Principal amounts are denominated in U.S. dollars (“USD”)
unless otherwise noted.
Purchases and sales of securities (excluding short term investments)
for the year ended April 30, 2022, aggregated $85,132,321 and $88,864,264, respectively.
The Fund is permitted to engage in purchase and sale transactions
(“cross trades”) with certain funds and accounts for which the Amundi Asset Management US, Inc. (the “Adviser”)
serves as the Fund’s investment adviser, as set forth in Rule 17a-7 under the Investment Company Act of 1940, pursuant to procedures
adopted by the Board of Directors. Under these procedures, cross trades are effected at current market prices. During the year ended April
30, 2022, the Fund did not engage in any cross trade activity.
At April 30, 2022, the net unrealized depreciation on investments
based on cost for federal tax purposes of $173,430,095 was as follows:
Various inputs are used in determining the value of the Fund’s
investments. These inputs are summarized in the three broad levels below.
Level 1 – unadjusted quoted prices in active markets for
identical securities.
Level 2 – other significant observable inputs (including
quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). See Notes to Financial Statements —Note 1A.
Level 3 – significant unobservable inputs (including the
Fund’s own assumptions in determining fair value of investments). See Notes to Financial Statements — Note 1A.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
Net change in unrealized appreciation (depreciation) of Level
3 investments still held and considered Level 3 at April 30, 2022: $
(131,958)
The accompanying notes are an integral part of these financial
statements.
Statement of Assets and Liabilities | 4/30/22
| ASSETS: |
|
| Investments
in unaffiliated issuers, at value (cost $172,500,801) |
$
164,751,168 |
| Foreign
currencies, at value (cost $18,780) |
18,764 |
| Distribution
paid in advance |
916,823 |
| Receivables
— |
|
| Investment
securities sold |
4,389,310 |
| Dividends |
9,789 |
| Interest |
2,464,944 |
| Other
assets |
75 |
| Total
assets |
$
172,550,873 |
| LIABILITIES: |
|
| Payables
— |
|
| Credit
agreement |
$ 54,950,000 |
| Investment
securities purchased |
2,442,935 |
| Distributions |
916,823 |
| Overdraft due to custodian |
900,698 |
| Written
options outstanding (net premiums received $26,125) |
1,121 |
| Net
unrealized depreciation on forward foreign currency exchange contracts |
36,869 |
| Reserve
for repatriation taxes |
793 |
| Due
to affiliates |
24,235 |
| Accrued
expenses |
95,168 |
| Total
liabilities |
$
59,368,642 |
| NET
ASSETS: |
|
| Paid-in
capital |
$
170,921,821 |
| Distributable
earnings (loss) |
(57,739,590) |
| Net
assets |
$
113,182,231 |
| NET
ASSET VALUE PER SHARE: |
|
| No
par value |
|
| Based
on $113,182,231/8,334,759 shares |
$
13.58 |
The accompanying notes are an integral part of these financial
statements.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 45
| Statement of Operations |
|
|
| FOR THE YEAR ENDED 4/30/22 |
|
|
| INVESTMENT INCOME: |
|
|
| Interest from unaffiliated issuers (net of foreign |
|
|
| taxes withheld $(1,659)) |
$ 12,769,074 |
|
| Dividends from unaffiliated issuers (net of foreign |
|
|
| taxes withheld $3,236) |
604,322 |
|
| Total Investment Income |
|
$ 13,373,396 |
| EXPENSES: |
|
|
| Management fees |
$ 1,594,207 |
|
| Administrative expenses |
87,709 |
|
| Transfer agent fees |
14,273 |
|
| Shareowner communications expense |
23,329 |
|
| Custodian fees |
8,394 |
|
| Professional fees |
195,041 |
|
| Printing expense |
26,786 |
|
| Pricing fees |
12,007 |
|
| Directors’ fees |
5,935 |
|
| Insurance expense |
28 |
|
| Interest expense |
665,530 |
|
| Miscellaneous |
48,164 |
|
| Total expenses |
|
$ 2,681,403 |
| Net investment income |
|
$ 10,691,993 |
| REALIZED AND UNREALIZED GAIN (LOSS) |
|
|
| ON INVESTMENTS: |
|
|
| Net realized gain (loss) on: |
|
|
| Investments in unaffiliated issuers |
$ (707,450) |
|
| Forward foreign currency exchange contracts |
(20,163) |
|
| Written option |
65,100 |
|
| Other assets and liabilities denominated in |
|
|
| foreign currencies |
(35,337) |
$ (697,850) |
| Change in net unrealized appreciation (depreciation) on: |
|
|
| Investments in unaffiliated issuers (net of foreign |
|
|
| capital gains tax of ($793)) |
$(16,393,405) |
|
| Forward foreign currency exchange contracts |
(57,114) |
|
| Written options |
20,287 |
|
| Other assets and liabilities denominated in |
|
|
| foreign currencies |
(6,591) |
$(16,436,823) |
| Net realized and unrealized gain (loss) on investments |
|
$(17,134,673) |
| Net decrease in net assets resulting from operations |
|
$ (6,442,680) |
The accompanying notes are an integral part of these financial
statements.
46 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Statements of Changes in Net Assets
| |
|
Year |
Year |
| |
|
Ended |
Ended |
| |
|
4/30/22 |
4/30/21 |
| FROM OPERATIONS: |
|
|
|
|
| Net investment income (loss) |
|
$ 10,691,993 |
$ 10,402,959 |
| Net realized gain (loss) on investments |
|
|
(697,850) |
(5,140,204) |
| Change in net unrealized appreciation (depreciation) |
|
|
|
| on investments |
|
|
(16,436,823) |
31,532,901 |
| Net increase (decrease) in net assets resulting |
|
|
|
| from operations |
|
$ (6,442,680) |
$ 36,795,656 |
| DISTRIBUTIONS TO SHAREOWNERS: |
|
|
|
| ($1.32 and $1.34 per share, respectively) |
$ (11,000,310) |
$ (11,186,771) |
| Total distributions to shareowners |
$ (11,000,310) |
$ (11,186,771) |
| FROM FUND SHARE TRANSACTIONS: |
|
|
|
| Reinvestment of distributions |
|
$ 30,948 |
$ — |
| Net increase in net assets resulting from Fund |
|
|
|
| share transactions |
|
$ 30,948 |
$ — |
| Net increase (decrease) in net assets |
$ (17,412,042) |
$ 25,608,885 |
| NET ASSETS: |
|
|
|
|
| Beginning of year |
|
$130,594,273 |
$ 104,985,388 |
| End of year |
|
$113,182,231 |
$ 130,594,273 |
| |
| |
|
Year |
Year |
Year |
Year |
| |
Ended |
Ended |
Ended |
Ended |
| |
4/30/22 |
4/30/22 |
4/30/21 |
4/30/21 |
| |
Shares |
Amount |
Shares |
Amount |
| Fund Share Transactions |
|
|
|
|
| Shares sold |
— |
$ — |
— |
$ — |
| Reinvestment of distributions |
1,969 |
30,948 |
— |
— |
| Net increase |
1,969 |
$30,948 |
— |
$ — |
The accompanying notes are an integral part of these financial
statements.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 47
| Statement of Cash Flows |
|
| FOR THE YEAR ENDED 4/30/22 |
|
| |
| Cash Flows From Operating Activities: |
|
| Net decrease in net assets resulting from operations |
$ (6,442,680) |
| Adjustments to reconcile net decrease in net assets resulting from operations |
|
| to net cash, restricted cash and foreign currencies from operating activities: |
|
| Purchases of investment securities |
$(80,903,321) |
| Proceeds from disposition and maturity of investment securities |
88,184,961 |
| Net sales of short-term investments |
(330,485) |
| Net accretion and amortization of discount/premium on investment securities |
(370,758) |
| Change in unrealized depreciation on investments in unaffiliated issuers |
16,393,405 |
| Change in unrealized depreciation on forward foreign currency |
|
| exchange contract |
57,114 |
| Change in unrealized appreciation on written options |
(20,287) |
| Net realized loss on investments in unaffiliated issuers |
707,450 |
| Increase in dividends receivable |
(9,389) |
| Increase
in distributions paid in advance |
(916,823) |
| Decrease in interest receivable |
23,369 |
| Increase in other assets |
(23) |
| Increase in due to affiliates |
12,271 |
| Decrease in directors’ fees payable |
(2,115) |
| Decrease in accrued expenses payable |
(31,796) |
| Proceeds from sale of written options |
66,810 |
| Net realized gain on written options |
(65,100) |
| Net cash, restricted cash and foreign currencies from operating activities |
$
16,352,603 |
| Cash Flows Provided by Financing Activities: |
|
| Decrease in Bank overdraft |
$ (501,280) |
| Borrowings repaid |
2,500,000 |
| Borrowings received |
(8,550,000) |
| Distributions to shareowners |
(10,083,487) |
| Reinvestment of distributions |
30,948 |
| Net cash flows used in Financing Activities |
$(16,603,819) |
| NET INCREASE (DECREASE) IN CASH AND FOREIGN CURRENCY |
$(251,216) |
| Cash, Restricted Cash and Foreign Currencies: |
|
| Beginning of year* |
$ 269,980 |
| End of year* |
$ 18,764 |
| Cash Flow Information: |
|
| Cash paid for interest |
$ 665,530 |
| * | | The following table provides a reconciliation of cash, restricted cash and foreign currencies
reported Assets and Liabilities that sum to the total of the same such amounts shown in the Statement of Cash Flows: |
| |
Year Ended |
Year Ended |
| |
4/30/22 |
4/30/21 |
| Cash |
$ — |
$ — |
| Foreign currencies at value |
18,764 |
269,980 |
| Total cash, restricted cash and foreign currencies |
|
|
| shown in the Statement of Cash Flows |
$18,764 |
$269,980 |
The accompanying notes are an integral part of these financial
statements.
48 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Financial Highlights
| |
Year |
Year |
Year |
Year |
Year |
| |
Ended |
Ended |
Ended |
Ended |
Ended |
| |
4/30/22 |
4/30/21 |
4/30/20 |
4/30/19 |
4/30/18 |
| Per Share Operating Performance |
|
|
|
|
|
|
| Net asset value, beginning of period |
$ 15.67 |
$ 12.60 |
$ 16.18 |
$ 17.09 |
$ 17.68 |
| Increase (decrease) from investment operations: |
|
|
|
|
|
|
| Net investment income (loss)(a) |
$ 1.28 |
$ 1.25 |
$ 1.19 |
$ 1.21 |
$ 1.23 |
| Net realized and unrealized gain (loss) on investments |
(2.05) |
|
3.16 |
(3.59) |
(0.98) |
(0.56) |
| Net increase (decrease) from investment operations |
$ (0.77) |
$ 4.41 |
$ (2.40) |
$ 0.23 |
$ 0.67 |
| Distributions to shareowners: |
|
|
|
|
|
|
| Net investment income and previously undistributed net investment income |
$ (1.32)* |
$ (1.34)* |
$ (1.18) |
$ (1.14) |
$ (1.26)* |
| Total distributions |
$ (1.32) |
$ (1.34) |
$ (1.18) |
$ (1.14) |
$ (1.26) |
| Net increase (decrease) in net asset value |
$ (2.09) |
$ 3.07 |
$ (3.58) |
$ (0.91) |
$ (0.59) |
| Net asset value, end of period |
$ 13.58 |
$ 15.67 |
$ 12.60 |
$ 16.18 |
$ 17.09 |
| Market value end of period |
$ 12.30 |
$ 14.95 |
$ 10.99 |
$ 14.39 |
$ 15.00 |
| Total return at net asset value(b) |
(5.19)% |
37.08% |
(15.21)% |
2.58% |
4.58% |
| Total return at market value(b) |
(9.99)% |
49.94% |
(16.84)% |
3.95% |
(2.82)% |
| Ratios to average net assets of shareowners: |
|
|
|
|
|
|
| Total expenses plus interest expense(c) |
2.11% |
|
2.06% |
2.88% |
2.95% |
2.54% |
| Net investment income available to shareowners |
8.42% |
|
8.49% |
7.64% |
7.37% |
7.07% |
| Portfolio turnover rate |
46% |
|
57% |
52% |
37% |
37% |
| Net assets, end of period (in thousands) |
$113,182 |
$130,594 |
$104,985 |
$134,853 |
$142,372 |
The accompanying notes are an integral part
of these financial statements.
Pioneer Diversified High Income Fund, Inc. | Annual Report
| 4/30/22 49
Financial Highlights (continued)
| |
Year |
Year |
Year |
Year |
Year |
| |
Ended |
Ended |
Ended |
Ended |
Ended |
| |
4/30/22 |
4/30/21 |
4/30/20 |
4/30/19 |
4/30/18 |
| Total amount of debt outstanding (in thousands) |
$ 54,950 |
$ 61,000 |
$ 45,000 |
$ 61,000 |
$ 64,000 |
| Asset coverage per $1,000 of indebtedness |
$ 3,060 |
$ 3,141 |
$ 3,333 |
$ 3,211 |
$ 3,225 |
| * | | The amount of distributions made to shareowners during the
year were in excess of the net investment income earned by the Fund during the year. The Fund has accumulated undistributed net investment
income which is part of the Fund’s net asset value (“NAV’) . A portion of the accumulated net investment
income was distributed to shareowners during the year. |
| (a) | | The per common share data presented above is based upon the average
common shares outstanding for the periods presented. |
| (b) | | Total investment return is calculated assuming a purchase of common shares
at the current net asset value or market value on the first day and a sale at the current net asset value or market
value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of
this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan.
Total investment return does not reflect brokerage commissions. Past performance is not a guarantee of
future results. |
| (c) | | Includes interest expense of 0.52%, 0.46%, 1.35%, 1.48% and 1.06%, respectively. |
The accompanying notes are an integral part
of these financial statements.
50 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Notes to Financial Statements | 4/30/22
1. Organization and Significant Accounting Policies
Pioneer Diversified High Income Fund, Inc. (the “Fund”)
is organized as a Maryland corporation. Prior to April 21, 2021, the Fund was organized as a Delaware statutory trust. On April 21, 2021,
the Fund redomiciled to a Maryland corporation through a statutory merger of the predecessor Delaware statutory trust with and into a
newly-established Maryland corporation formed for the purpose of effecting the redomiciling. The Fund was originally organized on January
30, 2007. Prior to commencing operations on May 30, 2007, the Fund had no operations other than matters relating to its organization and
registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended. The investment
objective of the Fund is to seek a high level of current income and the Fund may, as a secondary objective, also seek capital appreciation
to the extent that it is consistent with its investment objective.
Amundi Asset Management US, Inc., an indirect, wholly owned subsidiary
of Amundi and Amundi’s wholly owned subsidiary, Amundi USA, Inc., serves as the Fund’s investment adviser (the “Adviser”).
In March 2020, FASB issued an Accounting Standard Update, ASU
2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU
2020-04”), which provides optional, temporary relief with respect to the financial reporting of contracts subject to certain types
of modifications due to the planned discontinuation of the London Interbank Offered Rate (“LIBOR”) and other LIBOR-based reference
rates at the end of 2021. The temporary relief provided by ASU 2020-04 is effective for certain reference rate-related contract modifications
that occur during the period from March 12, 2020 through December 31, 2023. Management is evaluating the impact of ASU 2020-04 on the
Fund’s investments, derivatives, debt and other contracts, if applicable, that will undergo reference rate-related modifications
as a result of the reference rate reform.
The Fund is an investment company and follows investment company
accounting and reporting guidance under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). U.S. GAAP requires the
management of the Fund to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of income, expenses and gain or loss
on investments during the reporting period. Actual results could differ from those estimates.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 51
The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements:
The net asset value of the Fund is computed once daily, on each
day the New York Stock Exchange (“NYSE”) is open, as of the close of regular trading on the NYSE.
Fixed-income securities are valued by using prices supplied by
independent pricing services, which consider such factors as market prices, market events, quotations from one or more brokers, Treasury
spreads, yields, maturities and ratings, or may use a pricing matrix or other fair value methods or techniques to provide an estimated
value of the security or instrument. A pricing matrix is a means of valuing a debt security on the basis of current market prices for
other debt securities, historical trading patterns in the market for fixed-income securities and/or other factors. Non-U.S. debt securities
that are listed on an exchange will be valued at the bid price obtained from an independent third party pricing service. When independent
third party pricing services are unable to supply prices, or when prices or market quotations are considered to be unreliable, the value
of that security may be determined using quotations from one or more broker-dealers.
Loan interests are valued in accordance with guidelines established
by the Board of Directors at the mean between the last available bid and asked prices from one or more brokers or dealers as obtained
from Loan Pricing Corporation, an independent third party pricing service. If price information is not available from Loan Pricing Corporation,
or if the price information is deemed to be unreliable, price information will be obtained from an alternative loan interest pricing service.
If no reliable price quotes are available from either the primary or alternative pricing service, broker quotes will be solicited.
Event-linked bonds are valued at the bid price obtained from an
independent third party pricing service. Other insurance-linked securities (including reinsurance sidecars, collateralized reinsurance
and industry loss warranties) may be valued at the bid price obtained from an independent pricing service, or through a third party using
a pricing matrix, insurance industry valuation models, or other fair value methods or techniques to provide an estimated value of the
instrument.
Equity securities that have traded on an exchange are valued by
using the last sale price on the principal exchange where they are traded. Equity securities that have not traded on the date of valuation,
or securities for which sale prices are not available, generally are valued using the mean
52 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
between the last bid and asked prices or, if both last bid and
asked prices are not available, at the last quoted bid price. Last sale and bid and asked prices are provided by independent third party
pricing services. In the case of equity securities not traded on an exchange, prices are typically determined by independent third party
pricing services using a variety of techniques and methods.
The value of foreign securities is translated into U.S. dollars
based on foreign currency exchange rate quotations supplied by a third party pricing source. Trading in non-U.S. equity securities is
substantially completed each day at various times prior to the close of the NYSE. The values of such securities used in computing the
net asset value of the Fund’s shares are determined as of such times. The Fund may use a fair value model developed by an independent
pricing service to value non-U.S. equity securities.
Options contracts are generally valued at the mean between the
last bid and ask prices on the principal exchange where they are traded. Over-the-counter (“OTC”) options and options on swaps
(“swaptions”) are valued using prices supplied by independent pricing services, which consider such factors as market prices,
market events, quotations from one or more brokers, Treasury spreads, yields, maturities and ratings, or may use a pricing matrix or other
fair value methods or techniques to provide an estimated value of the security or instrument.
Forward foreign currency exchange contracts are valued daily using
the foreign exchange rate or, for longer term forward contract positions, the spot currency rate and the forward points on a daily basis,
in each case provided by a third party pricing service. Contracts whose forward settlement date falls between two quoted days are valued
by interpolation.
Swap contracts, including interest rate swaps, caps and floors
(other than centrally cleared swap contracts), are valued at the dealer quotations obtained from reputable International Swap Dealers
Association members. Centrally cleared swaps are valued at the daily settlement price provided by the central clearing counterparty.
Securities or loan interests for which independent pricing services
or broker-dealers are unable to supply prices or for which market prices and/or quotations are not readily available or are considered
to be unreliable are valued by a fair valuation team comprised of certain personnel of the Adviser pursuant to procedures adopted by the
Portfolio’s Board of Directors. The Adviser’s fair valuation team uses fair value methods approved by the Valuation Committee
of the Board of Directors. The Adviser’s fair valuation team is responsible for monitoring
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 53
developments that may impact fair valued securities and for discussing
and assessing fair values on an ongoing basis, and at least quarterly, with the Valuation Committee of the Board of Directors.
Inputs used when applying fair value methods to value a security
may include credit ratings, the financial condition of the company, current market conditions and comparable securities. The Fund may
use fair value methods if it is determined that a significant event has occurred after the close of the exchange or market on which the
security trades and prior to the determination of the Fund’s net asset value. Examples of a significant event might include political
or economic news, corporate restructurings, natural disasters, terrorist activity or trading halts. Thus, the valuation of the Fund’s
securities may differ significantly from exchange prices, and such differences could be material.
At April 30, 2022, five securities were valued using fair value
methods (in addition to securities valued using prices supplied by independent pricing services, broker-dealers or using a third party
insurance pricing model) representing 0.1% of net assets. The value of these fair valued securities was $70,003.
| B. | | Investment Income and Transactions |
Dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities where the ex-dividend date may have passed are recorded as soon as the Fund becomes aware of
the ex-dividend data in the exercise of reasonable diligence.
Interest income, including interest on income-bearing cash accounts,
is recorded on the accrual basis. Dividend and interest income are reported net of unrecoverable foreign taxes withheld at the applicable
country rates and net of income accrued on defaulted securities.
Interest and dividend income payable by delivery of additional
shares is reclassified as PIK (payment-in-kind) income upon receipt and is included in interest and dividend income, respectively.
Principal amounts of mortgage-backed securities are adjusted for
monthly paydowns. Premiums and discounts related to certain mortgage-backed securities are amortized or accreted in proportion to the
monthly paydowns. All discounts/premiums on purchase prices of debt securities are accreted/amortized for financial reporting purposes
over the life of the respective securities, and such accretion/amortization is included in interest income.
Security transactions are recorded as of trade date. Gains and
losses on sales of investments are calculated on the identified cost method for both financial reporting and federal income tax purposes.
54 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
| C. | | Foreign Currency Translation |
The books and records of the Fund are maintained in U.S. dollars.
Amounts denominated in foreign currencies are translated into U.S. dollars using current exchange rates.
Net realized gains and losses on foreign currency transactions,
if any, represent, among other things, the net realized gains and losses on foreign currency exchange contracts, disposition of foreign
currencies and the difference between the amount of income accrued and the U.S. dollars actually received. Further, the effects of changes
in foreign currency exchange rates on investments are not segregated on the Statement of Operations from the effects of changes in the
market prices of those securities, but are included with the net realized and unrealized gain or loss on investments.
It is the Fund’s policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net taxable income and net realized
capital gains, if any, to its shareowners. Therefore, no provision for federal income taxes is required. As of April 30, 2022, the Fund
did not accrue any interest or penalties with respect to uncertain tax positions, which, if applicable, would be recorded as an income
tax expense on the Statement of Operations. Tax returns filed within the prior three years remain subject to examination by federal and
state tax authorities.
The amount and character of income and capital gain distributions
to shareowners are determined in accordance with federal income tax rules, which may differ from U.S. GAAP. Distributions in excess of
net investment income or net realized gains are temporary over distributions for financial statement purposes resulting from differences
in the recognition or classification of income or distributions for financial statement and tax purposes. Capital accounts within the
financial statements are adjusted for permanent book/tax differences to reflect tax character, but are not adjusted for temporary differences.
At April 30, 2022, the Fund reclassified $33,898 to increase distributable
earnings and $33,898 to decrease paid-in capital to reflect permanent book/tax differences. These adjustments have no impact on net assets
or the results of operations.
At April 30, 2022, the Fund was permitted to carry forward indefinitely
$3,726,677 of short-term losses and $45,171,367 of long-term losses.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 55
The tax character of distributions paid during the years ended
April 30, 2022 and April 30, 2021, were as follows:
| |
2022 |
2021 |
| Distributions paid from: |
|
|
| Ordinary income |
$10,083,487 |
$11,186,771 |
| Total |
$10,083,487 |
$11,186,771 |
The following shows the components of distributable earnings (losses)
on a federal income tax basis at April 30, 2022:
| |
2022 |
| Distributable earnings/(losses): |
|
| Undistributed ordinary income |
$ 792,194 |
| Capital loss carryforward |
(48,898,044) |
| Other book/tax temporary differences |
(916,823) |
| Net unrealized depreciation |
(8,716,917) |
| Total |
$(57,739,590) |
The difference between book-basis and tax-basis
unrealized depreciation is primarily attributable to the realization for tax purposes of unrealized gains on investments in passive
foreign investment companies, purchased options, forward contracts and partnerships, and the tax deferral of losses on wash sales.
The value of securities held by the Fund may go up or down, sometimes
rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political or regulatory conditions,
recessions, the spread of infectious illness or other public health issues, inflation, changes in interest rates, armed conflict including
Russia’s military invasion of Ukraine, sanctions against Russia, other nations or individuals or companies and possible countermeasures,
lack of liquidity in the bond markets or adverse investor sentiment. In the past several years, financial markets have experienced increased
volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread.
Interest rates are very low, which means there is more risk that they may go up. The U.S. Federal Reserve has recently started to raise
certain interest rates. A general rise in interest rates could adversely affect the price and liquidity of fixed-income securities. Rates
of inflation have recently risen. The value of assets or income from an investment may be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Fund’s assets can decline as can the value of the Fund’s
distributions.
56 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
The global pandemic of the novel coronavirus respiratory disease
designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global financial
markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity for many
instruments has been greatly reduced for periods of time. Some sectors of the economy and individual issuers have experienced particularly
large losses. These circumstances may continue for an extended period of time, and may continue to affect adversely the value and liquidity
of the Fund’s investments. Following Russia’s recent invasion of Ukraine, Russian securities have lost all, or nearly all,
their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.
Governments and central banks, including the U.S. Federal Reserve,
have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have
resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact
on the economy and securities markets, may not be known for some time.
At times, the Fund’s investments may represent industries
or industry sectors that are interrelated or have common risks, making the Fund more susceptible to any economic, political, or regulatory
developments or other risks affecting those industries and sectors.
The Fund’s investments in foreign markets and countries
with limited developing markets may subject the Fund to a greater degree of risk than investments in a developed market. These risks include
disruptive political or economic conditions, military conflicts and sanctions, terrorism, sustained economic downturns, financial instability,
reduction of government or central bank support, inadequate accounting standards, tariffs, tax disputes or other tax burdens, nationalization
or expropriation of assets, and the imposition of adverse governmental laws, arbitrary application of laws and regulations or lack of
rule of law, or currency exchange restrictions.
Russia launched a large-scale invasion of Ukraine on February
24, 2022. In response to the military action by Russia, various countries, including the U.S., the United Kingdom, and European Union
issued broad-ranging economic sanctions against Russia and Belarus and certain companies and individuals. Since then, Russian securities
have lost all, or nearly all, their market value, and many other issuers, securities and markets have been adversely affected. The United
States and other countries may impose
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 57
sanctions on other countries, companies and individuals in light
of Russia’s military invasion. The extent and duration of the military action or future escalation of such hostilities, the extent
and impact of existing and future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be
predicted. These and any related events could have a significant impact on the value and liquidity of certain Fund investments, on Fund
performance and the value of an investment in the Fund, particularly with respect to securities and commodities, such as oil and natural
gas, as well as other sectors with exposure to Russian issuers or issuers in other countries affected by the invasion, and are likely
to have collateral impacts on market sectors globally.
The Fund invests in below investment grade (“high yield”)
debt securities, floating rate loans and insurance-linked securities. The Fund may invest in securities and other obligations of any credit
quality, including those that are rated below investment grade, or are unrated but are determined by the Adviser to be of equivalent credit
quality. Below investment grade securities are commonly referred to as “junk bonds” and are considered speculative with respect
to the issuer’s capacity to pay interest and repay principal. Below investment grade securities, including floating rate loans,
involve greater risk of loss, are subject to greater price volatility, and may be less liquid and more difficult to value, especially
during periods of economic uncertainty or change, than higher rated debt securities.
Certain securities in which the Fund invests, including floating
rate loans, once sold, may not settle for an extended period (for example, several weeks or even longer). The Fund will not receive its
sale proceeds until that time, which may constrain the Fund’s ability to meet its obligations. The Fund may invest in securities
of issuers that are in default or that are in bankruptcy. The value of collateral, if any, securing a floating rate loan can decline or
may be insufficient to meet the issuer’s obligations or may be difficult to liquidate. No active trading market may exist for many
floating rate loans, and many loans are subject to restrictions on resale. Any secondary market may be subject to irregular trading activity
and extended settlement periods. There is less readily available, reliable information about most floating rate loans than is the case
for many other types of securities. Normally, the Adviser will seek to avoid receiving material, nonpublic information about the issuer
of a loan either held by, or considered for investment by, the Fund, and this decision could adversely affect the Fund’s investment
performance. Loans may not be considered “securities,” and purchasers, such as the Fund, therefore may not be entitled to
rely on the anti-fraud protections afforded by federal securities laws. The Fund’s investments in certain foreign markets or countries
with
58 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
limited developing markets may subject the Fund to a greater degree
of risk than in a developed market. These risks include disruptive political or economic conditions and the possible imposition of adverse
governmental laws or currency exchange restrictions.
The Fund’s investments, payment obligations and financing
terms may be based on floating rates, such as LIBOR (London Interbank Offered Rate). ICE Benchmark Administration, the administrator
of LIBOR, ceased publication of most LIBOR settings on a representative basis at the end of 2021 and is expected to cease publication
of a majority of U.S. dollar LIBOR settings on a representative basis after June 30, 2023. In addition, global regulators have announced
that, with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. Actions by regulators have resulted in
the establishment of alternative reference rates to LIBOR in most major currencies. Markets are developing in response to these new rates,
but questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at
the time of transition remain a significant concern. The effect of any changes to - or discontinuation of - LIBOR on the Fund will vary
depending on, among other things, existing fallback provisions in individual contracts and whether, how, and when industry participants
develop and widely adopt new reference rates and fallbacks for both legacy and new products and instruments. In March, 2022, the U.S.
federal government enacted legislation to establish a process for replacing LIBOR in existing contracts that do not already provide for
the use of a clearly defined or practicable replacement benchmark rate as described in the legislation. Generally speaking, for contracts
that do not contain a fallback provision as described in the legislation, a benchmark replacement recommended by the Federal Reserve
Board will effectively automatically replace the USD LIBOR benchmark in the contract after June 30, 2023. The recommended benchmark replacement
will be based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, including any recommended
spread adjustment and benchmark replacement conforming changes. The process of transitioning from LIBOR may involve, among other things,
increased volatility or illiquidity in markets for instruments that rely on LIBOR. The transition may also result in a reduction in the
value of certain LIBOR-based investments held by the Fund or reduce the effectiveness of related transactions such as hedges. Any such
effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses for the Fund. Because the usefulness
of LIBOR as a benchmark may deteriorate during the transition period, these effects could occur at any time.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 59
The Fund may invest a significant amount of its total assets in
illiquid securities. Illiquid securities are securities that the Fund reasonably expects cannot be sold or disposed of in the current
market in seven calendar days or less without the sale or disposition significantly changing the market value of the securities.
The Fund may invest in REIT securities, the value of which can
fall for a variety of reasons, such as declines in rental income, fluctuating interest rates, poor property management, environmental
liabilities, uninsured damage, increased competition, or changes in real estate tax laws.
With the increased use of technologies such as the Internet to
conduct business, the Fund is susceptible to operational, information security and related risks. While the Fund’s Adviser has established
business continuity plans in the event of, and risk management systems to prevent, limit or mitigate, such cyber-attacks, 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 cybersecurity plans and systems put in place by service providers to the Fund such as the Fund’s custodian and accounting
agent, and the Fund’s transfer agent. In addition, many beneficial owners of Fund shares hold them through accounts at broker-dealers,
retirement platforms and other financial market participants over which neither the Fund nor the Adviser exercises control. Each of these
may in turn rely on service providers to them, which are also subject to the risk of cyber-attacks. Cybersecurity failures or breaches
at the Adviser or the Fund’s service providers or intermediaries have the ability to cause disruptions and impact business operations,
potentially resulting in financial losses, interference with the Fund’s ability to calculate its net asset value, impediments to
trading, the inability of Fund shareowners to effect share purchases or sales or receive distributions, loss of or unauthorized access
to private shareowner information and violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage,
or additional compliance costs. Such costs and losses may not be covered under any insurance. In addition, maintaining vigilance against
cyber-attacks may involve substantial costs over time, and system enhancements may themselves be subject to cyber-attacks.
Restricted Securities are subject to legal or contractual restrictions
on resale. Restricted securities generally are resold in transactions exempt from registration under the Securities Act of 1933. Private
placement securities are generally considered to be restricted except for those securities traded between qualified institutional investors
under the provisions of Rule 144A of the Securities Act of 1933.
60 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Disposal of restricted investments may involve negotiations and
expenses, and prompt sale at an acceptable price may be difficult to achieve. Restricted investments held by the Fund at April 30, 2022
are listed in the Schedule of Investments.
| G. | | Insurance-Linked Securities (“ILS”) |
The Fund invests in ILS. The Fund could lose a portion or all
of the principal it has invested in an ILS, and the right to additional interest or dividend payments with respect to the security, upon
the occurrence of one or more trigger events, as defined within the terms of an insurance-linked security. Trigger events, generally,
are hurricanes, earthquakes, or other natural events of a specific size or magnitude that occur in a designated geographic region during
a specified time period, and/or that involve losses or other metrics that exceed a specific amount. There is no way to accurately predict
whether a trigger event will occur, and accordingly, ILS carry significant risk. The Fund is entitled to receive principal, and interest
and/or dividend payments so long as no trigger event occurs of the description and magnitude specified by the instrument. In addition
to the specified trigger events, ILS may expose the Fund to other risks, including but not limited to issuer (credit) default, adverse
regulatory or jurisdictional interpretations and adverse tax consequences.
The Fund’s investments in ILS may include event-linked bonds.
ILS also may include special purpose vehicles (“SPVs”) or similar instruments structured to comprise a portion of a reinsurer’s
catastrophe-oriented business, known as quota share instruments (sometimes referred to as reinsurance sidecars), or to provide reinsurance
relating to specific risks to insurance or reinsurance companies through a collateralized instrument, known as collateralized reinsurance.
Structured reinsurance investments also may include industry loss warranties (“ILWs”). A traditional ILW takes the form of
a bilateral reinsurance contract, but there are also products that take the form of derivatives, collateralized structures, or exchange-traded
instruments.
Where the ILS are based on the performance of underlying reinsurance
contracts, the Fund has limited transparency into the individual underlying contracts, and therefore must rely upon the risk assessment
and sound underwriting practices of the issuer. Accordingly, it may be more difficult for the Adviser to fully evaluate the underlying
risk profile of the Fund’s structured reinsurance investments, and therefore the Fund’s assets are placed at greater risk
of loss than if the Adviser had more complete information. Structured reinsurance instruments generally will be considered illiquid securities
by the Fund. These securities may be difficult
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 61
to purchase, sell or unwind. Illiquid securities also may be difficult
to value. If the Fund is forced to sell an illiquid asset, the Fund may be forced to sell at a loss.
The Fund may purchase put and call options to seek to increase
total return. Purchased call and put options entitle the Fund to buy and sell a specified number of shares or units of a particular security,
currency or index at a specified price at a specific date or within a specific period of time. Upon the purchase of a call or put option,
the premium paid by the Fund is included on the Statement of Assets and Liabilities as an investment. All premiums are marked-to-market
daily, and any unrealized appreciation or depreciation is recorded on the Fund’s Statement of Operations. As the purchaser of an
index option, the Fund has the right to receive a cash payment equal to any depreciation in the value of the index below the strike price
of the option (in the case of a put) or equal to any appreciation in the value of the index over the strike price of the option (in the
case of a call) as of the valuation date of the option. Premiums paid for purchased call and put options which have expired are treated
as realized losses on investments on the Statement of Operations. Upon the exercise or closing of a purchased put option, the premium
is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain
or loss on investments. Upon the exercise or closing of a purchased call option, the premium is added to the cost of the security or financial
instrument. The risk associated with purchasing options is limited to the premium originally paid.
The average market value of purchased options contracts open during
the year ended April 30, 2022, was $83,395. Open purchased options at April 30, 2022, are listed in the Schedule of Investments.
The Fund may write put and covered call options to seek to increase
total return. When an option is written, the Fund receives a premium and becomes obligated to purchase or sell the underlying security
at a fixed price, upon the exercise of the option. When the Fund writes an option, an amount equal to the premium received by the Fund
is recorded as “Written options outstanding” on the Statement of Assets and Liabilities and is subsequently adjusted to the
current value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration
date as realized gains from investments on the Statement of Operations. The difference between the premium and the amount paid on effecting
a closing purchase transaction, including brokerage commissions, is also treated as a realized gain on the Statement
62 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
of Operations, or, if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss on the Statement of Operations. If a call option is exercised, the premium is
added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. The Fund as
writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option.
The average market value of written options for the year ended
April 30, 2022, was $11,702. Open written options contracts at April 30, 2022, are listed in the Schedule of Investments.
| J. | | Forward Foreign Currency Exchange Contracts |
The Fund may enter into forward foreign currency exchange contracts
(“contracts”) for the purchase or sale of a specific foreign currency at a fixed price on a future date. All contracts are
marked-to-market daily at the applicable exchange rates, and any resulting unrealized appreciation or depreciation is recorded in the
Fund’s financial statements. The Fund records realized gains and losses at the time a contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon entering into these contracts from the potential inability
of counterparties to meet the terms of the contract and from unanticipated movements in the value of foreign currencies relative to the
U.S. dollar (see Note 5).
During the year ended April 30, 2022, the Fund had entered into
various forward foreign currency exchange contracts that obligated the Fund to deliver or take delivery of currencies at specified future
maturity dates. Alternatively, prior to the settlement date of a forward foreign currency exchange contract, the Fund may close out such
contract by entering into an offsetting contract.
The average market value of forward foreign currency exchange
contracts open during the year ended April 30, 2022, was $3,535,542 and $1,919,693 for buys and sells, respectively. Open forward foreign
currency exchange contracts outstanding at April 30, 2022, are listed in the Schedule of Investments.
| K. | | Automatic Dividend Reinvestment Plan |
All shareowners whose shares are registered in their own names
automatically participate in the Automatic Dividend Reinvestment Plan (the “Plan”), under which participants receive all dividends
and capital gain distributions (collectively, dividends) in full and fractional shares of the Fund in lieu of cash. Shareowners may elect
not to participate in the
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 63
Plan. Shareowners not participating in the Plan receive all dividends
and capital gain distributions in cash. Participation in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by notifying American Stock Transfer & Trust Company, the agent for shareowners in administering the Plan (the “Plan
Agent”), in writing prior to any dividend record date; otherwise such termination or resumption will be effective with respect to
any subsequently declared dividend or other distribution.
If a shareowner’s shares are held in the name of a brokerage
firm, bank or other nominee, the shareowner can ask the firm or nominee to participate in the Plan on the shareowner’s behalf. If
the firm or nominee does not offer the Plan, dividends will be paid in cash to the shareowner of record. A firm or nominee may reinvest
a shareowner’s cash dividends in shares of the Fund on terms that differ from the terms of the Plan.
Whenever the Fund declares a dividend on shares payable in cash,
participants in the Plan will receive the equivalent in shares acquired by the Plan Agent either (i) through receipt of additional unissued
but authorized shares from the Fund or (ii) by purchase of outstanding shares on the New York Stock Exchange or elsewhere. If, on the
payment date for any dividend, the net asset value per share is equal to or less than the market price per share plus estimated brokerage
trading fees (market premium), the Plan Agent will invest the dividend amount in newly issued shares. The number of newly issued shares
to be credited to each account will be determined by dividing the dollar amount of the dividend by the net asset value per share on the
date the shares are issued, provided that the maximum discount from the then current market price per share on the date of issuance does
not exceed 5%. If, on the payment date for any dividend, the net asset value per share is greater than the market value (market discount),
the Plan Agent will invest the dividend amount in shares acquired in open-market purchases. There are no brokerage charges with respect
to newly issued shares. However, each participant will pay a pro rata share of brokerage trading fees incurred with respect to the Plan
Agent’s open-market purchases. Participating in the Plan does not relieve shareowners from any federal, state or local taxes which
may be due on dividends paid in any taxable year. Shareowners holding Plan shares in a brokerage account may be able to transfer the shares
to another broker and continue to participate in the Plan.
| L. | | Statement of Cash Flows |
Information on financial transactions which have been settled
through the receipt or disbursement of cash or restricted cash is presented in the Statement of Cash Flows. Cash as presented in the Fund’s
Statement of
64 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Assets and Liabilities includes cash on hand at the Fund’s
custodian bank and does not include any short-term investments. As of and for the year ended April 30, 2022, the Fund had no restricted
cash presented on the Statement of Assets and Liabilities.
2. Management Agreement
The Adviser manages the Fund’s portfolio. Management fees
payable under the Fund’s Investment Management Agreement with the Adviser are calculated daily and paid monthly at the annual rate
of 0.85% of the Fund’s average daily managed assets. “Managed assets” means (a) the total assets of the Fund, including
any form of investment leverage, minus (b) all accrued liabilities incurred in the normal course of operations, which shall not include
any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation,
borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other similar preference
securities, and/or (iii) any other means. For the year ended April 30, 2022, the net management fee was 0.85% of the Fund’s
average daily managed assets, which was equivalent to 1.26% of the Fund’s average daily net assets.
In addition, under the management and administration agreements,
certain other services and costs, including accounting, regulatory reporting and insurance premiums, are paid by the Fund as administrative
reimbursements. Included in “Due to affiliates” reflected on the Statement of Assets and Liabilities is $24,235 in management
fees, administrative costs and certain other reimbursements payable to the Adviser at April 30, 2022.
3. Compensation of Directors and Officers
The Fund pays an annual fee to its Directors. The Adviser reimburses
the Fund for fees paid to the Interested Directors. The Fund does not pay any salary or other compensation to its officers. For the year
ended April 30, 2022, the Fund paid $5,935 in Directors’ compensation, which is reflected on Statement of Operations as Directors’
fees. At April 30, 2022, the Fund had a payable for Directors’ fees on its Statement of Assets and Liabilities of $0.
4. Transfer Agent
American Stock Transfer & Trust Company (“AST”)
serves as the transfer agent with respect to the Fund’s common shares. The Fund pays AST an annual fee, as is agreed to from time
to time by the Fund and AST, for providing such services.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 65
In addition, the Fund reimbursed the transfer agent for out-of-pocket
expenses incurred by the transfer agent related to shareowner communications activities such as proxy and statement mailings, and outgoing
phone calls.
5. Master Netting Agreements
The Fund has entered into an International Swaps and
Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with substantially all of
its derivative counterparties. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs
the trading of certain Over the Counter (“OTC”) derivatives and typically contains, among other things, close-out and
set-off provisions which apply upon the occurrence of an event of default and/or a termination event as defined under the relevant
ISDA Master Agreement. The ISDA Master Agreement may also give a party the right to terminate all transactions traded under such
agreement if, among other things, there is deterioration in the credit quality of the other party.
Upon an event of default or a termination of the ISDA Master Agreement,
the non-defaulting party has the right to close-out all transactions under such agreement and to net amounts owed under each transaction
to determine one net amount payable by one party to the other. The right to close out and net payments across all transactions under the
ISDA Master Agreement could result in a reduction of the Fund’s credit risk to its counterparty equal to any amounts payable by
the Fund under the applicable transactions, if any. However, the Fund’s right to set-off may be restricted or prohibited by the
bankruptcy or insolvency laws of the particular jurisdiction to which each specific ISDA Master Agreement of each counterparty is subject.
The collateral requirements for derivatives transactions under
an ISDA Master Agreement are governed by a credit support annex to the ISDA Master Agreement. Collateral requirements are generally determined
at the close of business each day and are typically based on changes in market values for each transaction under an ISDA Master Agreement
and netted into one amount for such agreement. Generally, the amount of collateral due from or to a counterparty is subject to threshold
(a “minimum transfer amount”) before a transfer is required, which may vary by counterparty. Collateral pledged for the benefit
of the Fund and/or counterparty is held in segregated accounts by the Fund’s custodian and cannot be sold, re-pledged, assigned
or otherwise used while pledged. Cash that has been segregated to cover the Fund’s collateral obligations, if any, will be reported
66 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
separately on the Statement of Assets and Liabilities as “Swaps
collateral”. Securities pledged by the Fund as collateral, if any, are identified as such in the Schedule of Investments.
Financial instruments subject to an enforceable master netting
agreement, such as an ISDA Master Agreement, have been offset on the Statement of Assets and Liabilities. The following charts show gross
assets and liabilities of the Fund as of April 30, 2022.
| |
Derivative |
|
|
|
|
| |
Assets |
|
|
|
|
| |
Subject to |
Derivatives |
Non-Cash |
Cash |
Net Amount |
| |
Master Netting |
Available |
Collateral |
Collateral |
of Derivative |
| Counterparty |
Agreement |
for Offset |
Received (a) |
Received (a) |
Assets (b) |
| Bank of America NA |
$139,376 |
$(1,121) |
$ — |
$ — |
$138,255 |
| Bank of New York |
|
|
|
|
|
| Mellon Corp. |
—* |
— |
— |
— |
—* |
| Citibank NA |
78,492 |
— |
— |
— |
78,492 |
| Total |
$217,868 |
$(1,121) |
$ — |
$ — |
$216,747 |
| |
Derivative |
|
|
|
|
| |
Liabilities |
|
|
|
|
| |
Subject to |
Derivatives |
Non-Cash |
Cash |
Net Amount |
| |
Master Netting |
Available |
Collateral |
Collateral |
of Derivative |
| Counterparty |
Agreement |
for Offset |
Pledged (a) |
Pledged (a) |
Liabilities (c) |
| Bank of America NA |
$ 1,121 |
$(1,121) |
$ — |
$ — |
$ — |
| Brown Brothers |
|
|
|
|
|
| Harriman & Co. |
45,730 |
— |
— |
— |
45,730 |
| State Street Bank & |
|
|
|
|
|
| Trust Co. |
69,631 |
— |
— |
— |
69,631 |
| Total |
$116,482 |
$(1,121) |
$ — |
$ — |
$115,361 |
| * | | Includes securities that are valued at $0. |
| (a) | | The amount presented here may be less than the total amount of collateral received/pledged
as the net amount of derivative assets and liabilities cannot be less than $0. |
| (b) | | Represents the net amount due from the counterparty in the event of default. |
| (c) | | Represents the net amount payable to the counterparty in the event of default. |
6. Additional Disclosures about Derivative Instruments and Hedging
Activities
The Fund’s use of derivatives may enhance or mitigate the
Fund’s exposure to the following risks:
Interest rate risk relates to the fluctuations in the value of
interest-bearing securities due to changes in the prevailing levels of market interest rates.
Credit risk relates to the ability of the issuer of a financial
instrument to make further principal or interest payments on an obligation or commitment that it has to the Fund.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 67
Foreign exchange rate risk relates to fluctuations in the value
of an asset or liability due to changes in currency exchange rates.
Equity risk relates to the fluctuations in the value of financial
instruments as a result of changes in market prices (other than those arising from interest rate risk or foreign exchange rate risk),
whether caused by factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market
or market segment.
Commodity risk relates to the risk that the value of a commodity
or commodity index will fluctuate based on increases or decreases in the commodities market and factors specific to a particular industry
or commodity.
The fair value of open derivative instruments (not considered
to be hedging instruments for accounting disclosure purposes) by risk exposure at April 30, 2022, was as follows:
| Statement of Assets and Liabilities |
|
|
|
|
| |
|
|
Foreign |
|
|
| |
Interest |
Credit |
Exchange |
Equity |
Commodity |
| |
Rate Risk |
Risk |
Rate Risk |
Risk |
Risk |
| Options purchased* |
$ — |
$ — |
$139,376 |
$ —** |
$ — |
| Total Value |
$ — |
$ — |
$139,376 |
$ —** |
$ — |
| Liabilities |
|
|
|
|
|
| Net unrealized |
|
|
|
|
|
| depreciation on |
|
|
|
|
|
| forward foreign |
|
|
|
|
|
| currency exchange |
|
|
|
|
|
| contracts |
$ — |
$ — |
$ 36,869 |
$ — |
$ — |
| Call options written |
— |
— |
1,121 |
— |
— |
| Total Value |
$ — |
$ — |
$ 37,990 |
$ — |
$ — |
| * | | Reflects the market value of purchased option contracts (see Note 1H). These amounts are
included in investments in unaffiliated issuers, at value, on the Statement of Assets and Liabilities. |
| ** | | Securities valued at $0. |
68 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
The effect of derivative instruments (not considered to be hedging
instruments for accounting disclosure purposes) on the Statement of Operations by risk exposure at April 30, 2022 was as follows:
| Statement of Operations |
|
|
|
|
| |
|
|
Foreign |
|
|
| |
Interest |
Credit |
Exchange |
Equity |
Commodity |
| |
Rate Risk |
Risk |
Rate Risk |
Risk |
Risk |
| Net Realized |
|
|
|
|
|
| Gain (Loss) on |
|
|
|
|
|
| Forward foreign |
|
|
|
|
|
| currency exchange |
|
|
|
|
|
| contracts |
$ — |
$ — |
$ (20,163) |
$ — |
$ — |
| Options purchased* |
— |
— |
(65,100) |
— |
— |
| Options written |
— |
— |
65,100 |
— |
— |
| Total Value |
$ — |
$ — |
$ (20,163) |
$ — |
$ — |
| Change in Net |
|
|
|
|
|
| Unrealized |
|
|
|
|
|
| Appreciation |
|
|
|
|
|
| (Depreciation) on |
|
|
|
|
|
| Forward foreign |
|
|
|
|
|
| currency exchange |
|
|
|
|
|
| contracts |
$ — |
$ — |
$ (57,114) |
$ — |
$ — |
| Options purchased** |
— |
— |
130,514 |
—*** |
— |
| Options written |
— |
— |
20,287 |
— |
— |
| Total Value |
$ — |
$ — |
$ 93,687 |
$ —*** |
$ — |
| * | | Reflects the net realized gain (loss) on purchased option contracts (see Note 1H). These
amounts are included in net realized gain (loss) on investments in unaffiliated issuers, on the Statements of Operations. |
| ** | | Reflects the change in net unrealized appreciation (depreciation) on purchased option contracts
(see Note 1H). These amounts are included in change in net unrealized appreciation (depreciation) on Investments in unaffiliated issuers,
on the Statement of Operations. |
| *** | | Securities valued at $0. |
7. Fund Shares
There are 1,000,000,000 shares of common stock of the Fund (“common
shares”), $0.001 par value per share authorized. Transactions in common shares for the year ended April 30, 2022 and the year ended
April 30, 2021 were as follows:
| |
4/30/22 |
4/30/21 |
| Shares outstanding at beginning of year |
8,332,790 |
8,332,790 |
| Shares outstanding at end of year |
8,334,759 |
8,332,790 |
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 69
8. Credit Agreement
The Fund has entered into a Revolving Credit Facility (the
“Credit Agreement”) with the Bank of Scotia. There is a $68,000,000 borrowing limit.
At April 30, 2022, the Fund had a borrowing outstanding under
the Credit Agreement totaling $54,950,000. The interest rate charged at April 30, 2022 was 1.71%. During the year ended April 30, 2022,
the average daily balance under the Credit Agreement was $60,533,973 at an average interest rate of 1.10%. Interest expense of $665,530
in connection with the Credit Agreement is included on the Statement of Operations.
The Fund is required to maintain 300% asset coverage with respect
to amounts outstanding under the Credit Agreement. Asset coverage is calculated by subtracting the Fund’s total liabilities not
including any bank loans and senior securities, from the Fund’s total assets and dividing such amount by the principal amount of
the borrowing outstanding.
The Credit Agreement includes an “evergreen” facility
that renews on a daily basis in perpetuity. The Bank of Nova Scotia may, at any time, deliver to the Fund a termination notice, which
becomes effective 179 days after its date of delivery.
9. Unfunded Loan Commitments
The Fund may enter into unfunded loan commitments. Unfunded loan
commitments may be partially or wholly unfunded. During the contractual period, the Fund is obliged to provide funding to the borrower
upon demand. A fee is earned by the Fund on the unfunded loan commitment and is recorded as interest income on the Statement of Operations.
Unfunded loan commitments are fair valued in accordance with the valuation policy described in Footnote 1A and unrealized appreciation
or depreciation, if any, is recorded on the Statement of Assets and Liabilities.
As of April 30, 2022, the Fund had the following unfunded loan
commitment outstanding:
| |
|
|
|
Unrealized |
| |
|
|
|
Appreciation |
| Loan |
Principal |
Cost |
Value |
(Depreciation) |
| Project Watson Bridge Loan |
$1,817,200 |
$1,817,200 |
$1,817,200 |
$ — |
| Total Value |
$1,817,200 |
$1,817,200 |
$1,817,200 |
$ — |
70 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
10. Redomiciling
On April 21, 2021, the Fund, previously organized as a
Delaware statutory trust, redomiciled to a Maryland corporation (the “redomiciling”). The redomiciling was effected
through a statutory merger of the predecessor Delaware statutory trust (the “Predecessor Entity”) with and into a newly
established Maryland corporation formed for the purpose of effecting the redomiciling (the “Successor Entity”) pursuant
to the terms of an Agreement and Plan of Merger entered into by and between the Predecessor Entity and the Successor Entity (the
“Merger”). Upon effectiveness of the Merger, (i) the Successor Entity became the successor in interest to the Fund (ii)
each outstanding share of common stock of the Predecessor Entity was automatically converted into one share of common stock of the
Successor Entity, and (iii) the shareholders of the Predecessor Entity became stockholders of the Successor Entity. Neither the Fund
nor its stockholders realized gain (loss) as a direct result of the Merger. Accordingly, the Merger had no effect on the
Fund’s operations.
In connection with the redomiciling, the Fund’s name changed
from Pioneer Diversified High Income Trust to Pioneer Diversified High Income Fund, Inc. The Fund’s ticker symbol on the New York
Stock Exchange did not change. The redomiciling did not result in any change to the investment adviser, investment objective and strategies,
portfolio management team, policies and procedures or the members of the Board overseeing the Fund.
Following the Fund’s redomiciling, the rights of shareholders
are governed by Maryland General Corporation Law and the Articles of Incorporation and Bylaws of the Successor Entity. In addition, the
Fund is subject to the Maryland Control Share Acquisition Act (the “Control Share Act”) following the redomiciling.
The Control Share Act generally
provides that any holder of “control shares” acquired in a “control share acquisition” may not exercise voting
rights with respect to the “control shares,” except to the extent approved by a vote of two-thirds of all the votes entitled
to be cast on the matter. Generally, “control shares” are shares that, when aggregated with shares already owned by an acquiring
person, would entitle the acquiring person to exercise 10% or more, 33 1/3%
or more, or a majority of the total voting power of shares entitled to vote in the election of directors. The Control Share Act provides
that a “control share acquisition” does not include the acquisition of shares in a merger, consolidation or share exchange.
Therefore, a shareholder of the Fund that acquired shares of the Successor
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 71
Entity as a result of the Merger will be able to exercise voting
rights as to those shares even if the number of such shares acquired by the shareholder in the Merger exceeds one or more of the thresholds
of the Control Share Act.
The above description of the Control Share Act is only a high-level
summary and does not purport to be complete. Investors should refer to the actual provisions of the Control Share Act and the Fund’s
Bylaws for more information, including definitions of key terms, various exclusions and exemptions from the statute’s scope, and
the procedures by which stockholders may approve the reinstatement of voting rights to holders of “control shares.”
11. Change in Custodian and Sub-Administrator
Effective November 22, 2021, The Bank of New York Mellon Corporation
serves as the Fund’s Custodian and Sub-Administrator.
12. Subsequent Events
A monthly distribution was declared on May 4, 2022 of $0.1100
per share payable May 31, 2022, to shareowners of record on May 18, 2022.
72 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of Pioneer Diversified
High Income Fund, Inc.:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities
of Pioneer Diversified High Income Fund, Inc. (the “Fund”), including the schedule of investments, as of April 30, 2022, and
the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of Pioneer Diversified High Income Fund, Inc. at April 30, 2022, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended in conformity with U.S. generally accepted accounting principles.
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 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. The Fund is not required to have, nor were we engaged to perform, an
audit of the Fund’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s
internal control over financial reporting. Accordingly, we express no such opinion.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 73
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 procedures
included confirmation of securities owned as of April 30, 2022, by correspondence with the custodian and brokers or by other appropriate
auditing procedures where replies from brokers were not received. 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. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies
in the Pioneer family of funds since 2017.
Boston, Massachusetts
June 29, 2022
74 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Additional Information (unaudited)
Notice is hereby given in accordance with Section 23(c) of the
Investment Company Act of 1940 that the Fund may purchase, from time to time, its shares in the open market.
The percentages of the Fund’s ordinary income distributions
that are exempt from nonresident alien (NRA) tax withholding resulting from qualified interest income was 57.73%.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 75
Investment Objectives, Principal Investment Strategies and
Principal Risks
CHANGES OCCURRING DURING MOST RECENT FISCAL YEAR
The following information in this annual report is a summary of
certain changes during the most recent fiscal year. This information may not reflect all of the changes that have occurred since you purchased
shares of the Fund. The following principal risk disclosure has been revised:
Market risk. The market prices of securities or other
assets held by the Fund may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived
adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity
in the bond markets, the spread of infectious illness or other public health issues, armed conflict, market disruptions caused by tariffs,
trade disputes, sanctions or other government actions, or other factors or adverse investor sentiment. Changes in market conditions may
not have the same impact on all types of securities. The value of securities may also fall due to specific conditions that affect a particular
sector of the securities market or a particular issuer. If the market prices of the Fund’s securities and assets fall, the value
of your investment will go down. A change in financial condition or other event affecting a single issuer or market may adversely impact
securities markets as a whole. Rates of inflation have recently risen. The value of assets or income from an investment may be worth less
in the future as inflation decreases the value of money. As inflation increases, the real value of the Fund’s assets can decline
as can the value of the Fund’s distributions.
In the past decade, financial markets throughout the world have
experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. Governmental and non-governmental
issuers have defaulted on, or been forced to restructure, their debts. These conditions may continue, recur, worsen or spread. Events
that have contributed to these market conditions include, but are not limited to, major cybersecurity events; geopolitical events (including
wars, terror attacks and economic sanctions); measures to address budget deficits; downgrading of sovereign debt; changes in oil and commodity
prices; changes in currency exchange rates; global pandemics; and public sentiment. The global pandemic of the novel coronavirus respiratory
disease designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global
financial markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity
for many instruments has been greatly reduced for periods of time. Some sectors of the economy and
76 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
individual issuers have experienced particularly large losses.
These circumstances may continue for an extended period of time, and may continue to affect adversely the value and liquidity of the Fund’s
investments. Following Russia’s recent invasion of Ukraine, Russian securities have lost all, or nearly all, their market value.
Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.
Governments and central banks, including the U.S. Federal Reserve,
have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have
resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact
on the economy and securities markets, may not be known for some time. Interest rates are very low, which means there is more risk that
they may go up. In some cases yields are negative. U.S. Federal Reserve or other U.S. or non-U.S. governmental or central bank actions,
including increases or decreases in interest rates, or contrary actions by different governments, could negatively affect financial markets
generally, increase market volatility and reduce the value and liquidity of securities in which the Fund invests. Policy and legislative
changes in the U.S. and in other countries are affecting many aspects of financial regulation, and these and other events affecting global
markets, such as the United Kingdom’s exit from the European Union (or Brexit), potential trade imbalances with China or other countries,
or sanctions or other government actions against Russia, other nations or individuals or companies (or their countermeasures), may contribute
to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the implications
for market participants, may not be fully known for some time.
Economies and financial markets throughout the world are increasingly
interconnected. Economic, financial or political events, trading and tariff arrangements, armed conflict including Russia’s military
invasion of Ukraine, terrorism, natural disasters, infectious illness or public health issues, cybersecurity events, supply chain disruptions,
sanctions against Russia, other nations or individuals or companies and possible countermeasures, and other circumstances in one country
or region could have profound impacts on other countries or regions and on global economies or markets. As a result, whether or not the
Fund invests in securities of issuers located in or with significant exposure to the countries or regions directly affected, the value
and liquidity of the Fund’s investments may be negatively affected. The Fund may experience a substantial or complete loss on any
security or derivative position.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 77
Anti-takeover provisions. The Fund’s Charter
and Bylaws include provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term
objectives, including by converting the Fund to open-end status or changing the composition of the Board, that may be detrimental to the
Fund’s ability to achieve its primary investment objective of seeking to provide its common shareholders with a high level of current
income. The Fund’s Bylaws also contain a provision providing that the Board of Directors has adopted a resolution to opt in the
Fund to the provisions of the Maryland Control Share Acquisition Act (“MCSAA”). Such provisions may limit the ability of shareholders
to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund.
There can be no assurance, however, that such provisions will be sufficient to deter activist investors that seek to cause the Fund to
take actions that may not be aligned with the interests of long-term shareholders.
INVESTMENT OBJECTIVES
The Fund’s primary investment objective is to provide its
common shareholders with a high level of current income. As a secondary investment objective, the Fund seeks capital appreciation to the
extent consistent with its primary investment objective. The Fund’s investment objectives are fundamental policies and may not be
changed without the approval of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund. There can be
no assurance that the Fund will achieve its investment objectives.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund invests at least 80%
of its managed assets (net assets plus borrowings or other leverage for investment purposes) in a diversified portfolio of below investment
grade (high yield) debt securities, loans and preferred stocks. These securities are rated below investment grade by the national rating
agencies that cover the obligations (i.e., Ba and below by Moody’s or BB and below by S&P), or if unrated, are determined by
the Adviser to be of comparable quality. Investment in securities of below investment grade quality, commonly referred to as “junk
bonds,” involves substantial risk of loss. “Junk bonds” are considered predominantly speculative with respect to the
issuer’s ability to pay interest and repay principal and are susceptible to default or decline in market value due to adverse economic
and business developments.
78 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
The Fund will provide written notice to shareholders at least
60 days prior to any change to the requirement that it invest at least 80% of its managed assets in below investment grade (high yield)
debt securities, loans and preferred stocks.
The Fund may invest in securities and other obligations of any
credit quality, including those that are rated below investment grade or are unrated but determined by the Adviser to be of equivalent
credit quality. The Fund does not have a policy of maintaining a specific average credit quality or a dollar-weighted average maturity
target or range for its portfolio. The Fund may invest any portion of its assets in securities and other instruments of non-U.S. issuers,
including emerging market issuers, and may engage in certain strategic transactions.
The Fund allocates its investments principally among three sectors
of the fixed income securities markets: (i) below investment grade debt securities and preferred stocks of U.S. and non-U.S. issuers,
including governmental and corporate issuers in emerging markets (“global high income debt securities”), (ii) floating rate
loans and (iii) insurance-linked securities (“ILS”). ILS include event-linked bonds (also known as insurance-linked bonds
or catastrophe bonds), quota share instruments (also known as “reinsurance sidecars”), collateralized reinsurance investments,
industry loss warranties, event-linked swaps, securities of companies in the insurance or reinsurance industries, and other insurance-
and reinsurance-related securities. ILS are typically rated below investment grade or unrated.
The Adviser believes that this actively managed, diversified portfolio
of asset classes – global high yield debt securities, floating rate loans and ILS – may provide investors with a range of
potential benefits across various market cycles and under various market conditions. These benefits include, among others, the potential
to provide investors with a relatively high level of current income without undue risk as a result of the low correlation among these
asset classes, reduced volatility due to limited exposure to interest rate and duration risk, as well as a favorable risk return profile.
Specifically, the floating rate feature of both floating rate loans and ILS serves to reduce sensitivity to changes in prevailing interest
rates. In addition, the introduction of ILS to the diversified portfolio enhances these benefits by reducing volatility, while providing
the potential for above average returns. Moreover, the Fund’s investments in ILS offer investors access to a unique asset class
that otherwise may be unavailable to them. The Fund’s investments nevertheless involve significant risks since the Fund invests
at least 80% of its managed assets in below investment grade (high yield) debt securities, loans and preferred stocks.
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 79
The Adviser is responsible for managing the Fund’s overall
investment program, including allocating the Fund’s investments among the different asset classes and managing the Fund’s
investments in global high income debt securities, floating rate loans and ILS. The Adviser considers both broad economic and issuer specific
factors in selecting a portfolio designed to achieve the Fund’s investment objectives. The Adviser selects individual securities
based upon the terms of the securities (such as yields compared to U.S. Treasuries or comparable issues), liquidity and rating, sector
and issuer diversification. The Adviser also employs due diligence and fundamental quantitative and qualitative research to assess an
issuer’s credit quality, taking into account financial condition and profitability, future capital needs, potential for change in
rating, industry outlook, the competitive environment and management ability. The Adviser may sell a portfolio security when it believes
the security no longer will contribute to meeting the Fund’s investment objectives. The Adviser makes that determination based on
the same criteria it uses to select portfolio securities. In making these portfolio decisions, the Adviser relies on the knowledge, experience
and judgment of its staff and the staff of its affiliates who have access to a wide variety of research.
In selecting ILS for investment, the Adviser uses quantitative
and qualitative analysis. The Adviser utilizes quantitative analysis in an effort to model portfolio risk and attribution. This modeling
process is supported by use of a risk analytic system that is used by the insurance industry. The risk analytic system contains a database
of historical and hypothetical catastrophic events and property structures that assists the Adviser in its efforts to model peril exposures
at both the security and portfolio level. Among the factors considered in this process are expected loss and the probabilities of loss
and maximum loss. The Adviser’s qualitative analysis may consider various factors, such as trigger term (measurement of loss event
specific to an instrument) or other terms of an instrument, sponsor quality, deal structure, alignment of interest between the Fund and
the sponsoring insurance company, and model accuracy. The Adviser’s analysis guides the Adviser in determining the desired allocation
of reinsurance-related securities by issuer, peril and geographic exposure. The Adviser may rely on information and analysis obtained
from brokers, dealers and ratings organizations, among other sources.
The Fund may use financial leverage on an ongoing basis for investment
purposes by borrowing from banks through a revolving credit facility. Leverage creates special risks not associated with unleveraged funds
having a similar investment objectives and policies. These include the possibility of higher volatility of both the net asset value of
the Fund and the value of assets serving as asset coverage for the borrowing. The fees and expenses
80 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
attributed to leverage, including any increase in the management
fees, will be borne by holders of common shares. The Adviser intends only to leverage the Fund when it believes that the potential total
return on additional investments purchased with the proceeds of leverage is likely to exceed the costs incurred in connection with the
leverage. The Fund may not be leveraged at all times, and the amount of leverage, if any, may vary depending on a variety of factors,
including the Adviser’s outlook for interest rates and credit markets and the costs that the Fund would incur as a result of such
leverage. The Fund’s leveraging strategy may not be successful.
Although the Adviser considers ratings when making investment
decisions, the Adviser performs its own credit and investment analysis and does not rely primarily on ratings assigned by rating services.
In evaluating the attractiveness of a particular obligation, whether rated or unrated, the Adviser generally gives equal weight to the
obligation’s yield and the issuer’s creditworthiness and will normally take into consideration, among other things, the issuer’s
financial resources and operating history, its sensitivity to economic conditions and trends, the availability of its management, its
debt maturity schedules and borrowing requirements, and relative values based on anticipated cash flow, interest and asset coverage and
earnings prospects.
Portfolio Contents
Global high yield debt securities. The Fund’s
investments in global high yield debt securities may include below investment grade convertible bonds and preferred stocks that are convertible
into the equity securities of the issuer. The value of obligations of non-U.S. issuers is affected by changes in foreign tax laws (including
withholding tax), government policies (in this country or abroad) and relations between nations, and trading, settlement, custodial and
other operational risks. In addition, the costs of investing abroad are generally higher than in the United States.
Floating rate instruments. Floating rate instruments
pay interest rates that adjust or “float” periodically based on a specified interest rate or other reference and include floating
rate loans, repurchase agreements, money market securities and shares of money market and short-term bond funds.
Floating rate loans. Floating rate loans are provided
by banks and other financial institutions to large corporate customers in connection with recapitalizations, acquisitions, and refinancings.
These loans are generally acquired as a participation interest in, or assignment of, loans originated by a lender or other financial institution.
These loans are rated below investment grade. The rates of interest on the loans typically adjust
Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22 81
periodically by reference to a base lending rate, such as the
London Interbank Offered Rate (LIBOR), a designated U.S. bank’s prime or base rate or the overnight federal funds rate, plus a premium.
Some loans reset on set dates, typically every 30 to 90 days, but not to exceed one year. Other loans reset periodically when the underlying
rate resets.
Senior loans hold a senior position in the capital structure of
the borrower. Having a senior position means that, if the borrower becomes insolvent, senior debtholders, like the Fund, will be paid
before subordinated debtholders and stockholders of the borrower. Senior loans typically are secured by specific collateral.
Floating rate loans typically are structured and administered
by a financial institution that acts as an agent for the holders of the loan. Loans can be acquired directly through the agent, by assignment
from another holder of the loan, or as a participation interest in the loan. When the Fund is a direct investor in a loan, the Fund may
have the ability to influence the terms of the loan, although the Fund does not act as the sole negotiator or originator of the loan.
Participation interests are fractional interests in a loan issued by a lender or other financial institution. When the Fund invests in
a loan participation, the Fund does not have a direct claim against the borrower and must rely upon an intermediate participant to enforce
any rights against the borrower.
Insurance-linked securities
Event-linked bonds
The Fund may invest in “event-linked” bonds, which
sometimes are referred to as “insurance-linked” or “catastrophe” bonds. Event-linked bonds are floating rate debt
obligations for which the return of principal and the payment of interest are contingent on the non-occurrence of a pre-defined “trigger”
event, such as a hurricane or an earthquake of a specific magnitude. The trigger event’s magnitude may be based on losses to a company
or industry, industry indexes or readings of scientific instruments, or may be based on specified actual losses. If a trigger event, as
defined within the terms of an event-linked bond occurs, the Fund may lose a portion or all of its accrued interest and/or principal invested
in such event-linked bond. The Fund is entitled to receive principal and interest payments so long as no trigger event occurs of the description
and magnitude specified by the instrument.
Event-linked bonds may be issued by government agencies, insurance
companies, reinsurers, special purpose corporations or other U.S. or non-U.S. entities. Event-linked bonds are typically rated below investment
grade or may be unrated. The rating for an event-linked bond primarily reflects
82 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
the rating agency’s calculated probability that a pre-defined
trigger event will occur, which will cause a loss of principal. This rating may also assess the credit risk of the bond’s collateral
pool, if any, and the reliability of the model used to calculate the probability of a trigger event.
The Fund’s investments in event-linked bonds may have trigger
events related to a broad range of insurance risks, which can be broken down into three major categories: natural risks, weather risks
and non-natural events. Investments in event-linked bonds with trigger events related to natural risks will represent the largest portion
of the Fund’s event-linked bond investments. The events covered are natural catastrophes, such as hurricanes, other windstorms,
earthquakes and fires. Investments in event-linked bonds linked to weather risks provide insurance to companies, or insurers of companies,
whose sales depend on the weather and provide a hedge on the impact of weather-related risks. For example, a weather event-linked bond
could provide coverage based on the average temperature in a region over a given period. Investments in event-linked bonds linked to non-natural
risks could cover a much broader array of insurable risks, such as aerospace and shipping catastrophes.
The Fund may invest in other types of event-linked bonds where
the trigger event may be based on company-wide losses (“indemnity triggers”), index-based losses (“index triggers”)
or a combination of triggers (“hybrid triggers”).
Indemnity triggers. Indemnity triggers are based on
losses of the insurance company or other entity issuing the event-linked bond. The trigger event would be considered to have occurred
if a company’s losses on catastrophic insurance claims exceeded a certain aggregate amount of insured claims. If the company’s
losses were less than the pre-determined aggregate amount, then the trigger event would not be considered to have occurred and the Fund
would be entitled to recover its principal plus accrued but unpaid interest. Indemnity triggers require investors and rating agencies
to understand the risks of the insurance and reinsurance policies underwritten by the company, which may be difficult to obtain and ascertain,
particularly in the case of complex commercial insurance and reinsurance policies. In addition, event-linked bond investors are dependent
upon the company’s ability to settle catastrophe claims in a manner that would not be disadvantageous to investors’ interests.
Index triggers. Index triggers follow one of three
broad approaches: parametric, industry-loss and modeled-loss, or a combination thereof, which is discussed below as “hybrid triggers.”
Index triggers are based on pre-defined formulas, which eliminate the risks relating to a company’s insurance claims-handling practices
and potential information barriers.
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However, index triggers are generally riskier than indemnity triggers,
since investors in event-linked bonds that have index triggers are dependent upon the accuracy of the models and reporting services used
to calculate the formulas.
- Parametric. Parametric index triggers are based
upon the occurrence of a catastrophic event with certain defined physical parameters (e.g., wind speed and location of a hurricane or
magnitude and location of an earthquake).
- Industry-loss. Industry loss index triggers are
based upon the estimated loss for the insurance industry as a whole from a particular catastrophe. Estimates are derived from a reporting
service, such as Property Claim Services.
- Modeled-loss. Modeled-loss index triggers are based
upon a catastrophe-modeling firm’s database estimate of an industry loss, or a company’s losses compared to a modeling firm’s
industry estimate of losses.
Hybrid triggers. Hybrid triggers involve more than
one trigger type in a single transaction or tranche of an event-linked bond. For example, a hybrid trigger could involve the occurrence
of both a U.S. hurricane and a Japanese earthquake with a different kind of index trigger for each. Another example of a hybrid trigger
involves different trigger types occurring in a particular sequence. For example, after the occurrence of a qualifying U.S. earthquake,
a modeled-loss index is used to establish a company’s overall market share, and then applied to the industry loss index associated
with the qualifying event to determine any principal reduction. Hybrid triggers may be more complicated and difficult to understand for
investors, and involve the applicable risks associated with the types of triggers described above.
Structured reinsurance investments
ILS include special purpose vehicles (“SPVs”) or similar
instruments structured to comprise a portion of a reinsurer’s catastrophe-oriented business, known as quota share instruments (sometimes
referred to as reinsurance sidecars), or to provide reinsurance relating to specific risks to insurance or reinsurance companies through
a collateralized instrument, known as collateralized reinsurance. Quota share instruments and other structured reinsurance investments
generally will be considered illiquid securities by the Fund. The Fund may invest substantially in illiquid securities.
Structured reinsurance investments developed along with event-linked
bonds as a mechanism to facilitate risk-transfer from insurance markets to capital markets investors. These instruments are typically
more
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customizable but less liquid investments than event-linked bonds.
Like event-linked bonds, an investor in structured reinsurance investments participates in the premiums and losses associated with underlying
reinsurance contracts. Where the instruments are based on the performance of underlying reinsurance contracts, the Fund has limited transparency
into the underlying contracts and therefore must rely upon the risk assessment and sound underwriting practices of the insurer and/or
reinsurer. Accordingly, it may be more difficult for the Adviser to fully evaluate the underlying risk profile of the Fund’s structured
reinsurance investments, and therefore the Fund’s assets are placed at greater risk of loss than if the Adviser had more complete
information. The instruments typically mature in one year.
The Fund invests indirectly in reinsurance contracts, by holding
notes or preferred shares issued by a SPV or similar instrument whose performance is tied to an underlying reinsurance transaction, including
quota share instruments. Quota share instruments are a form of proportional reinsurance in which an investor participates in the premiums
and losses of a reinsurer’s portfolio of catastrophe-oriented policies, according to a predefined percentage. For example, under
a 10% quota share agreement, the SPV would be entitled to 10% of all premiums associated with a defined portfolio and be responsible for
10% of all related claims. The Fund, as a holder of a quota share issued by an SPV would be entitled to its pro rata share of premiums
received by the SPV and would be responsible for its pro rata share of the claims, up to the total amount invested.
Collateralized reinsurance investments are privately structured
securities or derivatives utilized to gain exposure to the reinsurance market. Collateralized reinsurance entails an SPV entering into
a reinsurance arrangement that is then collateralized by invested capital and premiums related to the insurance coverage. The collateral
is designed to cover in full the potential claims that could arise from the underlying reinsurance contract.
Structured reinsurance investments may include industry loss warranties
(“ILWs”). ILWs are insurance-linked securities used to finance peak, nonrecurrent insurance risks, such as hurricanes, tropical
storms and earthquakes. ILWs feature an industry loss index trigger, and, in some cases, a dual trigger design that includes a protection
buyer indemnity trigger. A traditional ILW takes the form of a bilateral reinsurance contract, but there are also index products that
take the form of derivatives, collateralized structures or exchange traded instruments. The common feature among these forms is that the
payout trigger is based on an
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industry loss index or a parametric index. County-weighted industry
loss warranties are variations of ILWs that provide reinsurance protection at a county level rather than state-wide or industry-wide losses.
The reinsurance market is highly cyclical, with coverage being
written at the beginning of the year and midyear for coverage for the following 12 months. The pricing of reinsurance is also highly cyclical
as premiums for reinsurance coverage are driven, in large part, by insurers’ recent loss experience.
Other fixed income securities
The Fund’s fixed-income securities may have fixed or variable
principal payments and all types of interest rate and dividend payment and reset terms, including fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and auction rate features. The Fund may invest in fixed-income securities with a broad range of
maturities. The Fund’s investments also may include unsecured or subordinated loans, revolving credit facilities, investment grade
fixed income securities, convertible securities and money market instruments, such as commercial paper. The Fund also may purchase other
floating rate debt securities such as notes, bonds and asset-backed securities (such as securities issued by special purpose funds investing
in bank loans).
The Fund may invest in zero coupon bonds, deferred interest bonds
and bonds or preferred stocks on which the interest is payable in-kind (PIK bonds). To the extent the Fund invests in such instruments,
they will not contribute to the Fund’s primary goal of current income. Zero coupon and deferred interest bonds are debt obligations
which are issued at a significant discount from face value. While zero coupon bonds do not require the periodic payment of interest, deferred
interest bonds provide for a period of delay before the regular payment of interest begins. PIK bonds are debt obligations that provide
that the issuer thereof may, at its option, pay interest on such bonds in cash or in the form of additional debt obligations. Such investments
may experience greater volatility in market value due to changes in interest rates. The Fund may be required to accrue income on these
investments for federal income tax purposes and is required to distribute its net income each year in order to qualify for the favorable
federal income tax treatment potentially available to regulated investment companies. The Fund may be required to sell securities to obtain
cash needed for income distributions.
The Fund may hold securities that are unrated or in the lowest
ratings categories (rated C by Moody’s or D by S&P). Because of the greater number of investment considerations involved in
investing in high yield, high risk
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floating rate loans and bonds, the achievement of the Fund’s
objectives depends more on the Adviser’s judgment and analytical abilities than would be the case if invested primarily in securities
in the higher ratings categories. The Fund may purchase obligations issued in connection with a restructuring pursuant to Chapter 11 of
the U.S. Bankruptcy Code. While these investments are not a primary focus of the Fund, the Fund does not have a policy limiting such investments
to a specific percentage of the Fund’s assets.
Other debt securities in which the Fund may invest include: securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities and custodial receipts therefor; securities issued or guaranteed
by a foreign government or any of its political subdivisions, authorities, agencies or instrumentalities or by international or supranational
entities; corporate debt securities, including notes, bonds and debentures; certificates of deposit and bankers’ acceptances issued
or guaranteed by, or time deposits maintained at, banks (including U.S. or foreign branches of U.S. banks or U.S. or foreign branches
of foreign banks) having total assets of more than $1 billion; commercial paper; and mortgage related securities. These securities may
be of any maturity. The value of debt securities can be expected to vary inversely with interest rates.
The Fund may invest any portion of its assets in securities and
other instruments of non-U.S. issuers, including emerging market issuers, and may engage in hedging transactions.
Preferred securities. The Fund may invest in preferred
securities. Preferred securities are equity securities, but they have many characteristics of fixed income securities, such as a fixed
dividend payment rate and/or a liquidity preference over the issuer’s common shares. However, because preferred shares are equity
securities, they may be more susceptible to risks traditionally associated with equity investments than the Fund’s fixed income
securities.
Fixed rate preferred stocks have fixed dividend rates. They can
be perpetual, with no mandatory redemption date, or issued with a fixed mandatory redemption date. Certain issues of preferred stock are
convertible into other equity securities. Perpetual preferred stocks provide a fixed dividend throughout the life of the issue, with no
mandatory retirement provisions, but may be callable. Sinking fund preferred stocks provide for the redemption of a portion of the issue
on a regularly scheduled basis with, in most cases, the entire issue being retired at a future date. The value of fixed rate preferred
stocks can be expected to vary inversely with interest rates.
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Adjustable rate preferred stocks have a variable dividend rate
which is determined periodically, typically quarterly, according to a formula based on a specified premium or discount to the yield on
particular U.S. Treasury securities, typically the highest base-rate yield of one of three U.S. Treasury securities: the 90-day Treasury
bill; the 10-year Treasury note; and either the 20-year or 30-year Treasury bond or other index. The premium or discount to be added to
or subtracted from this base-rate yield is fixed at the time of issuance and cannot be changed without the approval of the holders of
the adjustable rate preferred stock. Some adjustable rate preferred stocks have a maximum and a minimum rate and in some cases are convertible
into common stock.
Auction rate preferred stocks pay dividends that adjust based
on periodic auctions. Such preferred stocks are similar to short-term corporate money market instruments in that an auction rate preferred
stockholder has the opportunity to sell the preferred stock at par in an auction, normally conducted at least every 49 days, through which
buyers set the dividend rate in a bidding process for the next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate preferred stock’s dividend rate is limited to a specified
maximum percentage of an external commercial paper index as of the auction date. Further, the terms of the auction rate preferred stocks
generally provide that they are redeemable by the issuer at certain times or under certain conditions.
Convertible Securities. The Fund’s investment
in fixed income securities may include bonds and preferred stocks that are convertible into the equity securities of the issuer or a related
company. Depending on the relationship of the conversion price to the market value of the underlying securities, convertible securities
may trade more like equity securities than debt instruments.
Zero Coupon Securities. The Fund may invest in zero
coupon securities. Zero coupon securities are debt instruments that do not pay interest during the life of the security but are issued
at a discount from the amount the investor will receive when the issuer repays the amount borrowed (the face value). The discount approximates
the total amount of interest that would be paid at an assumed interest rate.
Mortgage- and asset-backed securities. The Fund may
invest in mortgage-backed and asset-backed securities. Mortgage-backed securities may be issued by private companies or by agencies of
the U.S. government and represent direct or indirect participation in, or are collateralized by and payable from, mortgage loans secured
by real property. Asset-backed securities represent participations in, or are secured by and payable from,
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assets such as installment sales or loan contracts, leases, credit
card receivables and other categories of receivables. The Fund’s investments in mortgage related securities may include mortgage
derivatives and structured securities.
The Fund may invest in commercial mortgage-backed securities (“CMBS”).
CMBS are subject to the risks generally associated with mortgage-backed securities. CMBS may not be backed by the full faith and credit
of the U.S. government and are subject to risk of default on the underlying mortgages. CMBS issued by non-government entities may offer
higher yields than those issued by government entities, but also may be subject to greater volatility than government issues. CMBS react
differently to changes in interest rates than other bonds and the prices of CMBS may reflect adverse economic and market conditions. Small
movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of CMBS.
The commercial mortgages underlying certain commercial mortgage-backed
securities generally allow all or a substantial portion of the loan balance to be paid at maturity, commonly known as a balloon payment.
Some mortgage loans restrict periodic adjustments by limiting changes in the borrower’s monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in negative amortization, where payments are less than the amount
of principal and interest owed, with excess amounts added to the outstanding principal balance, which can extend the average life of the
mortgage-backed securities.
The Fund may invest in credit risk transfer securities. Credit
risk transfer securities are a type of mortgage-related security that transfers the credit risk related to certain types of mortgage-backed
securities to the owner of the credit risk transfer security. Credit risk transfer securities are commonly issued by government-sponsored
enterprises (GSEs), such as FNMA or FHLMC, but may also be issued by private entities such as banks or other financial institutions. Credit
risk transfer securities issued by GSEs are unguaranteed and unsecured fixed or floating rate general obligations and are typically issued
at par and have stated final maturities. In addition, GSE-issued credit risk transfer securities are structured so that: (i) interest
is paid directly by the issuing GSE; and (ii) principal is paid by the issuing GSE in accordance with the principal payments and default
performance of a pool of residential mortgage loans acquired by the GSE. In this regard, holders of GSE credit risk transfer securities
receive compensation for providing credit protection to the GSE and, when a specified level of losses
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on the underlying mortgage loans occurs, the principal balance
and certain payments owed to the holders of such GSE credit risk transfer securities may be reduced.
In the event that a government sponsored enterprise fails to pay
principal or interest on its credit risk transfer securities or goes through a bankruptcy, insolvency or similar proceeding, holders of
such credit risk transfer securities have no direct recourse to the underlying mortgage loans and will generally receive recovery on par
with other unsecured note holders in such a scenario. The risks associated with an investment in credit risk transfer securities are different
than the risks associated with an investment in mortgage-backed securities issued by FNMA and FHLMC, or other government sponsored enterprise
or issued by a private issuer, because some or all of the mortgage default or credit risk associated with the underlying mortgage loans
is transferred to investors. As a result, investors in these securities could lose some or all of their investment in these securities
if the underlying mortgage loans default.
To the extent the Fund invests significantly in asset-backed and
mortgage-related securities, its exposure to prepayment and extension risks may be greater than if it invested in other fixed income securities.
Certain debt instruments may only pay principal at maturity or
may only represent the right to receive payments of principal or interest on underlying pools of mortgage or government securities, but
not both. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest
during periods of changing interest rates. Principal only mortgage-backed securities generally increase in value if interest rates decline,
but are also subject to the risk of prepayment. Interest only instruments generally increase in value in a rising interest rate environment
when fewer of the underlying mortgages are prepaid. Interest only instruments could lose their entire value in a declining interest rate
environment if the underlying mortgages are prepaid.
The Fund may invest in mortgage derivatives and structured securities.
Mortgage derivatives or structured securities typically are not secured by real property. Because these securities have imbedded leverage
features, small changes in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives can also become
illiquid and hard to value in declining markets.
Inverse floating rate obligations. The Fund may invest
in inverse floating rate obligations (a type of derivative instrument). The interest rate on inverse floating rate obligations will generally
decrease as short-term interest rates increase, and increase as short-term rates decrease. Due to
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their leveraged structure, the sensitivity of the market value
of an inverse floating rate obligation to changes in interest rates is generally greater than a comparable long-term bond issued by the
same issuer and with similar credit quality, redemption and maturity provisions. Inverse floating rate obligations may be volatile and
involve leverage risk.
Second lien loans and other subordinated securities. The
Fund may invest in second lien loans and other securities that are subordinated or “junior” to more senior securities of the
issuer. The investor in a subordinated security of an issuer is entitled to payment after other holders of debt in that issuer.
Collateralized debt obligations. The Fund may invest
in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized
loan obligations (“CLOs”) and other similarly structured securities. CDOs have securitized certain financial assets by issuing
securities in the form of negotiable paper that are issued by an SPV. These securitized assets are, as a rule, corporate financial assets
brought into a pool according to specific diversification rules. The SPV is a company founded solely for the purpose of securitizing these
claims and its only asset is the diversified asset pool. On this basis, marketable securities are issued which, due to the diversification
of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by
the SPV takes place at maturity out of the cash flow generated by the collected claims.
The Fund also may invest in CBOs, which are structured debt securities
backed by a diversified pool of high yield, public or private fixed income securities. These may be fixed pools or may be “market
value” (or managed) pools of collateral. The CBO issues debt securities that are typically separated into tranches representing
different degrees of credit quality. The top tranche of securities has the greatest collateralization and pays the lowest interest rate.
Lower CBO tranches have a lesser degree of collateralization quality and pay higher interest rates intended to compensate for the attendant
risks. The bottom tranche specifically receives the residual interest payments (i.e., money that is left over after the higher tranches
have been paid) rather than a fixed interest rate. The return on the lower tranches of a CBO is especially sensitive to the rate of defaults
in the collateral pool. Under normal market conditions, the Fund expects to invest in the lower tranches of a CBO.
A CLO is a structured debt security issued by an SPV that was
created to reapportion the risk and return characteristics of a pool of assets. The assets, typically floating rate loans, are used as
collateral supporting the
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various debt tranches issued by the SPV. The key feature of the
CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of securities issued by
a CLO.
Credit-linked notes. The Fund may invest in credit-linked
notes (“CLNs”) for risk management purposes, including diversification. A CLN is a derivative instrument. It is a synthetic
obligation between two or more parties where the payment of principal and/or interest is based on the performance of some obligation (a
reference obligation). In addition to credit risk of the reference obligations and interest rate risk, the buyer/seller of the CLN is
subject to counterparty risk.
Credit default swaps. The Fund may enter into credit
default swap agreements. The “buyer” in a credit default contract is obligated to pay the “seller” a periodic
stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred.
If an event of default occurs, the seller must pay the buyer the “par value” (full notional value) of the reference obligation
in exchange for the reference obligation. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no
event of default occurs, the Fund loses its investment and recovers nothing. However, if an event of default occurs, the buyer receives
full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives income throughout the
term of the contract, which typically is between six months and three years, provided that there is no default event.
Credit default swaps involve greater risks than if the Fund had
invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into swap agreements only with counterparties that are rated investment grade
quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness
is believed by the Adviser to be equivalent to such rating. If an event of default were to occur, the value of the reference obligation
received by the seller, coupled with the periodic payments previously received, may be less than the full notional value it pays to the
buyer, resulting in a loss of value to the seller. When the Fund acts as a seller of a credit default swap agreement it is exposed to
many of the same risks of leverage, since if an event of default occurs the seller must pay the buyer the full notional value of the reference
obligation.
Event-linked swaps. The Fund may obtain event-linked
exposure by investing in event-linked swaps, which are similar to credit default swaps but typically are contingent, or formulaically
related to defined trigger events. Trigger events include hurricanes, earthquakes and weather-related
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phenomena, including statistics relating to such events. If a
trigger event occurs, the Fund may lose the swap’s notional amount. As derivative instruments, event-linked swaps are subject to
risks in addition to the risks of investing in event-linked bonds, including counterparty risk and leverage risk.
U.S. government securities. The Fund may invest
in U.S. government securities. U.S. government securities are obligations of, or guaranteed by, the U.S. government, its agencies or
government-sponsored entities. U.S. government securities include obligations: directly issued by or supported by the full faith and
credit of the U.S. government, like Treasury bills, notes and bonds and GNMA certificates; supported by the right of the issuer to
borrow from the U.S. Treasury, like those of the FHLBs; supported by the discretionary authority of the U.S. government to purchase
the agency’s securities like those of the FNMA; or supported only by the credit of the issuer itself, like the Tennessee
Valley Authority. U.S. government securities include issues by non-governmental entities (like financial institutions) that carry
direct guarantees from U.S. government agencies as part of government initiatives in response to the market crisis or otherwise.
U.S. government securities include zero coupon securities that make payments of interest and principal only upon maturity and which
therefore tend to be subject to greater volatility than interest-bearing securities with comparable maturities. Although the U.S.
government guarantees principal and interest payments on securities issued by the U.S. government and some of its agencies, such as
securities issued by GNMA, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Some of the U.S. government securities that the Fund may hold are not guaranteed or backed by the full faith and credit of the U.S.
government, such as those issued by FNMA and FHLMC.
Money market instruments. Money market instruments
include short-term U.S. government securities, U.S. dollar-denominated, high quality commercial paper (unsecured promissory notes issued
by corporations to finance their short-term credit needs), certificates of deposit, bankers’ acceptances and repurchase agreements
relating to any of the foregoing. U.S. government securities include Treasury notes, bonds and bills, which are direct obligations of
the U.S. government backed by the full faith and credit of the United States and securities issued by agencies and instrumentalities of
the U.S. government, which may be guaranteed by the U.S. Treasury, may be supported by the issuer’s right to borrow from the U.S.
Treasury or may be backed only by the credit of the federal agency or instrumentality itself.
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Common stocks. The Fund may acquire an interest in
common stocks upon the default of a loan or other security secured by such common stock. The Fund may also acquire warrants or other rights
to purchase a borrower’s common stock in connection with the making of a loan. Common stocks are shares of a corporation or other
entity that entitle the holder to a pro rata share of the profits, if any, of the corporation without preference over any other shareholder
or class of shareholders, including holders of such entity’s preferred stock and other senior equity securities. Common stock usually
carries with it the right to vote and frequently an exclusive right to do so. In selecting common stocks for investment, the Fund generally
expects to focus primarily on the security’s dividend paying capacity rather than on its potential for capital appreciation.
Other investment companies. The Fund may invest in
the securities of other investment companies to the extent that such investments are consistent with the Fund’s investment objectives
and principal investment strategies and permissible under the 1940 Act. Subject to the limitations on investment in other investment companies,
the Fund may invest in “ETFs.”
Derivatives. The Fund may, but is not required to,
use futures and options on securities, indices and currencies, forward foreign currency exchange contracts, swaps, credit-linked notes
and other derivatives. The Fund also may enter into credit default swaps, which can be used to acquire or to transfer the credit risk
of a security or index of securities without buying or selling the security or securities comprising the relevant index. A derivative
is a security or instrument whose value is determined by reference to the value or the change in value of one or more securities, currencies,
indices or other financial instruments. The Fund may use derivatives for a variety of purposes, including:
| • | | In an attempt to hedge against adverse changes in the market prices of securities, interest
rates or currency exchange rates |
| • | | As a substitute for purchasing or selling securities |
| • | | To attempt to increase the Fund’s return as a non-hedging strategy that may be considered
speculative |
| • | | To manage portfolio characteristics (for example, the duration or credit quality of the Fund’s
portfolio) |
| • | | As a cash flow management technique |
The Fund may choose not to make use of derivatives for a variety
of reasons, and any use may be limited by applicable law and regulations.
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Repurchase Agreements. In a repurchase agreement,
the Fund purchases securities from a broker/dealer or a bank, called the counterparty, upon the agreement of the counterparty to repurchase
the securities from the Fund at a later date, and at a specified price, which is typically higher than the purchase price paid by the
Fund. The securities purchased serve as the Fund’s collateral for the obligation of the counterparty to repurchase the securities.
If the counterparty does not repurchase the securities, the Fund is entitled to sell the securities, but the Fund may not be able to sell
them for the price at which they were purchased, thus causing a loss. Additionally, if the counterparty becomes insolvent, there is some
risk that the Fund will not have a right to the securities, or the immediate right to sell the securities.
PRINCIPAL RISKS
General. The Fund is a closed-end management investment
company designed primarily as a long-term investment and not as a trading tool. The Fund is not a complete investment program and should
be considered only as an addition to an investor’s existing portfolio of investments. Because the Fund may invest substantially
in high yield debt securities, an investment in the Fund’s shares is speculative in that it involves a high degree of risk. Due
to uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. Instruments
in which the Fund invests may only have limited liquidity, or may be illiquid.
Market price of shares. Common shares of closed-end
funds frequently trade at a price lower than their net asset value. This is commonly referred to as “trading at a discount.”
This characteristic of shares of closed-end funds is a risk separate and distinct from the risk that the Fund’s net asset value
may decrease. Both long and short-term investors, including investors who sell their shares within a relatively short period after completion
of the initial public offering, will be exposed to this risk. The Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes.
Whether investors will realize a gain or loss upon the sale of
the Fund’s common shares will depend upon whether the market value of the shares at the time of sale is above or below the price
the investor paid, taking into account transaction costs, for the shares and is not directly dependent upon the Fund’s net asset
value. Because the market value of the Fund’s shares will be determined by factors such as the relative demand for and supply of
the shares in the market, general market conditions and other factors
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beyond the control of the Fund, the Fund cannot predict whether
its common shares will trade at, below or above net asset value, or below or above the initial offering price for the shares.
Market risk. The market prices of securities or other
assets held by the Fund may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived
adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity
in the bond markets, the spread of infectious illness or other public health issues, armed conflict, market disruptions caused by tariffs,
trade disputes, sanctions or other government actions, or other factors or adverse investor sentiment. Changes in market conditions may
not have the same impact on all types of securities. The value of securities may also fall due to specific conditions that affect a particular
sector of the securities market or a particular issuer. If the market prices of the Fund’s securities and assets fall, the value
of your investment will go down. A change in financial condition or other event affecting a single issuer or market may adversely impact
securities markets as a whole. Rates of inflation have recently risen. The value of assets or income from an investment may be worth less
in the future as inflation decreases the value of money. As inflation increases, the real value of the Fund’s assets can decline
as can the value of the Fund’s distributions.
In the past decade, financial markets throughout the world have
experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. Governmental and non-governmental
issuers have defaulted on, or been forced to restructure, their debts. These conditions may continue, recur, worsen or spread. Events
that have contributed to these market conditions include, but are not limited to, major cybersecurity events; geopolitical events (including
wars, terror attacks and economic sanctions); measures to address budget deficits; downgrading of sovereign debt; changes in oil and commodity
prices; changes in currency exchange rates; global pandemics; and public sentiment. The global pandemic of the novel coronavirus respiratory
disease designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global
financial markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity
for many instruments has been greatly reduced for periods of time. Some sectors of the economy and individual issuers have experienced
particularly large losses. These circumstances may continue for an extended period of time, and may continue to affect adversely the value
and liquidity of the Fund’s investments. Following Russia’s recent invasion of Ukraine, Russian
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securities have lost all, or nearly all, their market value. Other
securities or markets could be similarly affected by past or future geopolitical or other events or conditions.
Governments and central banks, including the U.S. Federal Reserve,
have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have
resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact
on the economy and securities markets, may not be known for some time. Interest rates are very low, which means there is more risk that
they may go up. In some cases yields are negative. U.S. Federal Reserve or other U.S. or non-U.S. governmental or central bank actions,
including increases or decreases in interest rates, or contrary actions by different governments, could negatively affect financial markets
generally, increase market volatility and reduce the value and liquidity of securities in which the Fund invests. Policy and legislative
changes in the U.S. and in other countries are affecting many aspects of financial regulation, and these and other events affecting global
markets, such as the United Kingdom’s exit from the European Union (or Brexit), potential trade imbalances with China or other countries,
or sanctions or other government actions against Russia, other nations or individuals or companies (or their countermeasures), may contribute
to decreased liquidity and increased volatility in the financial markets. The impact of these changes on the markets, and the implications
for market participants, may not be fully known for some time. Economies and financial markets throughout the world are increasingly interconnected.
Economic, financial or political events, trading and tariff arrangements,
armed conflict including Russia’s military invasion of Ukraine, terrorism, natural disasters, infectious illness or public health
issues, cybersecurity events, supply chain disruptions, sanctions against Russia, other nations or individuals or companies and possible
countermeasures, and other circumstances in one country or region could have profound impacts on other countries or regions and on global
economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to
the countries directly affected, the value and liquidity of the Fund’s investments may be negatively affected. The Fund may experience
a substantial or complete loss on any individual security or derivative position.
LIBOR risk. LIBOR (London Interbank Offered Rate)
is used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial
contracts, including corporate and municipal bonds, bank loans, asset-backed and mortgage-related securities, and
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interest rate swaps and other derivatives. ICE Benchmark Administration,
the administrator of LIBOR, ceased publication of most LIBOR settings on a representative basis at the end of 2021 and is expected to
cease publication of a majority of U.S. dollar LIBOR settings on a representative basis after June 30, 2023. In addition, global regulators
have announced that, with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. Actions by regulators have
resulted in the establishment of alternative reference rates to LIBOR in most major currencies. Markets are developing in response to
these new rates, but questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value
transfer at the time of transition remain a significant concern. The effect of any changes to - or discontinuation of - LIBOR on the Fund
will vary depending on, among other things, existing fallback provisions in individual contracts and whether, how, and when industry participants
develop and widely adopt new reference rates and fallbacks for both legacy and new products and instruments. The transition process may
involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR. The transition may also
result in a reduction in the value of certain LIBOR-based investments held by the Fund or reduce the effectiveness of related transactions
such as hedges. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses for the
Fund. Because the usefulness of LIBOR as a benchmark may deteriorate during the transition period, these effects could occur at any time.
High yield or “junk” bond risk. Debt securities
that are below investment grade, called “junk bonds,” are speculative, have a higher risk of default or are already in default,
tend to be less liquid and are more difficult to value than higher grade securities. Junk bonds tend to be volatile and more susceptible
to adverse events and negative sentiments. These risks are more pronounced for securities that are already in default.
Interest rate risk. The market prices of the Fund’s
fixed income securities may fluctuate significantly when interest rates change. The value of your investment will generally go down when
interest rates rise. A rise in rates tends to have a greater impact on the prices of longer term or duration securities. For example,
if interest rates increase by 1%, the value of a Fund’s portfolio with a portfolio duration of ten years would be expected to decrease
by 10%, all other things being equal. In recent years interest rates and credit spreads in the U.S. have been at historical lows, which
means there is more risk that they may go up. The U.S. Federal Reserve has recently started to raise certain interest rates. A general
rise in interest rates could adversely affect the price and liquidity of fixed income securities. The maturity of a security may be significantly
longer than its
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effective duration. A security’s maturity and other features
may be more relevant than its effective duration in determining the security’s sensitivity to other factors affecting the issuer
or markets generally, such as changes in credit quality or in the yield premium that the market may establish for certain types of securities
(sometimes called “credit spread”). In general, the longer its maturity the more a security may be susceptible to these factors.
When the credit spread for a fixed income security goes up, or “widens,” the value of the security will generally go down.
Rising interest rates can lead to increased default rates, as
issuers of floating rate securities find themselves faced with higher payments. Unlike fixed rate securities, floating rate securities
generally will not increase in value if interest rates decline. Changes in interest rates also will affect the amount of interest income
the Fund earns on its floating rate investments
Credit risk. If an issuer or guarantor of a security
held by the Fund or a counterparty to a financial contract with the Fund defaults on its obligation to pay principal and/or interest,
has its credit rating downgraded or is perceived to be less creditworthy, or the credit quality or value of any underlying assets declines,
the value of your investment will typically decline. Changes in actual or perceived creditworthiness may occur quickly. The Fund could
be delayed or hindered in its enforcement of rights against an issuer, guarantor or counterparty.
Prepayment or call risk. Many issuers have a right
to prepay their securities. If interest rates fall, an issuer may exercise this right. If this happens, the Fund will not benefit from
the rise in market price that normally accompanies a decline in interest rates, and will be forced to reinvest prepayment proceeds at
a time when yields on securities available in the market are lower than the yield on the prepaid security. The Fund also may lose any
premium it paid on the security.
Extension risk. 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 lock
in a below market interest rate, increase the security’s duration and reduce the value of the security.
Risk of illiquid investments. Certain securities and
derivatives held by the Fund may be impossible or difficult to purchase, sell or unwind. Illiquid securities and derivatives also may
be difficult to value. Liquidity risk may be magnified in an environment of rising interest rates or widening credit spreads. During times
of market turmoil, there have been, and may be, no buyers or sellers for securities in entire asset classes. If the Fund is forced to
sell an illiquid asset or unwind a derivatives position, the Fund may suffer a substantial loss or may not be able to sell at all.
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Portfolio selection risk. The Adviser’s judgment
about the quality, relative yield, relative value or market trends affecting a particular sector or region, market segment, security or
about interest rates generally may prove to be incorrect, or there may be imperfections, errors or limitations in the models, tools and
information used by the Adviser.
Reinvestment risk. Income from the Fund’s portfolio
will decline if the Fund invests the proceeds, repayment or sale of loans or other obligations into lower yielding instruments with a
lower spread over the base lending rate. A decline in income could affect the common shares’ distribution rate and their overall
return.
Risks of investing in floating rate loans. Floating
rate loans and similar investments may be illiquid or less liquid than other investments and difficult to value. Market quotations for
these securities may be volatile and/or subject to large spreads between bid and ask prices. No active trading market may exist for many
floating rate loans, and many loans are subject to restrictions on resale. Any secondary market may be subject to irregular trading activity
and extended trade settlement periods. An economic downturn generally leads to a higher non-payment rate, and a loan may lose significant
value before a default occurs.
When the Fund invests in a loan participation, the Fund does not
have a direct claim against the borrower and must rely upon an intermediate participant to enforce any rights against the borrower. As
a result, the Fund is subject to the risk that an intermediate participant between the Fund and the borrower will fail to meet its obligations
to the Fund, in addition to the risk that the issuer of the loan will default on its obligations. Also the Fund may be regarded as the
creditor of the agent lender (rather than the borrower), subjecting the Fund to the creditworthiness of the lender as well as the borrower.
There is less readily available, reliable information about most
senior loans than is the case for many other types of securities. Although the features of senior loans, including being secured by collateral
and having priority over other obligations of the issuer, reduce some of the risks of investment in below investment grade securities,
the loans are subject to significant risks. the Adviser believes, based on its experience, that senior floating rate loans generally have
more favorable loss recovery rates than most other types of below investment grade obligations. However, there can be no assurance that
the Fund’s actual loss recovery experience will be consistent with the Adviser’s prior experience or that the senior loans
in which the Fund invests will achieve any specific loss recovery rate.
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Some of the loans in which the Fund may invest may be “covenant
lite.” Covenant lite loans contain fewer maintenance covenants, or no maintenance covenants at all, than traditional loans and may
not include terms that allow the lender to monitor the financial performance of the borrower and declare a default if certain criteria
are breached. This may expose the Fund to greater credit risk associated with the borrower and reduce the Fund’s ability to restructure
a problematic loan and mitigate potential loss. As a result the Fund’s exposure to losses on such investments may be increased,
especially during a downturn in the credit cycle.
Second lien loans generally are subject to similar risks as those
associated with senior loans. Because second lien loans are subordinated or unsecured and thus lower in priority on payment to senior
loans, they are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may
be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. This risk is generally
higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second lien loans
generally have greater price volatility than senior loans and may be less liquid.
Certain floating rate loans and other corporate debt securities
involve refinancings, recapitalizations, mergers and acquisitions, and other financings for general corporate purposes. Other loans are
incurred in restructuring or “work-out” scenarios, including debtor-in-possession facilities in bankruptcy. Loans in restructuring
or similar scenarios may be especially vulnerable to the inherent uncertainties in restructuring processes. In addition, the highly leveraged
capital structure of the borrowers in any of these transactions, whether acquisition financing or restructuring, may make the loans especially
vulnerable to adverse economic or market conditions and the risk of default.
Loans to entities located outside of the U.S. may have substantially
different lender protections and covenants as compared to loans to U.S. entities and may involve greater risks. The Fund may have difficulties
and incur expense enforcing its rights with respect to non-U.S. loans and such loans could be subject to bankruptcy laws that are materially
different than in the U.S.
Because affiliates of the Adviser may participate in the primary
and secondary market for senior loans, limitations under applicable law may restrict the Fund’s ability to participate in a restructuring
of a senior loan or to acquire some senior loans, or affect the timing or price of such
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acquisition. Loans may not be considered “securities,”
and purchasers, such as the Fund, therefore may not be entitled to rely on the anti-fraud protections afforded by federal securities laws.
Collateral risk. The value of collateral, if any,
securing a floating rate loan can decline, and may be insufficient to meet the issuer’s obligations or may be difficult to liquidate.
In addition, the Fund’s access to collateral may be limited by bankruptcy or other insolvency laws. These laws may be less developed
and more cumbersome with respect to the Fund’s non-U.S. floating rate investments. Floating rate loans may not be fully collateralized
or may be uncollateralized. Uncollateralized loans involve a greater risk of loss. In the event of a default, the Fund may have difficulty
collecting on any collateral and would not have the ability to collect on any collateral for an uncollateralized loan. In addition, the
lender’s security interest or their enforcement of their security interest under the loan agreement may be found by a court to be
invalid or the collateral may be used to pay other outstanding obligations of the borrower. Further, the Fund’s access to collateral,
if any, may be limited by bankruptcy law. To the extent that a loan is collateralized by stock of the borrower or its affiliates, this
stock may lose all or substantially all of its value in the event of bankruptcy of the borrower. Loans that are obligations of a holding
company are subject to the risk that, in a bankruptcy of a subsidiary operating company, creditors of the subsidiary may recover from
the subsidiary’s assets before the lenders to the holding company would receive any amount on account of the holding company’s
interest in the subsidiary.
Risk of disadvantaged access to confidential information. The
issuer of a floating rate loan may offer to provide material, non-public information about the issuer to investors, such as the Fund.
Normally, the Adviser will seek to avoid receiving this type of information about the issuer of a loan either held by, or considered for
investment by, the Fund. the Adviser’s decision not to receive the information may place it at a disadvantage, relative to other
loan investors, in assessing a loan or the loan’s issuer. For example, in instances where holders of floating rate loans are asked
to grant amendments, waivers or consents, the Adviser’s inability to assess the impact of these actions may adversely affect the
value of the portfolio. For this and other reasons, it is possible that the Adviser’s decision not to receive material, non-public
information under normal circumstances could adversely affect the Fund’s investment performance.
Risks of subordinated securities. A holder of securities
that are subordinated or “junior” to more senior securities of an issuer is entitled to payment after holders of more senior
securities of the issuer. Subordinated securities are more likely to suffer a credit loss than non-subordinated
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securities of the same issuer, any loss incurred by the subordinated
securities is likely to be proportionately greater, and any recovery of interest or principal may take more time. As a result, even a
perceived decline in creditworthiness of the issuer is likely to have a greater impact on subordinated securities than more senior securities.
Issuer risk. The value of corporate income-producing
securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage
and reduced demand for the issuer’s goods and services.
U.S. Treasury obligations risk. The market value of
direct obligations of the U.S. Treasury may vary due to changes in interest rates. In addition, changes to the financial condition or
credit rating of the U.S. government may cause the value of the Fund’s investments in obligations issued by the U.S. Treasury to
decline.
U.S. government agency obligations risk. The Fund
invests in obligations issued by agencies and instrumentalities of the U.S. government. Government-sponsored entities such as the Federal
National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Banks (FHLBs), although
chartered or sponsored by Congress, are not funded by congressional appropriations and the debt and mortgage-backed securities issued
by them are neither guaranteed nor issued by the U.S. government. The maximum potential liability of the issuers of some U.S. government
obligations may greatly exceed their current resources, including any legal right to support from the U.S. government. Such debt and mortgage-backed
securities are subject to the risk of default on the payment of interest and/or principal, similar to debt of private issuers. Although
the U.S. government has provided financial support to FNMA and FHLMC in the past, there can be no assurance that it will support these
or other government-sponsored entities in the future.
Mortgage-related and asset-backed securities risk. The
value of mortgage-related securities, including commercial mortgage-backed securities, collateralized mortgage-backed securities, credit
risk transfer securities, and asset-backed securities, will be influenced by factors affecting the assets underlying such securities.
As a result, during periods of declining asset value, difficult or frozen credit markets, swings in interest rates, or deteriorating economic
conditions, mortgage-related and asset- backed securities may decline in value, face valuation difficulties, become more volatile and/or
become illiquid. Mortgage-backed securities tend to be more sensitive to changes in interest rate than other types of debt securities.
These securities are also subject to prepayment and extension risks. Some of these securities may receive little or no collateral protection
from the
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underlying assets and are thus subject to the risk of default.
The risk of such defaults is generally higher in the case of mortgage-backed investments offered by non-governmental issuers and those
that include so-called “sub-prime” mortgages. The structure of some of these securities may be complex and there may be less
available information than for other types of debt securities. Upon the occurrence of certain triggering events or defaults, the Fund
may become the holder of underlying assets at a time when those assets may be difficult to sell or may be sold only at a loss.
Risks of investing in collateralized debt obligations. Investment
in a collateralized debt obligation (CDO) is subject to the credit, subordination, interest rate, valuation, prepayment, extension and
other risks of the obligations underlying the CDO and the tranche of the CDO in which the Fund invests. CDOs are subject to liquidity
risk. Synthetic CDOs are also subject to the risks of investing in derivatives, such as credit default swaps, and leverage risk.
Risks of instruments that allow for balloon payments or negative
amortization payments. Certain debt instruments allow for balloon payments or negative amortization payments. Such instruments
permit the borrower to avoid paying currently a portion of the interest accruing on the instrument. While these features make the debt
instrument more affordable to the borrower in the near term, they increase the risk that the borrower will be unable to make the resulting
higher payment or payments that become due at the maturity of the loan.
Risks of investing in insurance-linked securities. The
Fund could lose a portion or all of the principal it has invested in an insurance-linked security, and the right to additional interest
and/or dividend payments with respect to the security, upon the occurrence of one or more trigger events, as defined within the terms
of an insurance-linked security. Trigger events may include natural or other perils of a specific size or magnitude that occur in a designated
geographic region during a specified time period, and/or that involve losses or other metrics that exceed a specific amount. Natural perils
include disasters such as hurricanes, earthquakes, windstorms, fires, floods and other weather-related occurrences, as well as mortality
or longevity events. Non-natural perils include disasters resulting from human-related activity such as commercial and industrial accidents
or business interruptions. The Fund may also invest in insurance-linked securities that are subject to “indemnity triggers.”
An indemnity trigger is a trigger based on the actual losses of the ceding sponsor (i.e., the party seeking reinsurance). Insurance-linked
securities subject to indemnity triggers are often regarded as being subject to potential moral hazard, since such insurance-linked securities
are triggered by actual losses of the ceding
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sponsor and the ceding sponsor may have an incentive to take actions
and/or risks that would have an adverse effect on the Fund. There is no way to accurately predict whether a trigger event will occur and,
accordingly, event-linked bonds and other insurance-linked securities carry significant risk. In addition to the specified trigger events,
insurance-linked securities may expose the Fund to other risks, including but not limited to issuer (credit) default, adverse regulatory
or jurisdictional interpretations and adverse tax consequences.
Risks of investing in structured reinsurance investments. The
Fund may invest in insurance-linked securities that are special purpose vehicles (“SPVs”) or similar instruments structured
to comprise a portion of a reinsurer’s catastrophe-oriented business, known as quota share instruments (sometimes referred to as
reinsurance sidecars), or to provide reinsurance relating to specific risks to insurance or reinsurance companies through a collateralized
instrument, known as collateralized reinsurance. Quota shares instruments and other structured reinsurance investments generally will
be considered illiquid securities by the Fund. Structured reinsurance investments are typically more customizable but less liquid investments
than event-linked bonds. Like event-linked bonds, an investor in structured reinsurance investments participates in the premiums and losses
associated with underlying reinsurance contracts. Structured reinsurance investments are subject to the same risks as event-linked bonds
and other insurance-linked securities. In addition, because quota share instruments represent an interest in a basket of underlying reinsurance
contracts, the Fund has limited transparency into the individual underlying contracts and therefore must rely upon the risk assessment
and sound underwriting practices of the insurer and/or reinsurer. Structured reinsurance investments may be difficult to value.
ILS market and reinvestment risk. The size of the
ILS market may change over time, which may limit the availability of ILS for investment by the Fund. The original issuance of ILS in general,
including ILS with desired instrument or risk characteristics, may fluctuate depending on the capital and capacity needs of reinsurers
as well as the demand for ILS by institutional investors. The availability of ILS in the secondary market also may be limited by supply
and demand dynamics and prevailing economic conditions. To the extent ILS held by the Fund mature, or the Fund must sell securities in
connection with share repurchases, the Fund may be required to hold more cash or short-term instruments than it normally would until attractive
ILS becomes available. Holding excess cash and/or reinvestment in securities that are lower yielding or less desirable than securities
sold may negatively affect performance.
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Risks of zero coupon bonds, payment in kind, deferred and contingent
payment securities. These securities may be more speculative and may fluctuate more in value than securities which pay income
periodically and in cash. In addition, although the Fund receives no periodic cash payments on such securities, the Fund is deemed for
tax purposes to receive income from such securities, which applicable tax rules require the Fund to distribute to shareholders. Such distributions
may be taxable when distributed to shareholders
Risks of non-U.S. investments. Investing in non-U.S.
issuers, or in U.S. issuers that have significant exposure to foreign markets, may involve unique risks compared to investing in securities
of U.S. issuers. These risks are more pronounced for issuers in emerging markets or to the extent that the Fund invests significantly
in one region or country. These risks may include different financial reporting practices and regulatory standards, less liquid trading
markets, extreme price volatility, currency risks, changes in economic, political, regulatory and social conditions, military conflicts
and sanctions, terrorism, sustained economic downturns, financial instability, reduction of government or central bank support, inadequate
accounting standards, tariffs, tax disputes or other tax burdens, nationalization or expropriation of assets, arbitrary application of
laws and regulations or lack of rule of law, and investment and repatriation restrictions. Lack of information and less market regulation
also may affect the value of these securities. Withholding and other non-U.S. taxes may decrease the Fund’s return. Non-U.S. issuers
may be located in parts of the world that have historically been prone to natural disasters. Emerging market economies tend to be less
diversified than those of more developed countries. They typically have fewer medical and economic resources than more developed countries
and thus they may be less able to control or mitigate the effects of a pandemic. Investing in depositary receipts is subject to many of
the same risks as investing directly in non-U.S. issuers. Depositary receipts may involve higher expenses and may trade at a discount
(or premium) to the underlying security. A number of countries in the European Union (EU) have experienced, and may continue to experience,
severe economic and financial difficulties. In addition, the United Kingdom has withdrawn from the EU (commonly known as “Brexit”).
Other countries may seek to withdraw from the EU and/or abandon the euro, the common currency of the EU. The range and potential implications
of possible political, regulatory, economic, and market outcomes of Brexit cannot be fully known but could be significant, potentially
resulting in increased volatility, illiquidity and potentially lower economic growth in the affected markets, which will adversely affect
the Fund’s investments.
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If one or more stockholders of a supranational entity such as
the World Bank fail to make necessary additional capital contributions, the entity may be unable to pay interest or repay principal on
its debt securities.
Sanctions or other government actions against certain countries
could negatively impact the Fund’s investments in securities that have exposure to that country. Circumstances that impact one country
could have profound impacts on other countries and on global economies or markets. China and other developing market countries may be
subject to considerable degrees of economic, political and social instability. In addition, the U.S. government has imposed restrictions
on U.S. investor participation in certain Chinese investments. These matters could adversely affect China’s economy.
Russia launched a large-scale invasion of Ukraine on February
24, 2022. In response to the military action by Russia, various countries, including the U.S., the United Kingdom, and European Union
issued broad-ranging economic sanctions against Russia and Belarus and certain companies and individuals. Since then, Russian securities
have lost all, or nearly all, their market value, and many other issuers, securities and markets have been adversely affected. The United
States and other countries may impose sanctions on other countries, companies and individuals in light of Russia’s military invasion.
The extent and duration of the military action or future escalation of such hostilities, the extent and impact of existing and future
sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted. These and any related
events could have a significant impact on the value and liquidity of certain Fund investments, on Fund performance and the value of an
investment in the Fund, particularly with respect to securities and commodities, such as oil and natural gas, as well as other sectors
with exposure to Russian issuers or issuers in other countries affected by the invasion, and are likely to have collateral impacts on
market sectors globally.
Currency risk. The Fund could experience losses based
on changes in the exchange rate between non-U.S. currencies and the U.S. dollar or as a result of currency conversion costs. Currency
exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments
or central banks, the imposition of currency controls and speculation.
Risks of convertible securities. The market values
of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. A downturn
in equity markets may cause the price of convertible securities to decrease relative to other fixed income securities.
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Preferred stocks risk. Preferred stocks may pay fixed
or adjustable rates of return. Preferred stocks are subject to issuer-specific and market risks applicable generally to equity securities.
In addition, a company’s preferred stocks generally pay dividends only after the company makes required payments to holders of its
bonds and other debt. Thus, the value of preferred stocks will usually react more strongly than bonds and other debt to actual or perceived
changes in the company’s financial condition or prospects. The market value of preferred stocks generally decreases when interest
rates rise. Preferred stocks of smaller companies may be more vulnerable to adverse developments than preferred stocks of larger companies.
Risks of investment in other funds. Investing in other
investment companies, including exchange-traded funds (ETFs) and closed-end funds, subjects the Fund to the risks of investing in the
underlying securities or assets held by those funds. When investing in another fund, the Fund will bear a pro rata portion of the underlying
fund’s expenses, including management fees, in addition to its own expenses. ETFs and closed-end funds are bought and sold based
on market prices and can trade at a premium or a discount to the ETF’s or closed-end fund’s net asset value.
Derivatives risk. Using swaps, forward foreign currency
exchange contracts, bond and interest rate futures and other derivatives can increase Fund losses and reduce opportunities for gains when
market prices, interest rates or the derivative instruments themselves behave in a way not anticipated by the Fund. Using derivatives
may increase the volatility of the Fund’s net asset value and may not provide the result intended. Derivatives may have a leveraging
effect on the Fund. Some derivatives have the potential for unlimited loss, regardless of the size of the Fund’s initial investment.
Derivatives are generally subject to the risks applicable to the assets, rates, indices or other indicators underlying the derivative.
Changes in a derivative’s value may not correlate well with the referenced asset or metric. The Fund also may have to sell assets
at inopportune times to satisfy its obligations. Derivatives may be difficult to sell, unwind or value, and the counterparty may default
on its obligations to the Fund. Use of derivatives may have different tax consequences for the Fund than an investment in the underlying
security, and such differences may affect the amount, timing and character of income distributed to shareholders. The U.S. government
and foreign governments are in the process of adopting and implementing regulations governing derivatives markets, including mandatory
clearing of certain derivatives, margin and reporting requirements. The ultimate impact of the regulations remains unclear. Additional
regulation of derivatives may make them more costly, limit their availability or utility, otherwise adversely affect their performance
or disrupt markets.
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Credit default swap risk. Credit default swap contracts,
a type of derivative instrument, involve special risks and may result in losses to the Fund. Credit default swaps may in some cases be
illiquid, and they increase credit risk since the Fund has exposure to the issuer of the referenced obligation and either the counterparty
to the credit default swap or, if it is a cleared transaction, the brokerage firm through which the trade was cleared and the clearing
organization that is the counterparty to that trade.
Structured securities risk. Structured securities
may behave in ways not anticipated by the Fund, or they may not receive the tax, accounting or regulatory treatment anticipated by the
Fund.
Forward foreign currency transactions risk. The Fund
may not fully benefit from or may lose money on forward foreign currency transactions if changes in currency rates do not occur as anticipated
or do not correspond accurately to changes in the value of the Fund’s holdings, or if the counterparty defaults. Such transactions
may also prevent the Fund from realizing profits on favorable movements in exchange rates. Risk of counterparty default is greater for
counterparties located in emerging markets.
Leveraging risk. The value of your investment may
be more volatile and other risks tend to be compounded if the Fund borrows or uses derivatives or other investments, such as ETFs, that
have embedded leverage. Leverage generally magnifies the effect of any increase or decrease in the value of the Fund’s underlying
assets and creates a risk of loss of value on a larger pool of assets than the Fund would otherwise have, potentially resulting in the
loss of all assets. Engaging in such transactions may cause the Fund to liquidate positions when it may not be advantageous to do so to
satisfy its obligations or meet segregation requirements.
The Fund may use financial leverage on an ongoing basis for investment
purposes by borrowing from banks through a revolving credit facility. The fees and expenses attributed to leverage, including any increase
in the management fees, will be borne by holders of common shares. Since the Adviser’s fee is based on a percentage of the Fund’s
managed assets, its fee will be higher if the Fund is leveraged, and the Adviser will thus have an incentive to leverage the Fund.
Repurchase agreement risk. In the event that the other
party to a repurchase agreement defaults on its obligations, the Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of the security. In addition, if the Fund is characterized by
a court as an unsecured creditor, it would be at risk of losing some or all of the principal and interest involved in the transaction.
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Market segment risk. To the extent the Fund emphasizes,
from time to time, investments in a market segment, the Fund will be subject to a greater degree to the risks particular to that segment,
and may experience greater market fluctuation than a fund without the same focus.
Industries in the financial segment, such as banks, insurance
companies and broker-dealers, may be sensitive to changes in interest rates and general economic activity and are generally subject to
extensive government regulation.
Valuation risk. The sales price the Fund could receive
for any particular portfolio investment may differ from the Fund’s valuation of the investment, particularly for illiquid securities
and securities that trade in thin or volatile markets or that are valued using a fair value methodology. These differences may increase
significantly and affect Fund investments more broadly during periods of market volatility. The Fund’s ability to value its investments
may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
Cybersecurity risk. Cybersecurity failures by and
breaches of the Fund’s Adviser, transfer agent, custodian, Fund accounting agent or other service providers may disrupt Fund operations,
interfere with the Fund’s ability to calculate its NAV, prevent Fund shareholders from receiving distributions, cause loss of or
unauthorized access to private shareholder information, and result in financial losses to the Fund and its shareholders, regulatory fines,
penalties, reputational damage, or additional compliance costs.
Cash management risk. The value of the investments
held by the Fund for cash management or temporary defensive purposes may be affected by market risks, changing interest rates and by changes
in credit ratings of the investments. To the extent that the Fund has any uninvested cash, the Fund would be subject to credit risk with
respect to the depository institution holding the cash. If the Fund holds cash uninvested, the Fund will not earn income on the cash and
the Fund’s yield will go down. During such periods, it may be more difficult for the Fund to achieve its investment objective.
Anti-takeover provisions. The Fund’s Charter
and Bylaws include provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term
objectives, including by converting the Fund to open-end status or changing the composition of the Board, that may be detrimental to the
Fund’s ability to achieve its primary investment objective of seeking to provide its common shareholders with a high level of current
income. The Fund’s Bylaws also contain a provision providing that the Board of Directors has adopted a resolution to opt in the
Fund to the provisions of the Maryland Control Share Acquisition Act (“MCSAA”). Such provisions may limit the ability of shareholders
to sell their shares at a
110 Pioneer Diversified High Income Fund, Inc. | Annual
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premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient to deter
activist investors that seek to cause the Fund to take actions that may not be aligned with the interests of long-term shareholders.
Please note that there are many other factors that could adversely
affect your investment and that could prevent the Fund from achieving its goals.
An investment in the Fund is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
INVESTMENT RESTRICTIONS
The following are the Fund’s fundamental investment restrictions.
These restrictions, along with the Fund’s investment objectives, may not be changed without the approval of the holders of a majority
of the Fund’s outstanding voting securities (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the common
shares represented at a meeting at which more than 50% of the outstanding common shares are represented or (ii) more than 50% of the outstanding
common shares).
The Fund may not:
| (1) | | Issue senior securities, other than as permitted by the 1940 Act. |
| (2) | | Borrow money, other than as permitted by the 1940 Act. |
| (3) | | Invest in real estate, except the Fund may invest in securities of issuers that invest in
real estate or interests therein, securities that are secured by real estate or interests therein, securities of real estate investment
trusts, mortgage-backed securities and other securities that represent a similar indirect interest in real estate, and the Fund may acquire
real estate or interests therein through exercising rights or remedies with regard to an instrument. |
| (4) | | Make loans, except that the Fund may (i) lend portfolio securities, (ii) enter into repurchase
agreements, (iii) purchase all or a portion of an issue of publicly distributed debt securities, loans, loan participation interests,
bank certificates of deposit, acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance
of the securities, (iv) participate in a credit facility whereby the Fund may directly lend to and borrow money from other affiliated
funds to the extent permitted under the 1940 Act or an exemption therefrom and (v) make loans in any other manner |
Pioneer Diversified High Income Fund, Inc. | Annual
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consistent with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction.
| (5) | | Invest in commodities or commodity contracts, except that the Fund may invest in currency
instruments and contracts and financial instruments and contracts that might be deemed to be commodities and commodity contracts. |
| (6) | | Make any investment inconsistent with its classification as a diversified open-end investment
company under the 1940 Act. Currently, diversification means that, with respect to 75% of its total assets, the Fund may not purchase
securities of an issuer (other than the U.S. government, its agencies or instrumentalities and securities of investment companies), if
(a) such purchase would cause more than 5% of the Fund’s total assets, taken at market value, to be invested in the securities
of such issuer, or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being
held by the Fund. |
| (7) | | Act as an underwriter, except insofar as the Fund technically may be deemed to be an underwriter
in connection with the purchase or sale of its portfolio securities. |
| (8) | | Invest 25% or more of the value of its total assets in any one industry, except that (a)
the Fund will invest more than 25% of its total assets in securities or other instruments issued or structured by companies in the financial
services group of industries, such as banks, broker-dealers and insurance and reinsurance companies, and (b) this limitation does not
apply to the purchase of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. |
All other investment policies of the Fund are considered non-fundamental
and may be changed by the Board of Directors without prior approval of the Fund’s outstanding voting shares.
112 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22
Effects of Leverage
The following table is furnished in response to requirements of
the Securities and Exchange Commission. It is designed to illustrate the effects of leverage on common share total return, assuming investment
portfolio total returns (consisting of income and changes in the value of investments held in the Fund’s portfolio) of -10%, -5%,
0%, 5% and 10%. The table below reflects the Fund’s borrowings under a credit agreement as a percentage of the Fund’s total
assets (which includes the amounts of leverage obtained through such borrowings), the annual rate of interest on the borrowings as of
April 30, 2022, and the annual return that the Fund’s portfolio must experience (net of expenses) in order to cover such costs.
The information below does not reflect the Fund’s use of certain other forms of economic leverage achieved through the use of other
instruments or transactions not considered to be senior securities under the 1940 Act, such as covered credit default swaps or other derivative
instruments.
The assumed investment portfolio returns in the table below are
hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced
by the Fund. Your actual returns may be greater or less than those appearing below. In addition, actual borrowing expenses associated
with borrowings by the Fund may vary frequently and may be significantly higher or lower than the rate used for the example below.
| Borrowings under credit agreement as a percentage of total managed assets |
|
| (including assets attributable to borrowings) |
32.68% |
| Annual effective interest rate payable by Fund on borrowings |
1.10% |
| Annual return Fund portfolio must experience (net of expenses) |
|
| to cover interest rate on borrowings |
0.36% |
| Common share total return for (10.00)% assumed portfolio total return |
(15.39)% |
| Common share total return for (5.00)% assumed portfolio total return |
(7.96)% |
| Common share total return for 0.00% assumed portfolio total return |
(0.53)% |
| Common share total return for 5.00% assumed portfolio total return |
6.89% |
| Common share total return for 10.00% assumed portfolio total return |
14.32% |
Common share total return is composed of two elements –
investment income net of the Fund’s expenses, including any interest/dividends on assets resulting from leverage, and gains or losses
on the value of the securities the Fund owns. As required by Securities and Exchange Commission rules, the table assumes that the Fund
is more likely to suffer capital losses than to enjoy capital appreciation. 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 losses in the value of those investments.
Pioneer Diversified High Income Fund, Inc. | Annual
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This table reflects hypothetical performance of the Fund’s
portfolio and not the performance of the Fund’s common shares, the value of which will be determined by market forces and other
factors.
Should the Fund elect to add additional leverage to its portfolio,
the potential benefits of leveraging the Fund’s shares cannot be fully achieved until the proceeds resulting from the use of leverage
have been received by the Fund and invested in accordance with the Fund’s investment objective and principal investment strategies.
The Fund’s willingness to use additional leverage, and the extent to which leverage is used at any time, will depend on many factors,
including, among other things, the Adviser’s assessment of the yield curve environment, interest rate trends, market conditions
and other factors.
114 Pioneer Diversified High Income Fund, Inc. | Annual
Report | 4/30/22