The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements |
10/31/22
(unaudited)
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 “1940
Act”). 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.
Effective August 19, 2022, the Fund is required to comply with
Rule 18f-4 under the 1940 Act, which governs the use of derivatives by registered investment companies. Rule 18f-4 permits funds to enter
into derivatives transactions (as defined in Rule 18f-4) and certain other transactions notwithstanding the restrictions on the issuance
of “senior securities” under Section 18 of the 1940 Act. Rule 18f-4 requires a fund to establish and
48 Pioneer Diversified High Income Fund, Inc. | Semiannual
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maintain a comprehensive derivatives risk management program, appoint
a derivatives risk manager and comply with a relative or absolute limit on fund leverage risk calculated based on value-at-risk (“VaR”),
unless the fund uses derivatives in only a limited manner.
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.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of its financial statements:
A. Security Valuation
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 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.
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 49
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 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 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 Adviser 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.
50 Pioneer Diversified High Income Fund, Inc. | Semiannual
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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. Effective September 8, 2022, the Adviser
is designated as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Adviser’s fair valuation team
is responsible for monitoring developments that may impact fair valued securities.
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 Adviser 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.
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
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 51
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.
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.
D. Federal Income Taxes
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.
52 Pioneer Diversified High Income Fund, Inc. | Semiannual
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The tax character of current year distributions payable will be
determined at the end of the current taxable year. The tax character of distributions paid during the year ended April 30, 2022 was as
follows:
| |
|
| |
2022 |
| Distributions paid from: |
|
| Ordinary income |
$10,083,487 |
| Total |
$10,083,487 |
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.
E. Risks
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.
In recent years, interest rates and credit spreads in the U.S. have been at historic lows. The U.S. Federal Reserve has raised certain
interest rates and interest rates may continue to go up. 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
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 53
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.
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 to affect adversely the value and liquidity of the Fund’s investments. Following
Russia’s 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. 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. 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.
54 Pioneer Diversified High Income Fund, Inc. | Semiannual
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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, natural gas and food commodities, 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
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 55
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 may invest in insurance-linked securities (“ILS”).
ILS may 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. 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. ILS carry significant
risk. See note 1.G.
The Fund may invest in mortgage-related and asset-backed securities.
The value of mortgage-related 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 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.
The Fund may invest in credit risk transfer securities. Credit
risk transfer securities are unguaranteed and unsecured debt securities issued by government sponsored enterprises and therefore are not
directly linked to or backed by the underlying mortgage loans. As a result, 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
56 Pioneer Diversified High Income Fund, Inc. | Semiannual
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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 Fannie Mae and Freddie Mac,
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.
The Fund’s investments, payment obligations and financing
terms may be based on floating rates, such as LIBOR (London Interbank Offered Rate) or Secured Overnight Financing Rate (SOFR). 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.
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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.
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.
58 Pioneer Diversified High Income Fund, Inc. | Semiannual
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F. Restricted Securities
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.
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 October 31, 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.
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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 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.
H. Purchased Options
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 six months ended October 31, 2022 was $129,368. Open purchased options at October 31, 2022 are listed in the Schedule of Investments.
60 Pioneer Diversified High Income Fund, Inc. | Semiannual
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I. Option Writing
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 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 six months
ended October 31, 2022 was $(9,232). Open written options contracts at October 31, 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 six months ended October 31, 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.
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 61
The average market value of forward foreign currency exchange contracts
open during the six months ended October 31, 2022 was $6,657,685 and $6,707,773 for buys and sells, respectively. Open forward foreign
currency exchange contracts outstanding at October 31, 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 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
62 Pioneer Diversified High Income Fund, Inc. | Semiannual
Report | 10/31/22
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 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 six months ended October 31, 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 six months ended October 31, 2022, the net management fee was 0.85% (annualized) of
the Fund’s average daily managed assets, which was equivalent to 1.25% (annualized) 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 $26,249 in management
fees, administrative costs and certain other reimbursements payable to the Adviser at October 31, 2022.
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 63
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 six
months ended October 31, 2022, the Fund paid $5,400 in Directors’ compensation, which is reflected on the Statement of Operations
as Directors’ fees. At October 31, 2022, the Fund had a payable for Directors’ fees on its Statement of Assets and Liabilities
of $813.
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
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.
| |
|
| Shareowner Communications: |
|
| Fund |
$30,739 |
| Total |
$30,739 |
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
64 Pioneer Diversified High Income Fund, Inc. | Semiannual
Report | 10/31/22
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
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.
Pioneer Diversified High Income Fund, Inc. | Semiannual Report
| 10/31/22 65
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 October 31, 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) |
| Brown Brothers |
$10,454 |
$(1,890) |
$ — |
$ — |
$ 8,564 |
| Harriman & Co. |
|
|
|
|
|
| JPMorgan Chase |
29,289 |
(3,267) |
— |
— |
26,022 |
| Bank NA |
|
|
|
|
|
| State Street Bank & |
— |
— |
— |
— |
— |
| Trust Co. |
|
|
|
|
|
| Total |
$39,743 |
$(5,157) |
$ — |
$ — |
$34,586 |
| |
| |
Derivatives |
|
|
|
|
| |
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) |
| Brown Brothers |
$ 1,890 |
$(1,890) |
$ — |
$ — |
$ — |
| Harriman & Co. |
|
|
|
|
|
| JPMorgan Chase |
3,267 |
(3,267) |
— |
— |
— |
| Bank NA |
|
|
|
|
|
| State Street Bank & |
|
|
|
|
|
| Trust Co. |
34,599 |
— |
— |
— |
34,599 |
| Total |
$39,756 |
$(5,157) |
$ — |
$ — |
$34,599 |
| (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.
Foreign exchange rate risk relates to fluctuations in the value
of an asset or liability due to changes in currency exchange rates.
66 Pioneer Diversified High Income Fund, Inc. | Semiannual
Report | 10/31/22
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 October 31, 2022, was as follows:
* 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.
The effect of derivative instruments (not considered to be hedging
instruments for accounting disclosure purposes) on the Statement of Operations by risk exposure at October 31, 2022 was as follows: