|
|
|
(3,529,781
|
)
|
|
Options expired
|
|
|
(637
|
)
|
|
|
(356,250
|
)
|
|
|
(4,686
|
)
|
|
|
(3,614,858
|
)
|
|
Options exercised
|
|
|
(397
|
)
|
|
|
(244,488
|
)
|
|
|
(1,782
|
)
|
|
|
(1,469,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of the period
|
|
|
1,450
|
|
|
$
|
666,235
|
|
|
|
1,537
|
|
|
$
|
974,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average number of call options written outstanding during the three months ended March 31, 2013 and the fiscal
year ended December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Average number of call options written outstanding*
|
|
|
1,494
|
|
|
|
1,627
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The average number of contracts is calculated based on the outstanding number of contracts as of the beginning of the fiscal year and at the end of each quarter within
the current fiscal year.
|
Refer to Note 3 – Derivative Instruments and Hedging Activities within these Notes
to Financial Statements for further details on options activity.
Forward Contracts
The Fund may enter into forward contracts but did not make any such investments during the three months ended March 31, 2013 and the
fiscal year ended December 31, 2012. A forward contract is an agreement between two parties to purchase or sell a specified quantity of a commodity at or before a specified date in the future at a specified price. Forward contracts are typically
traded in the over-the-counter (“OTC”) markets and all details of the contract are negotiated between the counterparties to the agreement. Accordingly, the forward contracts are valued by reference to the contracts traded in the OTC
markets.
The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of
the underlying commodity, establishing an opposite position in the contract and recognizing the profit or loss on both positions simultaneously on the delivery date or, in some instances, paying a cash settlement before the designated date of
delivery. The forward contracts are adjusted by the daily fluctuation of the underlying commodity or currency and any gains or losses are recognized on the Statements of Operations as unrealized appreciation or depreciation until the contract
settlement date.
Forward contracts are, in general, not cleared or guaranteed by a third party. The Fund may collateralize
forward commodity contracts with cash and/or certain securities as indicated on its Statements of Financial Condition or Schedule of Investments, when applicable, and such collateral is held for the benefit of the counterparty in a segregated
account at the custodian to protect the counterparty against non-payment by the Fund. In the event of a default by the counterparty, the Fund will seek return of this collateral and may incur certain costs exercising its right with respect to the
collateral.
16
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
The Fund remains subject to credit risk with respect to the amount it expects to receive
from counterparties, as those amounts are not similarly collateralized by the counterparty. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain only limited recovery or may obtain no recovery in such circumstances.
Participants in trading foreign exchange forward contracts often do not require margin deposits, but rely upon internal credit limitations and their judgments regarding the creditworthiness of their
counterparties.
The Fund will enter into forward contracts only with large, well-capitalized and well-established financial
institutions. The creditworthiness of each of the firms which is a party to a forward contract is monitored by the Manager.
Collateral Investments
Currently, approximately 15% of the Fund’s net assets are committed to secure the Fund’s futures and forward contract positions.
These assets are placed in a commodity futures account maintained by the Fund’s clearing broker, and are held in high-quality instruments permitted under CFTC regulations.
The Fund’s remaining assets are held in a separate collateral investment account managed by the Collateral Sub-advisor. The Fund’s assets held in the separate collateral account are invested in
cash equivalents, U.S. government securities and other high-quality short-term debt securities with final terms not exceeding one year at the time of investment. These collateral investments (other than U.S. government securities) shall be rated at
the applicable highest short-term or long-term debt or deposit rating or money market fund rating as determined by at least one nationally recognized statistical rating organization, or if unrated, judged by the Collateral Sub-advisor to be of
comparable quality.
Investment Valuation
Commodity futures and forward contracts and options on commodity futures and forward contracts traded on an exchange will be valued at the
final settlement price or official closing price as determined by the principal exchange on which the instruments are traded as supplied by independent pricing services. These investments are generally classified as Level 1 for fair value
measurement purposes. OTC commodity futures and forward contracts and options on commodity futures and forward contracts not traded on an exchange will be valued, in order of hierarchy, by independent pricing services, price quotations obtained from
counterparty broker-dealers, or through fair valuation methodologies as determined by the Manager. These investments are generally classified as Level 2. Additionally, events may occur after the close of the market, but prior to the determination of
the Fund’s net asset value, that may affect the values of the Fund’s investments. In such circumstances, the Manager will determine a fair valuation for such investments that in its opinion is reflective of fair market value. These
investments are generally classified as Level 2 or Level 3 depending on the priority of the significant inputs.
Prices of
fixed-income securities, including, but not limited to, highly rated agency discount notes and U.S. Treasury bills, are provided by a pricing service approved by the Fund’s Manager. These securities are generally classified as Level 2. The
pricing service establishes a security’s fair value using methods that may include consideration of the following: yields or prices of investments of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications
of value from security dealers, general market conditions and
17
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
other information and analysis, including the obligor’s credit characteristics considered relevant. These securities are generally classified as Level 2 or Level 3 depending on the priority
of the significant inputs.
Repurchase agreements are valued at contract amount plus accrued interest, which approximates
market value. These securities are generally classified as Level 2.
Fair Value Measurements
Fair value is defined as the price that the Fund would receive upon selling an investment or transferring a liability in an orderly
transaction to an independent buyer in the principal or most advantageous market for the investment. A three-tier hierarchy is used to maximize the use of observable market data and minimize the use of unobservable inputs and to establish
classification of fair value measurements for disclosure purposes. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability. Observable inputs are based on market data obtained from sources
independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Unobservable inputs are based on the best information
available in the circumstances. The following is a summary of the three-tier hierarchy of valuation inputs.
Level 1—Inputs are unadjusted and prices are determined by quoted prices in active markets for identical
securities.
Level 2—Prices are determined using other significant observable inputs (including
quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Prices are determined using significant unobservable inputs (including management’s assumptions
in determining the fair value of investments).
18
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
The inputs or methodologies used for valuing securities are not an indication of the
risks associated with investing in those securities. The following is a summary of the Fund’s fair value measurements as of March 31, 2013 and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Short-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Agency Obligations
|
|
$
|
—
|
|
|
$
|
161,152,204
|
|
|
$
|
—
|
|
|
$
|
161,152,204
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts*
|
|
|
(3,052,182
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,052,182
|
)
|
|
Call Options Written**
|
|
|
(363,888
|
)
|
|
|
—
|
***
|
|
|
—
|
|
|
|
(363,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,416,070
|
)
|
|
$
|
161,152,204
|
|
|
$
|
—
|
|
|
$
|
157,736,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Short-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Agency Obligations
|
|
$
|
—
|
|
|
$
|
169,902,839
|
|
|
$
|
—
|
|
|
$
|
169,902,839
|
|
|
Repurchase Agreements
|
|
|
—
|
|
|
|
583,450
|
|
|
|
—
|
|
|
|
583,450
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts*
|
|
|
(3,783,033
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,783,033
|
)
|
|
Call Options Written**
|
|
|
(502,586
|
)
|
|
|
(33,427
|
)
|
|
|
—
|
|
|
|
(536,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,285,619
|
)
|
|
$
|
170,452,862
|
|
|
$
|
—
|
|
|
$
|
166,167,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represents net unrealized appreciation (depreciation) as reported in the Schedule of Investments as of the end of each reporting period.
|
|
**
|
Refer to the Schedule of Investments as of the end of each reporting period for breakdown of Call Options Written classified as Level 2.
|
|
***
|
Value equals zero as of the end of the reporting period.
|
The Manager is responsible for the Fund’s valuation process and has delegated daily oversight of the process to the Manager’s Valuation Committee. The Valuation Committee, pursuant to its
valuation policies and procedures, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Manager’s senior management. The Valuation Committee is aided in its
efforts by the Manager’s Securities Valuation Team, which is responsible for administering the daily valuation process and applying fair value methodologies as approved by the Valuation Committee. When determining the reliability of independent
pricing services for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of the pricing services and monitors the quality of security prices received through various testing reports conducted by
the Securities Valuation Team.
For each portfolio instrument that has been fair valued pursuant to the Valuation
Committee’s policies, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such testing and fair valuation occurrences are reported to the
Manager’s senior management.
19
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Investment Transactions
Investment transactions are recorded on a trade date basis. Realized gains and losses from investment transactions are determined on the
specific identification method, which is the same for federal income tax purposes.
Investment Income
Interest income, which reflects the amortization of premiums and includes accretion of discount for financial reporting purposes, is
recorded on an accrual basis.
Brokerage Commissions and Fees
The Fund pays brokerage commissions, including applicable clearing costs, exchange fees, NFA fees, give-up fees, pit brokerage fees and
other transaction-related fees and expenses, incurred in connection with its commodity trading activities.
Income Taxes
No provision for federal, state, and local income taxes has been made in the accompanying financial statements because the Fund has elected to be classified as a partnership for U.S. federal income tax
purposes. Each owner of the Fund’s shares will be required to take into account its allocable share of the Fund’s income, gains, losses, deductions and other items for the Fund’s taxable year.
For all open tax years and all major taxing jurisdictions, the Manager of the Fund has concluded that there are no significant uncertain
tax positions that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore,
the Manager of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
Expense Recognition
All expenses of the Fund are recognized on an accrual basis. The Fund pays all routine and extraordinary costs and expenses of its
operations, brokerage expenses, custody fees, transfer agent expenses, professional fees, expenses of preparing, printing and distributing reports, notices, information statements, proxy statements, reports to governmental agencies, and taxes, if
any.
Offering Costs
During April 2011, the Fund filed a Registration Statement on Form S-1 with the SEC to register additional shares of the Fund for future issuance. Costs incurred by the Fund in 2011 and 2012 in connection
with the planned offering were recorded as a deferred charge and recognized as a component of “Other assets” on the Statements of Financial Condition during the fiscal year ended December 31, 2011. Due to adverse market conditions the
offering did not take place and the Fund withdrew the Form S-1 filing during October 2012. As a result, the costs incurred by the Fund were expensed in 2012 since they would not benefit the Fund in a future
20
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
offering and the Manager reimbursed the Fund for half of such costs. These costs are recognized as “Offering costs” on the Statements of Operations for the fiscal year ended December
31, 2012.
Calculation of Net Asset Value
The net asset value per share of the Fund on any given day is computed by dividing the value of all assets of the Fund (including any
accrued interest), less all liabilities (including accrued expenses and distributions declared but unpaid), by the total number of shares outstanding.
Distributions
The Fund intends to make regular monthly distributions to its shareholders (stated in terms of a fixed cents per share distribution rate) based on the past and projected performance of the Fund. Among
other factors, the Fund seeks to establish a distribution rate that roughly corresponds to the Manager’s projections of the total return that could reasonably be expected to be generated by the Fund over an extended period of time. Each monthly
distribution is not solely dependent on the amount of income earned or capital gains realized by the Fund, and such distributions may from time to time represent a return of capital and may require that the Fund liquidate investments. As market
conditions and portfolio performance may change, the rate of distribution on the shares and the Fund’s distribution policy could change. The Fund reserves the right to change its distribution policy and the basis for establishing the rate of
its monthly distributions, or may temporarily suspend or reduce distributions without a change in policy, at any time and may do so without prior notice to shareholders.
Distributions to shareholders are recorded on the ex-dividend date.
Commitments and Contingencies
Under the Fund’s organizational documents, the Manager, Wilmington Trust Company (the Fund’s Delaware trustee) and the
Manager’s independent committee members are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general
indemnifications to other parties. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or
losses pursuant to these contracts and believes the risk of loss to be remote.
Financial Instrument Risk
The Fund utilizes commodity futures and options, whose values are based upon an underlying asset and generally represent future
commitments that have a reasonable possibility of being settled in cash or through physical delivery. As of March 31, 2013 and December 31, 2012, the financial instruments held by the Fund were traded on an exchange and are standardized
contracts.
Market risk is the potential for changes in the value of the financial instruments traded by the Fund due to market
changes, including fluctuations in commodity prices. Investing in commodity futures and forward
21
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
2. Summary of Significant Accounting Policies (Continued)
contracts involves the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Fund’s
commitments to purchase commodities will be limited to the gross or face amount of the contracts held. The Fund’s exposure to market risk may be influenced by a number of factors, including changes in international balances of payments and
trade, currency devaluations and revaluations, changes in interest and foreign currency exchange rates, price volatility of commodity futures and forwards contracts and market liquidity, weather, geopolitical events and other factors. These factors
also affect the Fund’s investments in options on commodity futures and forward contracts. The inherent uncertainty of the Fund’s investments as well as the development of drastic market occurrences could ultimately lead to a loss of all,
or substantially all, of investors’ capital.
Credit risk is the possibility that a loss may occur due to failure of a
counterparty performing according to the terms of the forwards, futures and option contracts. The Fund may be exposed to credit risk from its investments in commodity futures and forward contracts and options on commodity futures and forward
contracts resulting from the clearing house associated with a particular exchange failing to meet its obligations to the Fund. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden
resulting from the nonperformance of one of their members, which should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., as in some foreign exchanges), it may be backed by a
consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.
The commodity markets have volatility risk.
The commodity markets have experienced periods of extreme volatility. General market uncertainty and consequent repricing risk have led to market
imbalances of sellers and buyers, which in turn have resulted in significant reductions in values of a variety of commodities. Similar future market conditions may result in rapid and substantial valuation increases or decreases in the Fund’s
holdings. In addition, volatility in the commodity and securities markets may directly and adversely affect the setting of distribution rates on the Fund’s shares.
22
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
3. Derivative Instruments and Hedging Activities
The Fund records derivative instruments at fair value, with changes in fair value recognized on the Statements of
Operations.
The following tables present the fair value of all derivative instruments held by the Fund as of March 31, 2013
and December 31, 2012, the location of these instruments on the Statements of Financial Condition and the primary underlying risk exposure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
2013
Location on the Statements of Financial Condition
|
|
Underlying
Risk Exposure
|
|
Derivative
Instrument
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
|
|
|
|
Commodity
|
|
Futures Contracts
|
|
Unrealized appreciation on futures contracts*
|
|
$
|
2,255,940
|
|
|
Unrealized depreciation on futures contracts*
|
|
$
|
(5,308,122
|
)
|
|
Commodity
|
|
Options
|
|
—
|
|
|
—
|
|
|
Call options written, at value
|
|
|
(363,888
|
)
|
|
Total
|
|
|
|
|
|
$
|
2,255,940
|
|
|
|
|
$
|
(5,672,010
|
)
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
Location on the Statements of Financial Condition
|
|
Underlying
Risk Exposure
|
|
Derivative
Instrument
|
|
Asset Derivatives**
|
|
|
Liability Derivatives
|
|
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
|
|
|
|
Commodity
|
|
Futures Contracts
|
|
Unrealized appreciation on futures contracts*
|
|
$
|
2,671,325
|
|
|
Unrealized depreciation on futures contracts*
|
|
$
|
(6,454,358
|
)
|
|
Commodity
|
|
Options
|
|
—
|
|
|
—
|
|
|
Call options written, at value
|
|
|
(536,013
|
)
|
|
Total
|
|
|
|
|
|
$
|
2,671,325
|
|
|
|
|
$
|
(6,990,371
|
)
|
|
*
|
Value represents cumulative gross unrealized appreciation (depreciation) of futures contracts as reported in the Schedule of Investments as of the end of each reporting
period and not the “Deposits with brokers” as presented on the Statements of Financial Condition.
|
|
**
|
Amounts have been reclassified to conform to the current presentation.
|
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation
(depreciation) recognized on derivative instruments and the primary underlying risk exposure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Risk Exposure
|
|
Three Months Ended
March 31, 2013
|
|
|
Three Months Ended
March 31, 2012
|
|
|
Net realized gain (loss) from:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
(4,348,807
|
)
|
|
$
|
5,286,752
|
|
|
Call options written
|
|
|
1,320,851
|
|
|
|
2,576,480
|
|
|
Change in net unrealized appreciation (depreciation) of:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
730,851
|
|
|
$
|
520,327
|
|
|
Call options written
|
|
|
(135,687
|
)
|
|
|
(356,999
|
)
|
23
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
4. Related Parties
The Manager, the Commodity Sub-advisor and the Collateral Sub-advisor are considered to be related parties to the Fund.
For the services and facilities provided by the Manager, the Fund pays the Manager an annual management fee, payable monthly,
based on the Fund’s average daily net assets, according to the following schedule:
|
|
|
|
|
|
|
Average Daily Net Assets
|
|
Management Fee
|
|
|
For the first $500 million
|
|
|
1.250
|
%
|
|
For the next $500 million
|
|
|
1.225
|
|
|
For the next $500 million
|
|
|
1.200
|
|
|
For the next $500 million
|
|
|
1.175
|
|
|
For net assets over $2 billion
|
|
|
1.150
|
|
“Average daily net assets” means the total assets of the Fund, minus the sum of its total liabilities.
The Manager and the Fund have entered into sub-advisory agreements with the Commodity Sub-advisor and the Collateral
Sub-advisor. Both the Commodity Sub-advisor and Collateral Sub-advisor are compensated for their services to the Fund from the management fees paid to the Manager, and the Fund does not reimburse the Manager for those fees.
5. Share Repurchase Program
On December 21, 2011, the Fund adopted an open-market share repurchase program allowing the Fund to repurchase an
aggregate of up to 10% of its outstanding common shares (approximately 920,000 shares) in open-market transactions at the Manager’s discretion.
Transactions in share repurchases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31, 2013
|
|
|
Year Ended
December 31,
2012
|
|
|
Shares repurchased
|
|
|
—
|
|
|
|
9,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average price per share repurchased
|
|
$
|
—
|
|
|
$
|
20.77
|
|
|
|
|
|
|
|
|
|
|
|
24
NUVEEN DIVERSIFIED COMMODITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)
March 31, 2013
6. Financial Highlights
The following financial highlights relate to investment performance and operations for a Fund share outstanding during
the three months ended March 31, 2013 and March 31, 2012. The Net Asset Value presentation is calculated using average daily shares outstanding. The Ratios to Average Net Assets are calculated using average daily net assets and have been annualized
for periods less than a full fiscal year. The Total Returns at Net Asset Value and Market Value are based on the change in net asset value and market value, respectively, for a share during the period. An investor’s return and ratios will vary
based on the timing of purchasing and selling Fund shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31, 2013
|
|
|
Three Months Ended
March
31, 2012
|
|
|
Net Asset Value:
|
|
|
|
|
|
|
|
|
|
Net asset value per share
—beginning of period
|
|
$
|
21.38
|
|
|
$
|
23.21
|
|
|
Net investment income (loss)
|
|
|
(.08
|
)
|
|
|
(.09
|
)
|
|
Net realized and unrealized gain (loss)
|
|
|
(.26
|
)
|
|
|
.87
|
|
|
Distributions
|
|
|
(.44
|
)
|
|
|
(.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share—end of period
|
|
$
|
20.60
|
|
|
$
|
23.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value:
|
|
|
|
|
|
|
|
|
|
Market value per share—beginning of period
|
|
$
|
19.97
|
|
|
$
|
20.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per share—end of period
|
|
$
|
20.75
|
|
|
$
|
23.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets:
(a)
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
(1.55
|
)%
|
|
|
(1.55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
1.68
|
%
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total Returns:
(b)
|
|
|
|
|
|
|
|
|
|
Based on Net Asset Value
|
|
|
(1.64
|
)%
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Based on Market Value
|
|
|
6.08
|
%
|
|
|
15.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Total Return Based on Net Asset Value is the combination of changes in net asset value per share and the assumed reinvestment of distributions, if any, at net asset
value per share on the distribution payment date. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the net asset value per share at the end of
the period. Total returns are not annualized.
|
Total Return Based on Market Value is the combination of changes in
the market price per share and the assumed reinvestment of distributions, if any, at the ending market price per share on the distribution payment date. The last distribution declared in the period, which is typically paid on the first business
day of the following month, is assumed to be reinvested at the ending market price per share at the end of the period. Total returns are not annualized.
25