Opinion
on the Financial Statements
We have audited the accompanying statement of assets and liabilities
of BNY Mellon High Yield Strategies Fund (the “Fund”), including the statements of investments and
forward foreign currency exchange contracts, as of March 31, 2021, and the statement of investments in
affiliated issuers as of and for the year then ended, the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the years in the two-year
period then ended, and the related notes (collectively, the financial statements) and the financial highlights
for each of the years in the five-year period then ended. In our opinion, the financial statements and
financial highlights present fairly, in all material respects, the financial position of the Fund as
of March 31, 2021, the results of its operations and its cash flows for the year then ended, the changes
in its net assets for each of the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended, in conformity with U.S. generally accepted
accounting principles.
Basis for
Opinion
These financial statements and financial highlights are the responsibility of the
Fund’s management. Our responsibility is to express an opinion on these financial statements and financial
highlights 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 and financial highlights are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements and financial highlights, 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 and financial highlights. Such procedures also
included confirmation of securities owned as of March 31, 2021, by correspondence with the custodian,
agent banks and brokers or by other appropriate auditing procedures when replies from agent banks and
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
and financial highlights. We believe that our audits provide a reasonable basis for our opinion.
We
have served as the auditor of one or more BNY Mellon Investment Adviser, Inc. investment companies since
1994.
New
York, New York
May 27, 2021
38
ADDITIONAL
INFORMATION (Unaudited)
Dividend
Reinvestment Plan
To participate automatically in the Dividend Reinvestment Plan (the “Plan”)
of the fund, fund shares must be registered in either your name, or, if your fund shares are held in
nominee or “street” name through your broker-dealer, your broker-dealer must be a participant in
the Plan. You may terminate your participation in the Plan, as set forth below. All shareholders participating
(the “Participants”) in the Plan will be bound by the following provisions:
Computershare Inc. (the
“Agent”) will act as Agent for each Participant, and will open an account for each Participant under
the Plan in the same name as their present shares are registered, and put into effect for them the dividends
reinvestment option of the plan as of the first record date for a dividend or capital gains distribution.
Whenever
the fund declares income dividend or capital gains distribution payable in shares of the fund or cash
at the option of the shareholders, each Participant that does not opt for cash distributions shall take
such distribution entirely in shares. If on the payment date for a dividend or capital gains distribution,
the net asset value is equal to or less than the market price per share plus estimated brokerage commissions,
the Agent shall automatically receive such shares, including fractions, for each Participant’s account
except in the circumstances described in the following paragraph. Except in such circumstances, the number
of additional shares to be credited to each Participant’s account shall be determined by dividing the
dollar amount of the income dividend or capital gains distribution payable on their shares by the greater
of the net asset value per share determined as of the date of purchase or 95% of the then current market
price per share of the fund’s shares on the payment date.
Should the net asset value per share of the
fund shares exceed the market price per share plus estimated brokerage commissions on the payment date
for a share or cash income dividend or capital gains distribution, the Agent or a broker-dealer selected
by the Agent shall endeavor, for a purchase period of 30 days to apply the amount of such dividend or
capital gains distribution on each Participant’s shares (less their pro rata share of brokerage commissions
incurred with respect to the Agent’s open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase shares of the fund on the open market for each Participant’s
account. In no event may such purchase be made more than 30 days after the payment date for such dividend
or distribution except where temporary curtailment or suspension of purchase is necessary to comply with
applicable provisions of federal securities laws. If, at the close of business on any day during the
purchase period the net asset value per share equals or is less than the market price per share plus
estimated brokerage commissions, the Agent will not make any further open-market purchases in connection
with the reinvestment of such dividend or distribution. If the Agent is unable to invest the full dividend
or distribution amount through open-market purchases during the purchase period, the Agent shall request
that, with respect to the uninvested portion of such dividend or distribution amount, the fund issue
new shares at the close of business on
39
ADDITIONAL
INFORMATION (Unaudited) (continued)
the
earlier of the last day of the purchase period or the first day during the purchase period on which the
net asset value per share equals or is less than the market price per share, plus estimated brokerage
commissions. These newly issued shares will be valued at the then-current market price per share of the
fund’s shares at the time such shares are to be issued.
For purposes of making the dividend reinvestment
purchase comparison under the Plan, (a) the market price of the fund’s shares on a particular date
shall be the last sales price on the NYSE on that date, or, if there is no sale on such NYSE on that
date, then the mean between the closing bid and asked quotations for such shares on such NYSE on such
date and (b) the net asset value per share of the fund’s shares on a particular date shall be the net
asset value per share most recently calculated by or on behalf of the fund.
Open-market purchases provided
for above may be made on any securities exchange where the fund’s shares are traded, in the over-the
counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise
as the Agent shall determine. Each Participant’s uninvested funds held by the Agent will not bear interest,
and it is understood that, in any event, the Agent shall have no liability in connection with any inability
to purchase shares within 30 days after the initial date of such purchase as herein provided, or with
the timing of any purchase effected. The Agent shall have no responsibility as to the value of the fund’s
shares acquired for each Participant’s account. For the purpose of cash investments, the Agent may
commingle each Participant’s fund with those of other shareholders of the fund for whom the Agent similarly
acts as Agent, and the average price (including brokerage commissions) of all shares purchased by the
Agent as Agent shall be the price per share allocable to each Participant in connection therewith.
The
Agent may hold each Participant’s shares acquired pursuant to the Plan together with the shares of
other shareholders of the fund acquired pursuant to the Plan in noncertificated form in the Agent’s
name or that of the Agent’s nominee. The Agent will forward to each Participant any proxy solicitation
material; and will vote any shares so held for each Participant first in accordance with the instructions
set forth on proxies returned by the Participant to the fund, and then with respect to any proxies not
returned by the participant to the fund in the same portion as the Agent votes proxies returned by the
Participants to the fund. Upon a Participant’s written request, the Agent will deliver to the Participant,
without charge, a certificate or certificates for the full shares.
The Agent will confirm to each Participant
each acquisition made for their account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided fractional interest (computed
to four decimal places) in a share of the fund, no certificates for a fractional share will be issued.
However, dividends and distributions on fractional shares will be credited to each Participant’s account.
In the event of termination of a Participant’s account under the Plan, the Agent will adjust for any
such undivided fractional interest in cash at the market value of the fund’s shares at the time of
termination.
40
Any
share dividends or split shares distributed by the fund on shares held by the Agent for Participants
will be credited to their accounts. In the event that the fund makes available to its shareholders rights
to purchase additional shares of other securities, the shares held for each Participant under the Plan
will be added to other shares held by the Participant in calculating the number of rights to be issued
to each Participant.
The Agent’s service fee for handling capital gains distributions or income dividends
will be paid by the fund. Each Participant will be charged their pro rata share of brokerage commissions
on all open market purchases.
Each Participant may terminate their account under the Plan by notifying the Agent
in writing. Such termination will be effective immediately if the Participant’s notice is received
by the Agent not less than ten days prior to any dividend or distribution record date, otherwise such
termination will be effective shortly after the investment of such dividend distributions with respect
to any subsequent dividend or distribution. The Plan may be terminated by the Agent or the fund upon
notice in writing mailed to each Participant at least 90 days prior to any record date for the payment
of any dividend or distribution by the fund. Upon any termination, the Agent will cause a certificate
or certificates to be issued for the full shares held for each Participant under the Plan and cash adjustment
for any fraction to be delivered to them without charge. If a Participant elects by notice to the Agent
in writing in advance of such termination to have the Agent sell part or all of their shares and remit
the proceeds to them, the Agent is authorized to deduct a $5.00 fee plus brokerage commission for this
transaction from the proceeds.
These terms and conditions may be amended or supplemented by the Agent or the fund
at any time or times but, except when necessary or appropriate to comply with applicable law or the rules
or policies of the SEC or any other regulatory authority, only by mailing to each Participant appropriate
written notice at least 30 days prior to the effective date thereof. The amendment or supplement shall
be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Agent receives
written notice of the termination of their account under the Plan. Any such amendment may include an
appointment by the Agent in its place and stead of a successor Agent under these terms and conditions,
with full power and authority to perform all or any of the acts to be performed by the Agent under these
terms and conditions. Upon any such appointment of any Agent for the purpose of receiving dividends and
distributions, the fund will be authorized to pay to such successor Agent, for each Participant’s account,
all dividends and distributions payable on shares of the fund held in their name or under the Plan for
retention or application by such successor Agent as provided in these terms and conditions.
The Agent shall at all
times act in good faith and agree to use its best efforts within reasonable limits to insure the accuracy
of all services performed under this Agreement and to comply with applicable law, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless such error is caused by the Agent’s
negligence, bad faith, or willful misconduct or that of its employees.
41
ADDITIONAL
INFORMATION (Unaudited) (continued)
These
terms and conditions shall be governed by the laws of the State of New York.
Investment Objective and Principal
Investment Strategies
Investment
Objective. The fund’s primary investment objective is to seek high current income. The fund
will also seek capital growth as a secondary objective, to the extent consistent with its objective of
seeking high current income. The
fund’s investment objectives are fundamental and may not be changed without the affirmative vote of
the holders of a majority (as defined in the Act) of the fund’s outstanding voting securities. There
is no assurance the fund will achieve its investment objective.
Principal Investment Strategies.
Under normal market conditions, the fund will invest at least 65% of its total assets in income securities
of U.S. issuers rated below investment grade quality (lower than Baa by Moody’s Investors Service,
Inc. (“Moody’s”) or lower than BBB by S&P Global Ratings (“S&P”) or comparably rated
by another nationally recognized securities organization (each, a “Rating Agency”)) or in unrated
income securities that the Adviser determines to be of comparable quality. Lower grade income securities
are commonly known as “junk bonds.” The fund may also invest up to 10% of its total assets in securities
that are the subject of bankruptcy proceedings or otherwise in default as to the repayment of principal
and/or payment of interest at the time of acquisition by the fund or are rated in the lower rating categories
(Ca or lower by Moody’s and CC or lower by S&P) or which, if unrated, are in the judgment of the
Adviser of equivalent quality (“Distressed Securities”). The fund is also permitted to invest up
to 10% of the fund’s total assets in floating rate loans.
The fund will invest primarily in bonds,
debentures, notes and other debt instruments. The fund’s portfolio securities may have fixed or variable
rates of interest and may include asset-backed securities, such as CLOs and government securities. Although
not a principal investment strategy, the fund’s portfolio securities also may include zero coupon securities,
payment in kind securities or other deferred payment securities, convertible debt obligations and convertible
preferred stock, participation interests in commercial loans, mortgage-related securities, municipal
obligations, stripped securities, commercial paper and other short-term debt obligations. The issuers
of the fund’s portfolio securities may include domestic and foreign corporations, partnerships, trusts
or similar entities, and governmental entities or their political subdivisions, agencies or instrumentalities.
The fund may invest in companies in, or governments of, developing countries. The fund may invest up
to 25% of its total assets in securities of issuers domiciled outside the United States or that are denominated
in various foreign currencies and multinational currency units.
The fund may engage in various portfolio
strategies to seek to enhance income and hedge its portfolio against investment and interest rate risks,
including the use of leverage and the use of derivative financial instruments. Although the fund is not
limited in the types of derivatives it can use, the fund currently expects that its use of derivatives
will consist principally of credit default swaps, credit default index swaps and foreign currency forward
contracts.
42
The
fund’s portfolio will be invested without regard to maturity. In connection with its investments in
corporate debt securities, or restructuring of investments owned by the fund, the fund may receive warrants
or other non-income producing equity securities. The fund may retain such securities, including equity
shares received upon conversion of convertible securities, until the Adviser determines it is appropriate
in light of current market conditions to effect a disposition of such securities. The fund also may invest
up to 5% of its assets directly in the common stock of junk bond issuers. This percentage will be in
addition to any other common stock holdings acquired as part of warrants or “units”, so that the
fund’s total common stock holdings could exceed 5% at a particular time. However, the fund currently
intends to invest directly in common stocks (including those offered in an initial public offering) to
gain sector exposure and when suitable junk bonds are not available for sale. The fund expects to sell
the common stock promptly when suitable junk bonds are subsequently acquired.
The fund is permitted to
invest asset-backed securities, including up to 5% of its total assets in CLOs. CLOs and other structured
credit investments are generally backed by an asset or a pool of assets (typically senior secured loans,
certain subordinated loans and other credit-related assets in the case of a CLOs) which serve as collateral.
The cash flows from CLOs and structured credit investments are split into two or more portions, called
tranches, varying in risk and yield. The fund and other investors in CLOs and structured finance securities
ultimately bear the credit risk of the underlying collateral. If there are defaults or the relevant collateral
otherwise underperforms, scheduled payments to senior tranches of such securities take precedence over
those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those
to subordinated/equity tranches. The fund may invest in any tranche, including the equity tranche. The
riskiest portion is the “equity” tranche, which is subordinate to the other tranches in the event
of defaults. Senior tranches typically have higher ratings and lower yields than its underlying securities,
and may be rated investment grade. The ratings reflect both the credit quality of underlying collateral
as well as how much protection a given tranche is afforded by tranches that are subordinate to it.
At
times, the fund expects to utilize financial leverage through borrowings, including the issuance of debt
securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase
agreements, which have the effect of financial leverage. The fund intends to utilize financial leverage
in an initial amount equal to approximately 25% of its total assets (including the amount obtained through
leverage). The fund currently utilizes financial leverage through its $100,000,000 Revolving Credit and
Security Agreement. The fund generally will not utilize leverage if it anticipates that the fund’s
leveraged capital structure would result in a lower return to shareholders than that obtainable over
time with an unleveraged capital structure. Use of financial leverage creates an opportunity for increased
income and capital growth for the shareholders but, at the same time, creates special risks, and there
can be no assurance that a leveraging strategy will be successful during any period in which it is employed.
In
selecting investments for the fund’s portfolio, the Adviser will seek to identify issuers and industries
that the Adviser believes are likely to experience stable or improving
43
ADDITIONAL
INFORMATION (Unaudited) (continued)
financial
conditions. The Adviser believes that this strategy should enhance the fund’s ability to earn high
current income while also providing opportunities for capital growth. The Adviser’s analysis may include
consideration of general industry trends, the issuer’s managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to changes in business conditions
and interest rates. The Adviser may also consider relative values based on anticipated cash flow, interest
or dividend coverage, asset coverage and earnings prospects. Of course there can be no assurances that
this strategy will be successful. The fund will seek its secondary objective of capital growth by investing
in securities that the Adviser expects may appreciate in value as a result of favorable developments
affecting the business or prospects of the issuer, which may improve the issuer’s financial condition
and credit rating, or as a result of declines in long-term interest rates.
In certain market conditions,
the Adviser may determine that securities rated investment grade (i.e., at least Baa by Moody’s or
BBB by S&P or comparably rated by another Rating Agency) offer significant opportunities for high
income and capital growth. In such conditions, the fund may invest less than 65% of its total assets
in lower grade income securities of U.S. issuers. In addition, the fund may implement various temporary
“defensive” strategies at times when the Adviser determines that conditions in the markets make pursuing
the fund’s basic investment strategy inconsistent with the best interests of its shareholders. These
strategies may include investing all or a portion of the fund’s assets in higher-quality debt securities.
Principal
Risk Factors
An investment in the fund involves special risk considerations, which are described
below. The fund is a non-diversified, closed-end management investment company designed primarily as
a long-term investment and not as a vehicle for short-term trading purposes. An investment in the fund
may be speculative and it involves a high degree of risk. The fund should not constitute a complete investment
program. Due to the uncertainty in all investments, there can be no assurance that the fund will achieve
its investment objectives. Different risks may be more significant at different times depending on market
conditions. Your shares at any point in time may be worth less than your original investment.
High Yield Securities Risk. Below investment grade instruments
are commonly referred to as “junk” or “high yield” instruments and are regarded as predominantly
speculative with respect to the issuer’s capacity to pay interest and repay principal. Below investment
grade instruments, though generally higher yielding, are characterized by higher risk. These instruments
are especially sensitive to adverse changes in general economic conditions, to changes in the financial
condition of their issuers and to price fluctuation in response to changes in interest rates. During
periods of economic downturn or rising interest rates, issuers of below investment grade instruments
may experience financial stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default. The secondary market for below investment grade
instruments may not be as liquid as the secondary market for more highly rated instruments, a factor
which may have an adverse effect on the fund’s
44
ability to dispose of a particular
security. There are fewer dealers in the market for high yield instruments than for investment grade
instruments. The prices quoted by different dealers may vary significantly, and the spread between the
bid and asked price is generally much larger for high-yield securities than for higher quality instruments.
Under adverse market or economic conditions, the secondary market for below investment grade instruments
could contract, independent of any specific adverse changes in the condition of a particular issuer,
and these instruments may become illiquid. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may also decrease the values and liquidity of below investment
grade instruments, especially in a market characterized by a low volume of trading.
Default, or the market’s
perception that an issuer is likely to default, could reduce the value and liquidity of below investment
grade instruments held by the fund, thereby reducing the value of an investment in the fund’s shares.
In addition, default, or the market’s perception that an issuer is likely to default, may cause the
fund to incur expenses, including legal expenses, in seeking recovery of principal or interest on its
portfolio holdings, including litigation to enforce the fund’s rights. In any reorganization or liquidation
proceeding relating to a portfolio company, the fund may lose its entire investment or may be required
to accept cash or securities with a value less than its original investment. Among the risks inherent
in investments in a troubled entity is the fact that it frequently may be difficult to obtain information
as to the true financial condition of such issuer. The Adviser’s judgment about the credit quality
of an issuer and the relative value of its securities may prove to be wrong. In addition, not only may
the fund lose its entire investment on one or more instruments, fund shareholders may also lose their
entire investments in the fund. Investments in below investment grade instruments may present special
tax issues for the fund to the extent that the issuers of these securities default on their obligations
pertaining thereto, and the U.S. federal income tax consequences to the fund as a holder of such securities
may not be clear.
Because of the greater number of investment considerations involved in investing
in below investment grade instruments, the ability of the fund to meet its investment objective depends
more on the Adviser’s judgment and analytical abilities than would be the case if the portfolio invested
primarily in securities in the higher rating categories. While the Adviser will attempt to reduce the
risks of investing in below investment grade instruments through active portfolio management, diversification,
credit analysis and attention to current developments and trends in the economy and the financial markets,
there can be no assurance that a broadly diversified portfolio of such instruments would substantially
lessen the risks of defaults brought about by an economic downturn or recession.
Distressed Securities Risk. The fund may invest in credit
instruments of distressed or defaulted issuers. Such instruments may be rated in the lower rating categories
(Caa1 or lower by Moody’s, or CCC+ or lower by S&P or Fitch Ratings, Inc.) or, if unrated, are
considered by the Adviser to be of comparable quality. For these securities, the risks associated with
below investment grade instruments are more pronounced. Instruments rated in the lower rating categories
are subject to higher credit risk with extremely poor
45
ADDITIONAL
INFORMATION (Unaudited) (continued)
prospects
of ever attaining any real investment standing, to have a current identifiable vulnerability to default,
to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse
business, financial or economic conditions and/or to be in default or not current in the payment of interest
or principal. Ratings may not accurately reflect the actual credit risk associated with a corporate security.
Investing
in distressed or defaulted securities is speculative and involves substantial risks. The fund may make
such investments when, among other circumstances, the Adviser believes it is reasonably likely that the
issuer of the distressed or defaulted securities will make an exchange offer or will be the subject of
a plan of reorganization pursuant to which the fund will receive new securities in return for the distressed
or defaulted securities. There can be no assurance, however, that such an exchange offer will be made
or that such a plan of reorganization will be adopted. In addition, a significant period of time may
pass between the time at which the fund makes its investment in distressed or defaulted securities and
the time that any such exchange offer or plan of reorganization is completed, if at all. During this
period, it is unlikely that the fund would receive any interest payments on the distressed or defaulted
securities, the fund would be subject to significant uncertainty whether the exchange offer or plan of
reorganization will be completed and the fund may be required to bear certain extraordinary expenses
to protect and recover its investment. The fund also will be subject to significant uncertainty as to
when, in what manner and for what value the obligations evidenced by the distressed or defaulted securities
will eventually be satisfied (e.g.,
through a liquidation of the issuer’s assets, an exchange offer or plan of reorganization involving
the distressed or defaulted securities or a payment of some amount in satisfaction of the obligation).
Even if an exchange offer is made or plan of reorganization is adopted with respect to distressed or
defaulted securities held by the fund, there can be no assurance that the securities or other assets
received by the fund in connection with the exchange offer or plan of reorganization will not have a
lower value or income potential than may have been anticipated when the investment was made, or no value.
Fixed-Income Market Risk. The
market value of a fixed-income security may decline due to general market conditions that are not specifically
related to a particular company, such as real or perceived adverse economic conditions, changes in the
outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally.
The fixed-income securities market can be susceptible to increases in volatility and decreases in liquidity.
Liquidity can decline unpredictably in response to overall economic conditions or credit tightening.
Increases in volatility and decreases in liquidity may be caused by a rise in interest rates (or the
expectation of a rise in interest rates). An unexpected increase in fund redemption requests, including
requests from shareholders who may own a significant percentage of the fund’s shares, which may be
triggered by market turmoil or an increase in interest rates, could cause the fund to sell its holdings
at a loss or at undesirable prices and adversely affect the fund’s share price and increase the fund’s
liquidity risk, fund expenses and/or taxable distributions. Federal Reserve policy in response to market
conditions, including with respect to interest rates, may adversely affect the value, volatility and
liquidity of dividend and interest paying securities. Policy
46
and
legislative changes worldwide are affecting many aspects of financial regulation. The impact of these
changes on the markets and the practical implications for market participants may not be fully known
for some time.
Interest
Rate Risk. Prices of bonds and other fixed-income securities tend to move inversely with changes
in interest rates. Typically, a rise in rates will adversely affect fixed-income securities and, accordingly,
will cause the value of the fund’s investments in these securities to decline. During periods of very
low interest rates, which occur from time to time due to market forces or actions of governments and/or
their central banks, including the Board of Governors of the Federal Reserve System in the U.S., the
fund may be subject to a greater risk of principal decline from rising interest rates. When interest
rates fall, the values of already-issued fixed-income securities generally rise. However, when interest
rates fall, the fund’s investments in new securities may be at lower yields and may reduce the fund’s
income. The magnitude of these fluctuations in the market price of fixed-income securities is generally
greater for securities with longer effective maturities and durations because such instruments do not
mature, reset interest rates or become callable for longer periods of time. The change in the value of
a fixed-income security or portfolio can be approximated by multiplying its duration by a change in interest
rates. For example, the market price of a fixed-income security with a duration of three years would
be expected to decline 3% if interest rates rose 1%. Conversely, the market price of the same security
would be expected to increase 3% if interest rates fell 1%. Unlike investment grade bonds, however, the
prices of high yield bonds may fluctuate unpredictably and not necessarily inversely with changes in
interest rates. Interest rates in the United States currently are at or near historic lows due to market
forces and actions of the Board of Governors of the Federal Reserve System in the U.S., primarily in
response to the novel coronavirus (COVID-19) pandemic and resultant market disruptions. Changing interest
rates, including rates that fall below zero, may have unpredictable effects on markets, may result in
heightened market volatility and may detract from fund performance.
Credit Risk. Credit risk is the risk that one or more fixed-income instruments
in the fund’s portfolio will decline in price, or the issuer or obligor thereof will fail to pay interest
or repay principal when due, because the issuer or obligor experiences a decline or there is a perception
of a decline in its financial status. Below investment grade instruments involve greater credit risk
than investment grade instruments.
Liquidity
Risk. When there is little or no active trading market for specific types of securities, it can
become more difficult to sell the securities in a timely manner at or near their perceived value. In
such a market, the value of such securities and the fund’s net asset value per share may fall dramatically,
even during periods of declining interest rates. Other market developments can adversely affect fixed-income
securities markets. Regulations and business practices, for example, have led some financial intermediaries
to curtail their capacity to engage in trading (i.e.,
“market making”) activities for certain fixed-income securities, which could have the potential to
decrease liquidity and increase volatility in the fixed-income securities markets. Investments that are
illiquid or that trade in lower volumes may be more difficult to value. Liquidity can declaim
47
ADDITIONAL
INFORMATION (Unaudited) (continued)
unpredictably in response to overall
economic conditions or credit tightening. Increases in volatility and decreases in liquidity may be caused
by a rise in interest rates (or the expectation of a rise in interest rates). The market for below investment
grade securities may be less liquid and therefore these securities may be harder to value or sell at
an acceptable price, especially during times of market volatility or decline. Investments in foreign
securities tend to have greater exposure to liquidity risk than domestic securities. No active trading
market may exist for some of the floating rate loans in which the fund invests and certain loans may
be subject to restrictions on resale. Because some floating rate loans that the fund invests in may have
a more limited secondary market, liquidity risk is more pronounced for the fund than for mutual funds
that invest primarily in other types of fixed-income instruments or equity securities.
CLO Risk. Holders of CLOs and other types of structured
products bear risks of the underlying investments, index or reference obligation and are subject to counterparty
risk. The fund may have the right to receive payments only from the issuers of the structured product,
and generally does not have direct rights against the issuer or the entity that sold the assets to be
securitized. While certain structured products enable the investor to acquire interests in a pool of
securities without the brokerage and other expenses associated with directly holding the same securities,
investors in structured products generally pay their share of the investment’s administrative and other
expenses. Although it is difficult to predict whether the prices of indices and securities underlying
structured products will rise or fall, these prices (and, therefore, the prices of structured products)
will be influenced by the same types of political and economic events that affect issuers of securities
and capital markets generally. If the issuer of a structured product uses shorter term financing to purchase
longer term securities, the issuer may be forced to sell its securities at below market prices if it
experiences difficulty in obtaining such financing, which may adversely affect the value of the structured
products owned by the fund.
Collateralized debt obligations, such as CLOs, may be thinly traded or have a limited
trading market. CLOs are typically privately offered and sold, and thus are not registered under the
securities laws. As a result, investments in CLOs may be characterized by the fund as illiquid securities,
especially investments in mezzanine and subordinated/equity tranches of CLOs; however, an active dealer
market may exist for certain investments and more senior CLO tranches, which would allow such securities
to be considered liquid in some circumstances. In addition to the general risks associated with credit
instruments, CLOs carry additional risks, including, but not limited to: (i) the possibility that distributions
from collateral securities will not be adequate to make interest or other payments; (ii) the quality
of the collateral may decline in value or default; (iii) the possibility that the class of CLO held
by the fund is subordinate to other classes; and (iv) the complex structure of the security may not
be fully understood at the time of investment and may produce disputes with the issuer or unexpected
investment results.
Floating
Rate Loan Risk. Unlike publicly traded common stocks which trade on national exchanges, there
is no central market or exchange for loans to trade. Loans trade in an over-the-counter market, and confirmation
and settlement, which are effected through
48
standardized
procedures and documentation, may take significantly longer than seven days to complete. The secondary
market for floating rate loans also may be subject to irregular trading activity and wide bid/ask spreads.
The lack of an active trading market for certain floating rate loans may impair the ability of the fund
to realize full value in the event of the need to sell a floating rate loan and may make it difficult
to value such loans. There may be less readily available, reliable information about certain floating
rate loans than is the case for many other types of securities, and the fund’s portfolio managers may
be required to rely primarily on their own evaluation of a borrower’s credit quality rather than on
any available independent sources. The value of collateral, if any, securing a floating rate loan can
decline, and may be insufficient to meet the issuer’s obligations in the event of non-payment of scheduled
interest or principal or may be difficult to readily liquidate. In the event of the bankruptcy of a borrower,
the fund could experience delays or limitations imposed by bankruptcy or other insolvency laws with respect
to its ability to realize the benefits of the collateral securing a loan. The floating rate loans in
which the fund invests typically will be below investment grade quality and, like other below investment
grade securities, are inherently speculative. As a result, the risks associated with such floating rate
loans are similar to the risks of below investment grade securities, although senior loans are typically
senior and secured in contrast to other below investment grade securities, which are often subordinated
and unsecured. Floating rate loans may not be considered to be “securities” for purposes of the anti-fraud
protections of the federal securities laws, including those with respect to the use of material non-public
information, so that purchasers, such as the fund, may not have the benefit of these protections.
LIBOR Risk. Many credit instruments,
derivatives and other financial instruments, including those in which the fund may invest, utilize LIBOR
as the reference or benchmark rate for variable interest rate calculations. However, the use of LIBOR
started to come under pressure following manipulation allegations in 2012. Despite increased regulation
and other corrective actions since that time, concerns have arisen regarding its viability as a benchmark,
due largely to reduced activity in the financial markets that it measures. In July 2017, the Financial
Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. It was subsequently
announced that tenors of US Dollar LIBOR would continue to be published through June 30, 2023, other
than one week and two month USD LIBOR settings which will cease publication on December 31, 2021. Various
financial industry groups around the world have begun planning the transition to the use of different
benchmarks. In the United States, the Federal Reserve Board and the New York Fed convened the Alternative
Reference Rates Committee, comprised of a group of private-market participants, which recommended the
Secured Overnight Financing Rate as an alternative reference rate to USD LIBOR. Neither the effect of
the transition process, in the United States or elsewhere, nor its ultimate success, can yet be known.
While some instruments tied to LIBOR may include a replacement rate in the event LIBOR is discontinued,
not all instruments have such fallback provisions and the effectiveness of such replacement rates remains
uncertain. The transition process might lead to increased volatility and illiquidity in markets that
currently rely on the LIBOR to determine
49
ADDITIONAL
INFORMATION (Unaudited) (continued)
interest
rates. The potential cessation of LIBOR could affect the value and liquidity of investments tied to LIBOR,
especially those that do not include fallback provisions, and may result in costs incurred in connection
with closing out positions and entering into new trades.
Market Risk. The value of the securities in which the fund invests may be
affected by political, regulatory, economic and social developments, and developments that impact specific
economic sectors, industries or segments of the market. In addition, turbulence in financial markets
and reduced liquidity in equity, credit and/or fixed income markets may negatively affect many issuers,
which could adversely affect the fund. Global economies and financial markets are becoming increasingly
interconnected, and conditions and events in one country, region or financial market may adversely impact
issuers in a different country, region or financial market. These risks may be magnified if certain events
or developments adversely interrupt the global supply chain; in these and other circumstances, such risks
might affect companies worldwide. Recent examples include pandemic risks related to COVID-19 and aggressive
measures taken worldwide in response by governments, including closing borders, restricting international
and domestic travel, and the imposition of prolonged quarantines of large populations, and by businesses,
including changes to operations and reducing staff. The effects of COVID-19 have contributed to increased
volatility in global markets and will likely affect certain countries, companies, industries and market
sectors more dramatically than others. The COVID-19 pandemic has had, and any other outbreak of an infectious
disease or other serious public health concern could have, a significant negative impact on economic
and market conditions and could trigger a prolonged period of global economic slowdown. To the extent
the fund may overweight its investments in certain countries, companies, industries or market sectors,
such positions will increase the fund’s exposure to risk of loss from adverse developments affecting
those countries, companies, industries or sectors.
Management Risk. The fund is subject to management risk because the Adviser
actively manages the fund. The Adviser and the fund’s portfolio managers will apply investment techniques
and risk analyses in making investment decisions for the fund, but there can be no guarantee that these
will produce the desired results.
Leverage
Risk. The use of leverage by the fund creates an opportunity for increased net income and capital
growth for the fund’s shares, but, at the same time, creates special risks. There can be no assurance
that a leveraging strategy will be successful during any period in which it is employed. Leverage creates
risks for holders of the fund’s shares including the likelihood of greater volatility of net asset
value and market price of the fund’s shares and the risk that fluctuations in interest rates on borrowings
may affect the return to the holders of the fund’s shares. To the extent the income or capital growth
derived from securities purchased with funds received from leverage exceeds the cost of leverage, the
fund’s return will be greater than if leverage had not been used. Conversely, if the income or capital
growth from the securities purchased with such funds is not sufficient to cover the cost of leverage,
the return to the fund will be less than if leverage had not been used, and therefore the amount available
for distribution to shareholders
50
as
dividends and other distributions will be reduced. In the latter case, the Adviser in its best judgment
may nevertheless determine to maintain the fund’s leveraged position if it deems such action to be
appropriate under the circumstances. During periods in which the fund is utilizing financial leverage,
the investment management and administration fee, which is payable to the Adviser as a percentage of
the fund’s Managed Assets, will be higher than if the fund did not utilize a leveraged capital structure.
Under the Agreement, the fund is subject to certain covenants, including those relating to asset coverage
and portfolio composition requirements. It is not anticipated that these covenants will impede the Adviser
in managing the fund’s portfolio in accordance with the fund’s investment objectives and policies.
Use of Derivatives Risk. The
fund is subject to additional risks with respect to the use of derivatives. Derivatives can be volatile
and involve various types and degrees of risk, depending upon the characteristics of the particular derivative
and the portfolio as a whole. Derivatives permit the fund to increase or decrease the level of risk,
or change the character of the risk, to which its portfolio is exposed in much the same way as the fund
can increase or decrease the level of risk, or change the character of the risk, of its portfolio by
making investments in specific securities. However, derivatives may entail investment exposures that
are greater than their cost would suggest, meaning that a small investment in derivatives could have
a large potential impact on the fund’s performance. If the fund invests in derivatives at inopportune
times or judges market conditions incorrectly, such investments may lower the fund’s return or result
in a loss. The fund also could experience losses if its derivatives were poorly correlated with the underlying
instruments or the fund’s other investments, or if the fund were unable to liquidate its position because
of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid.
Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives.
If a derivative transaction is particularly large or if the relevant market is illiquid, it may not be
possible to initiate a transaction or liquidate a position at an advantageous time or price. Additionally,
some derivatives the fund may use may involve economic leverage, which may increase the volatility of
these instruments as they may increase or decrease in value more quickly than the underlying security,
index, currency, futures contract, or other economic variable.
Derivatives may be purchased on established
exchanges or through privately negotiated transactions referred to as OTC derivatives. Exchange-traded
derivatives generally are guaranteed by the clearing agency that is the issuer or counterparty to such
derivatives. As a result, unless the clearing agency defaults, there is relatively little counterparty
credit risk associated with derivatives purchased on an exchange. In contrast, no clearing agency guarantees
OTC derivatives. Therefore, many of the regulatory protections afforded participants on organized exchanges
for futures contracts and exchange-traded options, such as the performance guarantee of an exchange clearing
house, are not available in connection with OTC derivative transactions. As a result, each party to an
OTC derivative bears the risk that the counterparty will default. Accordingly, the Adviser will consider
the creditworthiness of counterparties to OTC derivatives in the same manner as it would review the credit
quality of a security to be purchased by the
51
ADDITIONAL
INFORMATION (Unaudited) (continued)
fund.
OTC derivatives are less liquid than exchange-traded derivatives since the other party to the transaction
may be the only investor with sufficient understanding of the derivative to be interested in bidding
for it.
Because
many derivatives have a leverage component, adverse changes in the value or level of the underlying asset,
reference rate or index can result in a loss substantially greater than the amount invested in the derivative
itself. Certain derivatives, such as written call options, have the potential for unlimited loss, regardless
of the size of the initial investment. If a derivative transaction is particularly large or if the relevant
market is illiquid (as is the case with many privately-negotiated derivatives, including swap agreements),
it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price.
Credit
Derivatives. The use of credit derivatives is a highly specialized activity which involves strategies
and risks different from those associated with ordinary portfolio security transactions. If the Adviser
is incorrect in its forecasts of default risks, market spreads or other applicable factors, the investment
performance of the fund would diminish compared with what it would have been if these techniques were
not used. Moreover, even if the Adviser is correct in its forecasts, there is a risk that a credit derivative
position may correlate imperfectly with the price of the asset or liability being protected.
Swap Agreements. The fund may
enter into swap transactions, including credit default swap agreements. Such transactions are subject
to market risk, risk of default by the other party to the transaction and risk of imperfect correlation
between the value of such instruments and the underlying assets and may involve commissions or other
costs. Swaps generally do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to swaps generally is limited to the net amount of payments
that the fund is contractually obligated to make, or in the case of the other party to a swap defaulting,
the net amount of payments that the fund is contractually entitled to receive. The fund bears the risk
of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement counterparty. The fund will enter into swap agreements only with counterparties that
meet certain standards of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the fund’s repurchase agreement guidelines). In addition, it is possible
that developments in the swaps market, including potential government regulation, could adversely affect
the fund’s ability to terminate existing swap agreements or to realize amounts to be received under
such agreements.
Forward
Foreign Currency Exchange Contracts. The fund may enter into forward foreign currency exchange
contracts in order to protect against possible losses on foreign investments resulting from adverse changes
in the relationship between the U.S. dollar and foreign currencies. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a future date, which may be
any fixed number of days (usually less than one year) from the date of the contract agreed upon by the
parties, at a price and for an amount set at the time of the contract. These
52
contracts
are traded in the interbank market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has a deposit requirement, and no commissions
are charged at any stage for trades. Generally, secondary markets do not exist for forward contracts,
with the result that closing transactions can be made for forward contracts only by negotiating directly
with the counterparty to the contract. As with other over-the-counter derivatives transactions, forward
contracts are subject to the credit risk of the counterparty. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference (the spread) between the
price at which they are buying and selling various currencies. However, forward foreign currency exchange
contracts may limit potential gains which could result from a positive change in such currency relationships.
The
federal income tax treatment of payments in respect of certain derivatives contracts is unclear. Fund
shareholders may receive distributions that are attributable to derivatives contracts that are treated
as ordinary income for federal income tax purposes.
The SEC recently adopted Rule 18f-4 under
the Act, which will regulate the use of derivatives by the fund and is effective in August 2022. Under
the new rule, the fund may be required to establish a comprehensive derivatives risk management program,
to comply with certain value-at-risk based leverage limits, to appoint a derivatives risk manager and
to provide additional disclosure both publicly and to the SEC regarding its derivatives positions. Compliance
with the new rule by the fund could, among other things, make derivatives more costly, limit their availability
or utility or otherwise adversely affect their performance. The new rule may limit the fund’s ability
to use derivatives as part of its investment strategy.
Foreign Investment Risk. To the extent the fund invests
in foreign securities, the fund’s performance will be influenced by political, social and economic
factors affecting investments in foreign issuers. Special risks associated with investments in foreign
issuers include exposure to currency fluctuations, less liquidity, less developed or less efficient trading
markets, lack of comprehensive company information, political and economic instability and differing
auditing and legal standards. Investments denominated in foreign currencies are subject to the risk that
such currencies will decline in value relative to the U.S. dollar and affect the value of these investments
held by the fund.
Foreign
Currency Risk. Investments in foreign currencies are subject to the risk that those currencies
will decline in value relative to the U.S. dollar or, in the case of hedged positions, that the U.S.
dollar will decline relative to the currency being hedged. Foreign currencies, particularly the currencies
of emerging market countries, are also subject to risks caused by inflation, interest rates, budget deficits
and low savings rates, political factors and government intervention and controls.
Equity Securities Risk. To the
extent the fund invests directly in common stock of junk bond issuers or acquires equity securities or warrants incidental to
its
53
ADDITIONAL
INFORMATION (Unaudited) (continued)
investments
in credit instruments, it will be subject to the risks associated with those types of investments.
Common
Stock Risk. Stocks generally fluctuate more in value than bonds and may decline significantly
over short time periods. There is the chance that stock prices overall will decline because stock markets
tend to move in cycles, with periods of rising prices and falling prices. The market value of a stock
may decline due to general market conditions that are not related to the particular company, such as
real or perceived adverse economic conditions, changes in the general outlook for corporate earnings,
changes in interest or currency rates, or adverse investor sentiment generally. A security’s market
value also may decline because of factors that affect a particular industry, such as labor shortages
or increased production costs and competitive conditions within an industry, or factors that affect a
particular company, such as management performance, financial leverage, and reduced demand for the company’s
products or services.
Preferred
Stock Risk. There are special risks associated with investing in preferred stocks, including:
· Deferral and Omission. Preferred
stocks may include provisions that permit the issuer, at its discretion, to defer or omit distributions
for a stated period without any adverse consequences to the issuer. If the fund owns a preferred stock
that is deferring its distributions, the fund may be required to report income for tax purposes although
it has not yet received such income.
· Subordination. Preferred stocks
generally are subordinated to loans and other debt instruments in a company’s capital structure in
terms of having priority to corporate income and liquidation payments, and therefore will be subject
to greater credit risk than loans and other debt instruments.
· Limited
Voting Rights. Generally, preferred stockholders (such as the fund) have no voting rights with
respect to the issuing company unless, among other things, preferred dividends have been in arrears for
a specified number of periods, at which time the preferred stockholders may elect a number of directors
to the issuer’s board. Generally, once all the arrearages have been paid, the preferred stockholders
no longer have voting rights. In the case of trust preferred securities, holders generally have no voting
rights, except if (i) the issuer fails to pay dividends for a specified period of time or (ii) a declaration
of default occurs and is continuing.
· Special Redemption Rights. In
certain varying circumstances, an issuer of preferred stock may redeem the securities prior to a specified
date. For instance, for certain types of preferred stocks, a redemption may be triggered by certain changes
in U.S. federal income tax or securities laws.
54
As with call provisions, a special redemption by the issuer may negatively impact
the return of the security held by the fund.
Convertible Securities Risk. Convertible securities may be converted at either
a stated price or stated rate into underlying shares of common stock or another security. Convertible
securities generally are subordinated to other similar but non-convertible securities of the same issuer.
Although to a lesser extent than with fixed rate debt securities, the market value of convertible securities
tends to decline as interest rates increase. In addition, because of the conversion feature, the market
value of convertible securities tends to vary with fluctuations in the market value of the underlying
common stock or other security. Although convertible securities provide for a stable stream of income,
they are subject to the risk that their issuers may default on their obligations. Convertible securities
also offer the potential for capital appreciation through the conversion feature, although there can
be no assurance of capital appreciation because securities prices fluctuate. Convertible securities generally
offer lower interest or dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. Synthetic convertible securities are subject to additional risks,
including risks associated with derivatives.
Warrants and Rights Risk. If the price of the underlying stock does not rise
above the exercise price before the warrant expires, the warrant generally expires without any value
and the fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially
more risk than investments in common stock. Warrants may trade in the same markets as their underlying
stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.
An investment in warrants would not entitle the fund to receive dividends or exercise voting rights.
U.S. Government
Debt Securities Risk. U.S. government debt securities generally do not involve the credit risks
associated with investments in other types of debt securities, although, as a result, the yields available
from U.S. government debt securities are generally lower than the yields available from other securities.
However, in 2011 S&P downgraded its rating of U.S. government debt, suggesting an increased credit
risk. Further downgrades could have an adverse impact on the price and volatility of U.S. government
debt instruments. Like other debt securities, the values of U.S. government securities change as interest
rates fluctuate. Fluctuations in the value of portfolio securities will not affect interest income on
existing portfolio securities but will be reflected in the fund’s net asset value. Since the magnitude
of these fluctuations will generally be greater at times when the fund’s average maturity is longer,
under certain market conditions the fund may, for temporary defensive purposes, accept lower current
income from short-term investments rather than investing in higher yielding long-term securities.
Non-Diversification
Risk. The fund is non-diversified, which means that the fund may invest a relatively high percentage
of its assets in a limited number of issuers. Therefore, the fund’s performance may be more vulnerable
to changes in the market
55
ADDITIONAL
INFORMATION (Unaudited) (continued)
value of a single issuer or group of
issuers and more susceptible to risks associated with a single economic, political or regulatory occurrence
than a diversified fund.
Risk of Market Price Discount from Net Asset Value. Shares of closed-end
funds, such as the fund, frequently trade at a discount from their net asset value. This characteristic
is a risk separate and distinct from the risk that net asset value could decrease as a result of investment
activities. The fund cannot predict whether its shares will trade at, above or below net asset value.
Cybersecurity
Risk. The fund and its service providers are susceptible to operational and information security
risks due to cybersecurity incidents. In general, cybersecurity incidents can result from deliberate
attacks or unintentional events. Cybersecurity attacks include, but are not limited to, gaining unauthorized
access to digital systems (e.g.,
through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive
information, corrupting data or causing operational disruption. Cyber attacks also may be carried out
in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks
on websites (i.e., efforts to make services unavailable to intended users). Cybersecurity incidents affecting
the Adviser or other service providers, as well as financial intermediaries, have the ability to cause
disruptions and impact business operations, potentially resulting in financial losses, including by interference
with the fund’s ability to calculate its net asset value; impediments to trading for the fund’s portfolio;
the inability of shareholders to transact business with the fund; violations of applicable privacy, data
security or other laws; regulatory fines and penalties; reputational damage; reimbursement or other compensation
or remediation costs; legal fees; or additional compliance costs. Similar adverse consequences could
result from cybersecurity incidents affecting issuers of securities in which the fund invests, counterparties
with which the fund engages in transactions, governmental and other regulatory authorities, exchange
and other financial market operators, banks, brokers, dealers, insurance companies and other financial
institutions and other parties. While information risk management systems and business continuity plans
have been developed which are designed to reduce the risks associated with cybersecurity, there are inherent
limitations in any cybersecurity risk management systems or business continuity plans, including the
possibility that certain risks have not been identified.
Given the risks described above, an investment
in the fund may not be appropriate for all investors. You should carefully consider your ability to assume
these risks before making an investment in the fund.
Recent Changes & Supplemental Information
During
the fiscal year ended March 31, 2021, there were (i) no material changes to the fund's investment objectives
and policies that have not been approved by shareholders, (ii) no changes in the fund’s trust instrument
or by-laws that would delay or prevent a change of control of the company that have not been approved
by shareholders, (iii) no material changes to the principal risk factors associated with investment in
the fund, and
56
(iv)
no changes in the persons who are primarily responsible for the day-to-day management of the fund's portfolio,
except as follows:
Effective January 31, 2021, Leland Hart no longer serve as a primary portfolio manager
of the fund. Messrs. Chris Barris and Kevin Cronk continue to manage the fund.
The fund has updated certain
of its principal risk factors to reflect the risks associated with the COVID-19 pandemic, Brexit, cybersecurity,
new Rule 18f-4 under the Act and the pending cessation of LIBOR.
57
IMPORTANT
TAX INFORMATION (Unaudited)
For federal tax purposes
the fund reports the maximum amount allowable but not less than 74.64% as interest-related dividends
in accordance with Section 871(k)(1) and 881(e) of the Internal Revenue Code.
58
INFORMATION
ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT (Unaudited)
At a meeting of the fund’s Board of Trustees held on February
24-25, 2021, the Board considered the renewal
of the fund’s Investment Management and Administration Agreement pursuant to which the Adviser
provides the fund with investment advisory and administrative services (the “Agreement”). The Board
members, none of whom are “interested persons” (as defined in the Investment Company Act of 1940,
as amended) of the fund, were assisted in their review by independent legal counsel and met with counsel
in executive session separate from representatives of the Adviser. In considering the renewal of the
Agreement, the Board considered several factors that it believed to be relevant, including those discussed
below. The Board did not identify any one factor as dispositive, and each Board member may have attributed
different weights to the factors considered.
Analysis of Nature, Extent, and Quality of Services Provided to the Fund.
The Board considered information provided to it at the meeting and in previous presentations from representatives
of the Adviser regarding the nature, extent, and quality of the services provided to funds in the BNY
Mellon fund complex, including the fund. Representatives of the Adviser noted that the fund is a closed-end
fund without daily inflows and outflows of capital and provided the fund’s asset size.
The Board also considered
research support available to, and portfolio management capabilities of, the fund’s portfolio management
personnel and that the Adviser also provides oversight of day-to-day fund operations, including fund
accounting and administration and assistance in meeting legal and regulatory requirements. The Board
also considered the Adviser’s extensive administrative, accounting and compliance infrastructures.
Comparative
Analysis of the Fund’s Performance and Management Fee and Expense Ratio. The Board reviewed
reports prepared by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider
of investment company data based on classifications provided by Thomson Reuters Lipper, which included
information comparing (1) the fund’s performance with the performance of a group of leveraged closed-end
high yield funds selected by Broadridge as comparable to the fund (the “Performance Group”) and with
a broader group of funds consisting of all leveraged closed-end high yield funds (the “Performance
Universe”), all for various periods ended December 31, 2020, and (2) the fund’s actual and contractual
management fees and total expenses with those of the same group of funds in the Performance Group (the
“Expense Group”) and with a broader group of all leveraged closed-end high yield funds, excluding
outliers (the “Expense Universe”), the information for which was derived in part from fund financial
statements available to Broadridge as of the date of its analysis. The Adviser previously had furnished
the Board with a description of the methodology Broadridge used to select the Performance Group and Performance
Universe and the Expense Group and Expense Universe.
Performance Comparisons. Representatives of the Adviser stated that the
usefulness of performance comparisons may be affected by a number of factors, including different
59
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT
(Unaudited) (continued)
investment
limitations and policies that may be applicable to the fund and comparison funds and the end date selected.
The Board discussed with representatives of the Adviser the results of the comparisons and considered
that the fund’s total return performance, on a net asset value basis, was above the Performance Group
medians for all periods, except the five- and ten-year periods when it was below medians, and above the
Performance Universe medians for all periods. The Board also considered that the fund’s total return
performance, on a market price basis, was above the Performance Group medians for all periods, except
the five- and ten-year periods when it was below medians, and below the Performance Universe median for
all periods except the one year period when it was above median. The Board also considered that, on
net asset value basis and market price basis, the fund’s yield performance was above the Performance
Group medians for nine of the ten one-year periods ended December 31st and above the Performance Universe medians for all ten one-year
periods ended December 31st.
The Board considered the relative proximity of the fund’s performance to the Performance Group and/or
Performance Universe medians in certain periods when performance was below median. The Adviser also
provided a comparison of the fund’s calendar year total returns to the returns of the fund’s benchmark
index.
Management Fee and Expense Ratio Comparisons.
The Board reviewed and considered the contractual management fee rate payable by the fund to the Adviser
in light of the nature, extent and quality of the management services provided by the Adviser. In addition,
the Board reviewed and considered the actual management fee rate paid by the fund over the fund’s last
fiscal year. The Board also reviewed the range of actual and contractual management fees and total expenses
as a percentage of average net assets of the Expense Group and Expense Universe funds and discussed the
results of the comparisons. The Board considered that, based on common assets alone, the fund’s contractual
management fee was slightly higher than the Expense Group median contractual management fee, the fund’s
actual management fee was higher than the Expense Group median and slightly higher than the Expense Universe
median actual management fee and the fund’s total expenses were lower than the Expense Group median
and the Expense Universe median total expenses. The Board also considered that, based on common assets
and leveraged assets together, the fund’s actual management fee was slightly higher than the Expense
Group median and lower than the Expense Universe median actual management fee and the fund’s total
expenses were lower than the Expense Group median and the Expense Universe median total expenses.
Representatives
of the Adviser noted that there were no other funds advised or administered by the Adviser that are in
the same Lipper category as the fund or separate accounts and/or other types of client portfolios advised
by the Adviser that are considered to have similar investment strategies and policies as the fund.
Analysis
of Profitability and Economies of Scale. Representatives of the Adviser reviewed the expenses
allocated and profit received by the Adviser and its affiliates and the resulting profitability percentage
for managing the fund and the aggregate profitability percentage to the Adviser and its affiliates for
managing the funds in the
60
BNY
Mellon fund complex, and the method used to determine the expenses and profit. The Board concluded that
the profitability results were not excessive, given the services rendered and service levels provided
by the Adviser and its affiliates. The Board also had been provided with information prepared by an
independent consulting firm regarding the Adviser’s approach to allocating costs to, and determining
the profitability of, individual funds and the entire BNY Mellon fund complex. The consulting firm also
had analyzed where any economies of scale might emerge in connection with the management of a fund.
The
Board considered on the advice of its counsel the profitability analysis (1) as part of its evaluation
of whether the fees under the Agreement, considered in relation to the mix of services provided by the
Adviser, including the nature, extent and quality of such services, supported the renewal of the Agreement
and (2) in light of the relevant circumstances for the fund and the extent to which economies of scale
would be realized if the fund grows and whether fee levels reflect these economies of scale for the benefit
of fund shareholders. Representatives of the Adviser stated that, because the fund is a closed-end fund
without daily inflows and outflows of capital, there were not significant economies of scale at this
time to be realized by the Adviser in managing the fund’s assets. Representatives of the Adviser also
stated that, as a result of shared and allocated costs among funds in the BNY Mellon fund complex, the
extent of economies of scale could depend substantially on the level of assets in the complex as a whole,
so that increases and decreases in complex-wide assets can affect potential economies of scale in a manner
that is disproportionate to, or even in the opposite direction from, changes in the fund’s asset level.
The Board also considered potential benefits to the Adviser from acting as investment adviser and took
into consideration that there were no soft dollar arrangements in effect for trading the fund’s investments.
At
the conclusion of these discussions, the Board agreed that it had been furnished with sufficient information
to make an informed business decision with respect to the renewal of the Agreement. Based on the discussions
and considerations as described above, the Board concluded and determined as follows.
· The Board concluded that the nature, extent and quality
of the services provided by the Adviser are adequate and appropriate.
· The Board generally was satisfied with the fund’s
overall performance.
· The
Board concluded that the fee paid to the Adviser continued to be appropriate under the circumstances
and in light of the factors and the totality of the services provided as discussed above.
· The Board determined that the economies of scale which
may accrue to the Adviser and its affiliates in connection with the management of the fund had been adequately
considered by the Adviser in connection with the fee rate charged to the fund pursuant to the Management
Agreement and that, to the extent in the future it were determined that material economies of scale had
not
61
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AGREEMENT
(Unaudited) (continued)
been shared with the fund, the Board would seek to have those economies of scale
shared with the fund.
In evaluating the Agreement, the Board considered these conclusions and determinations
and also relied on its previous knowledge, gained through meetings and other interactions with the Adviser
and its affiliates, of the Adviser and the services provided to the fund by the Adviser. The Board also
relied on information received on a routine and regular basis throughout the year relating to the operations
of the fund and the investment management and other services provided under the Agreement, including
information on the investment performance of the fund in comparison to similar funds and benchmark performance
indices; general market outlook as applicable to the fund; and compliance reports. In addition, the
Board’s consideration of the contractual fee arrangements for the fund had the benefit of a number
of years of reviews of the Agreement for the fund, or substantially similar agreements for other BNY
Mellon funds that the Board oversees, during which lengthy discussions took place between the Board and
representatives of the Adviser. Certain aspects of the arrangements may receive greater scrutiny in
some years than in others, and the Board’s conclusions may be based, in part, on their consideration
of the fund’s arrangements, or substantially similar arrangements for other BNY Mellon funds that the
Board oversees, in prior years. The Board determined to renew the Agreement.
62
BOARD MEMBERS INFORMATION (Unaudited)
INDEPENDENT
BOARD MEMBERS
Joseph S. DiMartino (77)
Chairman
of the Board (1995)
Current
term expires in 2023
Principal Occupation During Past 5 Years:
· Director or Trustee of funds in the BNY Mellon Family
of Funds and certain other entities (as described in the fund’s Statement of Additional Information)
(1995-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ, Inc., a public company providing professional business
services, products and solutions, Director
(1997-Present)
No. of Portfolios for which Board Member Serves: 106
———————
Francine J. Bovich (69)
Board
Member (2011)
Current term expires in
2021
Principal
Occupation During Past 5 Years:
· Trustee,
The Bradley Trusts, private trust funds (2011-Present)
Other Public Company Board Memberships During
Past 5 Years:
· Annaly
Capital Management, Inc., a real estate investment trust, Director (2014-Present)
No. of Portfolios for which Board Member
Serves: 63
———————
Andrew J. Donohue (70)
Board Member (2019)
current term expires in 2023
Principal Occupation During Past 5 Years:
· Attorney, Solo Law Practice (2019-Present)
· Of Counsel, Shearman & Sterling LLP (2017-2019)
· Chief of Staff to the Chair of the
SEC (2015-2017)
Other
Public Company Board Memberships During Past 5 Years:
· Oppenheimer Funds (58 funds), Director (2017-2019)
No. of Portfolios for which Board Member
Serves: 50
———————
63
BOARD
MEMBERS INFORMATION (Unaudited) (continued)
INDEPENDENT BOARD MEMBERS (continued)
Kenneth A. Himmel (74)
Board
Member (1998)
Current term expires in
2023
Principal
Occupation During Past 5 Years:
· Managing
Partner, Gulf Related, an international real estate development company (2010-Present)
· President and CEO, Related Urban Development, a real
estate development company (1996-Present)
· CEO,
American Food Management, a restaurant company (1983-Present)
· President and CEO, Himmel & Company, a real estate
development company (1980-Present)
No.
of Portfolios for which Board Member Serves: 21
———————
Stephen J. Lockwood (73)
Board Member (1998)
Current term expires in
2021
Principal
Occupation During Past 5 Years:
· Chairman
of the Board, Stephen J. Lockwood and Company LLC, a real estate investment company (2000-Present)
No.
of Portfolios for which Board Member Serves: 21
———————
Roslyn M. Watson (71)
Board
Member (1998)
Current term expires in
2022
Principal
Occupation During Past 5 Years:
· Principal,
Watson Ventures, Inc., a real estate investment company (1993-Present)
Other Public Company Board
Memberships During Past 5 Years:
· American
Express Bank, FSB, Director
(1993-2018)
No.
of Portfolios for which Board Member Serves: 50
———————
64
Benaree Pratt Wiley (74)
Board Member (1998)
Current term expires in 2022
Principal Occupation During Past 5 Years:
· Principal, The Wiley Group, a firm specializing in strategy
and business development (2005-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ,
Inc., a public company providing professional business services, products and solutions, Director (2008-Present)
· Blue Cross-Blue Shield of Massachusetts, Director (2004-Present)
No. of Portfolios for which
Board Member Serves: 68
———————
The address of the Board Members and Officers is c/o BNY Mellon Investment Adviser, Inc. 240 Greenwich
Street, New York, New York 10286.
James M. Fitzgibbons, Emeritus Board Member
65
OFFICERS
OF THE FUND (Unaudited)
DAVID DIPETRILLO, President since January 2021.
Vice President and Director of the Adviser since February 2021, Head of North America
Product, BNY Mellon Investment Management since January 2018, Director of Product Strategy, BNY Mellon
Investment Management from January 2016 to December 2017; He is an officer of 61 investment companies
(comprised of 114 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 43 years old
and has been an employee of BNY Mellon since 2005.
JAMES WINDELS, Treasurer since November 2001.
Vice President
of the Adviser since September 2020, Director-BNY Mellon Fund Administration, and an officer of 62 investment
companies (comprised of 137 portfolios) managed by the Adviser or an affiliate of the Adviser. He is
62 years old and has been an employee of the Adviser since April 1985.
BENNETT A. MACDOUGALL, Chief
Legal Officer since October 2015.
Chief Legal Officer of the Adviser and Associate
General Counsel and Managing Director of BNY Mellon. He is an officer of 62 investment companies (comprised
of 137 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 49 years old and has
been an employee of the Adviser since June 2015.
JAMES BITETTO, Vice President since August 2005 and Secretary since
February 2018.
Senior Managing Counsel of BNY Mellon since December 2019; Managing
Counsel of BNY Mellon from April 2014 to December 2019; Secretary of the Adviser, and an officer of 62
investment companies (comprised of 137 portfolios) managed by the Adviser or an affiliate of the Adviser.
He is 54 years old and has been an employee of the Adviser since December 1996.
DEIRDRE CUNNANE,
Vice President and Assistant Secretary since March 2019.
Counsel of BNY Mellon since
August 2018; Senior Regulatory Specialist at BNY Mellon Investment Management Services from February
2016 to August 2018. She is an officer of 62 investment companies (comprised of 137 portfolios) managed
by the Adviser or an affiliate of the Adviser. She is 30 years old and has been an employee of the Adviser
since August 2018.
SARAH S. KELLEHER, Vice President and Assistant Secretary since April 2014.
Managing
Counsel of BNY Mellon since December 2017, Senior Counsel of BNY Mellon from March 2013 to December 2017.
She is an officer of 62 investment companies (comprised of 137 portfolios) managed by the Adviser or
an affiliate of the Adviser. She is 45 years old and has been an employee of the Adviser since March
2013.
JEFF
PRUSNOFSKY, Vice President and Assistant Secretary since August 2005.
Senior
Managing Counsel of BNY Mellon, and an officer of 62 investment companies (comprised of 137 portfolios)
managed by the Adviser or an affiliate of the Adviser. He is 55 years old and has been an employee of
the Adviser since October 1990.
AMANDA QUINN, Vice President and Assistant Secretary since March 2020.
Counsel
of BNY Mellon since June 2019; Regulatory Administration Manager at BNY Mellon Investment Management
Services from September 2018 to May 2019; Senior Regulatory Specialist at BNY Mellon Investment Management
Services from April 2015 to August 2018. She is an officer of 62 investment companies (comprised of 137
portfolios) managed by the Adviser or an affiliate of the Adviser. She is 35 years old and has been
an employee of the Adviser since June 2019.
PETER M. SULLIVAN, Vice President and Assistant Secretary since March
2019.
Senior Managing Counsel of BNY Mellon since December 2020; Managing Counsel of BNY
Mellon from March 2009 to December 2020, and an officer of 62 investment companies (comprised of 137
portfolios) managed by the the Adviser or an affiliate of the the Adviser. He is 53 years old and has
been an employee of BNY Mellon since April 2004.
NATALYA ZELENSKY, Vice President and Assistant Secretary since March
2017.
Managing Counsel of BNY Mellon since December 2019; Counsel of BNY Mellon from May
2016 to December 2019; Assistant Secretary of the Adviser since 2018; Attorney at Wildermuth Endowment
Strategy Fund/Wildermuth Advisory, LLC from November 2015 to May 2016. She is an officer of 62 investment
companies (comprised of 137 portfolios) managed by the Adviser or an affiliate of the Adviser. She is
35 years old and has been an employee of the Adviser since May 2016.
66
GAVIN
C. REILLY, Assistant Treasurer since December 2005.
Tax Manager-BNY Mellon
Fund Administration, and an officer of 62 investment companies (comprised of 137 portfolios) managed
by the Adviser or an affiliate of the Adviser. He is 52 years old and has been an employee of the Adviser
since April 1991.
ROBERT SALVIOLO, Assistant Treasurer since May 2007.
Senior
Accounting Manager–BNY Mellon Fund Administration, and an officer of 62 investment companies (comprised
of 137 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 53 years old and has
been an employee of the Adviser since June 1989.
ROBERT SVAGNA, Assistant Treasurer since August 2005.
Senior
Accounting Manager–BNY Mellon Fund Administration, and an officer of 62 investment companies (comprised
of 137 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 54 years old and has
been an employee of the Adviser since November 1990.
JOSEPH W. CONNOLLY, Chief Compliance Officer since
October 2004.
Chief Compliance Officer of the Adviser, the BNY Mellon Family
of Funds and BNY Mellon Funds Trust (61 investment companies, comprised of 129 portfolios). He is 63
years old and has served in various capacities with the Adviser since 1980, including manager of the
firm’s Fund Accounting Department from 1997 through October 2001.
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