TABLE
OF CONTENTS
Prospectus
Summary
This
is only a summary. You should review the more detailed information elsewhere in this prospectus (“Prospectus”), in
any related supplement to this Prospectus (each, a “Prospectus Supplement”), and in the Statement of Additional Information
(the “SAI”) prior to making an investment in the Fund. See “Risk Factors.”
The
Fund
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John
Hancock Investors Trust (the “Fund”) is a diversified, closed-end management investment company. The Fund commenced
operations in January 1971 following an initial public offering.
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Investment
Objectives
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The
Fund’s primary investment objective is to generate income for distribution to its shareholders, with capital appreciation
as a secondary objective. There can be no assurance that the Fund will achieve its investment objectives. The Fund’s
investment objectives are not fundamental and may be changed without shareholder approval.
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The
Offering
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The
Fund may offer, from time to time, in one or more offerings, up to 1,000,000 of the Fund’s common shares of beneficial
interest, no par value (“Common Shares”), on terms to be determined at the time of the offering. The Common Shares
may be offered at prices and on terms to be set forth in one or more Prospectus Supplements. You should read this Prospectus
and the applicable Prospectus Supplement carefully before you invest in Common Shares. Common Shares may be offered directly
to one or more purchasers, through agents designated from time to time by the Fund, or to or through underwriters or dealers.
The Prospectus Supplement relating to the offering will identify any agents, underwriters or dealers involved in the offer
or sale of Common Shares, and will set forth any applicable offering price, sales load, fee, commission or discount arrangement
between the Fund and its agents or underwriters, or among its underwriters, or the basis upon which such amount may be calculated,
net proceeds and use of proceeds, and the terms of any sale. See “Plan of Distribution.” The Fund may not sell
any Common Shares through agents, underwriters or dealers without delivery of a Prospectus Supplement describing the method
and terms of the particular offering of Common Shares.
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Listing
and Symbol
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The
Fund’s currently outstanding Common Shares are listed on the New York Stock Exchange (“NYSE”) under the
symbol “JHI.” Any new Common Shares offered and sold hereby will be listed on the NYSE and trade under this symbol.
As of February 16, 2021, the last reported sale price for the Common Shares was $18.14.
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Investment
Strategy
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The
preponderance of the Fund’s assets are invested in a diversified portfolio of debt securities issued by U.S. and non-U.S.
corporations and governments, some of which may carry equity features. The Fund emphasizes corporate debt securities which
pay interest on a fixed or contingent basis and which may possess certain equity features, such as conversion or exchange
rights, warrants for the acquisition of the stock of the same or different issuers, or participations based on revenues, sales
or profits. The Fund also may purchase preferred securities and may acquire common stock through the exercise of conversion
or exchange rights acquired in connection with other securities owned by the Fund. The Fund will not acquire any additional
preferred securities or common stock if as a result of that acquisition the value of all preferred securities and common stocks
in the Fund’s portfolio would exceed 20% of its total assets. Up to 50% of the value of the Fund’s assets may
be invested in restricted securities acquired through private placements. The Fund may purchase mortgage-backed securities.
The Fund also may purchase and sell derivative instruments, including foreign currency forward contracts, foreign currency
swaps, futures contracts, swaps, including credit-default swaps and interest-rate swaps, and options, including currency options.
In addition, the Fund may invest in repurchase agreements.
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At
least 30% of Fund’s net assets (plus borrowings for investment purposes) will be represented by (a) debt securities
that are rated, at the time of acquisition, investment grade (i.e., at least “Baa” by Moody’s
Investors Service, Inc. (“Moody’s”) or “BBB” by Standard & Poor’s Ratings Services
(“S&P”)) or in unrated securities determined by the Subadvisor to be of comparable credit quality, (b)
securities issued or guaranteed by the U.S. government or its agencies and instrumentalities, and (c) cash or cash equivalents.
The remaining 70% of the Fund’s net assets (plus borrowings for investment purposes) may be invested in debt securities
of any credit quality, including securities rated below investment grade (i.e., rated “Ba” or lower
by Moody’s or “BB” or lower by S&P). Debt securities of below investment grade quality are regarded
as having predominantly speculative characteristics with respect to the issuer’s ability to pay interest and repay
principal and are commonly referred to as “junk bonds” or “high yield securities.” While the Fund
focuses on intermediate- and longer-term debt securities, the Fund may acquire securities of any maturity and is not subject
to any limits as to the average maturity of its overall portfolio.
Securities
rated “BBB” by S&P are regarded by S&P as having an adequate capacity to pay interest or dividends
and repay capital or principal, as the case may be; whereas such securities normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely, in the opinion of S&P, to lead to a weakened
capacity to pay interest or dividends and repay capital or principal for securities in this category than in higher rating
categories. Securities rated “Baa” by Moody’s are considered by Moody’s as medium to lower medium
grade securities; they are neither highly protected nor poorly secured; interest or dividend payments and capital or principal
security, as the case may be, appear to Moody’s to be adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over time; and, in the opinion of Moody’s, securities in this
rating category lack outstanding investment characteristics and in fact have speculative characteristics as well. Below
investment grade securities and comparable unrated securities involve substantial risk of loss, are considered highly
speculative with respect to the issuer’s ability to pay interest and any required redemption or principal payments
and are susceptible to default or decline in market value due to adverse economic and business developments. Securities
rated Ba or BB may face significant ongoing uncertainties or exposure to adverse business, financial or economic conditions
that could lead to the issuer being unable to meet its financial commitments. The protection of interest and principal
may be moderate and not well safeguarded during both good and bad times. Securities rated B generally lack the characteristics
of a desirable investment. Assurance of interest and principal payments over the long term may be low, and such securities
are more vulnerable to nonpayment than obligations rated BB or Ba. Adverse business, financial or economic conditions
will likely impair the issuer’s capacity or willingness to meet its financial commitments. The descriptions of the
investment grade rating categories by Moody’s and S&P, including a description of their speculative characteristics,
are set forth in the SAI. All references to securities ratings by Moody’s and S&P in this Prospectus shall,
unless otherwise indicated, include all securities within each such rating category (e.g., “Baa1”,
“Baa2” and “Baa3” in the case of Moody’s and “BBB+”, “BBB” and “BBB-”
in the case of S&P). All percentage and ratings limitations on securities in which the Fund may invest apply at the
time of making an investment and shall not be considered violated if an investment rating is subsequently downgraded to
a rating that would have precluded the Fund’s initial investment in such security. In the event of such security
downgrade, the Fund will sell the portfolio security as soon as the Subadvisor believes it to be prudent to do so in order
to again cause the Fund to be within the percentage and ratings limitations set forth in this Prospectus. In the event
that the Fund disposes of a portfolio security subsequent to its being downgraded, the Fund
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may
experience a greater risk of loss than if such security had been sold prior to such downgrade.
In
managing the Fund’s portfolio, the Subadvisor concentrates first on sector selection by deciding which types of
bonds and industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry
allocations, the Subadvisor tries to anticipate shifts in the business cycle, using top-down analysis to determine which
sectors and industries may benefit over the next 12 months. In choosing individual securities, the Subadvisor uses bottom-up
research to find securities that appear comparatively undervalued. The Subadvisor looks at bonds of all quality levels
and maturities from many different issuers, potentially including U.S. dollar-denominated securities of foreign corporations
and governments. There can be no assurance that the Fund will achieve its investment objectives.
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Investment
Advisor and Subadvisor
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The
Fund’s investment advisor is John Hancock Investment Management LLC (the “Advisor” or “JHIM”)
and its subadvisor is Manulife Investment Management (US) LLC (the “Subadvisor”).
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JHIM,
the Fund’s investment advisor, is an indirect principally owned subsidiary of Manulife Financial Corporation. The Advisor
is responsible for overseeing the management of the Fund, including its day-to-day business operations and monitoring the
Subadvisor. As of December 31, 2020, the Advisor had total assets under management of approximately $153.3 billion.
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The
Subadvisor handles the fund’s portfolio management activity, subject to oversight by the Advisor. The Subadvisor, organized
in 1968, is a wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife Financial,
a publicly held, Canadian-based company). As of December 31, 2020, the Subadvisor had total assets under management of approximately
$221.31 billion.
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See
“Management of the Fund—The Advisor” and “—The Subadvisor.”
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Distributions
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The
Fund makes regular quarterly distributions to holders of Common Shares (the “Common Shareholders”) sourced from
the Fund’s cash available for distribution. “Cash available for distribution” consists of the Fund’s
(i) investment company taxable income, which includes among other things, dividend and ordinary income after payment of Fund
expenses, the excess of net short-term capital gain over net long-term capital loss, and income from certain hedging and interest
rate transactions, and (ii) net long-term capital gain (gain from the sale of capital assets held longer than one year). The
Board of Trustees of the Fund (the “Board”) may modify this distribution policy at any time without obtaining
the approval of Common Shareholders.
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Pursuant
to the requirements of the 1940 Act, in the event the Fund makes distributions from sources other than income, a notice will
accompany each quarterly distribution with respect to the estimated sources of the distribution made. Such notices will describe
the portion, if any, of the quarterly dividend which, in the Fund’s good faith judgment, constitutes long-term capital
gain, short-term capital gain, net investment income or a return of capital. The actual character of such dividend distributions
for U.S. federal income tax purposes, however, will only be determined finally by the Fund at the close of its fiscal year,
based on the Fund’s full year performance and its actual net investment company taxable income and net capital gain
for the year, which may result in a recharacterization of amounts distributed during such fiscal year from the characterization
in the quarterly estimates.
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If,
for any calendar year, as discussed above, the total distributions made exceed the Fund’s net investment taxable income
and net capital gain, the excess
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generally
will be treated as a return of capital to each Common Shareholder (up to the amount of the Common Shareholder’s basis
in his or her Common Shares) and thereafter as gain from the sale of Common Shares. The amount treated as a return of capital
reduces the Common Shareholder’s adjusted basis in his or her Common Shares, thereby increasing his or her potential
gain or reducing his or her potential loss on the subsequent sale of his or her Common Shares. Distributions in any year may
include a substantial return of capital component.
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Distribution
rates are based on projected quarterly cash available for distribution, which may result in fluctuations in quarterly rates.
As a result, the distributions paid by the Fund for any particular quarter may be more or less than the amount of cash available
for distribution from that quarterly period. In certain circumstances, the Fund may be required to sell a portion of its investment
portfolio to fund distributions. Distributions will reduce the Common Shares’ net asset value (“NAV”).
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The
1940 Act limits the number of times the Fund may distribute long-term capital gain in any tax year, which may increase the
variability of the Fund’s distributions and result in certain distributions being composed more heavily of long-term
capital gain eligible for favorable income tax rates. In the future, the Advisor may seek Board approval to implement a managed
distribution plan for the Fund. The managed distribution plan would be implemented pursuant to an exemptive order previously
granted by the Securities and Exchange Commission (the “SEC”), which provides an exemption from Section 19(b)
of the 1940 Act and Rule 19b-1 thereunder to permit the Fund to include long-term capital gain as a part of its regular distributions
to Common Shareholders more frequently than would otherwise be permitted by the 1940 Act (generally once or twice per year).
If the Fund implements a managed distribution plan, it would do so without a vote of the Common Shareholders.
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Dividend
Reinvestment Plan
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The
Fund has established an automatic dividend reinvestment plan (the “Plan”). Under the Plan, distributions of dividends
and capital gain are automatically reinvested in Common Shares of the Fund by Computershare, Inc. Every shareholder holding
at least one full share of the Fund will be automatically enrolled in the Plan. Shareholders who do not participate in the
Plan will receive all distributions in cash. Common Shareholders who intend to hold their Common Shares through a broker or
nominee should contact such broker or nominee regarding the Plan. See “Dividend Reinvestment Plan.”
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Closed-End
Fund Structure
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Closed-end
funds differ from open-end management investment companies (which generally are referred to as “mutual funds”)
in that closed-end funds generally list their shares for trading on a securities exchange and do not redeem their shares at
the option of the shareholder. Mutual funds do not trade on securities exchanges and issue securities redeemable at the option
of the shareholder. The continuous outflows of assets in a mutual fund can make it difficult to manage the fund’s investments.
Closed-end funds generally are able to stay more fully invested in securities that are consistent with their investment objectives
and also have greater flexibility to make certain types of investments and to use certain investment strategies, such as financial
leverage and investments in illiquid securities. The Fund’s Common Shares are designed primarily for long-term investors;
you should not purchase Common Shares if you intend to sell them shortly after purchase.
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Common
shares of closed-end funds frequently trade at prices lower than their NAV. Since inception, the market price of the Common
Shares has fluctuated and at times has traded below the Fund’s NAV and at times has traded above the Fund’s NAV.
The Fund cannot predict whether in the future the Common Shares will trade at, above or below NAV. In addition to NAV, the
market price of the Fund’s Common Shares may be affected by such factors as the Fund’s dividend stability, dividend
levels, which are in turn affected by expenses, and market supply and demand.
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In
recognition of the possibility that the Common Shares may trade at a discount from their NAV, and that any such discount may
not be in the best interest of Common Shareholders, the Board, in consultation with the Advisor, from time to time may review
possible actions to reduce any such discount. There can be no assurance that the Board will decide to undertake any of these
actions or that, if undertaken, such actions would result in the Common Shares trading at a price equal to or close to NAV
per Common Share. In the event that the Fund conducts an offering of new Common Shares and such offering constitutes a “distribution”
under Regulation M, the Fund and certain of its affiliates may be subject to an applicable restricted period that could limit
the timing of any repurchases by the Fund.
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Summary
of Risks
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The
Fund’s principal risk factors are listed below by general risks and strategy risks. The Fund’s main risks are
listed below in alphabetical order, not in order of importance. Before investing, be sure to read the additional descriptions
of these risks beginning on page 27 of this Prospectus.
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General
Risks
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Anti-takeover
Provisions. The Fund’s Declaration of Trust includes provisions that could limit the ability of other persons
or entities to acquire control of the Fund or to change the composition of its Board. These provisions may deprive shareholders
of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See
“Certain Provisions in the Declaration of Trust and By-Laws—Anti-takeover provisions.”
Changes
in U.S. Law. Changes in the state and U.S. federal laws applicable to the Fund, including changes to state and
U.S. federal tax laws, or applicable to the Advisor, the Subadvisor and other securities or instruments in which the Fund
may invest, may negatively affect the Fund’s returns to Common Shareholders. The Fund may need to modify its investment
strategy in the future in order to satisfy new regulatory requirements or to compete in a changed business environment.
Cybersecurity
and Operational Risk. Cybersecurity breaches may allow an unauthorized party to gain access to fund assets, customer
data, or proprietary information, or cause the Fund or its service providers to suffer data corruption or lose operational
functionality. Similar incidents affecting issuers of the Fund’s securities may negatively impact performance. Operational
risk may arise from human error, error by third parties, communication errors, or technology failures, among other causes.
Defensive
Positions Risk. During periods of adverse market or economic conditions, the Fund may temporarily invest all or
a substantial portion of its total assets in short-term money market instruments, securities with remaining maturities
of less than one year, cash or cash equivalents. The Fund will not be pursuing its investment objectives in these circumstances
and could miss favorable market developments.
Distribution
Risk. There can be no assurance that quarterly distributions paid by the Fund to shareholders will be maintained
at current levels or increase over time. The quarterly distributions shareholders receive from the Fund are derived from
the Fund’s dividends and interest income after payment of Fund expenses. The Fund’s cash available for distribution
may vary widely over the short- and long-term. If, for any calendar year, the total distributions made exceed the Fund’s
net investment taxable income and net capital gain, the excess generally will be treated as a return of capital to each
Common Shareholder (up to the amount of the Common Shareholder’s basis in his or her Common Shares) and thereafter
as gain from the sale of Common Shares. The amount treated as a return of capital reduces the Common Shareholder’s
adjusted basis in his or her Common Shares, thereby increasing his or her potential gain or reducing his or her potential
loss on the subsequent sale of his or her Common Shares. Distributions in any year may include a substantial return of
capital component.
Economic
and market events risk. Events in the U.S. and global financial markets, including actions taken by the U.S. Federal
Reserve or foreign central
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banks
to stimulate or stabilize economic growth, may at times result in unusually high market volatility, which could negatively
impact performance. Reduced liquidity in credit and fixed-income markets could adversely affect issuers worldwide. Banks
and financial services companies could suffer losses if interest rates rise or economic conditions deteriorate.
Inflation
Risk. Inflation risk is the risk that the purchasing power of assets or income from investments will be worth
less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares
and distributions thereon can decline.
Interest
Rate Risk. Interest rate risk is the risk that fixed-income securities such as debt securities and preferred securities
will decline in value because of changes in market interest rates. When market interest rates rise, the market value of
such securities generally will fall. The Fund’s investments in debt securities and preferred securities means that
the NAV and market price of the Common Shares will tend to decline if market interest rates rise. Given the historically
low level of interest rates in recent years and the likelihood that interest rates will increase when the national economy
strengthens, the risk of the potentially negative impact of rising interest rates on the value of the Fund’s portfolio
may be significant. In addition, the longer the average maturity of the Fund’s portfolio of debt securities, the
greater the potential impact of rising interest rates on the value of the Fund’s portfolio and the less flexibility
the Fund may have to respond to the decreasing spread between the yield on its portfolio securities.
During
periods of declining interest rates, an issuer may exercise its option to prepay principal of debt securities or to redeem
preferred securities earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known
as call or prepayment risk. During periods of rising interest rates, the average life of certain types of securities may
be extended because of slower than expected principal payments. This may lock in a below market interest rate, increase
the security’s duration and reduce the value of the security. This is known as extension risk. Recent and potential
future changes in government monetary policy may affect the level of interest rates.
Investment
and Market Risk. An investment in Common Shares is subject to investment and market risk, including the possible
loss of the entire principal amount invested. An investment in Common Shares represents an indirect investment in the
securities owned by the Fund, which generally are traded on a securities exchange or in the over-the-counter markets.
The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original investment, even after taking into account any
reinvestment of dividends and distributions.
Leverage
Risk. The Fund is authorized to utilize leverage through borrowings, reinvestment of securities lending collateral
or reverse repurchase agreement proceeds, and/or the issuance of preferred shares, including the issuance of debt securities.
The Fund is party to the LA as described in “—Description of Capital Structure—Liquidity Facility.”
The
Fund utilizes the LA to increase its assets available for investment. When the Fund leverages its assets, Common Shareholders
bear the fees associated with the LA and have the potential to benefit or be disadvantaged from the use of leverage. In
addition, the fee paid to the Advisor is calculated on the basis of the Fund’s average daily managed assets, including
proceeds from borrowings and/or the issuance of any preferred shares, so the fee will be higher when leverage is utilized,
which may create an incentive for the Advisor to employ financial leverage. Consequently, the Fund and the Advisor may
have differing interests in determining whether to leverage the Fund’s assets. Leverage creates risks that may adversely
affect the return for the Common Shareholders, including:
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• the
likelihood of greater volatility of NAV and market price of Common Shares;
• fluctuations
in the interest rate paid for the use of the LA;
• increased
operating costs, which may reduce the Fund’s total return;
• the
potential for a decline in the value of an investment acquired through leverage, while the Fund’s obligations under
such leverage remains fixed; and
• the
Fund is more likely to have to sell securities in a volatile market in order to meet asset coverage or other debt compliance
requirements.
To
the extent the returns derived from securities purchased with proceeds received from leverage exceeds the cost of leverage,
the Fund’s distributions may be greater than if leverage had not been used. Conversely, if the returns from the
securities purchased with such proceeds are not sufficient to cover the cost of leverage, the amount available for distribution
to Common Shareholders will be less than if leverage had not been used. In the latter case, the Advisor, in its best judgment,
may nevertheless determine to maintain the Fund’s leveraged position if it deems such action to be appropriate.
The costs of a borrowing program and/or an offering of preferred shares would be borne by Common Shareholders and consequently
would result in a reduction of the NAV of Common Shares.
In
addition to the risks created by the Fund’s use of leverage, the Fund is subject to the risk that it would be unable
to timely, or at all, obtain replacement financing if the LA is terminated. For more information regarding termination,
see “—Description of Capital Structure—Liquidity Facility.”
LIBOR
Discontinuation Risk. The LA utilizes LIBOR as the reference or benchmark rate for interest rate calculations.
LIBOR is a measure of the average interest rate at which major global banks can borrow from one another. Following allegations
of rate manipulation and concerns regarding its thin liquidity, in July 2017, the U.K. Financial Conduct Authority, which
regulates LIBOR, announced that it will stop encouraging banks to provide the quotations needed to sustain LIBOR. The
ICE Benchmark Administration Limited, the administrator of LIBOR, is expected to cease publishing most LIBOR maturities,
including some US LIBOR maturities, on December 31, 2021, and the remaining and most liquid US LIBOR maturities on June
30, 2023. Before the end of 2021, it is expected that market participants such as the fund and SSB will transition to
the use of alternative reference or benchmark rates. However, although regulators have encouraged the development and
adoption of alternative rates such as the Secured Overnight Financing Rate, there is currently no definitive information
regarding the future utilization of LIBOR or of any particular replacement rate.
Management
Risk. The Fund is subject to management risk because it relies on the Subadvisor’s ability to pursue the
Fund’s investment objectives. The Subadvisor applies investment techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee that it will produce the desired results.
Market
Discount Risk. The Fund’s Common Shares will be offered only when Common Shares of the Fund are trading
at a price equal to or above the Fund’s NAV per Common Share plus the per Common Share amount of commissions. As
with any security, the market value of the Common Shares may increase or decrease from the amount initially paid for the
Common Shares. The Fund’s Common Shares have traded at both a premium and at a discount to NAV. The shares of closed-end
management investment companies frequently trade at a discount from their NAV. This characteristic is a risk separate
and distinct from the risk that the Fund’s NAV could decrease as a result of investment activities. Investors bear
a risk of loss to the extent that the price at which they sell their
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shares
is lower in relation to the Fund’s NAV than at the time of purchase, assuming a stable NAV.
Natural
Disasters and Adverse Weather Conditions. Certain areas of the world historically have been prone to major natural
disasters, such as hurricanes, earthquakes, typhoons, flooding, tidal waves, tsunamis, erupting volcanoes, wildfires or
droughts, and have been economically sensitive to environmental events. Such disasters, and the resulting damage, could
have a severe and negative impact on the Fund’s investment portfolio and, in the longer term, could impair the ability
of issuers in which the Fund invests to conduct their businesses in the manner normally conducted. Adverse weather conditions
also may have a particularly significant negative effect on issuers in the agricultural sector and on insurance companies
that insure against the impact of natural disasters.
Secondary
Market for the Common Shares. The issuance of new Common Shares may have an adverse effect on the secondary market
for the Common Shares. When Common Shares are trading at a premium, the Fund may issue new Common Shares of the Fund.
The increase in the amount of the Fund’s outstanding Common Shares resulting from the offering of new Common Shares
may put downward pressure on the market price for the Common Shares of the Fund. Common Shares will not be issued at any
time when Common Shares are trading at a price lower than a price equal to the Fund’s NAV per Common Share plus
the per Common Share amount of commissions.
The
Fund also issues Common Shares through its dividend reinvestment plan. Common Shares may be issued under the plan at a
discount to the market price for such Common Shares, which may put downward pressure on the market price for Common Shares
of the Fund.
The
voting power of current Common Shareholders will be diluted to the extent that such shareholders do not purchase shares
in any future Common Share offerings or do not purchase sufficient shares to maintain their percentage interest. In addition,
if the proceeds of such offering are unable to be invested as intended, the Fund’s per Common Share distribution
may decrease (or may consist of return of capital) and the Fund may not participate in market advances to the same extent
as if such proceeds were fully invested as planned.
Tax
Risk. To qualify for the special tax treatment available to regulated investment companies, the Fund must: (i)
derive at least 90% of its annual gross income from certain kinds of investment income; (ii) meet certain asset diversification
requirements at the end of each quarter; and (iii) distribute in each taxable year at least 90% of its net investment
income (including net interest income and net short-term capital gain). If the Fund failed to meet any of these requirements,
subject to the opportunity to cure such failures under applicable provisions of the Internal Revenue Code of 1986, as
amended (the “Code”), the Fund would be subject to U.S. federal income tax at regular corporate rates on its
taxable income, including its net capital gain, even if such income were distributed to its shareholders. All distributions
by the Fund from earnings and profits, including distributions of net capital gain (if any), would be taxable to the shareholders
as ordinary income. To the extent designated by the Fund, such distributions generally would be eligible (i) to be treated
as qualified dividend income in the case of individual and other non-corporate shareholders and (ii) for the dividends
received deduction in the case of corporate shareholders, provided that in each case the shareholder meets applicable
holding period requirements. In addition, in order to requalify for taxation as a regulated investment company, the Fund
might be required to recognize unrealized gain, pay substantial taxes and interest, and make certain distributions. See
“U.S. Federal Income Tax Matters.”
The
tax treatment and characterization of the Fund’s distributions may vary significantly from time to time due to the
nature of the Fund’s investments. The
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ultimate
tax characterization of the Fund’s distributions in a calendar year may not finally be determined until after the
end of that calendar year. The Fund may make distributions during a calendar year that exceed the Fund’s net investment
income and net realized capital gain for that year. In such a situation, the amount by which the Fund’s total distributions
exceed net investment income and net realized capital gain generally would be treated as a return of capital up to the
amount of the Common Shareholder’s tax basis in his or her Common Shares, with any amounts exceeding such basis
treated as gain from the sale of his or her Common Shares. The Fund’s income distributions that qualify for favorable
tax treatment may be affected by Internal Revenue Service (“IRS”) interpretations of the Code and future changes
in tax laws and regulations all of which may apply with retroactive effect. See “U.S. Federal Income Tax Matters.”
No
assurance can be given as to what percentage of the distributions paid on the Common Shares, if any, will consist of long-term
capital gain or what the tax rates on various types of income will be in future years.
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Strategy
Risks
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Brady
Bonds Risk. Brady Bonds may involve a high degree of risk, may be in default or present the risk of default. Agreements
implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ.
These types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds bearing an interest rate which increases
over time and bonds issued in exchange for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady
Bonds. Collateral purchases are financed by the International Monetary Fund, the World Bank and the debtor nations’
reserves. In addition, the first two or three interest payments on certain types of Brady Bonds may be collateralized
by cash or securities agreed upon by creditors. Although Brady Bonds may be collateralized by U.S. government securities,
repayment of principal and interest is not guaranteed by the U.S. government.
Corporate
Debt Securities Risk. Corporate debt obligations are subject to the risk of an issuer’s inability to meet
principal and interest payments on the obligations and also may be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Credit
and counterparty risk. The issuer or guarantor of a fixed-income security, the counterparty to an over-the-counter
derivatives contract, or a borrower of fund securities may not make timely payments or otherwise honor its obligations.
U.S. government securities are subject to varying degrees of credit risk depending upon the nature of their support. A
downgrade or default affecting any of the Fund’s securities could affect the Fund’s performance.
Equity
securities risk. The price of equity securities may decline due to changes in a company’s financial condition
or overall market conditions.
Fixed-income securities risk. A rise in interest rates typically causes bond prices to fall. The longer the average
maturity or duration of the bonds held by a fund, the more sensitive it will likely be to interest-rate fluctuations.
An issuer may not make all interest payments or repay all or any of the principal borrowed. Changes in a security’s
credit quality may adversely affect fund performance.
Hedging,
Derivatives and Other Strategic Transactions Risk. Hedging, derivatives, and other strategic transactions may
increase the volatility of the
|
|
Fund
and, if the transaction does not have the desired outcome, could result in a significant loss to the Fund. The use of
derivative instruments could produce disproportionate gain or loss, more than the principal amount invested. Investing
in derivative instruments involves risks different from, or possibly greater than, the risks associated with investing
directly in securities and other traditional investments and, in a down market, could become harder to value or sell at
a fair price. The following is a list of certain derivatives and other strategic transactions that the Fund may utilize
and the main risks associated with each of them:
• Credit
default swaps. Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions),
interest-rate risk, settlement risk, risk of default of the underlying reference obligation and risk of disproportionate
loss are the principal risks of engaging in transactions involving credit default swaps.
• Foreign
currency forward contracts. Counterparty risk, liquidity risk (i.e., the inability to enter into closing
transactions), foreign currency risk and risk of disproportionate loss are the principal risks of engaging in transactions
involving foreign currency forward contracts.
• Foreign
currency swaps. Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions),
foreign currency risk and risk of disproportionate loss are the principal risks of engaging in transactions involving
foreign currency swaps.
• Futures
contracts. Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions) and
risk of disproportionate loss are the principal risks of engaging in transactions involving futures contracts.
• Interest-rate
swaps. Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions), interest-rate
risk and risk of disproportionate loss are the principal risks of engaging in transactions involving interest-rate swaps.
• Options
and currency options. Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions)
and risk of disproportionate loss are the principal risks of engaging in transactions involving options, including currency
options. Counterparty risk does not apply to exchange-traded options.
• Swaps.
Counterparty risk, liquidity risk (i.e., the inability to enter into closing transactions), interest-rate
risk, settlement risk, risk of default of the underlying reference obligation and risk of disproportionate loss are the
principal risks of engaging in transactions involving swaps, including credit default swaps and total return swaps.
Illiquid
and Restricted Securities Risk. The Fund may invest up to 20% of its total assets in securities for which there
is no readily available trading market or which are otherwise illiquid. The Fund may have significant exposure to restricted
securities. Restricted securities are securities with restrictions on public resale, such as securities offered
in accordance with an exemption under Rule 144A under the Securities Act of 1933 (the “1933 Act”), or commercial
paper issued under Section 4(a)(2) of the 1933 Act. Restricted securities are often required to be sold in private
sales to institutional buyers, markets for restricted securities may or may not be well developed, and restricted securities
can be illiquid. Illiquid and restricted securities may be difficult to value and may involve greater risks than liquid
securities. Illiquidity may have an adverse impact on a particular security’s market price and the fund’s
ability to see the security.
|
|
The
extent (if at all) to which a security may be sold or a derivative position closed without negatively impacting its market
value may be impaired by reduced market activity or participation, legal restrictions, or other economic and market
impediments. Liquidity risk may be magnified in rising interest rate environments due to higher than normal redemption
rates. Widespread selling of fixed-income securities to satisfy redemptions during periods of reduced demand may adversely
impact the price or salability of such securities. Periods of heavy redemption could cause the fund to sell assets at
a loss or depressed value, which could negatively affect performance. Redemption risk is heightened during periods of
declining or illiquid markets.
Lower-rated
and high-yield fixed-income securities risk. Lower-rated and high-yield fixed-income securities (junk bonds) are
subject to greater credit quality risk, risk of default, and price volatility than higher-rated fixed-income securities,
may be considered speculative, and can be difficult to resell.
|
|
Mortgage-backed
and asset-backed securities risk. Mortgage-backed and asset-backed securities are subject to different combinations
of prepayment, extension, interest-rate, and other market risks. Factors that impact the value of these securities include
interest rate changes, the reliability of available information, credit quality or enhancement, and market perception.
|
|
Non-U.S.
Investment Risk. As compared to U.S. companies, less information may be publicly available regarding foreign issuers.
Non-U.S. securities may be subject to foreign taxes and may be more volatile than U.S. securities. Currency fluctuations
and political and economic developments may adversely impact the value of foreign securities. Any depository receipts
are subject to most of the risks associated with investing in foreign securities directly because the value of a depository
receipt is dependent upon the market price of the underlying foreign equity security. Depository receipts are also subject
to liquidity risk. Investments in emerging-market countries are subject to greater levels of non-U.S. investment risk.
Repurchase
agreement risk. The risk of a repurchase agreement transaction is limited to the ability of the seller to pay
the agreed-upon sum on the delivery date. In the event of bankruptcy or other default by the seller, the instrument purchased
may decline in value, interest payable on the instrument may be lost and there may be possible difficulties and delays
in obtaining collateral and delays and expense in liquidating the instrument.
Reverse
Repurchase Agreement Risk. Reverse repurchase agreement transactions involve the risk that the market value of
the securities that the Fund is obligated to repurchase under such agreements may decline below the repurchase price.
Any fluctuations in the market value of either the securities transferred to the other party or the securities in which
the proceeds may be invested would affect the market value of the Fund’s assets, thereby potentially increasing
fluctuations in the market value of the Fund’s assets. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund’s use of proceeds received under the agreement may
be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund’s
obligation to repurchase the securities. An event of default of insolvency of the counterparty to a reverse repurchase
agreement could result in delays or restrictions with respect to the Fund’s ability to dispose of the underlying
securities, in addition, a reverse repurchase agreement may be considered a form of leverage and may, therefore, increase
fluctuations in the Fund’s net asset value per share (NAV).
|
|
Sovereign
Debt Obligations Risk. An investment in debt obligations of non-U.S. governments and their political subdivisions
(sovereign debt), whether denominated in U.S. dollars or a foreign currency, involves special risks that are not present
in corporate debt obligations. The non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due, and the Fund
may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign
debt may be more volatile than prices of debt obligations of U.S. issuers. In the past, certain non-U.S. countries have
encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared
moratoria on the payment of principal and interest on their sovereign debt. A sovereign debtor’s willingness or
ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative
size of the debt service burden, the sovereign debtor’s policy toward its principal international lenders and local
political constraints. Sovereign debtors also may be dependent on expected disbursements from non-U.S. governments, multilateral
agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor
to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when due
may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair
such debtor’s ability or willingness to service its debts.
U.S.
Government Securities Risk. No assurance can be given that the U.S. government will provide financial support
in the future to U.S. government agencies, authorities or instrumentalities that are not supported by the full faith and
credit of the U.S. Securities guaranteed as to principal and interest by the United States government, its agencies, authorities
or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. government or any of its agencies, authorities or instrumentalities; and (ii) participations
in loans made to non-U.S. governments or other entities that are so guaranteed. The secondary market for certain of these
participations is limited and therefore may be regarded as illiquid.
Warrants
Risk. Warrants are rights to purchase securities at specific prices and are valid for a specific period of time.
Warrant prices do not necessarily move parallel to the prices of the underlying securities, and warrant holders receive
no dividends and have no voting rights or rights with respect to the assets of an issuer. The price of a warrant may be
more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation
as well as capital loss. Warrants cease to have value if not exercised prior to the expiration date. These factors can
make warrants more speculative than other types of investments.
|
Given
the risks described above, an investment in Common Shares may not be appropriate for all investors.
You
should carefully consider your ability to assume these risks before making an investment in the Fund.
|
Summary
of Fund Expenses
The
purpose of the table below is to help you understand all fees and expenses that you, as a Common Shareholder, would bear directly
or indirectly. In accordance with SEC requirements, the table below shows the Fund’s expenses as a percentage of its average
net assets as of October 31, 2020, and not as a percentage of total assets. By showing expenses as a percentage of average net
assets, expenses are not expressed as a percentage of all of the assets in which the Fund invests. The offering costs to be paid
or reimbursed by the Fund are not included in the Annual Expenses table below. However, these expenses will be borne by Common
Shareholders and may result in a reduction in the NAV of the Common Shares. See “Management of the Fund” and “Dividend
Reinvestment Plan.” The table and example are based on the Fund’s capital structure as of October 31, 2020.
Shareholder
Transaction Expenses
|
|
Sales
load (as a percentage of offering price) (1)
|
_____%
|
Offering
expenses (as a percentage of offering price) (1)
|
_____%
|
Dividend
Reinvestment Plan fees (2)
|
None
|
Annual
Expenses (Percentage of Net Assets Attributable to Common Shares)
|
|
Management
fees (3)
|
0.86%
|
Interest
payments on borrowed funds(4)
|
0.82%
|
Other
expenses
|
0.23%
|
Total
Annual Operating Expenses
|
1.91%
|
Contractual
Expense Reimbursement (5)
|
(0.01)%
|
Total
Annual Fund Operating Expenses After Expense Reimbursements
|
1.90%
|
|
(1)
|
If
Common Shares are sold to or through underwriters, the Prospectus Supplement will set
forth any applicable sales load and the estimated offering expenses.
|
|
(2)
|
Participants
in the Fund’s dividend reinvestment plan do not pay brokerage charges with respect
to Common Shares issued directly by the Fund. However, whenever Common Shares are purchased
or sold on the NYSE or otherwise on the open market, each participant will pay a pro
rata portion of brokerage trading fees, currently $0.05 per share purchased or sold.
Brokerage trading fees will be deducted from amounts to be invested. Shareholders participating
in the Plan may buy additional Common Shares of the Fund through the Plan at any time
and will be charged a $5 transaction fee plus $0.05 per share brokerage trading fee for
each order. See “Distribution Policy” and “Dividend Reinvestment Plan.”
|
|
(3)
|
See
“Management of the Fund—The Advisor.”
|
|
(4)
|
The
Fund uses leverage by borrowing under a liquidity agreement. “Interest payments
on borrowed funds” includes all interest paid in connection with outstanding loans.
See “Other Investment Policies - Borrowing” and “Use of Leverage by
the Fund.
|
(5)
The Advisor contractually agrees to waive a portion of its management fee and/or reimburse expenses for the Fund and certain other
John Hancock funds according to an asset level breakpoint schedule that is based on the aggregate net assets of all the funds
participating in the waiver or reimbursement. This waiver is allocated proportionally among the participating funds. During its
most recent fiscal year, the fund’s reimbursement amounted to 0.01% of the fund’s average daily net assets. This agreement
expires on July 31, 2022, unless renewed by mutual agreement of the fund and the Advisor based upon a determination that this
is appropriate under the circumstances at that time.
EXAMPLE
The
following example illustrates the expenses that Common Shareholders would pay on a $1,000 investment in Common Shares, assuming
(i) total annual expenses set forth above, including any reimbursements through their current expiration date; (ii) a 5% annual
return; and (iii) all distributions are reinvested at NAV:
|
1
Year
|
3
Years
|
5
Years
|
10
Years
|
Total Expenses
|
$19
|
$60
|
$103
|
$223
|
The
above table and example and the assumption in the example of a 5% annual return are required by regulations of the SEC that are
applicable to all investment companies; the assumed 5% annual return is not a prediction of, and does not represent, the projected
or actual performance of the Fund’s Common Shares. For more complete descriptions of certain of the Fund’s costs and
expenses, see “Management of the Fund.” In addition, while the example assumes reinvestment of all dividends and distributions
at NAV, participants in the Fund’s dividend reinvestment plan may receive Common Shares purchased or issued at a price or
value different from NAV. See “Distribution Policy” and “Dividend Reinvestment Plan.” The example does
not include sales load or estimated offering costs, which would cause the expenses shown in the example to increase.
The
example should not be considered a representation of past or future expenses, and the Fund’s actual expenses may be greater
or less than those shown. Moreover, the Fund’s actual rate of return may be greater or less than the hypothetical 5% return
shown in the example.
Financial
Highlights
This
table details the financial performance of the Common Shares, including total return information showing how much an investment
in the Fund has increased or decreased each period (assuming reinvestment of all dividends and distributions).
The
financial statements of the Fund as of October 31, 2020 have been audited by PricewaterhouseCoopers LLP (“PwC”), the
Fund’s independent registered public accounting firm. The report of PwC is included, along with the Fund’s financial
statements, in the Fund’s annual report, which has been incorporated by reference into the SAI and is available upon request.
Common
Shares
Period
ended
|
10-31-20
|
10-31-19
|
10-31-18
|
10-31-17
|
10-31-16
|
10-31-15
|
10-31-14
|
Per
share operating performance
|
|
|
|
|
|
|
|
Net
asset value, beginning of period
|
$18.38
|
$16.99
|
$18.81
|
$18.11
|
$17.20
|
$19.56
|
$19.76
|
Net
investment income1
|
1.27
|
1.19
|
1.21
|
1.28
|
1.32
|
1.41
|
1.58
|
Net
realized and unrealized gain (loss) on investments
|
(1.19)
|
1.40
|
(1.79)
|
0.72
|
0.96
|
(2.28)
|
(0.14)
|
Total
from investment operations
|
0.08
|
2.59
|
(0.58)
|
2.00
|
2.28
|
(0.87)
|
1.44
|
Less
distributions
|
|
|
|
|
|
|
|
From
net investment income
|
(1.35)
|
(1.20)
|
(1.24)
|
(1.30)
|
(1.39)
|
(1.49)
|
(1.64)
|
Anti-dilutive
impact of repurchase plan
|
—
|
—
|
—
|
—
|
0.022
|
—
|
—
|
Anti-dilutive
impact of shelf offering
|
—
|
—
|
—
|
—
|
—
|
—
|
—3
|
Net
asset value, end of period
|
$17.11
|
$18.38
|
$16.99
|
$18.81
|
$18.11
|
$17.20
|
$19.56
|
Per
share market value, end of period
|
$15.47
|
$17.14
|
$15.51
|
$17.87
|
$16.73
|
$15.20
|
$19.06
|
Total
return at net asset value (%)4,5
|
1.56
|
16.56
|
(2.74)
|
11.87
|
14.95
|
(3.85)
|
7.65
|
Total
return at market value (%)4
|
(1.53)
|
19.07
|
(6.54)
|
15.05
|
20.17
|
(12.80)
|
7.40
|
Ratios
and supplemental data
|
|
|
|
|
|
|
|
Net
assets, end of period (in millions)
|
$149
|
$160
|
$148
|
$164
|
$158
|
$151
|
$172
|
Ratios
(as a percentage of average net assets):
|
|
|
|
|
|
|
|
Expenses
before reductions
|
1.91
|
2.74
|
2.52
|
1.95
|
1.79
|
1.54
|
1.38
|
Expenses
including reductions6
|
1.90
|
2.73
|
2.51
|
1.94
|
1.78
|
1.53
|
1.37
|
Net
investment income
|
7.42
|
6.77
|
6.76
|
6.96
|
7.75
|
7.70
|
7.94
|
Portfolio
turnover (%)
|
62
|
40
|
52
|
53
|
62
|
74
|
71
|
Senior
securities
|
|
|
|
|
|
|
|
Total
debt outstanding end of period (in millions)
|
$87
|
$87
|
$87
|
$87
|
$87
|
$87
|
$87
|
Asset
coverage per $1,000 of debt7
|
$2,714
|
$2,841
|
$2,702
|
$2,884
|
$2,814
|
$2,741
|
$2,979
|
1
|
Based
on average daily shares outstanding.
|
2
|
The
repurchase plan was completed at an average repurchase price of $13.99 for 84,400 shares for the period ended 10-31-16.
|
3
|
Less
than $0.005 per share.
|
4
|
Total
return based on net asset value reflects changes in the fund’s net asset value during each period. Total return based
on market value reflects changes in market value. Each figure assumes that distributions from income, capital gains and tax
return of capital, if any, were reinvested.
|
5
|
Total
returns would have been lower had certain expenses not been reduced during the applicable periods.
|
6
|
Expenses
including reductions excluding interest expense were 1.08%, 1.04%, 1.12%, 1.06%, 1.16%
and 1.06% for the periods ended 10-31-20, 10-31-19, 10-31-18, 10-31-17, 10-31-16 and
10-31-15, respectively.
|
7
|
Asset
coverage equals the total net assets plus borrowings divided by the borrowings of the fund outstanding at period end (Note
8). As debt outstanding changes, the level of invested assets may change accordingly. Asset coverage ratio provides a measure
of leverage.
|
COMMON
SHARES Period ended
|
10-31-13
|
10-31-12
|
10-31-11
|
Per
share operating performance
|
|
|
|
Net
asset value, beginning of period
|
$20.44
|
$19.19
|
$20.11
|
Net
investment income1
|
1.61
|
1.88
|
1.93
|
Net
realized and unrealized gain (loss) on investments
|
(0.59)
|
1.30
|
(0.88)
|
Total
from investment operations
|
1.02
|
3.18
|
1.05
|
Less
distributions to common shareholders
|
|
|
|
From
net investment income
|
(1.71)
|
(1.94)
|
(1.97)
|
Anti-dilutive
impact of shelf offering
|
0.01
|
0.01
|
—
|
Net
asset value, end of period
|
$19.76
|
$20.44
|
$19.19
|
Per
share market value, end of period
|
$19.30
|
$22.24
|
$21.28
|
Total
return at net asset value (%)2
|
5.09
|
16.14
|
4.90
|
Total
return at market value (%)2
|
(5.66)
|
11.13
|
13.52
|
Ratios
and supplemental data
|
|
|
|
Net
assets applicable to common shares, end of period (in millions)
|
$173
|
$176
|
$164
|
Ratios
(as a percentage of average net assets):
|
|
|
|
Expenses3
|
1.41
|
1.57
|
1.62
|
Net
investment income
|
8.00
|
9.65
|
9.63
|
Portfolio
turnover (%)
|
61
|
56
|
45
|
Senior
securities
|
|
|
|
Total
debt outstanding end of period (in millions)
|
$86
|
$86
|
$88
|
Asset
coverage per $1,000 of debt4
|
$3,013
|
$3,054
|
$2,871
|
1
|
Based
on average daily shares outstanding.
|
2
|
Total
return based on net asset value reflects changes in the fund’s net asset value during each period. Total return based
on market value reflects changes in market value. Each figure assumes that dividend and capital gain distributions, if any,
were reinvested. These figures will differ depending upon the level of any discount from or premium to net asset value at
which the fund’s shares traded during the period.
|
3
|
Expenses
excluding interest were 1.07%, 1.07%, 1.04%, and 1.12% for the periods ended 10-31-13, 10-31-12, 10-31-11, and 10-31-10, respectively.
|
4
|
Asset
coverage equals the total net assets plus borrowings divided by the borrowings of the fund outstanding at period end (Note
7). As debt outstanding changes, level of invested assets may change accordingly. Asset coverage ratio provides a measure
of leverage.
|
Market
and Net Asset Value Information
The
Fund’s currently outstanding Common Shares are listed on the New York Stock Exchange (“NYSE”) under the symbol
“JHI” and commenced trading on the NYSE in 1971.
The
Fund’s Common Shares have traded both at a premium and at a discount to its net asset value (“NAV”). The Fund
cannot predict whether its shares will trade in the future at a premium or discount to NAV. The provisions of the 1940 Act generally
require that the public offering price of common shares (less any underwriting commissions and discounts) must equal or exceed
the NAV per share of a company’s common stock (calculated within 48 hours of pricing). The Fund’s issuance of Common
Shares may have an adverse effect on prices in the secondary market for Common Shares by increasing the number of Common Shares
available, which may put downward pressure on the market price for Common Shares. Shares of common stock of closed-end investment
companies frequently trade at a discount from NAV. See “Risk Factors—General Risks—Market Discount Risk”
and “—Secondary Market for the Common Shares.”
The
following table sets forth for each of the periods indicated the high and low closing market prices for Common Shares on the NYSE,
and the corresponding NAV per share and the premium or discount to NAV per share at which the Fund’s Common Shares were
trading as of such date. NAV is determined once daily as of the close of regular trading of the NYSE (typically 4:00 P.M., Eastern
Time). See “Determination of Net Asset Value” for information as to the determination of the Fund’s NAV.
|
Market
Price
|
NAV
per Share on
Date
of Market Price
High
and Low
|
Premium/(Discount)
on
Date
of Market Price
High
and Low
|
Fiscal
Quarter Ended
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
January
31, 2019
|
$15.61
|
$13.60
|
$16.98
|
$15.99
|
(8.07)%
|
(14.95)%
|
April
30, 2019
|
$16.11
|
$15.34
|
$17.94
|
$17.06
|
(9.24)%
|
(10.34%
|
July
31, 2019
|
$16.73
|
$15.87
|
$18.20
|
$17.76
|
(7.62)%
|
(10.94)%
|
October
31, 2019
|
$17.51
|
$16.70
|
$18.49
|
$18.05
|
(5.15)%
|
(8.14)%
|
January
31, 2020
|
$17.98
|
$17.00
|
$18.77
|
$18.34
|
(3.59)%
|
(7.31)%
|
April
30, 2020
|
$18.47
|
$10.33
|
$18.98
|
$11.90
|
(2.63)%
|
(20.42)%
|
July
31, 2020
|
$16.31
|
$11.72
|
$17.39
|
$13.64
|
(4.40)%
|
(14.07)%
|
October
31, 2020
|
$16.94
|
$15.47
|
$17.85
|
$16.89
|
(5.10)%
|
(9.59)%
|
January
31, 2021
|
$17.46
|
$15.51
|
$18.53
|
$17.16
|
(5.62)%
|
(9.61)%
|
The
last reported sale price, NAV per share and percentage discount to NAV per share of the Common Shares as of February 16, 2021
were $18.14, $18.83 and -3.66%, respectively. As of February 16, 2021, the Fund had 8,707,025 Common Shares outstanding and net
assets of the Fund were $163,925,346.
The
Fund
The
Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized on October
26, 1970 as a Delaware corporation and was reorganized on October 5, 1984 as a Massachusetts business trust pursuant to an Agreement
and Declaration of Trust (as amended and restated from time to time, the “Declaration of Trust”). The Fund commenced
operations following an initial public offering on January 29, 1971, pursuant to which the Fund issued an aggregate of 5,500,000
Common Shares of beneficial interest, $1.00 par value. The Fund’s principal office is located at 200 Berkeley Street, Boston,
Massachusetts 02116 and its phone number is 800-225-6020.
The
following provides information about the Fund’s outstanding securities as of October 31, 2020.
Title
of Class
|
Amount
Authorized
|
Amount
Held by
the
Fund or for
its
Account
|
Amount
Outstanding
|
Common Shares,
no par value
|
Unlimited
|
0
|
8,707,025
|
Use
of Proceeds
Subject
to the remainder of this section, and unless otherwise specified in a Prospectus Supplement, the Fund currently intends to invest
substantially all of the net proceeds of any sales of Common Shares pursuant to this Prospectus in accordance with its investment
objectives and policies as described under “Investment Objectives” and “Investment Strategies” within
three months of receipt of such proceeds. Such investments may be delayed up to three months if suitable investments are unavailable
at the time or for other reasons, such as market volatility and lack of liquidity in the markets of suitable investments. Pending
such investment, the Fund anticipates that it will invest the proceeds in short-term money market instruments, securities with
remaining maturities of less than one year, cash or cash equivalents. A delay in the anticipated use of proceeds could lower returns
and reduce the Fund’s distribution to Common Shareholders or result in a distribution consisting principally of a return
of capital.
Investment
Objectives
The
Fund’s primary investment objective is to generate income for distribution to its shareholders, with capital appreciation
as a secondary objective. There can be no assurance that the Fund will achieve its investment objectives. The Fund’s investment
objectives are not fundamental policies and may be changed without the approval of a majority of the outstanding voting securities
(as defined in the 1940 Act) of the Fund.
Investment
Strategies
The
preponderance of the Fund’s assets are invested in a diversified portfolio of debt securities issued by U.S. and non-U.S.
corporations and governments, some of which may carry equity features. The Fund emphasizes corporate debt securities which pay
interest on a fixed or contingent basis and which may possess certain equity features, such as conversion or exchange rights,
warrants for the acquisition of the stock of the same or different issuers, or participations based on revenues, sales or profits.
The Fund also may purchase preferred securities and may acquire common stock through the exercise of conversion or exchange rights
acquired in connection with other securities owned by the Fund. The Fund will not acquire any additional preferred securities
or common stock if as a result of that acquisition the value of all preferred securities and common stocks in the Fund’s
portfolio would exceed 20% of its total assets. Up to 50% of the value of the Fund’s assets may be invested in restricted
securities acquired through private placements. The Fund may purchase mortgage-backed securities. The Fund also may purchase and
sell derivative instruments, including foreign currency forward contracts, foreign currency swaps, futures contracts, swaps, including
credit-default swaps and interest-rate swaps, and options, including currency options. In addition, the Fund may invest in repurchase
agreements.
At
least 30% of Fund’s net assets (plus borrowings for investment purposes) will be represented by (a) debt securities which
are rated, at the time of acquisition, investment grade (i.e., at least “Baa” by Moody’s Investors Service,
Inc. (“Moody’s”) or “BBB” by Standard & Poor’s Ratings Services (“S&P”))
or in unrated securities determined by the Subadvisor to be of comparable credit quality, (b) securities issued or guaranteed
by the U.S. government or its agencies and instrumentalities, and (c) cash or cash equivalents. The remaining 70% of the Fund’s
net assets (plus borrowings for investment purposes) may be invested in debt securities of any credit quality, including securities
rated below investment grade (i.e., rated “Ba” or lower by Moody’s or “BB” or lower by S&P).
Debt securities of below investment grade quality are regarded as having predominantly speculative characteristics with respect
to the issuer’s ability to pay interest and repay principal and are commonly referred to as “junk bonds” or
“high yield securities.” While the Fund focuses on intermediate- and longer-term debt securities, the Fund may acquire
securities of any maturity and is not subject to any limits as to the average maturity of its overall portfolio.
Securities
rated “BBB” by S&P are regarded by S&P as having an adequate capacity to pay interest or dividends and repay
capital or principal, as the case may be; whereas such securities normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely, in the opinion of S&P, to lead to a weakened capacity to pay interest
or dividends and repay capital or principal for securities in this category than in higher rating categories. Securities rated
“Baa” by Moody’s are considered by Moody’s as medium to lower medium grade securities; they are neither
highly protected nor poorly secured; interest or dividend payments and capital or principal security, as the case may be, appear
to Moody’s to be adequate for the present but certain protective elements may be lacking or may be characteristically unreliable
over time; and, in the opinion of Moody’s, securities in this rating
category
lack outstanding investment characteristics and in fact have speculative characteristics as well. Below investment grade securities
and comparable unrated securities involve substantial risk of loss, are considered highly speculative with respect to the issuer’s
ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market
value due to adverse economic and business developments. Securities rated Ba or BB may face significant ongoing uncertainties
or exposure to adverse business, financial or economic conditions that could lead to the issuer being unable to meet its financial
commitments. The protection of interest and principal may be moderate and not well safeguarded during both good and bad times.
Securities rated B generally lack the characteristics of a desirable investment. Assurance of interest and principal payments
over the long term may be low, and such securities are more vulnerable to nonpayment than obligations rated BB or Ba. Adverse
business, financial or economic conditions will likely impair the issuer’s capacity or willingness to meet its financial
commitments. The descriptions of the investment grade rating categories by Moody’s and S&P, including a description
of their speculative characteristics, are set forth in the SAI. All references to securities ratings by Moody’s and S&P
in this Prospectus shall, unless otherwise indicated, include all securities within each such rating category (e.g., “Baa1”,
“Baa2” and “Baa3” in the case of Moody’s and “BBB+”, “BBB” and “BBB-”
in the case of S&P). All percentage and ratings limitations on securities in which the Fund may invest apply at the time of
making an investment and shall not be considered violated if an investment rating is subsequently downgraded to a rating that
would have precluded the Fund’s initial investment in such security. In the event of such security downgrade, the Fund will
sell the portfolio security as soon as the Subadvisor believes it to be prudent to do so in order to again cause the Fund to be
within the percentage and ratings limitations set forth in this Prospectus. In the event that the Fund disposes of a portfolio
security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold
prior to such downgrade.
In
managing the Fund’s portfolio, the Subadvisor concentrates first on sector selection by deciding which types of bonds and
industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry allocations,
the Subadvisor tries to anticipate shifts in the business cycle, using top-down analysis to determine which sectors and industries
may benefit over the next 12 months. In choosing individual securities, the Subadvisor uses bottom-up research to find securities
that appear comparatively undervalued. The Subadvisor looks at bonds of all quality levels and maturities from many different
issuers, potentially including U.S. dollar-denominated securities of foreign corporations and governments. There can be no assurance
that the Fund will achieve its investment objectives.
The
Fund may deviate from its principal investment strategies during transition periods, which may include the reassignment of portfolio
management, a change in investment objective or strategy, a reorganization or liquidation or the occurrence of large inflows or
outflows.
PORTFOLIO
INVESTMENTS
Corporate
debt securities
The
Fund invests in corporate debt obligations. Corporate debt obligations are subject to the risk of an issuer’s inability
to meet principal and interest payments on the obligations and also may be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
U.S.
government and foreign government securities
U.S.
government securities in which the Fund invests include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. government. U.S. government securities include securities issued
or guaranteed by the U.S. government or its authorities, agencies, or instrumentalities. Foreign government securities include
securities issued or guaranteed by foreign governments (including political subdivisions) or their authorities, agencies, or instrumentalities
or by supra-national agencies. Different kinds of U.S. government securities and foreign government securities have different
kinds of government support. For example, some U.S. government securities (e.g., U.S. Treasury bills, Treasury notes and
Treasury bonds, which differ only in their interest rates, maturities and times of issuance) are supported by the full faith and
credit of the U.S. Other U.S. government securities are issued or guaranteed by federal agencies or government-chartered or -sponsored
enterprises, but are neither guaranteed nor insured by the U.S. government (e.g., debt securities issued by the Federal
Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”),
and Federal Home Loan Banks (“FHLBs”)). Others may be supported by: (i) the right of the issuer to borrow from the
U.S. Treasury; (ii) the discretionary authority of the U.S. government to purchase the agency’s obligations; or (iii) only
the credit of the
issuer.
Similarly, some foreign government securities are supported by the full faith and credit of a foreign national government or political
subdivision and some are not. Foreign government securities of some countries may involve varying degrees of credit risk as a
result of financial or political instability in those countries and the possible inability of the Fund to enforce its rights against
the foreign government issuer. As with other fixed-income securities, sovereign issuers may be unable or unwilling to make timely
principal or interest payments.
Supra-national
agencies are agencies whose member nations make capital contributions to support the agencies’ activities, and include the
International Bank for Reconstruction and Development (the “World Bank”), the Asian Development Bank, the European
Coal and Steel Community, and the Inter-American Development Bank.
Like
other fixed-income securities, U.S. government securities are subject to market risk and their market values typically will change
as interest rates fluctuate. For example, the value of the Fund’s investment in U.S. government securities may fall during
times of rising interest rates. Yields on U.S. government securities tend to be lower than those of corporate securities of comparable
maturities.
In
addition to investing directly in U.S. government securities and foreign government securities, the Fund may purchase certificates
of accrual or similar instruments evidencing undivided ownership interests in interest payments and/or principal payments of U.S.
government securities and foreign government securities. Certificates of accrual and similar instruments may be more volatile
than other government securities.
Mortgage-backed
securities
The
Fund may invest in mortgage-backed securities which represent participation interests in pools of adjustable and fixed rate mortgage
loans which are guaranteed by agencies or instrumentalities of the U.S. government. Unlike conventional debt obligations, mortgage-backed
securities provide monthly payments derived from the monthly interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans. The mortgage loans underlying mortgage-backed securities are generally
subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest and prepayment scenarios, the Fund may fail to
recover the full amount of its investment in mortgage-backed securities notwithstanding any direct or indirect governmental or
agency guarantee. Since faster than expected prepayments must usually be invested in lower yielding securities, mortgage-backed
securities are less effective than conventional bonds in “locking in” a specified interest rate. In a rising interest
rate environment, a declining prepayment rate may extend the average life of many mortgage-backed securities. Extending the average
life of a mortgage-backed security increases the risk of depreciation due to future increases in market interest rates. Government-sponsored
entities such as the FHLMC, FNMA and FHLB, although chartered or sponsored by Congress, are not funded by congressional appropriations
and the debt and mortgage-backed securities issued by them are neither guaranteed nor issued by the U.S. government.
The
Fund’s investments in mortgage-backed securities may include conventional mortgage pass through securities and certain classes
of multiple class collateralized mortgage obligations (“CMOs”). In order to reduce the risk of prepayment for investors,
CMOs are issued in multiple classes, each having different maturities, interest rates, payment schedules and allocations of principal
and interest on the underlying mortgages. Senior CMO classes will typically have priority over residual CMO classes as to the
receipt of principal and/or interest payments on the underlying mortgages. The CMO classes in which the Fund may invest include
but are not limited to sequential and parallel pay CMOs, including planned amortization class (“PAC”) and target amortization
class (“TAC”) securities.
Different
types of mortgage-backed securities are subject to different combinations of prepayment, extension, interest rate and/or other
market risks. Conventional mortgage pass through securities and sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. PACs, TACs and other senior classes of sequential and parallel pay CMOs involve less exposure to prepayment,
extension and interest rate risk than other mortgage-backed securities, provided that prepayment rates remain within expected
prepayment ranges or “collars.”
Illiquid
securities
The
Fund may invest up to 20% of its total assets in illiquid securities (i.e., securities that are not readily marketable).
For this purpose, “illiquid securities” may include certain securities that are not registered (“restricted
securities”) under the Securities Act of 1933, as amended (the “1933 Act”), including commercial paper issued
in reliance on Section 4(a)(2) of the 1933 Act and securities offered and sold to “qualified institutional buyers”
under Rule 144A
under
the 1933 Act. If the Board of Trustees (the “Board”) determines, based upon a continuing review of the trading markets
for specific Section 4(a)(2) commercial paper or Rule 144A securities, that these instruments are liquid, they will not be subject
to the 20% limit on illiquid investments. The Board has adopted guidelines and delegated to the Advisor the daily function of
determining the monitoring and liquidity of restricted securities. The Board will, however, retain sufficient oversight and be
ultimately responsible for these determinations. The Board will carefully monitor the Fund’s investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested
in purchasing these restricted securities.
Repurchase
agreements maturing in more than seven days are considered illiquid, unless an agreement can be terminated after a notice period
of seven days or less.
As
long as the SEC maintains the position that most swap contracts, caps, floors, and collars are illiquid, the Fund will continue
to designate these instruments as illiquid for purposes of its 20% illiquid limitation unless the instrument includes a termination
clause or has been determined to be liquid based on a case-by-case analysis pursuant to procedures approved by the Board.
Equity
securities
The
Fund may invest up to 20% of its assets in preferred securities and common stocks. The Fund may purchase preferred securities
and may acquire common stock through the exercise of conversion or exchange rights acquired in connection with other securities
owned by the Fund. The Fund normally will invest in such securities when the Subadvisor believes that they will provide a sufficiently
high yield to attain the Fund’s investment objectives. The Fund also may purchase income producing securities which are
convertible into or come with rights to purchase preferred securities and common stocks.
Fixed
rate preferred securities have fixed dividend rates. They can be perpetual, with no mandatory redemption date, or issued with
a fixed mandatory redemption date. Certain issues of preferred securities are convertible into other equity securities. Perpetual
preferred securities provide a fixed dividend throughout the life of the issue, with no mandatory retirement provisions, but may
be callable. Sinking fund preferred securities provide for the redemption of a portion of the issue on a regularly scheduled basis
with, in most cases, the entire issue being retired as of a future date. The value of fixed rate preferred securities can be expected
to vary inversely with interest rates.
Adjustable
rate preferred securities have a variable dividend rate which is determined periodically, typically quarterly, according to a
formula based on a specified premium or discount to the yield on particular U.S. Treasury securities, typically the highest base-rate
yield of one of three U.S. Treasury securities: the 90-day Treasury bill; the 10-year Treasury note; and either the 20-year or
30-year Treasury bond or other index. The premium or discount to be added to or subtracted from this base-rate yield is fixed
at the time of issuance and cannot be changed without the approval of the holders of the adjustable rate preferred securities.
Some adjustable rate preferred securities have a maximum and a minimum rate and in some cases are convertible into common stock.
Auction
rate preferred securities pay dividends that adjust based upon periodic auctions. Such preferred securities are similar to short-term
corporate money market instruments in that an auction rate preferred stockholder has the opportunity to sell the preferred securities
at its liquidation value in an auction, normally conducted at least every 49 days, through which buyers set the dividend rate
in a bidding process for the next period. The dividend rate set in the auction depends upon market conditions and the credit quality
of the particular issuer. Typically, the auction rate preferred securities’ dividend rate is limited to a specified maximum
percentage of an external commercial paper index as of the auction date. Further, the terms of auction rate preferred securities
generally provide that they are redeemable by the issuer at certain times or under certain conditions.
Common
stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits, if any,
of the corporation without preference over any other shareholder or class of shareholders, including holders of such entity’s
preferred securities and other senior equity securities. Common stock usually carries with it the right to vote and frequently
an exclusive right to do so. In selecting common stocks for investment, the Fund expects generally to focus more on the security’s
dividend paying capacity than on its potential for capital appreciation.
Non-U.S.
securities
While
the Fund primarily invests in the securities of United States issuers, the Fund may invest in securities of corporate and governmental
issuers located outside the United States, including emerging market issuers. The Fund may invest up to 30% of its total assets
in securities that are denominated in foreign currencies.
Sovereign
debt obligations
The
Fund may invest in sovereign debt obligations, which involve special risks that are not present in corporate debt obligations.
The foreign issuer of the sovereign debt or the foreign governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of a default.
During periods of economic uncertainty, the market prices of sovereign debt, and the Fund’s NAV, to the extent it invests
in such securities, may be more volatile than prices of debt obligations of U.S. issuers. In the past, certain foreign countries
have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debt.
Money
market instruments
Money
market instruments include short-term U.S. government securities, U.S. dollar-denominated, high quality commercial paper (unsecured
promissory notes issued by corporations to finance their short-term credit needs), certificates of deposit, bankers’ acceptances
and repurchase agreements relating to any of the foregoing. U.S. government securities include Treasury notes, bonds and bills,
which are direct obligations of the U.S. government backed by the full faith and credit of the U.S., and securities issued by
agencies and instrumentalities of the U.S. government, which may be guaranteed by the U.S. Treasury, may be supported by the issuer’s
right to borrow from the U.S. Treasury or may be backed only by the credit of the U.S. federal agency or instrumentality itself.
Hedging
and interest rate transactions
The
Fund may, but is not required to, use various hedging and interest rate transactions described below to mitigate risks or facilitate
portfolio management. Such transactions are regularly used by many mutual funds and other institutional investors. Although the
Subadvisor seeks to use these practices to further the Fund’s investment objectives, no assurance can be given that these
practices will achieve this result.
The
Fund may purchase and sell derivative instruments such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income, interest rate and equity indices, and other financial instruments, purchase and sell financial
futures contracts and options thereon, and enter into various interest rate transactions such as swaps, caps, floors or collars
or credit transactions and credit default swaps. The Fund also may purchase derivative instruments that combine features of these
instruments. Collectively, all of the above are referred to as “Strategic Transactions.” The Fund generally seeks
to use Strategic Transactions as a portfolio management or hedging technique to seek to protect against possible adverse changes
in the market value of securities held in or to be purchased for the Fund’s portfolio, protect the value of the Fund’s
portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate exposure of the
Fund, including the effective yield paid on any preferred shares issued by the Fund, manage the effective maturity or duration
of the Fund’s portfolio or establish positions in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. The Fund does not engage in these transactions for speculative purposes.
Strategic
Transactions have risks, including the imperfect correlation between the value of such instruments and the underlying assets,
the possible default of the other party to the transaction or illiquidity of the derivative instruments. Furthermore, the ability
to use Strategic Transactions depends on the Subadvisor’s ability to predict pertinent market movements, which cannot be
assured. Thus, the use to the benefit of the Fund of Strategic Transactions may result in a loss greater than if they had not
been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security
that it might otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or other assets held in margin accounts
with respect to Strategic Transactions are not otherwise available to the Fund for investment purposes.
A
more complete discussion of Strategic Transactions and their risks is contained in the SAI.
TEMPORARY
DEFENSIVE STRATEGIES
There
may be times when, in the Subadvisor’s judgment, conditions in the securities markets would make pursuit of the Fund’s
investment strategy inconsistent with achievement of the Fund’s investment objectives. At such times, the Subadvisor may
employ alternative strategies primarily to seek to reduce fluctuations in the value of the Fund’s assets. In implementing
these temporary defensive strategies, depending on the circumstances, the Fund may invest an unlimited portion of its portfolio
in short-term money market instruments, securities with remaining maturities of less than one year, cash or cash equivalents.
It is impossible to predict when, or for how long, the Fund may use these alternative strategies.
ADDITIONAL
PORTFOLIO INVESTMENTS
Structured
securities
The
Fund may invest in structured securities including notes, bonds or debentures, the value of the principal of and/or interest on
which is to be determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or
other financial indicators (the “Reference”) or the relative change in two or more References. The interest rate or
the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable
Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and,
therefore, may result in the loss of the Fund’s investment. Structured securities may be positively or negatively indexed,
so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at maturity may be a multiple of the change in the value
of the Reference. Consequently, structured securities entail a greater degree of market risk than other types of debt obligations.
Structured securities also may be more volatile, less liquid and more difficult to price accurately than less complex fixed-income
investments.
When-Issued
and Forward Commitment Securities
The
Fund may purchase securities on a when-issued or forward commitment basis. “When-issued” refers to securities whose
terms are available and for which a market exists, but which have not been issued. The Fund will engage in when-issued transactions
with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield
at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more
after the purchase. In a forward commitment transaction, the Fund contracts to purchase securities for a fixed price at a future
date beyond customary settlement time.
When
the Fund engages in a forward commitment or when-issued transaction, the Fund relies on the issuer or seller to consummate the
transaction. The failure of the issuer or seller to consummate the transaction may result in the Fund losing the opportunity to
obtain a price and yield considered to be advantageous. The purchase of securities on a when-issued or forward commitment basis
also involves a risk of loss if the value of the security to be purchased declines prior to the settlement date.
On
the date that the Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund
will segregate in a separate account cash or liquid securities, of any type or maturity, equal in value to the Fund’s commitment.
These assets will be valued daily at market, and additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively,
the Fund may enter into offsetting contracts for the forward sale of other securities that it owns.
Repurchase
agreements
The
Fund may enter into repurchase agreements. In a repurchase agreement the Fund would buy a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the seller at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with “primary
dealers” in U.S. government securities. When the Fund enters into a repurchase agreement, it receives collateral which is
held in a segregated account by the Fund’s custodian. The collateral amount is marked-to-market and monitored on a daily
basis to ensure that the collateral held is in an amount not less than the principal amount of the repurchase agreement plus any
accrued interest. In the event of a default by the counterparty, realization of the collateral proceeds could be delayed, during
which time the collateral value may decline.
Reverse
repurchase agreements
The
Fund may enter into “reverse” repurchase agreements. To the extent permitted under the 1940 Act, and related guidance
of the SEC and its staff, under a reverse repurchase agreement, a fund may sell a debt security and agree to repurchase it at
an agreed upon time and at an agreed upon price. The Fund maintains liquid assets such as cash, Treasury bills or other U.S. government
securities having an aggregate value equal to the amount of such commitment to repurchase including accrued interest, until payment
is made. A reverse repurchase agreement may be considered a form of leveraging and may increase fluctuations in a fund’s
NAV per share.
The
Fund intends to use reverse repurchase agreements to obtain investment leverage either alone and/or pursuant to the LA. To the
extent permitted under the LA, in a reverse repurchase transaction, the Fund temporarily transfers possession of a portfolio instrument
to another party in return for cash. At the same time, the Fund agrees to repurchase the instrument at an agreed upon time and
price, which reflects an interest payment. The value of the portfolio securities transferred may substantially exceed the purchase
price received by the Fund under the reverse repurchase agreement transaction and, during the life of the reverse repurchase agreement
transaction, the Fund may be required to transfer additional securities if the market value of those securities initially transferred
declines. In engaging in a reverse repurchase transaction, the Fund may transfer (“sell”) any of its portfolio securities
to a broker-dealer, bank or another financial institution counterparty. Each such counterparty must be approved by the Fund. In
accordance with guidance from the SEC and its staff from time to time in effect, the Fund will pledge, earmark or segregate liquid
assets equal to repayment obligations under the reverse repurchase agreements or otherwise comply with applicable regulations.
Reverse
repurchase agreements involve the risk that the market value of securities purchased by the Fund with proceeds of the transaction
may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund also will
continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. The Fund may designate any or all securities as ineligible for reverse
repurchase transactions with any counterparty, whether or not such securities are currently the subject of any such transaction,
for any reason. Under the procedures established by the Trustees, the Advisor will monitor the creditworthiness of the Fund’s
reverse repurchase agreement counterparties.
Asset-backed
securities
The
Fund may invest in asset-backed securities. Asset-backed securities are often subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly,
the Fund’s ability to maintain positions in these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Brady
Bonds
The
Fund may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities described as part of a restructuring
plan created by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding
external indebtedness (generally, commercial bank debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International
Monetary Fund (the “IMF”). The Brady Plan facilitates the exchange of commercial bank debt for newly issued bonds
(known as Brady Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements
the IMF debtor nations are required to implement domestic monetary and fiscal reforms. These reforms have included the liberalization
of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and
borrowing. These policies and programs seek to promote the debtor country’s ability to service its external obligations
and promote its economic growth and development. The Brady Plan only sets forth general
guiding
principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors.
Other
investment companies
The
Fund may invest in the securities of other investment companies to the extent that such investments are consistent with the Fund’s
investment objectives and policies and permissible under the 1940 Act. As a stockholder in an investment company, the Fund will
bear its ratable share of that investment company’s expenses, and would remain subject to payment of the Fund’s investment
management fees and other expenses with respect to the assets so invested. Common Shareholders would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In addition, these other investment companies may utilize
leverage, in which case an investment would subject the Fund to additional risks associated with leverage. See “Risk Factors—Leverage
Risk.” The Fund, as a holder of the securities of other investment companies, will bear its pro rata portion of the
other investment companies’ expenses, including advisory fees. These expenses are in addition to the direct expenses of
the Fund’s own operations.
OTHER
INVESTMENT POLICIES
Borrowing
The
Fund may use leverage to the extent permitted by the 1940 Act, this Prospectus, and the LA. The Fund is authorized to utilize
leverage through borrowings, reinvestment of securities lending collateral or reverse repurchase agreement proceeds, and/or the
issuance of preferred shares, including the issuance of debt securities. The Fund is party to the LA as described in “—Description
of Capital Structure—Liquidity Facility.” Borrowings, together with the issuance of preferred shares, or other “senior
securities” as that term is defined in the 1940 Act, may not be in an aggregate amount that would, immediately after giving
effect to the drawdown, exceed 331/3% of the Fund’s total assets (including any assets attributable to financial
leverage from senior securities) minus the sum of accrued liabilities (other than liabilities from senior securities).
Portfolio
turnover
The
Fund may engage in short-term trading strategies, and securities may be sold without regard to the length of time held when, in
the opinion of the Subadvisor, investment considerations warrant such action. Short term trading may have the effect of increasing
portfolio turnover rate. A high turnover rate (100% or more) necessarily involves greater trading costs to the Fund and may result
in the realization of net short-term capital gain. The portfolio turnover rate for the Fund for the fiscal years ended October
31, 2020 and October 31, 2019 was 62% and 40%, respectively. The success of short-term trading will depend upon the ability of
the Subadvisor to evaluate particular securities, to anticipate relevant market factors, including trends of interest rates and
earnings and variations from such trends, to obtain relevant information, to evaluate it promptly, and to take advantage of its
evaluations by completing transactions on a favorable basis. There can be no assurance that the Subadvisor will be successful
in that evaluation. If securities are not held for the applicable holding periods, dividends paid on them will not qualify for
the advantageous U.S. federal tax rates. See “Investment Strategies” and “U.S. Federal Income Tax Matters.”
Securities
loans
The
Fund is party to the LA as described in “—Description of Capital Structure—Liquidity Facility.” The Fund
may seek to obtain additional income or portfolio leverage by making secured loans of its portfolio securities with a value of
up to 331/3% of total assets. In such transactions, the borrower pays to the Fund an amount equal to any dividends
or interest received on loaned securities. The Fund retains all or a portion of the dividends, interest, capital gains, and/or
other distributions received on investment of cash collateral in short-term obligations of the U.S. government, cash equivalents
(including shares of a fund managed by the Fund’s investment adviser or an affiliate thereof), or other investments consistent
with the Fund’s investment objective, policies, and restrictions, or receives a fee from the borrower. If the Fund receives
a fee in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction, such income will not
be eligible for the dividends-received deduction for corporate shareholders. As a result of investing such cash collateral in
such investments, the Fund will receive the benefit of any gains and bear any losses generated by such investments. All securities
loans will be made pursuant to agreements requiring that the loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the market value of the loaned securities. The Fund may pay reasonable finders’,
administrative and custodial fees in
connection
with loans of its portfolio securities. Although voting rights or rights to consent accompanying loaned securities pass to the
borrower, the Fund retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities
may be voted by the Fund with respect to matters materially affecting the Fund’s investment. The Fund may also call a loan
in order to sell the securities involved. Lending portfolio securities involves risks of delay in recovery of the loaned securities
or, in some cases, loss of rights in the collateral should the borrower commence an action relating to bankruptcy, insolvency
or reorganization. The use of securities lending collateral to obtain leverage in the Fund’s investment portfolio may subject
the Fund to greater risk of loss than the use of traditional securities lending to earn incremental income via investing collateral
solely in short-term U.S. government securities or cash equivalents.
Foreign
currency transactions
The
value of non-U.S. assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in foreign currency rates
and exchange control regulations. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency controls or political developments in the U.S. or abroad.
The Fund may (but is not required to) engage in transactions to hedge against changes in foreign currencies, and will use such
hedging techniques when the Advisor or the Subadvisor deems appropriate. Foreign currency exchange transactions may be conducted
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or through entering into
derivative currency transactions. Currency futures contracts are exchange-traded and change in value to reflect movements of a
currency or a basket of currencies. Settlement must be made in a designated currency.
Forward
foreign currency exchange contracts are individually negotiated and privately traded so they are dependent upon the creditworthiness
of the counterparty. Such contracts may be used when a security denominated in a foreign currency is purchased or sold, or when
the receipt in a foreign currency of dividend or interest payments on such a security is anticipated. A forward contract can then
“lock in” the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment,
as the case may be.
Additionally,
when the Advisor or the Subadvisor believes that the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the securities held that are denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved generally will not be possible. In addition, it may not
be possible to hedge against long-term currency changes. Cross-hedging may be performed by using forward contracts in one currency
(or basket of currencies) to hedge against fluctuations in the value of securities denominated in a different currency if the
Advisor or the Subadvisor determines that there is an established historical pattern of correlation between the two currencies
(or the basket of currencies and the underlying currency). Use of a different foreign currency magnifies exposure to foreign currency
exchange rate fluctuations. Forward contracts also may be used to shift exposure to foreign currency exchange rate changes from
one currency to another. Short-term hedging provides a means of fixing the dollar value of only a portion of portfolio assets.
Income or gain earned on any of the Fund’s foreign currency transactions generally will be treated as fully taxable income
(i.e., income other than tax-advantaged dividends).
Currency
transactions are subject to the risk of a number of complex political and economic factors applicable to the countries issuing
the underlying currencies. Furthermore, unlike trading in most other types of instruments, there is no systematic reporting of
last sale information with respect to the foreign currencies underlying the derivative currency transactions. As a result, available
information may not be complete. In an over-the-counter trading environment, there are no daily price fluctuation limits. There
may be no liquid secondary market to close out options purchased or written, or forward contracts entered into, until their exercise,
expiration or maturity. There also is the risk of default by, or the bankruptcy of, the financial institution serving as counterparty.
USE
OF LEVERAGE BY THE FUND
The
Fund may use leverage to the extent permitted by the 1940 Act, this Prospectus, and the LA. The Fund is authorized to utilize
leverage through borrowings, reinvestment of securities lending collateral or reverse repurchase agreement proceeds, and/or the
issuance of preferred shares, including the issuance of debt securities. See “—Other Investment Policies—Borrowing.”
The Fund is party to the LA as described in “—Description of Capital Structure—Liquidity Facility.”
The
Fund’s leverage strategy may not be successful. By leveraging its investment portfolio, the Fund creates an opportunity
for increased net income or capital appreciation. However, the use of leverage also involves risks, which can be significant.
These risks include the possibility that the value of the assets acquired with such borrowing decreases although the Fund’s
liability is fixed, greater volatility in the Fund’s NAV and the market price of the Fund’s Common Shares and higher
expenses. Because the Advisor’s fee is based upon a percentage of the Fund’s managed assets, the Advisor’s fee
will be higher if the Fund is leveraged and the Advisor will have an incentive to leverage the Fund. The Advisor intends only
to leverage the Fund when it believes that the potential return on the additional investments acquired through the use of leverage
is likely to exceed the costs incurred in connection with the offering.
At
October 31, 2020, the Fund had borrowings under the LA of $86,900,000. The average daily loan balance, weighted average interest
rate and maximum daily loan outstanding for the year ended October 31, 2020, were as follows:
Average
Daily Loan Balance
|
Weighted
Average Interest Rate%
|
Maximum
Daily Loan Outstanding
|
$86,900,000
|
1.41%
|
$86,900,000
|
The
Fund’s borrowings under the LA as of October 31, 2020 equaled approximately 36.62% of the Fund’s total assets (including
the proceeds of such leverage). The Fund’s asset coverage ratio as of October 31, 2020 was 273%. See “—Other
Investment Policies—Borrowing” for a brief description of the Fund’s liquid facility agreement.
Assuming
the utilization of leverage in the amount of 36.62% of the Fund’s total assets and an annual interest rate of 0.74% payable
on such leverage based on market rates as of October 31, 2020, the additional income that the Fund must earn (net of expenses)
in order to cover such leverage is approximately $643,060. Actual costs of leverage may be higher or lower than that assumed in
the previous example. Under normal market conditions, interest charged under the LA is at the rate of one-month LIBOR plus 0.60%.
Following
an offering of additional Common Shares from time to time, the Fund may increase the amount of leverage outstanding. The Fund
may engage in additional borrowings, securities lending, and reverse repurchase agreements in order to maintain the Fund’s
desired leverage ratio. Leverage creates a greater risk of loss, as well as a potential for more gain, for the Common Shares than
if leverage was not used. Interest on borrowings may be at a fixed or floating rate and generally will be based on short-term
rates. The costs associated with the Fund’s use of leverage, including the issuance of such leverage and the payment of
dividends or interest on such leverage, will be borne entirely by the Common Shareholders. As long as the rate of return, net
of applicable Fund expenses, on the Fund’s investment portfolio investments purchased with leverage exceeds the costs associated
with such leverage, the Fund will generate more return or income than will be needed to pay such costs. In this event, the excess
will be available to pay higher dividends to Common Shareholders. Conversely, if the Fund’s return on such assets is less
than the cost of leverage and other Fund expenses, the return to the Common Shareholders will diminish. To the extent that the
Fund uses leverage, the NAV and market price of the Common Shares and the yield to Common Shareholders will be more volatile.
The Fund’s leveraging strategy may not be successful. See “Risk Factors—Leverage Risk.”
The
following table is designed to illustrate the effect on the return to a holder of the Fund’s Common Shares of leverage in
the amount of approximately 36.62% of the Fund’s total assets, assuming hypothetical annual returns of the Fund’s
investment portfolio of minus 10% to plus 10%. As the table shows, leverage generally increases the return to Common Shareholders
when portfolio return is positive and greater than the cost of leverage and decreases the return when the portfolio return is
negative or less than the cost of leverage. The figures appearing in the table are hypothetical. Actual returns may be greater
or less than those appearing in the table.
Assumed
Portfolio Return
|
(10.00)%
|
(5.00)%
|
0.00%
|
5.00%
|
10.00%
|
Corresponding
Common Shares Total Return
|
-13.58%
|
-6.99%
|
-0.40%
|
6.19%
|
12.77%
|
Risk
Factors
The
principal risks of investing in the Fund are summarized in the Prospectus Summary above. Below are descriptions of the principal
factors that may play a role in shaping the Fund’s overall risk profile. The descriptions appear in alphabetical order by
general risks, equity strategy risks, and options strategy risks, not in order of importance. For further details about the Fund’s
risks, including additional risk factors that are not discussed in this Prospectus because they are considered non-principal factors,
see the Fund’s SAI.
General
Risks
ANTI-TAKEOVER
PROVISIONS
The
Fund’s Declaration of Trust includes provisions that could limit the ability of other persons or entities to acquire control
of the Fund or to change the composition of its Board. These provisions may deprive shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common Shares. See “Certain Provisions in the Declaration
of Trust and By-Laws—Anti-takeover provisions.”
CHANGES
IN U.S. LAW
Changes
in the state and U.S. federal laws applicable to the Fund, including changes to state and U.S. federal tax laws, or applicable
to the Advisor, the Subadvisor and other securities or instruments in which the Fund may invest, may negatively affect the Fund’s
returns to Common Shareholders. The Fund may need to modify its investment strategy in the future in order to satisfy new regulatory
requirements or to compete in a changed business environment.
Cybersecurity
and operational risk
Intentional
cybersecurity breaches include unauthorized access to systems, networks, or devices (such as through “hacking” activity);
infection from computer viruses or other malicious software code; and attacks that shut down, disable, slow, or otherwise disrupt
operations, business processes, or website access or functionality. In addition, unintentional incidents can occur, such as the
inadvertent release of confidential information (possibly resulting in the violation of applicable privacy laws).
A
cybersecurity breach could result in the loss or theft of customer data or funds, the inability to access electronic systems (“denial
of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system,
or costs associated with system repairs. Such incidents could cause the Fund, the advisor, a manager, or other service providers
to incur regulatory penalties, reputational damage, additional compliance costs, or financial loss. In addition, such incidents
could affect issuers in which the Fund invests, and thereby cause the fund’s investments to lose value.
Cyber-events
have the potential to affect materially the Fund and the Advisor’s relationships with accounts, shareholders, clients, customers,
employees, products, and service providers. The Fund has established risk management systems reasonably designed to seek to reduce
the risks associated with cyber-events. There is no guarantee that the Fund will be able to prevent or mitigate the impact of
any or all cyber-events.
The
Fund is exposed to operational risk arising from a number of factors, including, but not limited to, human error, processing and
communication errors, errors of the Fund’s service providers, counterparties, or other third parties, failed or inadequate
processes and technology or system failures.
In
addition, other disruptive events, including (but not limited to) natural disasters and public health crises (such as the novel
coronavirus (COVID-19) pandemic), may adversely affect the Fund’s ability to conduct business, in particular if the Fund’s
employees or the employees of its service providers are unable or unwilling to perform their responsibilities as a result of any
such event. Even if the Fund’s employees and the employees of its service providers are able to work remotely, those remote
work arrangements could result in the Fund’s business operations being less efficient than under normal circumstances, could
lead to delays in its processing of transactions, and could increase the risk of cyber-events.
DEFENSIVE
POSITIONS RISK
During
periods of adverse market or economic conditions, the Fund may temporarily invest all or a substantial portion of its total assets
in short-term money market instruments, securities with remaining maturities of less than one year, cash or cash equivalents.
The Fund will not be pursuing its investment objectives in these circumstances and could miss favorable market developments.
DISTRIBUTION
RISK
There
can be no assurance that quarterly distributions paid by the Fund to shareholders will be maintained at current levels or increase
over time. The quarterly distributions shareholders receive from the Fund are derived from the Fund’s dividends and interest
income after payment of Fund expenses, net option premiums and net realized gain on
equity
securities investments. If stock market volatility and/or stock prices decline, the premiums available from writing call options
and writing put options on individual stocks likely will decrease as well. Payments to purchase put options and to close written
call and put options will reduce amounts available for distribution. Net realized gain on the Fund’s stock investments will
be determined primarily by the direction and movement of the stock market and the equity securities held. The Fund’s cash
available for distribution may vary widely over the short- and long-term. If, for any calendar year, the total distributions made
exceed the Fund’s net investment taxable income and net capital gain, the excess generally will be treated as a return of
capital to each Common Shareholder (up to the amount of the Common Shareholder’s basis in his or her Common Shares) and
thereafter as gain from the sale of Common Shares. The amount treated as a return of capital reduces the Common Shareholder’s
adjusted basis in his or her Common Shares, thereby increasing his or her potential gain or reducing his or her potential loss
on the subsequent sale of his or her Common Shares. Distributions in any year may include a substantial return of capital component.
Dividends on common stocks are not fixed but are declared at the discretion of the issuer’s board of directors.
ECONOMIC
AND MARKET EVENTS RISK
Events
in certain sectors historically have resulted, and may in the future result, in an unusually high degree of volatility in the
financial markets, both domestic and foreign. These events have included, but are not limited to: bankruptcies, corporate restructurings,
and other similar events; governmental efforts to limit short selling and high frequency trading; measures to address U.S. federal
and state budget deficits; social, political and economic instability in Europe; economic stimulus by the Japanese central bank;
dramatic changes in energy prices and currency exchange rates; and China’s economic slowdown. Interconnected global economies
and financial markets increase the possibility that conditions in one country or region might adversely impact issuers in a different
country or region. Both domestic and foreign equity markets have experienced increased volatility and turmoil, with issuers that
have exposure to the real estate, mortgage, and credit markets particularly affected. Banks and financial services companies could
suffer losses if interest rates were to rise or economic conditions deteriorate.
In
addition, relatively high market volatility and reduced liquidity in credit and fixed-income markets may adversely affect many
issuers worldwide. Actions taken by the U.S. Federal Reserve (Fed) or foreign central banks to stimulate or stabilize economic
growth, such as interventions in currency markets, could cause high volatility in the equity and fixed-income markets. Reduced
liquidity may result in less money being available to purchase raw materials, goods, and services from emerging markets, which
may, in turn, bring down the prices of these economic staples. It may also result in emerging-market issuers having more difficulty
obtaining financing, which may, in turn, cause a decline in their securities prices.
In
addition, while interest rates have been unusually low in recent years in the United States and abroad, any decision by the Fed
to adjust the target fed funds rate, among other factors, could cause markets to experience continuing high volatility. A significant
increase in interest rates may cause a decline in the market for equity securities. Also, regulators have expressed concern that
rate increases may contribute to price volatility. These events and the possible resulting market volatility may have an adverse
effect on the Fund.
Political
turmoil within the United States and abroad may also impact the fund. Although the U.S. government has honored its credit obligations,
it remains possible that the United States could default on its obligations. While it is impossible to predict the consequences
of such an unprecedented event, it is likely that a default by the United States would be highly disruptive to the United States
and global securities markets and could significantly impair the value of the fund’s investments. Similarly, political events
within the United States at times have resulted, and may in the future result, in a shutdown of government services, which could
negatively affect the U.S. economy, decrease the value of many fund investments, and increase uncertainty in or impair the operation
of the United States or other securities markets. The U.S. is also renegotiating many of its global trade relationships and has
imposed or threatened to impose significant import tariffs. These actions could lead to price volatility and overall declines
in U.S. and global investment markets.
Uncertainties
regarding the viability of the EU have impacted and may continue to impact markets in the United States and around the world.
If one or more countries leave the EU or the EU dissolves, securities markets would likely be significantly disrupted. On January
31, 2020, the UK left the EU, commonly referred to as “Brexit,” and the UK ceased to be a member of the EU. Following
a transition period during which the EU and the UK Government engaged in a series of negotiations regarding the terms of the UK's
future relationship with the EU, the EU and the UK Government signed an agreement on December 30, 2020 regarding the economic
relationship between the UK and the EU. This agreement became effective on a provisional basis on January 1, 2021. There remains
significant market uncertainty regarding Brexit’s ramifications, and the range and potential implications of
possible
political, regulatory, economic, and market outcomes are difficult to predict. This uncertainty may affect other countries in
the EU and elsewhere, and may cause volatility within the EU, triggering prolonged economic downturns in certain countries within
the EU. It is also possible that various countries within the UK, such as Scotland or Northern Ireland, could seek to separate
and remain a part of the EU. Other secessionist movements including countries seeking to abandon the Euro or withdraw from the
EU may cause volatility and uncertainty in the EU.
A
widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and
closures, impact the ability to complete redemptions, and affect fund performance. For example, the novel coronavirus disease
(COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics
and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the
present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely
affect the fund’s performance, resulting in losses to your investment.
The
United States has responded to the novel coronavirus (COVID-19) pandemic and resulting economic distress with fiscal and monetary
stimulus packages. In late March 2020, the government passed the Coronavirus Aid, Relief, and Economic Security Act, a stimulus
package providing for over $2.2 trillion in resources to small businesses, state and local governments, and individuals that have
been adversely impacted by the novel coronavirus (COVID-19) pandemic. In addition, in mid-March 2020 the Fed cut interest rates
to historically low levels and promised unlimited and open-ended quantitative easing, including purchases of corporate and municipal
government bonds. The Fed also enacted various programs to support liquidity operations and funding in the financial markets,
including expanding its reverse repurchase agreement operations, adding $1.5 trillion of liquidity to the banking system, establishing
swap lines with other major central banks to provide dollar funding, establishing a program to support money market funds, easing
various bank capital buffers, providing funding backstops for businesses to provide bridging loans for up to four years, and providing
funding to help credit flow in asset-backed securities markets. The Fed also plans to extend credit to small- and medium-sized
businesses.
Political
and military events, including in North Korea, Venezuela, Iran, Syria, and other areas of the Middle East, and nationalist unrest
in Europe and South America, also may cause market disruptions.
In
addition, there is a risk that the prices of goods and services in the United States and many foreign economies may decline over
time, known as deflation. Deflation may have an adverse effect on stock prices and creditworthiness and may make defaults on debt
more likely. If a country’s economy slips into a deflationary pattern, it could last for a prolonged period and may be difficult
to reverse.
INFLATION
RISK
Inflation
risk is the risk that the purchasing power of assets or income from investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of Common Shares and distributions thereon can decline.
INTEREST
RATE RISK
Interest
rate risk is the risk that fixed-income securities such as debt securities and preferred securities will decline in value because
of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall.
The Fund’s investments in debt securities and preferred securities means that the NAV and market price of the Common Shares
will tend to decline if market interest rates rise. Given the historically low level of interest rates in recent years and the
likelihood that interest rates will increase when the national economy strengthens, the risk of the potentially negative impact
of rising interest rates on the value of the Fund’s portfolio may be significant. In addition, the longer the average maturity
of the Fund’s portfolio of debt securities, the greater the potential impact of rising interest rates on the value of the
Fund’s portfolio and the less flexibility the Fund may have to respond to the decreasing spread between the yield on its
portfolio securities.
During
periods of declining interest rates, an issuer may exercise its option to prepay principal of debt securities or to redeem preferred
securities earlier than scheduled, forcing the Fund to reinvest in lower yielding securities. This is known as call or prepayment
risk. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest rate,
increase
the security’s duration and reduce the value of the security. This is known as extension risk. Recent and potential future
changes in government monetary policy may affect the level of interest rates.
The
fixed-income securities market has been and may continue to be negatively affected by the novel coronavirus (COVID-19) pandemic.
As with other serious economic disruptions, governmental authorities and regulators are responding to this crisis with significant
fiscal and monetary policy changes, including considerably lowering interest rates, which, in some cases could result in negative
interest rates. These actions, including their possible unexpected or sudden reversal or potential ineffectiveness, could further
increase volatility in securities and other financial markets and reduce market liquidity. To the extent the fund has a bank deposit
or holds a debt instrument with a negative interest rate to maturity, the fund would generate a negative return on that investment.
Similarly, negative rates on investments by money market funds and similar cash management products could lead to losses on investments,
including on investments of the fund’s uninvested cash.
INVESTMENT
AND MARKET RISK
An
investment in Common Shares is subject to investment and market risk, including the possible loss of the entire principal amount
invested. An investment in Common Shares represents an indirect investment in the securities owned by the Fund, which generally
are traded on a securities exchange or in the over-the-counter markets. The value of these securities, like other market investments,
may move up or down, sometimes rapidly and unpredictably. Common Shares at any point in time may be worth less than the original
investment, even after taking into account any reinvestment of dividends and distributions.
LEVERAGE
RISK
By
leveraging its investment portfolio, the Fund creates an opportunity for increased net income or capital appreciation. However,
the use of leverage also involves risks, which can be significant. These risks include the possibility that the value of the assets
acquired with such borrowing decreases although the Fund’s liability is fixed, greater volatility in the Fund’s NAV
and the market price of the Fund’s Common Shares and higher expenses. Since the Advisor’s fee is based upon a percentage
of the Fund’s managed assets, the Advisor’s fee will be higher if the Fund is leveraged and the Advisor will have
an incentive to leverage the Fund. The Board will monitor this potential conflict. The Advisor intends to leverage the Fund only
when it believes that the potential return on the additional investments acquired through the use of leverage is likely to exceed
the costs incurred in connection with the offering.
The
Fund is authorized to utilize leverage through borrowings, reinvestment of securities lending collateral or reverse repurchase
agreement proceeds, and/or the issuance of preferred shares, including the issuance of debt securities. The Fund is party to the
LA as described in “—Description of Capital Structure—Liquidity Facility.”
The
Fund utilizes the LA to increase its assets available for investment. When the Fund leverages its assets, Common Shareholders
bear the fees associated with the liquidity facility and have the potential to benefit or be disadvantaged from the use of leverage.
In addition, the fee paid to the Advisor is calculated on the basis of the Fund’s average daily managed assets, including
proceeds from borrowings and/or the issuance of preferred shares, so the fee will be higher when leverage is utilized, which may
create an incentive for the Advisor to employ financial leverage. Consequently, the Fund and the Advisor may have differing interests
in determining whether to leverage the Fund’s assets. Leverage creates risks that may adversely affect the return for the
Common Shareholders, including:
|
•
|
the
likelihood of greater volatility of NAV and market price of Common Shares;
|
|
•
|
fluctuations
in the interest rate paid for the use of the LA;
|
|
•
|
increased
operating costs, which may reduce the Fund’s total return;
|
|
•
|
the
potential for a decline in the value of an investment acquired through leverage, while
the Fund’s obligations under such leverage remains fixed; and
|
|
•
|
the
Fund is more likely to have to sell securities in a volatile market in order to meet
asset coverage or other debt compliance requirements.
|
To
the extent the returns derived from securities purchased with proceeds received from leverage exceed the cost of leverage, the
Fund’s distributions may be greater than if leverage had not been used. Conversely, if the returns from the securities purchased
with such proceeds are not sufficient to cover the cost of leverage, the amount available for
distribution
to Common Shareholders will be less than if leverage had not been used. In the latter case, the Advisor, in its best judgment,
may nevertheless determine to maintain the Fund’s leveraged position if it deems such action to be appropriate. The costs
of a borrowing program and/or an offering of preferred shares would be borne by Common Shareholders and consequently would result
in a reduction of the NAV of Common Shares.
In
addition to the risks created by the Fund’s use of leverage, the Fund is subject to the risk that the liquidity facility
agreement is terminated due to the occurrence of one or more events of default under the LA. If the LA is terminated in such circumstances,
the Fund would be subject to additional risk that it would be unable to timely, or at all, obtain replacement financing. The Fund
might also be required to de-leverage, selling securities at a potentially inopportune time and incurring tax consequences. Further,
the Fund’s ability to generate income from the use of leverage would be adversely affected.
The
Fund may be required to maintain minimum average balances in connection with borrowings or to pay a commitment or other fee to
maintain a liquidity facility; either of these requirements will increase the cost of borrowing over the stated interest rate.
To the extent that the Fund borrows through the use of reverse repurchase agreements, it would be subject to a risk that the value
of the portfolio securities transferred may substantially exceed the purchase price received by the Fund under the reverse repurchase
agreement transaction. Alternatively, during the life of any reverse repurchase agreement transaction, the Fund may be required
to transfer additional securities if the market value of those securities initially transferred declines. In addition, capital
raised through borrowing or the issuance of preferred shares will be subject to interest costs or dividend payments that may or
may not exceed the income and appreciation on the assets purchased. The issuance of additional classes of preferred shares involves
offering expenses and other costs, which will be borne by the Common Shareholders, and may limit the Fund’s freedom to pay
dividends on Common Shares or to engage in other activities.
The
Fund may be subject to certain restrictions on investments imposed by guidelines of one or more nationally recognized statistical
rating organizations which may issue ratings for the preferred shares or short-term debt instruments issued by the Fund. These
guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940
Act. Certain types of borrowings may result in the Fund being subject to covenants in credit agreements, including those relating
to asset coverage, borrowing base and portfolio composition requirements and additional covenants that may affect the Fund’s
ability to pay dividends and distributions on Common Shares in certain instances. The Fund also may be required to pledge its
assets to the lenders in connection with certain types of borrowing. Under the current LA, the Fund is subject to covenants that
include, but are not limited to, certain minimum net asset value and collateral requirements, as well as a requirement to provide
timely certain financial information to the lender. The Advisor does not anticipate that these covenants or restrictions will
adversely affect its ability to manage the Fund’s portfolio in accordance with the Fund’s investment objectives and
principal investment strategies. Due to these covenants or restrictions, the Fund may be forced to liquidate investments at times
and at prices that are not favorable to the Fund, or the Fund may be forced to forego investments that the Advisor otherwise views
as favorable.
The
extent that the Fund employs leverage, if any, will depend on many factors, the most important of which are investment outlook,
market conditions and interest rates. Successful use of a leveraging strategy depends on the Advisor’s ability to predict
correctly interest rates and market movements. There is no assurance that a leveraging strategy will be successful during any
period in which it is employed.
LIBOR
DISCONTINUATION RISK
The
LA utilizes LIBOR as the reference or benchmark rate for interest rate calculations. LIBOR is a measure of the average interest
rate at which major global banks can borrow from one another. Following allegations of rate manipulation and concerns regarding
its thin liquidity, in July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will stop encouraging
banks to provide the quotations needed to sustain LIBOR. The ICE Benchmark Administration Limited, the administrator of LIBOR,
is expected to cease publishing most LIBOR maturities, including some US LIBOR maturities, on December 31, 2021, and the remaining
and most liquid US LIBOR maturities on June 30, 2023. Before the end of 2021, it is expected that market participants such as
the fund and SSB will transition to the use of alternative reference or benchmark rates. However, although regulators have encouraged
the development and adoption of alternative rates such as the Secured Overnight Financing Rate (“SOFR”), there is
currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate.
Although
the transition process away from LIBOR has become increasingly well-defined in advance of the anticipated discontinuation dates,
the impact on the LA remains uncertain. It is expected that market participants will amend financial instruments referencing LIBOR,
such as the LA, to include fallback provisions and other measures that contemplate the discontinuation of LIBOR or other similar
market disruption events, but neither the effect of the transition process nor the viability of such measures is known. To facilitate
the transition of legacy derivatives contracts referencing LIBOR, the International Swaps and Derivatives Association, Inc. launched
a protocol to incorporate fallback provisions. However, there are obstacles to converting certain longer term securities and transactions
to a new benchmark or benchmarks and the effectiveness of one alternative reference rate versus multiple alternative reference
rates in new or existing financial instruments and products has not been determined. Certain proposed replacement rates to LIBOR,
such as SOFR, which is a broad measure of secured overnight US Treasury repo rates, are materially different from LIBOR, and changes
in the applicable spread for financial instruments transitioning away from LIBOR will need to be made to accommodate the differences.
Furthermore, the risks associated with the expected discontinuation of LIBOR and transition to replacement rates may be exacerbated
if an orderly transition to an alternative reference rate is not completed in a timely manner.
As
market participants transition away from LIBOR, LIBOR’s usefulness may deteriorate. The transition process may lead to increased
volatility and illiquidity in markets that currently rely on LIBOR to determine interest rates. LIBOR’s deterioration may
adversely affect the liquidity and/or market value of securities that use LIBOR as a benchmark interest rate. The use of an alternative
reference rate, or the transition process to an alternative reference rate, may result in increases to the interest paid by the
fund pursuant to the LA and, therefore, may adversely affect the fund’s performance.
MANAGEMENT
RISK
The
Fund is subject to management risk because it relies on the Subadvisor’s ability to pursue the Fund’s investment objectives.
The Subadvisor applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no
guarantee that it will produce the desired results. The Subadvisor’s securities selections and other investment decisions
might produce a loss or cause the Fund to underperform when compared to other funds with similar investment goals. If one or more
key individuals leave the employ of the Subadvisor, then the Subadvisor may not be able to hire qualified replacements, or may
require an extended time to do so. This could prevent the Fund from achieving its investment objectives.
MARKET
DISCOUNT RISK
The
Fund’s Common Shares will be offered only when Common Shares of the Fund are trading at a price equal to or above the Fund’s
NAV per Common Share plus the per Common Share amount of commissions. As with any security, the market value of the Common Shares
may increase or decrease from the amount initially paid for the Common Shares. The Fund’s Common Shares have traded at both
a premium and at a discount to NAV. The shares of closed-end management investment companies frequently trade at a discount from
their NAV. This characteristic is a risk separate and distinct from the risk that the Fund’s NAV could decrease as a result
of investment activities. Investors bear a risk of loss to the extent that the price at which they sell their shares is lower
in relation to the Fund’s NAV than at the time of purchase, assuming a stable NAV.
NATURAL
DISASTERS AND ADVERSE WEATHER CONDITIONS
Certain
areas of the world historically have been prone to major natural disasters, such as hurricanes, earthquakes, typhoons, flooding,
tidal waves, tsunamis, erupting volcanoes, wildfires or droughts, and have been economically sensitive to environmental events.
Such disasters, and the resulting damage, could have a severe and negative impact on the Fund’s investment portfolio and,
in the longer term, could impair the ability of issuers in which the Fund invests to conduct their businesses in the manner normally
conducted. Adverse weather conditions also may have a particularly significant negative effect on issuers in the agricultural
sector and on insurance companies that insure against the impact of natural disasters.
SECONDARY
MARKET FOR THE COMMON SHARES
The
issuance of new Common Shares may have an adverse effect on the secondary market for the Common Shares. When Common Shares are
trading at a premium, the Fund may issue new Common Shares of the Fund. The increase in the amount of the Fund’s outstanding
Common Shares resulting from the offering of new Common Shares may put
downward
pressure on the market price for the Common Shares of the Fund. Common Shares will not be issued at any time when Common Shares
are trading at a price lower than a price equal to the Fund’s NAV per Common Share plus the per Common Share amount of commissions.
The
Fund also issues Common Shares through its dividend reinvestment plan. Common Shares may be issued under the plan at a discount
to the market price for such Common Shares, which may put downward pressure on the market price for Common Shares of the Fund.
The
voting power of current Common Shareholders will be diluted to the extent that such shareholders do not purchase shares in any
future Common Share offerings or do not purchase sufficient shares to maintain their percentage interest. In addition, if the
proceeds of such offering are unable to be invested as intended, the Fund’s per Common Share distribution may decrease (or
may consist of return of capital) and the Fund may not participate in market advances to the same extent as if such proceeds were
fully invested as planned.
TAX
RISK
To
qualify for the special tax treatment available to regulated investment companies, the Fund must: (i) derive at least 90% of its
annual gross income from certain kinds of investment income; (ii) meet certain asset diversification requirements at the end of
each quarter; and (iii) distribute in each taxable year at least 90% of its net investment income (including net interest income
and net short term capital gain). If the Fund failed to meet any of these requirements, subject to the opportunity to cure such
failures under applicable provisions of the Code, the Fund would be subject to U.S. federal income tax at regular corporate rates
on its taxable income, including its net capital gain, even if such income were distributed to its shareholders. All distributions
by the Fund from earnings and profits, including distributions of net capital gain (if any), would be taxable to the shareholders
as ordinary income. To the extent designated by the Fund, such distributions generally would be eligible (i) to be treated as
qualified dividend income in the case of individual and other non-corporate shareholders and (ii) for the dividends received deduction
in the case of corporate shareholders, provided that in each case the shareholder meets applicable holding period requirements.
In addition, in order to requalify for taxation as a regulated investment company, the Fund might be required to recognize unrealized
gain, pay substantial taxes and interest, and make certain distributions. See “U.S. Federal Income Tax Matters.”
The
tax treatment and characterization of the Fund’s distributions may vary significantly from time to time due to the nature
of the Fund’s investments. The ultimate tax characterization of the Fund’s distributions in a calendar year may not
finally be determined until after the end of that calendar year. The Fund may make distributions during a calendar year that exceed
the Fund’s net investment income and net realized capital gain for that year. In such a situation, the amount by which the
Fund’s total distributions exceed net investment income and net realized capital gain generally would be treated as a return
of capital up to the amount of the Common Shareholder’s tax basis in his or her Common Shares, with any amounts exceeding
such basis treated as gain from the sale of his or her Common Shares. The Fund’s income distributions that qualify for favorable
tax treatment may be affected by the Internal Revenue Service’s (“IRS”) interpretations of the Code and future
changes in tax laws and regulations. See “U.S. Federal Income Tax Matters.”
No
assurance can be given as to what percentage of the distributions paid on Common Shares, if any, will consist of long-term capital
gain or what the tax rates on various types of income will be in future years. See “U.S. Federal Income Tax Matters.”
Strategy
Risks
BRADY
BONDS RISK
Brady
Bonds may involve a high degree of risk, may be in default or present the risk of default. Agreements implemented under the Brady
Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with
its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange
of outstanding commercial bank debt for bonds issued at 100% of face value of such debt, bonds issued at a discount of face value
of such debt, bonds bearing an interest rate which increases over time and bonds issued in exchange for the advancement of new
money by existing lenders. Certain Brady Bonds have been collateralized as to principal due at maturity by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors
until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations’
reserves. In addition, the first two or three interest payments on certain types of Brady Bonds may be
collateralized
by cash or securities agreed upon by creditors. Although Brady Bonds may be collateralized by U.S. government securities, repayment
of principal and interest is not guaranteed by the U.S. government.
CORPORATE
DEBT SECURITIES RISK
Corporate
debt obligations are subject to the risk of an issuer’s inability to meet principal and interest payments on the obligations
and also may be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
CREDIT
AND COUNTERPARTY RISK
This
is the risk that the issuer or guarantor of a fixed-income security, the counterparty to an over-the-counter (OTC) derivatives
contract (see “Hedging, derivatives, and other strategic transactions risk”), or a borrower of the Fund’s securities
will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. Credit
risk associated with investments in fixed-income securities relates to the ability of the issuer to make scheduled payments of
principal and interest on an obligation. A fund that invests in fixed-income securities is subject to varying degrees of risk
that the issuers of the securities will have their credit ratings downgraded or will default, potentially reducing the fund’s
share price and income level. Nearly all fixed-income securities are subject to some credit risk, which may vary depending upon
whether the issuers of the securities are corporations, domestic or foreign governments, or their subdivisions or instrumentalities.
U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by
the full faith and credit of the United States; the ability to borrow from the U.S. Treasury; only by the credit of the issuing
U.S. government agency, instrumentality, or corporation; or otherwise supported by the United States. For example, issuers of
many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage
Association (Fannie Mae), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by congressional
appropriations, and their fixed-income securities, including asset-backed and mortgage-backed securities, are neither guaranteed
nor insured by the U.S. government. An agency of the U.S. government has placed Fannie Mae and Freddie Mac into conservatorship,
a statutory process with the objective of returning the entities to normal business operations. It is unclear what effect this
conservatorship will have on the securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, these securities are
subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States
(e.g., U.S. Treasury bonds). When a fixed-income security is not rated, a manager may have to assess the risk of the security
itself. Asset-backed securities, whose principal and interest payments are supported by pools of other assets, such as credit
card receivables and automobile loans, are subject to further risks, including the risk that the obligors of the underlying assets
default on payment of those assets.
Funds
that invest in below-investment-grade securities, also called junk bonds (e.g., fixed-income securities rated Ba or lower by Moody’s
Investors Service, Inc. or BB or lower by Standard & Poor’s Ratings Services, at the time of investment, or determined
by a manager to be of comparable quality to securities so rated) are subject to increased credit risk. The sovereign debt of many
foreign governments, including their subdivisions and instrumentalities, falls into this category. Below-investment-grade securities
offer the potential for higher investment returns than higher-rated securities, but they carry greater credit risk: their issuers’
continuing ability to meet principal and interest payments is considered speculative, they are more susceptible to real or perceived
adverse economic and competitive industry conditions, and they may be less liquid than higher-rated securities.
In
addition, the Fund is exposed to credit risk to the extent that it makes use of OTC derivatives (such as forward foreign currency
contracts and/or swap contracts) and engages to a significant extent in the lending of fund securities or the use of repurchase
agreements. OTC derivatives transactions can be closed out with the other party to the transaction. If the counterparty defaults,
the Fund will have contractual remedies, but there is no assurance that the counterparty will be able to meet its contractual
obligations or that, in the event of default, the Fund will succeed in enforcing them. A fund, therefore, assumes the risk that
it may be unable to obtain payments owed to it under OTC derivatives contracts or that those payments may be delayed or made only
after the fund has incurred the costs of litigation. While the manager intends to monitor the creditworthiness of contract counterparties,
there can be no assurance that the counterparty will be in a position to meet its obligations, especially during unusually adverse
market conditions.
EQUITY
SECURITIES RISK
Common
and preferred stocks represent equity ownership in a company. Stock markets are volatile. The price of equity securities will
fluctuate, and can decline and reduce the value of the Fund investing in equities. The price of equity securities fluctuates based
on changes in a company’s financial condition and overall market and economic conditions. The value of equity securities
purchased by the Fund could decline if the financial condition of the companies in which the Fund is invested declines, or if
overall market and economic conditions deteriorate. An issuer’s financial condition could decline as a result of poor management
decisions, competitive pressures, technological obsolescence, undue reliance on suppliers, labor issues, shortages, corporate
restructurings, fraudulent disclosures, or other factors. Changes in the financial condition of a single issuer can impact the
market as a whole.
Even
a fund that invests in high-quality, or blue chip, equity securities, or securities of established companies with large market
capitalizations (which generally have strong financial characteristics), can be negatively impacted by poor overall market and
economic conditions. Companies with large market capitalizations may also have less growth potential than smaller companies and
may be less able to react quickly to changes in the marketplace.
The
Fund generally does not attempt to time the market. Because of its exposure to equities, the possibility that stock market prices
in general will decline over short or extended periods subjects the Fund to unpredictable declines in the value of its investments,
as well as periods of poor performance.
PREFERRED
AND CONVERTIBLE SECURITIES RISK. Unlike interest on debt securities, preferred stock dividends are payable only if
declared by the issuer’s board. Also, preferred stock may be subject to optional or mandatory redemption provisions. The
market values of convertible securities tend to fall as interest rates rise and rise as interest rates fall. The value of convertible
preferred stock can depend heavily upon the value of the security into which such convertible preferred stock is converted, depending
on whether the market price of the underlying security exceeds the conversion price.
FIXED-INCOME
SECURITIES RISK
Fixed-income
securities are generally subject to two principal types of risk, as well as other risks described below: (1) interest-rate risk
and (2) credit quality risk.
Additional
risks regarding lower-rated foreign government fixed-income securities. Lower-rated foreign government fixed-income securities
are subject to the risks of investing in foreign countries described under “Foreign securities risk.” In addition,
the ability and willingness of a foreign government to make payments on debt when due may be affected by the prevailing economic
and political conditions within the country. Emerging-market countries may experience high inflation, interest rates, and unemployment,
as well as exchange-rate fluctuations which adversely affect trade and political uncertainty or instability. These factors increase
the risk that a foreign government will not make payments when due.
Credit
quality risk. Fixed-income securities are subject to the risk that the issuer of the security will not repay all or a portion
of the principal borrowed and will not make all interest payments. If the credit quality of a fixed-income security deteriorates
after the Fund has purchased the security, the market value of the security may decrease and lead to a decrease in the value of
the fund’s investments. An issuer’s credit quality could deteriorate as a result of poor management decisions, competitive
pressures, technological obsolescence, undue reliance on suppliers, labor issues, shortages, corporate restructurings, fraudulent
disclosures, or other factors. Funds that may invest in lower-rated fixed-income securities, commonly referred to as junk securities,
are riskier than funds that may invest in higher-rated fixed-income securities. Additional information on the risks of investing
in investment-grade fixed-income securities in the lowest rating category and lower-rated fixed-income securities is set forth
below.
Interest-rate
risk. Fixed-income securities are affected by changes in interest rates. When interest rates decline, the market value of
fixed-income securities generally can be expected to rise. Conversely, when interest rates rise, the market value of fixed-income
securities generally can be expected to decline. The longer the duration or maturity of a fixed-income security, the more susceptible
it is to interest-rate risk. Recent and potential future changes in government monetary policy may affect the level of interest
rates.
The
fixed-income securities market has been and may continue to be negatively affected by the novel coronavirus (COVID-19) pandemic.
As with other serious economic disruptions, governmental authorities and regulators are responding to this crisis with
significant
fiscal and monetary policy changes, including considerably lowering interest rates, which, in some cases could result in negative
interest rates. These actions, including their possible unexpected or sudden reversal or potential ineffectiveness, could further
increase volatility in securities and other financial markets and reduce market liquidity. To the extent the fund has a bank deposit
or holds a debt instrument with a negative interest rate to maturity, the fund would generate a negative return on that investment.
Similarly, negative rates on investments by money market funds and similar cash management products could lead to losses on investments,
including on investments of the fund’s uninvested cash.
Investment-grade
fixed-income securities in the lowest rating category risk. Investment-grade fixed-income securities in the lowest rating
category (such as Baa by Moody’s Investors Service, Inc. or BBB by Standard and Poor’s Ratings Services or Fitch Ratings,
as applicable, and comparable unrated securities) involve a higher degree of risk than fixed-income securities in the higher rating
categories. While such securities are considered investment-grade quality and are deemed to have adequate capacity for payment
of principal and interest, such securities lack outstanding investment characteristics and have speculative characteristics as
well. For example, changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher-grade securities.
Prepayment
of principal risk. Many types of debt securities, including floating-rate loans, are subject to prepayment risk. Prepayment
risk occurs when the issuer of a security can repay principal prior to the security’s maturity. Securities subject to prepayment
risk can offer less potential for gains when the credit quality of the issuer improves.
Recent
Fixed-Income Market Events. In addition to financial market volatility, relatively high market volatility and reduced liquidity
in credit and fixed-income markets may adversely affect many issuers worldwide. Actions taken by the U.S. Federal Reserve or foreign
central banks to stimulate or stabilize economic growth, such as decreases or increases in short-term interest rates, or interventions
in currency markets, could cause high volatility in the equity and fixed-income markets.
HEDGING,
DERIVATIVES AND OTHER STRATEGIC TRANSACTIONS RISK
The
ability of the Fund to utilize hedging, derivatives and other strategic transactions to benefit the Fund will depend in part on
the Subadvisor’s ability to predict pertinent market movements and market risk, counterparty risk, credit risk, interest-rate
risk and other risk factors, none of which can be assured. The skills required to utilize hedging and other strategic transactions
are different from those needed to select the Fund’s securities. Even if the Subadvisor only uses hedging and other strategic
transactions in the Fund primarily for hedging purposes or to gain exposure to a particular securities market, if the transaction
does not have the desired outcome, it could result in a significant loss to the Fund. The amount of loss could be more than the
principal amount invested. These transactions also may increase the volatility of the Fund and may involve a small investment
of cash relative to the magnitude of the risks assumed, thereby magnifying the impact of any resulting gain or loss. For example,
the potential loss from the use of futures can exceed the Fund’s initial investment in such contracts. In addition, these
transactions could result in a loss to the Fund if the counterparty to the transaction does not perform as promised.
The
Fund may invest in derivatives, which are financial contracts with a value that depends on, or is derived from, the value of underlying
assets, reference rates or indexes. Examples of derivative instruments include options, futures contracts, options on futures
contracts, foreign currency forward contracts and swap agreements (including, but not limited to, interest-rate swaps, total return
swaps, credit default swaps and swaps on exchange-traded funds). Derivatives may relate to stocks, bonds, interest rates, currencies
or currency exchange rates and related indexes. The Fund may use derivatives for many purposes, including for hedging, and as
a substitute for direct investment in securities or other assets. Derivatives may be used in a way to efficiently adjust the exposure
of the Fund to various securities, markets and currencies without the Fund actually having to sell existing investments and make
new investments. This generally will be done when the adjustment is expected to be relatively temporary or in anticipation of
effecting the sale of fund assets and making new investments over time. Further, since 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 have the potential for unlimited loss, regardless of the
size of the initial investment. When the Fund uses derivatives for leverage, investments in the Fund will tend to be more volatile,
resulting in larger gain or loss in response to market changes. For a description of the various derivative instruments the Fund
may utilize and certain risk measures the Fund may implement, refer to the SAI.
The
regulation of the U.S. and non-U.S. derivatives markets has undergone substantial change in recent years and such change may continue.
In particular, new Rule 18f-4 (the “Derivatives Rule”), adopted by the SEC on October
28,
2020, replaces the asset segregation regime of Investment Company Act Release No. 10666 (Release 10666) with a new framework for
the use of derivatives by registered funds. For funds using a significant amount of derivatives, , the Derivatives Rule mandates
a fund adopt and/or implement: (i) value at risk limitations in lieu of asset segregation requirements; (ii) a written derivatives
risk management program; (iii) new Board oversight responsibilities, and (iv) new reporting and recordkeeping requirements. The
Derivative Rule provides an exception for funds with derivative exposure to 10% of its net assets, excluding certain currency
and interest rate hedging transactions. In addition, the Derivatives Rule provides special treatment for reverse repurchase agreements,
similar financing transactions and unfunded commitment agreements. On August 19, 2022, the SEC will rescind Release 10666 and
withdraw letters and similar guidance addressing a fund’s use of derivatives and require funds to satisfy the requirements
of the Derivatives Rule. Unless a Fund elects to comply early with the Derivatives Rule, a Fund may continue to engage in certain
asset segregation practices in accordance with Release 10666 and related staff letters and guidance until August 19, 2022.
In
addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and regulation proposed to be promulgated thereunder
require many derivatives to be cleared and traded on an exchange, expand entity registration requirements, impose business conduct
requirements on dealers that enter into swaps with a pension plan, endowment, retirement plan or government entity, and required
banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them
altogether. Although the CFTC has released final rules relating to clearing, reporting, recordkeeping and registration requirements
under the legislation, many of the provisions are subject to further final rule making, and thus its ultimate impact remains unclear.
New regulations could, among other things, restrict the Fund’s ability to engage in derivatives transactions (for example,
by making certain types of derivatives transactions no longer available to the Fund) and/or increase the costs of such derivatives
transactions (for example, by increasing margin or capital requirements), and the Fund may be unable to fully execute its investment
strategies as a result. Limits or restrictions applicable to the counterparties with which the Fund engages in derivative transactions
also could prevent the Fund from using these instruments or affect the pricing or other factors relating to these instruments,
or may change the availability of certain investments.
At
any time after the date of this prospectus, legislation may be enacted that could negatively affect the assets of the Fund. Legislation
or regulation may change the way in which the Fund itself is regulated. The Adviser cannot predict the effects of any new governmental
regulation that may be implemented, and there can be no assurance that any new governmental regulation will not adversely affect
the Fund’s ability to achieve its investment objectives.
The
use of derivative instruments may involve risks different from, or potentially greater than, the risks associated with investing
directly in securities and other, more traditional assets. In particular, the use of derivative instruments exposes the Fund to
the risk that the counterparty to an OTC derivatives contract will be unable or unwilling to make timely settlement payments or
otherwise honor its obligations. OTC derivatives transactions typically can only be closed out with the other party to the transaction,
although either party may engage in an offsetting transaction that puts that party in the same economic position as if it had
closed out the transaction with the counterparty or may obtain the other party’s consent to assign the transaction to a
third party. If the counterparty defaults, the Fund will have contractual remedies, but there is no assurance that the counterparty
will meet its contractual obligations or that, in the event of default, the Fund will succeed in enforcing them. For example,
because the contract for each OTC derivatives transaction is individually negotiated with a specific counterparty, the Fund is
subject to the risk that a counterparty may interpret contractual terms (e.g., the definition of default) differently than the
Fund when the Fund seeks to enforce its contractual rights. If that occurs, the cost and unpredictability of the legal proceedings
required for the Fund to enforce its contractual rights may lead it to decide not to pursue its claims against the counterparty.
The Fund, therefore, assumes the risk that it may be unable to obtain payments owed to it under OTC derivatives contracts or that
those payments may be delayed or made only after the Fund has incurred the costs of litigation. While a manager intends to monitor
the creditworthiness of counterparties, there can be no assurance that a counterparty will meet its obligations, especially during
unusually adverse market conditions. To the extent the Fund contracts with a limited number of counterparties, the Fund’s
risk will be concentrated and events that affect the creditworthiness of any of those counterparties may have a pronounced effect
on the Fund. Derivatives are also subject to a number of other risks, including market risk and liquidity risk. Since the value
of derivatives is calculated and derived from the value of other assets, instruments, or references, there is a risk that they
will be improperly valued. Derivatives also involve the risk that changes in their value may not correlate perfectly with the
assets, rates, or indexes they are designed to hedge or closely track. Suitable derivatives transactions may not be available
in all circumstances. The Fund is also subject to the risk that the counterparty closes out the derivatives transactions upon
the occurrence of certain triggering events. In addition, a manager may determine not to use derivatives to hedge or otherwise
reduce risk exposure. Government legislation or regulation could affect the use of derivatives transactions
and
could limit the Fund’s ability to pursue its investment strategies.
The
following is a list of certain derivatives and other strategic transactions that the Fund may utilize and the main risks associated
with each of them:
|
•
|
Credit
default swaps. Counterparty risk, liquidity risk (i.e., the inability
to enter into closing transactions), interest-rate risk, settlement risk, risk of default
of the underlying reference obligation and risk of disproportionate loss are the principal
risks of engaging in transactions involving credit default swaps.
|
|
•
|
Foreign
currency forward contracts. Counterparty risk, liquidity risk (i.e., the
inability to enter into closing transactions), foreign currency risk and risk of disproportionate
loss are the principal risks of engaging in transactions involving foreign currency forward
contracts.
|
|
•
|
Foreign
currency swaps. Counterparty risk, liquidity risk (i.e., the inability
to enter into closing transactions), foreign currency risk and risk of disproportionate
loss are the principal risks of engaging in transactions involving foreign currency swaps.
|
|
•
|
Futures
contracts. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions) and risk of disproportionate loss are the principal risks
of engaging in transactions involving futures contracts.
|
|
•
|
Interest-rate
swaps. Counterparty risk, liquidity risk (i.e., the inability to enter
into closing transactions), interest-rate risk and risk of disproportionate loss are
the principal risks of engaging in transactions involving interest-rate swaps.
|
|
•
|
Options
and currency option. Counterparty risk, liquidity risk (i.e., the inability
to enter into closing transactions) and risk of disproportionate loss are the principal
risks of engaging in transactions involving options, including currency options. Counterparty
risk does not apply to exchange-traded options.
|
|
•
|
Swaps.
Counterparty risk, liquidity risk (i.e., the inability to enter into closing
transactions), interest-rate risk, settlement risk, risk of default of the underlying
reference obligation and risk of disproportionate loss are the principal risks of engaging
in transactions involving swaps, including credit default swaps and total return swaps.
|
ILLIQUID AND RESTRICTED SECURITIES RISK
The
Fund may have significant exposure to restricted securities. Restricted securities are securities with restrictions on public
resale, such as securities offered in accordance with an exemption under Rule 144A under the Securities Act of 1933 (the “1933
Act”), or commercial paper issued under Section 4(a)(2) of the 1933 Act. Restricted securities are often required to be
sold in private sales to institutional buyers, markets for restricted securities may or may not be well developed, and restricted
securities can be illiquid. The extent (if at all) to which a security may be sold or a derivative position closed without negatively
impacting its market value may be impaired by reduced market activity or participation, legal restrictions or other economic and
market impediments. Funds with principal investment strategies that involve investments in securities of companies with smaller
market capitalizations, foreign securities, derivatives, or securities with substantial market and/or credit risk tend to have
the greatest exposure to liquidity risk. Exposure to liquidity risk may be heightened for funds that invest in securities of emerging
markets and related derivatives that are not widely traded, and that may be subject to purchase and sale restrictions.
The
capacity of traditional dealers to engage in fixed-income trading has not kept pace with the bond market’s growth. As a
result, dealer inventories of corporate bonds, which indicate the ability to “make markets,” i.e., buy or sell a security
at the quoted bid and ask price, respectively, are at or near historic lows relative to market size. Because market makers provide
stability to fixed-income markets, the significant reduction in dealer inventories could lead to decreased liquidity and increased
volatility, which may become exacerbated during periods of economic or political stress.
LOWER-RATED
AND HIGH-YIELD FIXED-INCOME SECURITIES RISK
Lower-rated
fixed-income securities and high-yield fixed-income securities (both commonly known as “junk bonds”) are subject to
the same risks as other fixed-income securities but have greater credit quality risk and may be considered speculative. In addition,
lower-rated corporate debt securities (and comparable unrated securities) tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated corporate fixed-income securities. Issuers of lower-rated corporate debt
securities may also be highly leveraged, increasing the risk that principal and income will not be repaid. Lower-rated foreign
government fixed-income securities are subject to the risks of investing in foreign countries described under “Foreign securities
risk.” In addition, the ability and willingness of a foreign government to make payments on debt when due may be affected
by the prevailing economic and political conditions within the country. Emerging-market countries may experience high inflation,
interest rates and unemployment, as well as exchange rate fluctuations which adversely affect trade and political uncertainty
or instability. These factors increase the risk that a foreign government will not make payments when due.
Lower-rated
fixed-income securities are defined as securities rated below investment grade (such as Ba and below by Moody’s Investors
Service, Inc. and BB and below by Standard and Poor’s Ratings Services) (also called junk bonds). The general risks of investing
in these securities are as follows:
Risk
to principal and income. Investing in lower-rated fixed-income securities is considered speculative. While these securities
generally provide greater income potential than investments in higher-rated securities, there is a greater risk that principal
and interest payments will not be made. Issuers of these securities may even go into default or become bankrupt.
Price
volatility. The price of lower-rated fixed-income securities may be more volatile than securities in the higher-rated
categories. This volatility may increase during periods of economic uncertainty or change. The price of these securities is affected
more than higher-rated fixed-income securities by the market’s perception of their credit quality,
especially
during times of adverse publicity. In the past, economic downturns or increases in interest rates have, at times, caused more
defaults by issuers of these securities and may do so in the future. Economic downturns and increases in interest rates have an
even greater effect on highly leveraged issuers of these securities.
Liquidity.
The market for lower-rated fixed-income securities may have more limited trading than the market for investment-grade
fixed-income securities. Therefore, it may be more difficult to sell these securities, and these securities may have to be sold
at prices below their market value in order to meet redemption requests or to respond to changes in market conditions.
Dependence
on manager’s own credit analysis. While a manager may rely on ratings by established credit rating agencies, it
will also supplement such ratings with its own independent review of the credit quality of the issuer. Therefore, the assessment
of the credit risk of lower-rated fixed-income securities is more dependent on the manager’s evaluation than the assessment
of the credit risk of higher-rated securities.
Additional
risks regarding lower-rated corporate fixed-income securities. Lower-rated corporate fixed-income securities (and comparable
unrated securities) tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated
corporate fixed-income securities. Issuers of lower-rated corporate fixed-income securities may also be highly leveraged, increasing
the risk that principal and income will not be repaid.
MORTGAGE-BACKED
AND ASSET-BACKED SECURITIES RISK
Mortgage-backed
securities. Mortgage-backed securities represent participating interests in pools of residential mortgage loans, which
are guaranteed by the U.S. government, its agencies, or its instrumentalities. However, the guarantee of these types of securities
relates to the principal and interest payments, and not to the market value of such securities. In addition, the guarantee only
relates to the mortgage-backed securities held by a fund and not the purchase of shares of a fund.
Mortgage-backed
securities are issued by lenders, such as mortgage bankers, commercial banks, and savings and loan associations. Such securities
differ from conventional debt securities, which provide for the periodic payment of interest in fixed amounts (usually semiannually)
with principal payments at maturity or on specified dates. Mortgage-backed securities provide periodic payments which are, in
effect, a pass through of the interest and principal payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans. A mortgage-backed security will mature when all the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity and their expected maturities may vary when interest rates rise or fall.
When
interest rates fall, homeowners are more likely to prepay their mortgage loans. An increased rate of prepayments on the fund’s
mortgage-backed securities will result in an unforeseen loss of interest income to the fund as the fund may be required to reinvest
assets at a lower interest rate. Because prepayments increase when interest rates fall, the prices of mortgage-backed securities
do not increase as much as other fixed-income securities when interest rates fall.
When
interest rates rise, homeowners are less likely to prepay their mortgage loans. A decreased rate of prepayments lengthens the
expected maturity of a mortgage-backed security. Therefore, the prices of mortgage-backed securities may decrease more than prices
of other fixed-income securities when interest rates rise.
The
yield of mortgage-backed securities is based on the average life of the underlying pool of mortgage loans. The actual life of
any particular pool may be shortened by unscheduled or early payments of principal and interest. Principal prepayments may result
from the sale of the underlying property, or the refinancing or foreclosure of underlying mortgages. The occurrence of prepayments
is affected by a wide range of economic, demographic, and social factors, and, accordingly, it is not possible to accurately predict
the average life of a particular pool. The actual prepayment experience of a pool of mortgage loans may cause the yield realized
by the fund to differ from the yield calculated on the basis of the average life of the pool. In addition, if the Fund purchases
mortgage-backed securities at a premium, the premium may be lost in the event of early prepayment, which may result in a loss
to the Fund.
Prepayments
tend to increase during periods of falling interest rates, while during periods of rising interest rates, prepayments are likely
to decline. Monthly interest payments received by the Fund have a compounding effect, which will increase the yield to shareholders
as compared with debt obligations that pay interest semiannually. Because of the reinvestment of prepayments of principal at current
rates, mortgage-backed securities may be less
effective
than U.S. Treasury bonds of similar maturity at maintaining yields during periods of declining interest rates. Also, although
the value of debt securities may increase as interest rates decline, the value of these pass through types of securities may not
increase as much, due to their prepayment feature.
The
mortgage-backed securities market has been and may continue to be negatively affected by the novel coronavirus (COVID-19) pandemic.
The U.S. government, its agencies or its instrumentalities may implement initiatives in response to the economic impacts of the
novel coronavirus (COVID-19) pandemic applicable to federally backed mortgage loans. These initiatives could involve forbearance
of mortgage payments or suspension or restrictions of foreclosures and evictions. The Fund cannot predict with certainty the extent
to which such initiatives or the economic effects of the pandemic generally may affect rates of prepayment or default or adversely
impact the value of the Fund’s investments in securities in the mortgage industry as a whole.
Collateralized
mortgage obligations (CMOs). The Fund may invest in mortgage-backed securities called CMOs. CMOs are issued in separate
classes with different stated maturities. As the mortgage pool experiences prepayments, the pool pays off investors in classes
with shorter maturities first. By investing in CMOs, the Fund may manage the prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be substantially shorter than its stated maturity.
Asset-backed
securities. Asset-backed securities include interests in pools of debt securities, commercial or consumer loans, or other
receivables. The value of these securities depends on many factors, including changes in interest rates, the availability of information
concerning the pool and its structure, the credit quality of the underlying assets, the market’s perception of the servicer
of the pool, and any credit enhancement provided. In addition, asset-backed securities have prepayment risks similar to mortgage-backed
securities.
Mortgage
Dollar Rolls. Under a mortgage dollar roll, the Fund sells mortgage-backed securities for
delivery in the future (generally within 30 days) and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date.
At
the time the Fund enters into a mortgage dollar roll, it will maintain on its records liquid assets such as cash or U.S. government
securities equal in value to its obligations in respect of dollar rolls, and accordingly, such dollar rolls will not be considered
borrowings.
The
Fund may only enter into covered rolls. A “covered roll” is a specific type of dollar roll for which there is an offsetting
cash or cash equivalent security position that matures on or before the forward settlement date of the dollar roll transaction.
Dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase
price of those securities. While a mortgage dollar roll may be considered a form of leveraging, and may, therefore, increase fluctuations
in the Fund’s NAV per share, the Fund will cover the transaction as described above.
NON-U.S.
INVESTMENT RISK
Funds
that invest in securities traded principally in securities markets outside the United States. are subject to additional and more
varied risks, as the value of non-U.S. securities may change more rapidly and extremely than the value of U.S. securities. Less
information may be publicly available regarding non-U.S. issuers. Non-U.S. securities may be subject to non-U.S. taxes and may
be more volatile than U.S. securities. Currency fluctuations and political and economic developments may adversely impact the
value of foreign securities. The securities markets of many foreign countries are relatively small, with a limited number of companies
representing a small number of industries. Additionally, issuers of non-U.S. securities may not be subject to the same degree
of regulation as U.S. issuers. Reporting, accounting and auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There generally are higher commission rates on non-U.S. portfolio transactions, transfer taxes, higher custodial
costs and the possibility that non-U.S. taxes will be charged on dividends and interest payable on non-U.S. securities, some or
all of which may not be reclaimable. Also, adverse changes in investment or exchange control regulations (which may include suspension
of the ability to transfer currency or assets from a country), political changes or diplomatic developments could adversely affect
the Fund’s investments. In the event of nationalization, expropriation, confiscatory taxation, or other confiscation, the
Fund could lose a substantial portion of, or its entire investment, in a non-U.S. security. Some of the non-U.S. Investments securities
risks also are applicable to funds that invest a material portion of their assets in securities of non-U.S. issuers traded in
the United States.
Any
depositary receipts are subject to most of the risks associated with investing in foreign securities directly because the value
of a depository receipt is dependent upon the market price of the underlying foreign equity security. Depositary receipts are
also subject to liquidity risk.
Currency
risk. Currency risk is the risk that fluctuations in exchange rates may adversely affect the U.S. dollar value of the
Fund’s investments. Currency risk includes both the risk that currencies in which a fund’s investments are traded,
or currencies in which a fund has taken an active investment position, will decline in value relative to the U.S. dollar and,
in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged. Currency rates
in foreign countries may fluctuate significantly for a number of reasons, including the forces of supply and demand in the foreign
exchange markets, actual or perceived changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign
governments or central banks, or currency controls or political developments in the United States or abroad. Certain funds may
engage in proxy hedging of currencies by entering into derivative transactions with respect to a currency whose value is expected
to correlate to the value of a currency the fund owns or wants to own. This presents the risk that the two currencies may not
move in relation to one another as expected. In that case, the fund could lose money on its investment and also lose money on
the position designed to act as a proxy hedge. Certain funds may also take active currency positions and may cross-hedge currency
exposure represented by their securities into another foreign currency. This may result in a fund’s currency exposure being
substantially different than that suggested by its securities investments. All funds with foreign currency holdings and/or that
invest or trade in securities denominated in foreign currencies or related derivative instruments may be adversely affected by
changes in foreign currency exchange rates. Derivative foreign currency transactions (such as futures, forwards, and swaps) may
also involve leveraging risk, in addition to currency risk. Leverage may disproportionately increase a fund’s portfolio
losses and reduce opportunities for gain when interest rates, stock prices, or currency rates are changing.
REPURCHASE
AGREEMENT RISK
The
risk of a repurchase agreement transaction is limited to the ability of the seller to pay the agreed-upon sum on the delivery
date. In the event of bankruptcy or other default by the seller, the instrument purchased may decline in value, interest payable
on the instrument may be lost and there may be possible difficulties and delays in obtaining collateral and delays and expense
in liquidating the instrument. If an issuer of a repurchase agreement fails to repurchase the underlying obligation, the loss,
if any, would be the difference between the repurchase price and the underlying obligation’s market value. The Fund might
also incur certain costs in liquidating the underlying obligation. Moreover, if bankruptcy or other insolvency proceedings are
commenced with respect to the seller, realization upon the underlying obligation might be delayed or limited.
REVERSE
REPURCHASE AGREEMENT RISK
Reverse
repurchase agreement transactions involve the risk that the market value of the securities that the Fund is obligated to repurchase
under such agreements may decline below the repurchase price. Any fluctuations in the market value of either the securities transferred
to the other party or the securities in which the proceeds may be invested would affect the market value of the Fund’s assets,
thereby potentially increasing fluctuations in the market value of the Fund’s assets. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of proceeds received under
the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the
Fund’s obligation to repurchase the securities.
SOVEREIGN
DEBT OBLIGATIONS RISK
An
investment in debt obligations of non-U.S. governments and their political subdivisions (sovereign debt), whether denominated
in U.S. dollars or a foreign currency, involves special risks that are not present in corporate debt obligations. The non-U.S.
issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or pay interest when due, and the Fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt may be more volatile than prices of debt obligations of U.S.
issuers. In the past, certain non-U.S. countries have encountered difficulties in servicing their debt obligations, withheld payments
of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debt. A sovereign
debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative
size of the debt service burden, the sovereign debtor’s policy toward its principal international lenders and local political
constraints. Sovereign debtors also may be dependent on expected disbursements from non-U.S. governments, multilateral
agencies
and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic
reforms, achieve specified levels of economic performance or repay principal or interest when due may result in the cancellation
of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtor’s ability or willingness
to service its debts.
U.S.
GOVERNMENT SECURITIES RISK
The
Fund may invest in U.S. government securities issued or guaranteed by the U.S. government or by an agency or instrumentality of
the U.S. government. Not all U.S. government securities are backed by the full faith and credit of the United States. Some are
supported only by the credit of the issuing agency or instrumentality, which depends entirely on its own resources to repay the
debt. U.S. government securities that are backed by the full faith and credit of the United States include U.S. Treasuries and
mortgage-backed securities guaranteed by the Government National Mortgage Association. Securities that are only supported by the
credit of the issuing agency or instrumentality include Fannie Mae, FHLBs and Freddie Mac. See “Credit and counterparty
risk” for additional information on Fannie Mae and Freddie Mac securities.
WARRANTS
RISK
Warrants
are rights to purchase securities at specific prices and are valid for a specific period of time. Warrant prices do not necessarily
move parallel to the prices of the underlying securities, and warrant holders receive no dividends and have no voting rights or
rights with respect to the assets of an issuer. The price of a warrant may be more volatile than the price of its underlying security,
and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants cease to have value if not
exercised prior to the expiration date. These factors can make warrants more speculative than other types of investments.
Given
the risks described above, an investment in Common Shares may not be appropriate for all investors. You should carefully consider
your ability to assume these risks before making an investment in the Fund.
Management
of the Fund
TRUSTEES
The
overall management of the Fund, including supervision of the duties performed by the Advisor and the Subadvisor, is the responsibility
of the Board of Trustees, under the laws of The Commonwealth of Massachusetts and the 1940 Act. The Board of Trustees is responsible
for the Fund’s overall management, including adopting the investment and other policies of the Fund, electing and replacing
officers and selecting and supervising the Fund’s Advisor and Subadvisor. The names and business addresses of the Trustees
and officers of the Fund and their principal occupations and other affiliations during the past five years, as well as a description
of committees of the Board, are set forth under “Those Responsible for Management” in the SAI.
A
discussion regarding the basis for the Trustees’ approval of the Advisory Agreement and the Subadvisory Agreement (each,
as defined below) is available in the Fund’s most recent annual shareholder report for the period ended October 31.
THE
ADVISOR
The
Advisor is a Delaware limited liability company whose principal offices are located at 200 Berkeley Street, Boston, Massachusetts
02116 and serves as the Fund’s investment advisor. The Advisor is registered with the SEC as an investment advisor under
the Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Founded
in 1968, the Advisor is an indirect principally owned subsidiary of John Hancock Life Insurance Company (U.S.A.), a subsidiary
of Manulife Financial Corporation (“Manulife Financial” or the “Company”). Manulife Financial is the holding
company of The Manufacturers Life Insurance Company (the “Life Company”) and its subsidiaries. John Hancock Life Insurance
Company (U.S.A.) and its subsidiaries (“John Hancock”) today offer a broad range of financial products and services,
including whole, term, variable, and universal life insurance, as well as college savings products, mutual funds, fixed and variable
annuities, long-term care insurance and various forms of business insurance.
The
Advisor’s parent company has been helping individuals and institutions work toward their financial goals since 1862. The
Advisor offers investment solutions managed by institutional money managers, taking a disciplined team approach to portfolio management
and research, leveraging the expertise of seasoned investment professionals. The Advisor has been managing closed-end funds since
1971. As of December 31, 2020, the Advisor had total assets under management of approximately $153.3 billion.
Subject
to general oversight by the Board of Trustees, the Advisor manages and supervises the investment operations and business affairs
of the Fund. The Advisor selects, contracts with and compensates one or more subadvisors to manage all or a portion of the Fund’s
portfolio assets, subject to oversight by the Advisor. In this role, the Advisor has supervisory responsibility for managing the
investment and reinvestment of the Fund, as described in further detail below. In this role, the Advisor has supervisory responsibility
for managing the investment and reinvestment of the Fund as described in further detail below. The Advisor is responsible for
developing overall investment strategies for the Fund and overseeing and implementing the Fund’s continuous investment program
and provides a variety of advisory oversight and investment research services. The Advisor also provides management and transition
services associated with certain fund events (e.g., strategy, portfolio manager or subadvisor changes) and coordinates and oversees
services provided under other agreements.
The
Advisor has ultimate responsibility to oversee a subadvisor and recommended to the Board of Trustees its hiring, termination,
and replacement. In this capacity, the Advisor, among other things: (i) monitors on a daily basis the compliance of the subadvisor
with the investment objectives and related policies of the fund; (ii) monitors significant changes that may impact the subadvisor’s
overall business and regularly performs due diligence reviews of the subadvisor; (iii) reviews the performance of the subadvisor;
and (iv) reports periodically on such performance to the Board of Trustees. The Advisor employs a team of investment professionals
who provide these ongoing research and monitoring services.
The
Advisor has contractually agreed to waive a portion of its management fee and/or reimburse expenses for certain funds of the John
Hancock group of funds complex, including the fund (the participating portfolios). The waiver equals, on an annualized basis,
0.0100% of that portion of the aggregate net assets of all the participating portfolios that exceeds $75 billion but is less than
or equal to $125 billion; 0.0125% of that portion of the aggregate net assets of all the participating portfolios that exceeds
$125 billion but is less than or equal to $150 billion; 0.0150% of that portion of the aggregate net assets of all the participating
portfolios that exceeds $150 billion but is less than or equal to $175 billion; 0.0175% of that portion of the aggregate net assets
of all the participating portfolios that exceeds $175 billion but is less than or equal to $200 billion; 0.0200% of that portion
of the aggregate net assets of all the participating portfolios that exceeds $200 billion but is less than or equal to $225 billion;
and 0.0225% of that portion of the aggregate net assets of all the participating portfolios that exceeds $225 billion. The amount
of the reimbursement is calculated daily and allocated among all the participating portfolios in proportion to the daily net assets
of each fund. During the year ended October 31, 2020, this waiver amounted to 0.01% of the fund’s average daily net assets.
This arrangement expires on July 31, 2022, unless renewed by mutual agreement of the fund and the Advisor based upon a determination
that this is appropriate under the circumstances at that time.
Manulife
Financial Corporation is a leading international financial services group with principal operations in Asia, Canada and the United
States. Operating primarily as John Hancock in the United States and Manulife elsewhere, it provides financial protection products
and advice, insurance, as well as wealth and asset management services through its extensive network of solutions for individuals,
groups and institutions. As of December 31, 2020, it had over C$1.3 trillion (US$1.0 trillion) in assets under management and
administration. Its global headquarters are in Toronto, Canada, and it trades as ‘MFC’ on the Toronto Stock Exchange,
New York Stock Exchange (the “NYSE”), and the Philippine Stock Exchange, and under '945' in Hong Kong. Manulife Financial
Corporation can be found on the Internet at manulife.com.
Advisory
Agreement. The Fund entered into an investment management contract dated July 1, 2009 (the “Advisory Agreement”)
with the Advisor. As compensation for its advisory services under the Advisory Agreement, the Advisor receives a fee from the
Fund, calculated and paid daily, at an annual rate of the Fund’s average daily managed assets. “Managed assets”
means, for the purposes of calculating the advisory fee, the total assets of the Fund (including any assets attributable to any
leverage that may be outstanding) minus the sum of accrued liabilities (other than liabilities representing financial leverage).
The liquidation preference of any preferred shares is not a liability.
Pursuant
to the Advisory Agreement and subject to the general supervision of the Trustees, the Advisor selects, contracts with, and compensates
the Subadvisor to manage the investments and determine the composition of the assets of the Fund. The Advisor does not itself
manage any of the Fund’s portfolio assets but has ultimate responsibility to oversee the Subadvisor and recommend its hiring,
termination and replacement. In this capacity, the Advisor
monitors
the Subadvisor’s management of the Fund’s investment operations in accordance with the investment objectives and related
investment policies of the Fund, reviews the performance of the Subadvisor and reports periodically on such performance to the
Board.
Service
Agreement. The Fund entered into a management-related service contract dated July 1, 2009 and re-executed on January 1,
2014 (the “Service Agreement”) with JHIM, under which the Fund receives Non-Advisory Services. These “Non-Advisory
Services” include, but are not limited to, legal, tax, accounting, valuation, financial reporting and performance, compliance,
service provider oversight, portfolio and cash management, project management office, EDGAR conversion and filing, graphic design,
and other services that are not investment advisory in nature. JHIM is reimbursed for its costs in providing Non-Advisory Services
to the Fund under the Service Agreement.
THE
SUBADVISOR
Subadvisory
Agreement. The Advisor entered into a Subadvisory Agreement dated December 31, 2005 with the Subadvisor (the “Subadvisory
Agreement”). The Subadvisor handles the fund’s portfolio management activities, subject to oversight by the Advisor.
The Subadvisor, organized in 1968, is a wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary
of Manulife Financial, a publicly held, Canadian-based company). As of December 31, 2020, the Subadvisor had total assets under
management of approximately $221.31 billion. The Subadvisor is located at 101 Huntington Avenue, Boston, Massachusetts 02199.
Under
the terms of the Subadvisory Agreement, the Subadvisor is responsible for managing the investment and reinvestment of the assets
of the Fund, subject to the supervision and control of the Board and the Advisor. For services rendered by the Subadvisor under
the Subadvisory Agreement, the Advisor (and not the Fund) pays the Subadvisor a fee.
PORTFOLIO
MANAGERS
Below
is a list of the Fund’s investment management team at the Subadvisor, listed in alphabetical order, which includes a brief
summary of their business careers during the past five years. These managers are jointly and primarily responsible for the day-to-day
management of the Fund’s portfolio. These managers are employed by the Subadvisor. For more details about these individuals,
including information about their compensation, other accounts they manage and any investments they may have in the Fund, see
the SAI.
John
F. Addeo, CFA
Chief
Investment Officer, US Fixed-Income, Manulife Investment Management (US) LLC since 2012
Investment
Officer, Portfolio Manager/Analyst, High Yield Bond Group, MFS Investment Management (1998—2012)
Began
business career in 1984
Joined
Fund team in 2013
Jeffrey
N. Given, CFA
Senior
Managing Director, Senior Portfolio Manager, Manulife Investment Management (US) LLC since 2012
Managing
Director, Manulife Investment Management(US) LLC (2005—2012)
Second
Vice President, John Hancock Investment Management LLC (1993—2005)
Began
business career in 1993
Joined
Fund team in 1999
Dennis
F. McCafferty, CFA
Managing
Director, Portfolio Manager, Manulife Investment Management (US) LLC since 2009
Investment
analyst, Manulife Investment Management (US) LLC (2008—2009)
Principal
and senior analyst, Pardus Capital Management (2005—2008)
Began
business career in 1995
Joined
Fund team in 2013
CUSTODIAN
AND TRANSFER AGENT
The
Fund’s portfolio securities are held pursuant to a custodian agreement between the Fund and State Street Bank and Trust
Company (“State Street” or the “Custodian”), State Street Financial Center, One Lincoln Street, Boston,
Massachusetts 02111. Under the custodian agreement, State Street performs custody, foreign custody manager and fund accounting
services.
Computershare
Trust Company, N.A., P.O. Box 505000, Louisville, KY 40233, is the transfer agent and dividend disbursing agent of the Fund.
Determination
of Net Asset Value
The
Fund’s net asset value per Common Share (“NAV”) is normally determined each business day at the close of regular
trading on the NYSE (typically 4:00 p.m. Eastern Time, on each business day that the NYSE is open) by dividing the Fund’s
net assets by the number of Common Shares outstanding. In case of emergency or other disruption resulting in the NYSE not opening
for trading or the NYSE closing at a time other than the regularly scheduled close, the NAV may be determined as of the regularly
scheduled close of the NYSE pursuant to the Fund's Valuation Policies and Procedures. The time at which shares and transactions
are priced and until which orders are accepted may vary to the extent permitted by the Securities and Exchange Commission and
applicable regulations. On holidays or other days when the NYSE is closed, the NAV is not calculated. Trading of securities that
are primarily listed on foreign exchanges may take place on weekends and U.S. business holidays on which the Fund’s NAV
is not calculated. Consequently, the Fund’s portfolio securities may trade and the NAV of the Fund’s Common Shares
may be significantly affected on days when a shareholder will not be able to purchase or sell the Fund’s Common Shares.
Portfolio
securities are valued by various methods that are generally described below. Portfolio securities also may be fair valued by the
Fund’s Pricing Committee in certain instances pursuant to procedures established by the Trustees. Equity securities are
generally valued at the last sale price or, for certain markets, the official closing price as of the close of the relevant exchange.
Securities not traded on a particular day are valued using last available bid prices. A security that is listed or traded on more
than one exchange is typically valued at the price on the exchange where the security was acquired or most likely will be sold.
In certain instances, the Pricing Committee may determine to value equity securities using prices obtained from another exchange
or market if trading on the exchange or market on which prices are typically obtained did not open for trading as scheduled, or
if trading closed earlier than scheduled, and trading occurred as normal on another exchange or market. Equity securities traded
principally in foreign markets are typically valued using the last sale price or official closing price in the relevant exchange
or market, as adjusted by an independent pricing vendor to reflect fair value. On any day a foreign market is closed and the NYSE
is open, any foreign securities will typically be valued using the last price or official closing price obtained from the relevant
exchange on the prior business day adjusted based on information provided by an independent pricing vendor to reflect fair value.
Debt obligations are typically valued based on evaluated prices provided by an independent pricing vendor. The value of securities
denominated in foreign currencies is converted into U.S. dollars at the exchange rate supplied by an independent pricing vendor.
Forward foreign currency contracts are valued at the prevailing forward rates which are based on foreign currency exchange spot
rates and forward points supplied by an independent pricing vendor. Exchange-traded options are valued at the mid-price of the
last quoted bid and ask prices. Futures contracts whose settlement prices are determined as of the close of the NYSE are typically
valued based on the settlement price while other futures contracts are typically valued at the last traded price on the exchange
on which they trade. Foreign equity index futures that trade in the electronic trading market subsequent to the close of regular
trading may be valued at the last traded price in the electronic trading market as of the close of the NYSE, or may be fair valued
based on fair value adjustment factors provided by an independent pricing vendor in order to adjust for events that may occur
between the close of foreign exchanges or markets and the close of the NYSE. Swaps and unlisted options are generally valued using
evaluated prices obtained from an independent pricing vendor. Shares of open-end investment companies that are not exchange-traded
funds (“ETFs”) held by the Fund are valued based on the NAVs of such other investment companies.
Pricing
vendors may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values, including transaction
data, broker-dealer quotations, credit quality information, general market conditions, news, and other factors and assumptions.
The Fund may receive different prices when it sells odd-lot positions
than
it would receive for sales of institutional round lot positions. Pricing vendors generally value securities assuming orderly transactions
of institutional round lot sizes, but the Fund may hold or transact in such securities in smaller, odd lot sizes.
The
Pricing Committee engages in oversight activities with respect to the Fund’s pricing vendors, which includes, among other
things, monitoring significant or unusual price fluctuations above predetermined tolerance levels from the prior day, back-testing
of pricing vendor prices against actual trades, conducting periodic due diligence meetings and reviews, and periodically reviewing
the inputs, assumptions and methodologies used by these vendors. Nevertheless, market quotations, official closing prices, or
information furnished by a pricing vendor could be inaccurate, which could lead to a security being valued incorrectly.
If
market quotations, official closing prices, or information furnished by a pricing vendor are not readily available or are otherwise
deemed unreliable or not representative of the fair value of such security because of market- or issuer-specific events, a security
will be valued at its fair value as determined in good faith by the Trustees. The Trustees are assisted in their responsibility
to fair value securities by the Fund’s Pricing Committee, and the actual calculation of a security’s fair value may
be made by the Pricing Committee acting pursuant to the procedures established by the Trustees. In certain instances, therefore,
the Pricing Committee may determine that a reported valuation does not reflect fair value, based on additional information available
or other factors, and may accordingly determine in good faith the fair value of the assets, which may differ from the reported
valuation.
Fair
value pricing of securities is intended to help ensure that the Fund’s NAV reflects the fair market value of the Fund’s
portfolio securities as of the close of regular trading on the NYSE (as opposed to a value that no longer reflects market value
as of such close). The use of fair value pricing has the effect of valuing a security based upon the price the Fund might reasonably
expect to receive if it sold that security in an orderly transaction between market participants, but does not guarantee that
the security can be sold at the fair value price. Further, because of the inherent uncertainty and subjective nature of fair valuation,
a fair valuation price may differ significantly from the value that would have been used had a readily available market price
for the investment existed and these differences could be material.
Regarding
the Fund’s investment in an open-end investment company that is not an ETF, which (as noted above) is valued at such investment
company’s NAV, the prospectus for such investment company explains the circumstances and effects of fair value pricing for
that investment company.
Distribution
Policy
The
Fund makes regular quarterly distributions to Common Shareholders sourced from the Fund’s cash available for distribution.
“Cash available for distribution” consists of the Fund’s (i) investment company taxable income, which includes
among other things, dividend and ordinary income after payment of Fund expenses, the excess of net short-term capital gain over
net long-term capital loss, and income from certain hedging and interest rate transactions and (ii) net long-term capital gain
(gain from the sale of capital assets held longer than one year). The Board may modify this distribution policy at any time without
obtaining the approval of Common Shareholders.
Expenses
of the Fund are accrued each day. To the extent that the Fund’s net investment income for any year exceeds the total quarterly
distributions paid during the year, the Fund may make a special distribution at or near year-end of such excess amount as may
be required. If it does, over time, all of the Fund’s investment company taxable income will be distributed.
If,
for any calendar year, as discussed above, the total distributions made exceed the Fund’s net investment taxable income
and net capital gain, the excess generally will be treated as a return of capital to each Common Shareholder (up to the amount
of the Common Shareholder’s basis in his or her Common Shares) and thereafter as gain from the sale of Common Shares. The
amount treated as a return of capital reduces the Common Shareholder’s adjusted basis in his or her Common Shares, thereby
increasing his or her potential gain or reducing his or her potential loss on the subsequent sale of his or her Common Shares.
Distributions in any year may include a substantial return of capital component.
Pursuant
to the requirements of the 1940 Act, in the event the Fund makes distributions from sources other than income, a notice will accompany
each quarterly distribution with respect to the estimated source of the distribution made. Such notices will describe the portion,
if any, of the quarterly dividend which, in the Fund’s good faith judgment, constitutes long-term capital gain, short-term
capital gain, net investment income or a return of capital. The
actual
character of such dividend distributions for U.S. federal income tax purposes, however, will only be determined finally by the
Fund at the close of its fiscal year, based on the Fund’s full year performance and its actual net investment company taxable
income and net capital gain for the year, which may result in a recharacterization of amounts distributed during such fiscal year
from the characterization in the quarterly estimates.
At
least annually, the Fund intends to distribute any net capital gain (which is the excess of net long-term capital gain over net
short-term capital loss) or, alternatively, to retain all or a portion of the year’s net capital gain and pay U.S. federal
income tax on the retained gain. As provided under U.S. federal tax law, Common Shareholders of record as of the end of the Fund’s
taxable year will include their attributable share of the retained gain in their income for the year as a long-term capital gain,
and will be entitled to a tax credit or refund for the tax deemed paid on their behalf by the Fund. The Fund may treat the cash
value of tax credit and refund amounts in connection with retained capital gain as a substitute for equivalent cash distributions.
The
tax treatment and characterization of the Fund’s distributions may vary substantially from time to time because of the varied
nature of the Fund’s investments. If the Fund’s total quarterly distributions in any year exceed the amount of its
net investment taxable income for the year, any such excess would be characterized as a return of capital for U.S. federal income
tax purposes to the extent not designated as a capital gain dividend. Distributions in any year may include a substantial return
of capital component. Under the 1940 Act, for any distribution that includes amounts from sources other than net income (calculated
on a book basis), the Fund is required to provide Common Shareholders a written statement regarding the components of such distribution.
Such a statement will be provided at the time of any distribution believed to include any such amounts. A return of capital is
a distribution to Common Shareholders that is not attributable to the Fund’s earnings but, represents a return of part of
the Common Shareholder’s investment. If the Fund’s distributions exceed the Fund’s current and accumulated earnings
and profits, such excess will be treated first as a return of capital to the extent of the shareholder’s tax basis in Common
Shares (thus reducing a shareholder’s adjusted tax basis in his or her Common Shares), and thereafter as capital gain assuming
Common Shares are held as a capital asset. Upon the sale of Common Shares, a shareholder generally will recognize capital gain
or loss equal to the difference between the amount realized on the sale and the shareholder’s adjusted tax basis in Common
Shares sold. For example, in year one, a Common Shareholder purchased 100 shares of the Fund at $10 per Share. In year two, the
Common Shareholder received a $1-per-share return of capital distribution, which reduced the basis in each share by $1, to give
the Common Shareholder an adjusted basis of $9 per share. In year three, the Common Shareholder sells the 100 shares for $15 per
Share. Assuming no other transactions during this period, a Common Shareholder would have a capital gain in year three of $6 per
share ($15 minus $9) for a total capital gain of $600.
The
1940 Act currently limits the number of times the Fund may distribute long-term capital gain in any tax year, which may increase
the variability of the Fund’s distributions and result in certain distributions being composed more heavily of long-term
capital gain eligible for favorable income tax rates. In the future, the Advisor may seek Board approval to implement a managed
distribution plan for the Fund. The managed distribution plan would be implemented pursuant to an exemptive order previously granted
by the SEC, which provides an exemption from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder to permit the Fund to include
long-term capital gain as a part of its regular distributions to Common Shareholders more frequently than would otherwise be permitted
by the 1940 Act (generally once or twice per year). If the Fund implements a managed distribution plan, it would do so without
a vote of the Common Shareholders.
Distribution
rates are based on projected quarterly cash available for distribution, which may result in fluctuations in quarterly rates. As
a result, the distributions paid by the Fund for any particular quarter may be more or less than the amount of cash available
for distribution from that quarterly period. In certain circumstances, the Fund may be required to sell a portion of its investment
portfolio to fund distributions. Distributions will reduce the Common Shares’ NAV.
Common
Shareholders may automatically reinvest some or all of their distributions in additional Common Shares under the Fund’s
dividend reinvestment plan. See “Dividend Reinvestment Plan.”
Dividend
Reinvestment Plan
Pursuant
to the Fund’s Dividend Reinvestment Plan (the “Plan”), distributions of dividends and capital gain are automatically
reinvested in Common Shares by Computershare, Inc. (the “Plan Agent”). Every shareholder holding at least one full
share of the Fund is automatically enrolled in the Plan. Shareholders who do not participate in the Plan will receive all distributions
in cash.
If
the Fund declares a dividend or distribution payable either in cash or in Common Shares and the market price of shares on the
payment date for the distribution or dividend equals or exceeds the Fund’s NAV per share, the Fund will issue Common Shares
to participants at a value equal to the higher of NAV or 95% of the market price. The number of additional Common Shares to be
credited to each participant’s account will be determined by dividing the dollar amount of the distribution or dividend
by the higher of NAV or 95% of the market price. If the market price is lower than NAV, or if dividends or distributions are payable
only in cash, then participants will receive Common Shares purchased by the Plan Agent on participants’ behalf on the NYSE
or otherwise on the open market. If the market price exceeds NAV before the Plan Agent has completed its purchases, the average
per share purchase price may exceed NAV, resulting in fewer Common Shares being acquired than if the Fund had issued new Common
Shares.
There
are no brokerage charges with respect to Common Shares issued directly by the Fund. However, whenever shares are purchased or
sold on the NYSE or otherwise on the open market, each participant will pay a pro rata portion of brokerage trading fees,
currently $0.05 per share purchased or sold. Brokerage trading fees will be deducted from amounts to be invested.
The
reinvestment of dividends and net capital gain distributions does not relieve participants of any income tax that may be payable
on such dividends or distributions even though cash is not received by the participant.
Shareholders
participating in the Plan may buy additional Common Shares of the Fund through the Plan at any time in amounts of at least $50
per investment, up to a maximum of $10,000, with a total calendar year limit of $100,000. Shareholders will be charged a $5 transaction
fee plus $0.05 per share brokerage trading fee for each order. Purchases of additional shares of the Fund will be made on the
open market. Shareholders who elect to utilize monthly electronic fund transfers to buy additional shares of the Fund will be
charged a $2 transaction fee plus $0.05 per share brokerage trading fee for each automatic purchase. Shareholders also can sell
Fund shares held in the Plan account at any time by contacting the Plan Agent by telephone, in writing or by visiting the Plan
Agent’s website at www.computershare.com/investor The Plan Agent will mail a check (less applicable brokerage trading fees)
on settlement date (two business days after the shares have been sold). If shareholders choose to sell shares through their stockbroker,
they will need to request that the Plan Agent electronically transfer those shares to their stockbroker through the Direct Registration
System.
Shareholders
participating in the Plan may elect to receive all distributions in cash by withdrawing from the Plan at any time by contacting
the Plan Agent by telephone, in writing or by visiting the Plan Agent’s website at www.computershare.com/investor. Such
termination will be effective immediately if the notice is received by the Plan Agent prior to any dividend or distribution record
date; otherwise, such termination will be effective on the first trading day after the payment date for such dividend or distribution,
with respect to any subsequent dividend or distribution. If you withdraw, your shares will be credited to your account; or, if
you wish, the Plan Agent will sell your full and fractional shares and send you the proceeds, less a transaction fee of $5.00
and less brokerage trading fees of $0.05 per share. If a shareholder does not maintain at least one whole share of common stock
in the Plan account, the Plan Agent may terminate such shareholder’s participation in the Plan after written notice. Upon
termination, shareholders will be sent a check for the cash value of any fractional share in the Plan account, less any applicable
broker commissions and taxes.
Shareholders
who hold at least one full share of the Fund may join the Plan by notifying the Plan Agent by telephone, in writing or by visiting
the Plan Agent’s website at www.computershare.com/investor. If received in proper form by the Plan Agent before the record
date of a dividend, the election will be effective with respect to all dividends paid after such record date. If you wish to participate
in the Plan and your shares are held in the name of a brokerage firm, bank or other nominee, please contact your nominee to see
if it will participate in the Plan for you. If you wish to participate in the Plan, but your brokerage firm, bank or other nominee
is unable to participate on your behalf, you will need to request that your shares be re-registered in your own name, or you will
not be able to participate. The Plan Agent will administer the Plan on the basis of the number of shares certified from time to
time by you as representing the total amount registered in your name and held for your account by your nominee.
Experience
under the Plan may indicate that changes are desirable. Accordingly, the Fund and the Plan Agent reserve the right to amend or
terminate the Plan. Participants generally will receive written notice at least 90 days before the effective date of any amendment.
In the case of termination, participants will receive written notice at least 90 days before the record date for the payment of
any dividend or distribution by the Fund.
All
correspondence or additional information about the Plan should be directed to Computershare, Inc. (Telephone: 800-852-0218 (within
the U.S. and Canada), 201-680-6578 (International Telephone Inquiries), and 201-680-6610 (For the Hearing Impaired (TDD)).
Closed-End
Fund Structure
Closed-end
funds differ from open-end management investment companies (which generally are referred to as “mutual funds”) in
that closed-end funds generally list their shares for trading on a securities exchange and do not redeem their shares at the option
of the shareholder. Mutual funds do not trade on securities exchanges and issue securities redeemable at the option of the shareholder.
The continuous outflows of assets in a mutual fund can make it difficult to manage the fund’s investments. Closed-end funds
generally are able to stay more fully invested in securities that are consistent with their investment objectives and also have
greater flexibility to make certain types of investments and to use certain investment strategies, such as financial leverage
and investments in illiquid securities. The Fund’s Common Shares are designed primarily for long-term investors; you should
not purchase Common Shares if you intend to sell them shortly after purchase.
Common
shares of closed-end funds frequently trade at prices lower than their NAV. Since inception, the market price of the Common Shares
has fluctuated and at times has traded below the Fund’s NAV and at times has traded above the Fund’s NAV. The Fund
cannot predict whether in the future the Common Shares will trade at, above or below NAV. In addition to NAV, the market price
of the Fund’s Common Shares may be affected by such factors as the Fund’s dividend stability, dividend levels, which
are in turn affected by expenses, and market supply and demand.
In
recognition of the possibility that Common Shares may trade at a discount from their NAV, and that any such discount may not be
in the best interest of Common Shareholders, the Board, in consultation with the Advisor, from time to time may review possible
actions to reduce any such discount. There can be no assurance that the Board will decide to undertake any of these actions or
that, if undertaken, such actions would result in Common Shares trading at a price equal to or close to NAV per Common Share.
In the event that the Fund conducts an offering of new Common Shares and such offering constitutes a “distribution”
under Regulation M, the Fund and certain of its affiliates may be subject to an applicable restricted period that could limit
the timing of any repurchases by the Fund.
U.S.
Federal Income Tax Matters
The
following discussion of U.S. federal income tax matters is based on the advice of K&L Gates LLP. The Fund has elected to be
treated and to qualify each year as a regulated investment company (a “RIC”) under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and diversification of its total assets and to distribute
substantially all of its net income and net short-term capital gain (after reduction by net long-term capital loss and any available
capital loss carryforwards) in accordance with the timing requirements imposed by the Code, so as to maintain its RIC status and
to avoid paying U.S. federal income or excise tax thereon. To the extent it qualifies for treatment as a RIC and satisfies the
above-mentioned distribution requirements, the Fund will not be subject to U.S. federal income tax on income paid to its shareholders
in the form of dividends or capital gain distributions.
At
least annually, the Fund intends to distribute any net capital gain (which is the excess of net long-term capital gain over net
short-term capital loss) or, alternatively, to retain all or a portion of the year’s net capital gain and pay U.S. federal
income tax on the retained gain. As provided under U.S. federal tax law, Common Shareholders of record as of the end of the Fund’s
taxable year will include their attributable share of the retained gain in their income for the year as long-term capital gain
(regardless of holding period in Common Shares), and will be entitled to a tax credit or refund for the tax paid on their behalf
by the Fund. Common Shareholders of record for the retained capital gain also will be entitled to increase their tax basis in
their Common Shares by an amount equal to the deemed distribution less the tax credit. Distributions of the Fund’s net capital
gain (“capital gain distributions”), if any, are taxable to Common Shareholders as long-term capital gain, regardless
of their holding period in Common Shares. Distributions of the Fund’s net realized short-term capital gain will be taxable
as ordinary income.
If,
for any calendar year, the Fund’s total distributions exceed the Fund’s current and accumulated earnings and profits,
the excess will be treated as a return of capital to each Common Shareholder (up to the amount of the Common Shareholder’s
basis in his or her Common Shares) and thereafter as gain from the sale of Common Shares (assuming Common Shares are held as a
capital asset). The amount treated as a return of capital reduces the Common Shareholder’s adjusted basis in his or her
Common Shares, thereby increasing his or her potential gain or reducing his or her potential loss on the subsequent sale or other
disposition of his or her Common Shares. See below for a summary of the current maximum tax rates applicable to long-term capital
gain (including capital gain distributions).
For
federal income tax purposes, the Fund is generally permitted to carry forward a net capital loss incurred in any taxable year,
for an unlimited period to offset net capital gains, if any, during its taxable years following the year of the loss. Capital
losses carried forward will retain their character as either short-term or long-term capital losses. To the extent subsequent
net capital gains are offset by such losses, they would not result in federal income tax liability to the Fund and would not be
distributed as such to shareholders.
To
qualify as a RIC for income tax purposes, the Fund must derive at least 90% of its annual gross income from dividends, interest,
payments with respect to securities loans, gain from the sale or other disposition of stock, securities or foreign currencies,
or other income (including, but not limited to, gain from options, futures or forward contracts) derived with respect to its business
of investing in stock, securities and currencies, and net income derived from an interest in a qualified publicly traded partnership.
A “qualified publicly traded partnership” is a publicly traded partnership that meets certain requirements with respect
to the nature of its income. To qualify as a RIC, the Fund must also satisfy certain requirements with respect to the diversification
of its assets. The Fund must have, at the close of each quarter of the taxable year, at least 50% of the value of its total assets
represented by cash, cash items, U.S. government securities, securities of other regulated investment companies, and other securities
that, in respect of any one issuer, do not represent more than 5% of the value of the assets of the Fund nor more than 10% of
the voting securities of that issuer. In addition, at those times not more than 25% of the value of the Fund’s assets can
be invested in securities (other than U.S. government securities or the securities of other regulated investment companies) of
any one issuer, or of two or more issuers, which the Fund controls and which are engaged in the same or similar trades or businesses
or related trades or businesses, or of one or more qualified publicly traded partnerships. If the Fund fails to meet the annual
gross income test described above, the Fund will nevertheless be considered to have satisfied the test if (i) (a) such failure
is due to reasonable cause and not due to willful neglect and (b) the Fund reports the failure, and (ii) the Fund pays an excise
tax equal to the excess non-qualifying income. If the Fund fails to meet the asset diversification test described above with respect
to any quarter, the Fund will nevertheless be considered to have satisfied the requirements for such quarter if the Fund cures
such failure within 6 months and either (i) such failure is de minimis or (ii) (a) such failure is due to reasonable cause
and not due to willful neglect and (b) the Fund reports the failure and pays an excise tax.
As
a RIC, the Fund generally will not be subject to federal income tax on its investment company taxable income (as that term is
defined in the Code, but without regard to the deductions for dividend paid) and net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, that it distributes in each taxable year to its shareholders, provided
that it distributes at least the sum of 90% of its investment company taxable income and 90% of its net tax-exempt interest income
for such taxable year. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment
company taxable income, net tax-exempt income and net capital gain. In order to avoid incurring a nondeductible 4% federal excise
tax obligation, the Code requires that the Fund distribute (or be deemed to have distributed) by December 31 of each calendar
year an amount at least equal to the sum of (i) 98% of its ordinary income for such year, (ii) 98.2% of its capital gain net income
(which is the excess of its realized net long-term capital gain over its realized net short-term capital loss), generally computed
on the basis of the one-year period ending on October 31 of such year, after reduction by any available capital loss carryforwards
and (iii) 100% of any ordinary income and capital gain net income from the prior year (as previously computed) that were not paid
out during such year and on which the Fund paid no U.S. federal income tax.
If
the Fund does not qualify as a RIC for any taxable year, the Fund’s taxable income will be subject to corporate income taxes,
and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to the
shareholder as ordinary income. Such distributions generally would be eligible (i) to be treated as qualified dividend income
in the case of individual and other non-corporate shareholders and (ii) for the dividends received deduction (“DRD”)
in the case of corporate shareholders. In addition, in order to requalify for taxation as a RIC, the Fund may be required to recognize
unrealized gain, pay substantial taxes and interest, and make certain distributions.
Certain
of the Fund’s investment practices are subject to special and complex U.S. federal income tax provisions that may, among
other things, (i) convert dividends that would otherwise constitute qualified dividend income into ordinary income, (ii) treat
dividends that would otherwise be eligible for the corporate DRD as ineligible for such treatment, (iii) disallow, suspend or
otherwise limit the allowance of certain loss or deductions, (iv) convert long-term capital gain into short-term capital gain
or ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited),
(vi) cause the Fund to recognize income or gain without a corresponding receipt of cash, (vii) adversely affect when a purchase
or sale of stock or securities is deemed to occur, (viii) adversely alter the characterization of certain complex financial transactions,
and (ix) produce income that will not qualify as good income for purposes of the income requirement that applies to RICs. While
it may not always be
successful
in doing so, the Fund will seek to avoid or minimize the adverse tax consequences of its investment practices.
The
Fund may recognize gain (but not loss) from a constructive sale of certain “appreciated financial positions” if the
Fund enters into a short sale, offsetting notional principal contract, or forward contract transaction with respect to the appreciated
position or substantially identical property. Appreciated financial positions subject to this constructive sale treatment include
interests (including options and forward contracts and short sales) in stock and certain other instruments. Constructive sale
treatment does not apply if the transaction is closed out not later than thirty days after the end of the taxable year in which
the transaction was initiated, and the underlying appreciated securities position is held unhedged for at least the next sixty
days after the hedging transaction is closed.
Gain
or loss from a short sale of property generally is considered as capital gain or loss to the extent the property used to close
the short sale constitutes a capital asset in the Fund’s hands. Except with respect to certain situations where the property
used to close a short sale has a long-term holding period on the date the short sale is entered into, gain on short sales generally
are short-term capital gain. A loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale,
“substantially identical property” has been held by the Fund for more than one year. In addition, entering into a
short sale may result in suspension of the holding period of “substantially identical property” held by the Fund.
Gain
or loss on a short sale generally will not be realized until such time as the short sale is closed. However, as described above
in the discussion of constructive sales, if the Fund holds a short sale position with respect to securities that have appreciated
in value, and it then acquires property that is the same as or substantially identical to the property sold short, the Fund generally
will recognize gain on the date it acquires such property as if the short sale were closed on such date with such property. Similarly,
if the Fund holds an appreciated financial position with respect to securities and then enters into a short sale with respect
to the same or substantially identical property, the Fund generally will recognize gain as if the appreciated financial position
were sold at its fair market value on the date it enters into the short sale. The subsequent holding period for any appreciated
financial position that is subject to these constructive sale rules will be determined as if such position were acquired on the
date of the constructive sale.
The
Fund will inform Common Shareholders of the source and tax status of all distributions promptly after the close of each calendar
year.
Selling
Common Shareholders generally will recognize gain or loss in an amount equal to the difference between the amount realized on
the sale and the Common Shareholder’s adjusted tax basis in the Common Shares sold. If Common Shares are held as a capital
asset, the gain or loss will be a capital gain or loss. The maximum tax rate applicable to net capital gain recognized by individuals
and other non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate for gain recognized on the sale of capital
assets held for one year or less (currently 37%), or (ii) for gain recognized on the sale of capital assets held for more than
one year (as well as any capital gain distributions), 20%, 15%, or 0% for individuals depending on the amount of their taxable
income for the year. An additional 3.8% Medicare tax will also apply in the case of some individuals.
Any
loss on a disposition of Common Shares held for six months or less will be treated as a long-term capital loss to the extent of
any capital gain distributions received with respect to those Common Shares. For purposes of determining whether Common Shares
have been held for six months or less, the holding period is suspended for any periods during which the Common Shareholder’s
risk of loss is diminished as a result of holding one or more other positions in substantially similar or related property, or
through certain options or short sales. Any loss realized on a sale or exchange of Common Shares will be disallowed to the extent
those Common Shares are replaced by other Common Shares within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of Common Shares (whether through the reinvestment of distributions or otherwise). In that event,
the basis of the replacement Common Shares will be adjusted to reflect the disallowed loss.
An
investor should be aware that, if Common Shares are purchased shortly before the record date for any taxable distribution (including
a capital gain distribution), the purchase price likely will reflect the value of the distribution and the investor then would
receive a taxable distribution that is likely to reduce the trading value of such Common Shares, in effect resulting in a taxable
return of some of the purchase price.
Taxable
distributions to certain individuals and certain other non-corporate Common Shareholders, including those who have not provided
their correct taxpayer identification number and other required certifications, may be subject
to
“backup” U.S. federal income tax withholding at the fourth lowest rate of tax applicable to a single individual (24%).
Backup withholding is not an additional tax. Any amounts withheld may be refunded or credited against such shareholder’s
U.S. federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service.
An
investor also should be aware that the benefits of the reduced tax rate applicable to long-term capital gain and qualified dividend
income may be impacted by the application of the alternative minimum tax to individual shareholders.
The
Fund’s investments in non-U.S. securities may be subject to foreign withholding taxes on dividends, interest, or capital
gain, which will decrease the Fund’s yield. Foreign withholding taxes may be reduced under income tax treaties between the
U.S. and certain foreign jurisdictions.
Depending
on the number of non-U.S. shareholders in the Fund, however, such reduced foreign withholding tax rates may not be available for
investments in certain jurisdictions.
The
foregoing briefly summarizes some of the important U.S. federal income tax consequences to Common Shareholders of investing in
Common Shares, reflects the U.S. federal tax law as of the date of this Prospectus, and does not address special tax rules applicable
to certain types of investors, such as corporate and non-U.S. investors. A more complete discussion of the tax rules applicable
to the Fund and the Common Shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Unless
otherwise noted, this discussion assumes that an investor is a U.S. person and holds Common Shares as a capital asset. This discussion
is based upon current provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities,
all of which are subject to change or differing interpretations by the courts or the IRS retroactively or prospectively. Investors
should consult their tax advisors regarding other U.S. federal, state or local tax considerations that may be applicable in their
particular circumstances, as well as any proposed tax law changes.
Plan
of Distribution
The
Fund may sell the Common Shares being offered under this Prospectus in any one or more of the following ways: (i) directly to
purchasers; (ii) through agents; (iii) to or through underwriters; or (iv) through dealers. The Prospectus Supplement relating
to the offering will identify any agents, underwriters or dealers involved in the offer or sale of Common Shares, and will set
forth any applicable offering price, sales load, fee, commission or discount arrangement between the Fund and its agents or underwriters,
or among its underwriters, or the basis upon which such amount may be calculated, net proceeds and use of proceeds, and the terms
of any sale.
The
Fund may distribute Common Shares from time to time in one or more transactions at: (i) a fixed price or prices, which may be
changed; (ii) market prices prevailing at the time of sale; (iii) prices related to prevailing market prices; or (iv) negotiated
prices; provided, however, that in each case the offering price per Common Share (less any underwriting commission or discount)
must equal or exceed the NAV per Common Share.
The
Fund from time to time may offer its Common Shares through or to certain broker-dealers, including [______], that have entered
into selected dealer agreements relating to at-the-market offerings.
The
Fund may directly solicit offers to purchase Common Shares, or the Fund may designate agents to solicit such offers. The Fund
will, in a Prospectus Supplement relating to such offering, name any agent that could be viewed as an underwriter under the Securities
Act of 1933, as amended (the “Securities Act”), and describe any commissions the Fund must pay. Any such agent will
be acting on a best efforts basis for the period of its appointment or, if indicated in the applicable Prospectus Supplement or
other offering materials, on a firm commitment basis. Agents, dealers and underwriters may be customers of, engage in transactions
with, or perform services for the Fund in the ordinary course of business.
If
any underwriters or agents are used in the sale of Common Shares in respect of which this Prospectus is delivered, the Fund will
enter into an underwriting agreement or other agreement with them at the time of sale to them, and the Fund will set forth in
the Prospectus Supplement relating to such offering their names and the terms of the Fund’s agreement with them.
If
a dealer is utilized in the sale of Common Shares in respect of which this Prospectus is delivered, the Fund will sell such Common
Shares to the dealer, as principal. The dealer may then resell such Common Shares to the public at varying prices to be determined
by such dealer at the time of resale.
The
Fund may engage in at-the-market offerings to or through a market maker or into an existing trading market, on an exchange or
otherwise, in accordance with Rule 415(a)(4) under the Securities Act. An at-the-market offering may be through an underwriter
or underwriters acting as principal or agent for the Fund.
Agents,
underwriters and dealers may be entitled under agreements which they may enter into with the Fund to indemnification by the Fund
against certain civil liabilities, including liabilities under the Securities Act, and may be customers of, engage in transactions
with or perform services for the Fund in the ordinary course of business.
In
order to facilitate the offering of Common Shares, any underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of Common Shares or any other Common Shares the prices of which may be used to determine payments on the Common
Shares. Specifically, any underwriters may over-allot in connection with the offering, creating a short position for their own
accounts. In addition, to cover over-allotments or to stabilize the price of Common Shares or of any such other Common Shares,
the underwriters may bid for, and purchase, Common Shares or any such other Common Shares in the open market. Finally, in any
offering of Common Shares through a syndicate of underwriters, the underwriting syndicate may reclaim selling concessions allowed
to an underwriter or a dealer for distributing Common Shares in the offering if the syndicate repurchases previously distributed
Common Shares in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of Common Shares above independent market levels. Any such underwriters are not required
to engage in these activities and may end any of these activities at any time.
The
Fund may enter into derivative transactions with third parties, or sell Common Shares not covered by this Prospectus to third
parties in privately negotiated transactions. If the applicable Prospectus Supplement indicates, in connection with those derivatives,
the third parties may sell Common Shares covered by this Prospectus and the applicable Prospectus Supplement or other offering
materials, including in short sale transactions. If so, the third parties may use Common Shares pledged by the Fund or borrowed
from the Fund or others to settle those sales or to close out any related open borrowings of securities, and may use Common Shares
received from the Fund in settlement of those derivatives to close out any related open borrowings of securities. The third parties
in such sale transactions will be underwriters and, if not identified in this Prospectus, will be identified in the applicable
Prospectus Supplement or other offering materials (or a post-effective amendment).
The
Fund or one of the Fund’s affiliates may loan or pledge Common Shares to a financial institution or other third party that
in turn may sell Common Shares using this Prospectus. Such financial institution or third party may transfer its short position
to investors in Common Shares or in connection with a simultaneous offering of other Common Shares offered by this Prospectus
or otherwise.
The
maximum amount of compensation to be received by any member of the Financial Industry Regulatory Authority, Inc. will not exceed
8% of the initial gross proceeds from the sale of any security being sold with respect to each particular offering of Common Shares
made under a single Prospectus Supplement.
Any
underwriter, agent or dealer utilized in the initial offering of Common Shares will not confirm sales to accounts over which it
exercises discretionary authority without the prior specific written approval of its customer.
Description
of Capital Structure
The
Fund is a business trust established under the laws of The Commonwealth of Massachusetts by the Declaration of Trust. The Declaration
of Trust provides that the Board may authorize separate classes of shares of beneficial interest. The Board has authorized an
unlimited number of Common Shares. The Fund holds annual meetings of Common Shareholders in compliance with the requirements of
the NYSE.
COMMON
SHARES
The
Declaration of Trust permits the Fund to issue an unlimited number of full and fractional Common Shares of beneficial interest,
with or without par value. Each Common Share represents an equal proportionate interest in the assets of the Fund with each other
Common Share in the Fund. Common Shareholders will be entitled to the payment
of
distributions when, and if declared by the Fund. The 1940 Act or the terms of any future borrowings or issuance of preferred shares
may limit the payment of distributions to the Common Shareholders. Each whole Common Share is entitled to one vote and each fractional
Common Share is entitled to a proportionate fractional vote as to matters on which it is entitled to vote pursuant to the terms
of the Declaration of Trust. Upon termination of the Fund, after paying or adequately providing for the payment of all liabilities
of the Fund and the liquidation preference with respect to any outstanding preferred shares, and upon receipt of such releases,
indemnities and refunding agreements as the Trustees deem necessary , the Trustees may distribute the remaining assets of the
Fund among the Common Shareholders. The Declaration of Trust provides that Common Shareholders are not liable for any liabilities
of the Fund, and indemnifies shareholders against any such liability. Although shareholders of a business trust established under
Massachusetts law, in certain limited circumstances, may be held personally liable for the obligations of the business trust as
though they were general partners, the provisions of the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote. The Fund will not issue Common Share certificates.
The
Fund has no current intention to issue preferred shares. However, if at some future time there are any preferred shares outstanding,
subject to certain exceptions, the Fund might not be permitted to declare any cash distribution on its Common Shares, unless at
the time of such declaration, (i) all accrued distributions on preferred shares and any accrued interest on borrowings, if any,
have been paid and (ii) the value of the Fund’s total assets (determined after deducting the amount of such distribution),
less all liabilities and indebtedness of the Fund not represented by senior securities, is at least 300% of the aggregate amount
of any securities representing indebtedness and at least 200% of the aggregate amount of any securities representing indebtedness
plus the aggregate liquidation value of the outstanding preferred shares. In addition to the requirements of the 1940 Act, the
Fund may be required to comply with other asset coverage requirements under a liquidity facility or as a condition of the Fund
obtaining a rating of preferred shares from a nationally recognized statistical rating organization (a “Rating Agency”).
These requirements may include an asset coverage test more stringent than under the 1940 Act. This limitation on the Fund’s
ability to make distributions on its Common Shares could in certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a RIC for U.S. federal income tax purposes. If the Fund were in the future to issue preferred shares,
it would intend, however, to the extent possible, to purchase or redeem preferred shares from time to time to maintain compliance
with such asset coverage requirements and may pay special distributions to the holders of the preferred shares in certain circumstances
in connection with any potential impairment of the Fund’s status as a RIC. Depending on the timing of any such redemption
or repayment, the Fund may be required to pay a premium in addition to the liquidation preference of the preferred shares to the
holders thereof.
The
Fund has no present intention of offering additional Common Shares, except as described herein. Other offerings of its Common
Shares, if made, will require approval of the Board. Any additional offering will not be sold at a price per Common Share below
the then current NAV (exclusive of underwriting discounts and commissions) except in connection with an offering to existing Common
Shareholders or with the consent of a majority of the Fund’s outstanding Common Shares. Common Shares have no preemptive
rights.
LIQUIDITY
FACILITY
The
Fund has entered into the LA with State Street Bank and Trust Company ("SSB") that allows it to borrow or otherwise
access funds through a line of credit, securities lending and reverse repurchase agreements. The Fund pledges its assets as collateral
to secure obligations under the LA. The Fund retains the risks and rewards of the ownership of assets pledged to secure obligations
under the LA and makes these assets available for securities lending and reverse repurchase transactions with SSB acting as the
Fund's authorized agent for these transactions. All transactions initiated through SSB are required to be secured with cash collateral
received from the securities borrower or cash is received from the reverse repurchase agreement counterparties. Securities lending
transactions (other than reverse repurchase) will be secured with cash collateral in amounts at least equal to 100% of the market
value of the securities utilized in these transactions. Cash received by SSB from securities lending or reverse repurchase transactions
is credited against the amounts borrowed under the line of credit.
Upon
return of securities by the borrower or reverse repurchase counterparty, SSB will return the cash collateral to the borrower or
proceeds from the reverse repurchase transaction, as applicable, which will eliminate the credit against the line of credit and
will cause the drawdowns under the line of credit to increase by the amounts returned. Income earned on the loaned securities
is retained by SSB, and any interest due on the reverse repurchase agreements is paid by SSB.
SSB
has indemnified the fund for certain losses that may arise if the borrower or a reverse repurchase counterparty fails to return
securities when due. With respect to securities lending transactions, upon a default of the securities borrower, SSB uses the
collateral received from the borrower to purchase replacement securities of the same issue, type, class and series. If the value
of the collateral is less than the purchase cost of replacement securities, SSB is responsible for satisfying the shortfall, but
only to the extent that the shortfall is not due to any of the fund's losses on the reinvested cash collateral. Although the risk
of the loss of the securities is mitigated by receiving collateral from the borrower or proceeds from the reverse repurchase counterparty
and through SSB indemnification, the fund could experience a delay in recovering securities or could experience a lower than expected
return if the borrower or reverse repurchase counterparty fails to return the securities on a timely basis.
Under
normal circumstances, interest charged is at the rate of one month LIBOR (London Interbank Offered Rate) plus 0.60%, and is payable
monthly on the aggregate balance of the drawdowns outstanding under the LA. As of October 31, 2020, the Fund had an average daily
loan balance of $86,900,000 at an average interest rate of 1.41%.
After
the six month anniversary of the effective date of the agreement, the Fund may terminate the LA with 60 days' notice. If certain
asset coverage and collateral requirements, or other covenants are not met, the LA could be deemed in default and result in termination.
Absent a default or facility termination event, SSB is required to provide the Fund with 360 days' notice prior to terminating
the LA.
By
leveraging its investment portfolio, the Fund creates an opportunity for increased net income or capital appreciation. However,
the use of leverage also involves risks, which can be significant. See "Liquidity and Restricted Securities Risk."
REPURCHASE
OF SHARES AND OTHER DISCOUNT MEASURES
In
recognition of the possibility that Common Shares might trade at a discount to NAV and that any such discount may not be in the
interest of the Fund’s shareholders, the Board, in consultation with the Advisor, from time to time may review possible
actions to help reduce any such discount. The Board, in consultation with the Advisor, may review the possibility of open market
repurchases and/or tender offers for the Common Shares and consider such factors as the market price of the Common Shares, the
NAV of the Common Shares, the liquidity of the assets of the Fund, effect on the Fund’s expenses, whether such transactions
would impair the Fund’s status as a RIC or result in a failure to comply with applicable asset coverage requirements, general
economic conditions and such other events or conditions, which may have a material effect on the Fund’s ability to consummate
such transactions. There are no assurances that the Board will, in fact, decide to undertake either of these actions or, if undertaken,
that such actions will result in the Fund’s Common Shares trading at a price which is equal to or approximates their NAV.
In
the event that the Fund conducts an offering of new Common Shares and such offering constitutes a “distribution” under
Regulation M, the Fund and certain of its affiliates may be subject to an applicable restricted period that could limit the timing
of any repurchases by the Fund.
PREFERRED
SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest with preference rights, including
preferred shares (“Preferred Shares”), having no par value per share or such other amount as the Board may establish,
in one or more series, with rights as determined by the Board, by action of the Board without the approval of the Common Shareholders.
The Board has no current intention to issue Preferred Shares.
Under
the requirements of the 1940 Act, the Fund must, immediately after the issuance of any Preferred Shares, have an “asset
coverage” of at least 200%. Asset coverage means the ratio which the value of the total assets of the Fund, less all liability
and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Fund, if any, plus the aggregate liquidation preference of the Preferred Shares. If the Fund
seeks a rating of the Preferred Shares, asset coverage requirements, in addition to those set forth in the 1940 Act, may be imposed.
The liquidation value of the Preferred Shares is expected to equal their aggregate original purchase price plus redemption premium,
if any, together with any accrued and unpaid dividends thereon (on a cumulative basis), whether or not earned or declared. The
terms of the Preferred Shares, including their dividend rate, voting rights, liquidation preference and redemption provisions,
will be determined by the Board (subject to applicable law and the Declaration of Trust) if and when it authorizes the Preferred
Shares. The Fund may issue Preferred Shares that provide for the periodic redetermination of the dividend rate at relatively short
intervals
through an auction or remarketing procedure, although the terms of the Preferred Shares also may enable the Fund to lengthen such
intervals. At times, the dividend rate as redetermined on the Fund’s Preferred Shares may approach or exceed the Fund’s
return after expenses on the investment of proceeds from the Preferred Shares and the Fund’s leveraged capital structure
would result in a lower rate of return to Common Shareholders than if the Fund were not so structured.
In
the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the terms of any Preferred Shares
may entitle the holders of Preferred Shares to receive a preferential liquidating distribution (expected to equal the original
purchase price per share plus redemption premium, if any, together with accrued and unpaid dividends, whether or not earned or
declared and on a cumulative basis) before any distribution of assets is made to Common Shareholders. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders of Preferred Shares would not be entitled to any
further participation in any distribution of assets by the Fund.
Under
the 1940 Act, if at any time dividends on the Preferred Shares are unpaid in an amount equal to two full years’ dividends
thereon, the holders of all outstanding Preferred Shares, voting as a class, will be allowed to elect a majority of the Fund’s
Trustees until all dividends in default have been paid or declared and set apart for payment. In addition, if required by the
Rating Agency rating the Preferred Shares or if the Board determines it to be in the best interests of the Common Shareholders,
issuance of the Preferred Shares may result in more restrictive provisions than required by the 1940 Act being imposed. In this
regard, holders of the Preferred Shares may be entitled to elect a majority of the Board in other circumstances, for example,
if one payment on the Preferred Shares is in arrears.
If
the Fund were to issue Preferred Shares, it is expected that the Fund would seek a credit rating for the Preferred Shares from
a Rating Agency. In that case, as long as Preferred Shares are outstanding, the composition of its portfolio would reflect guidelines
established by such Rating Agency. Although, as of the date hereof, no such Rating Agency has established guidelines relating
to any such Preferred Shares, based on previous guidelines established by such Rating Agencies for the securities of other issuers,
the Fund anticipates that the guidelines with respect to the Preferred Shares would establish a set of tests for portfolio composition
and asset coverage that supplement (and in some cases are more restrictive than) the applicable requirements under the 1940 Act.
Although, at this time, no assurance can be given as to the nature or extent of the guidelines, which may be imposed in connection
with obtaining a rating of the Preferred Shares, the Fund currently anticipates that such guidelines will include asset coverage
requirements, which are more restrictive than those under the 1940 Act, restrictions on certain portfolio investments and investment
practices, requirements that the Fund maintain a portion of its total assets in short-term, high-quality, fixed-income securities
and certain mandatory redemption requirements relating to the Preferred Shares. No assurance can be given that the guidelines
actually imposed with respect to the Preferred Shares by such Rating Agency will be more or less restrictive than as described
in this Prospectus.
Certain
Provisions in the Declaration of Trust and By-Laws
Under
Massachusetts law, shareholders, in certain circumstances, could be held personally liable for the obligations of the Fund. However,
the Declaration of Trust contains an express disclaimer of shareholder liability in connection with Fund property or the acts,
obligations or affairs of the Fund and provides for indemnification out of the assets of the Fund for all loss and expense of
any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The
Declaration of Trust provides that the Trustees may amend the Declaration of Trust without Common Shareholder approval to change
the name of the Fund or to supply any omission, clear any ambiguity or correct or supplement a defective or inconsistent provision.
The Declaration of Trust does not permit amendments that impair the exemption from personal liability of the shareholders, Trustees,
officers, employees and agents of the Fund or permit assessments upon shareholders.
The
By-laws provide that the Trustees have the power, to the exclusion of shareholders, to adopt, alter, amend or repeal any of the
By-laws, except for any By-law that requires a vote of the shareholders to be amended, adopted or repealed by the terms of the
Declaration of Trust, By-laws or applicable law.
ANTI-TAKEOVER
PROVISIONS
The
Declaration of Trust and By-laws include provisions that could have the effect of limiting the ability of other entities or persons
to acquire control of the Fund or to change the composition of its Board and could have the effect of depriving Common Shareholders
of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund. These provisions may have the effect of discouraging attempts to acquire control of the Fund, which
attempts could have the effect of increasing the expenses of the Fund and interfering with the normal operation of the Fund. They
provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund’s investment objectives and policies. The Board
has considered and approved the following anti-takeover provisions. The following is only a summary and is qualified in its entirety
by reference to the Declaration of Trust and By-laws on file with the SEC.
The
number of Trustees is currently twelve, but by action of a majority of the Trustees, the Board may from time to time be increased
or decreased. If the Fund issues Preferred Shares, the Fund may establish a separate class for the Trustees elected by the holders
of the Preferred Shares. Subject to applicable provisions of the 1940 Act, vacancies on the Board may be filled by a majority
action of the remaining Trustees. Such provisions may work to delay a change in the majority of the Board.
Generally,
the shareholders have power to vote only: (a) for the election of Trustees; (b) with respect to any investment advisory or management
contract; (c) with respect to a termination of the Fund; (d) with respect to an amendment of the Declaration of Trust; (e) with
respect to a merger, consolidation or sale of assets of the Fund; (f) with respect to incorporation of the Fund; (g) to the same
extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should
or should not be brought or maintained derivatively or as a class action on behalf of the Fund or the shareholders; and (h) with
respect to such additional matters relating to the Fund as may be required by the Declaration of Trust or the By-Laws or by reason
of the registration of the Fund or the shares with the SEC or any state or by any applicable law or any regulation or order of
the SEC or any state or as the Trustees may consider necessary or desirable. On any matter required or permitted to be voted on
by the shareholders, all shares then entitled to vote shall be voted in the aggregate as a single class without regard to class,
except (i) when required by the Declaration of Trust, the By-Laws, the 1940 Act, or when the Trustees have determined that any
matter to be submitted to a vote of the shareholders affects the rights or interests of the shareholders of one or more classes,
if any, materially differently, shares shall be voted by each such affected class individually; and (ii) when the Trustees shall
have determined that the matter affects only the interests of one or more classes, then only the shareholders of such affected
class shall be entitled to vote thereon.
Additionally,
the Fund’s By-laws contain certain provisions that may tend to make a change of control of the Fund more difficult. For
example, the By-laws (i) require a shareholder to give written advance notice and other information to the Fund of the shareholder’s
nominees for Trustees and proposals for other business to be considered at annual shareholders’ meetings, or in the event
a shareholder proposes to seek a shareholder action by written consent or requests a special meeting of shareholders; (ii) require
any such notice by a shareholder to be accompanied by certain information as provided in the By-laws; (iii) provide that Trustees
may be nominated by shareholders only at an annual meeting of the Fund or special meeting in lieu of an annual meeting; and (iv)
reserve to the Trustees the exclusive power to alter, amend or repeal any provision of the By-laws or to make new By-laws, except
where the Declaration of Trust, By-laws or applicable law would also require a shareholder vote to effect such alteration, amendment
or repeal. The foregoing description of the By-laws is qualified in its entirety by the full text of the Amended and Restated
By-laws effective as of January 22, 2016, last amended March 10, 2016.
POTENTIAL
CONVERSION TO OPEN-END FUND
Conversion
of the Fund to an open-end management investment company would require an amendment to the Fund’s Declaration of Trust.
Such amendment would require approval by each of the following: (i) a majority of the Trustees then in office, (ii) a majority
of the outstanding voting securities, and (iii) by such vote or votes of the holders of any class or classes or series of shares
as may be required by the 1940 Act. In the event of conversion, the Common Shares would cease to be listed on the NYSE or other
national securities exchange or market system. The Board believes, however, that the closed-end structure is desirable, given
the Fund’s investment objective and policies. Investors should assume, therefore, that it is unlikely that the Board would
vote to convert the Fund to an open-end management investment company. Shareholders of an open-end management investment company
may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940
Act) at their NAV, less such redemption charge, if any, as might be in effect at the time of a redemption. The Fund would expect
to pay
all
such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities.
If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If
the Fund were converted to an open-end fund, it is likely that new Common Shares would be sold at NAV plus a sales load.
Reports
to Shareholders
The
Fund sends to its shareholders unaudited semi-annual and audited annual reports, including a list of investments held.
Independent
Registered Public Accounting Firm
PricewaterhouseCoopers
LLP, who has offices at 101 Seaport Boulevard, Suite 500, Boston Massachusetts 02210, is the independent registered public accounting
firm for the Fund and audits the Fund’s financial statements.
Additional
Information
The
Fund has entered into contractual arrangements with various parties that provide services to the Fund, which may include, among
others, the Advisor, Subadvisor, Custodian, and transfer agent, as described above and in the SAI. Fund shareholders are not parties
to, or intended or “third-party” beneficiaries of, any of these contractual arrangements. These contractual arrangements
are not intended to, nor do they, create in any individual shareholder or group of shareholders any right, either directly or
on behalf of the fund, to either: (a) enforce such contracts against the service providers; or (b) seek any remedy under such
contracts against the service providers.
This
Prospectus provides information concerning the Fund that you should consider in determining whether to purchase shares of the
Fund. Each of this prospectus, the SAI, or any contract that is an exhibit to the Fund’s registration statement, is not
intended to, nor does it, give rise to an agreement or contract between the Fund and any investor. Each such document also does
not give rise to any contract or create rights in any individual shareholder, group of shareholders, or other person. The foregoing
disclosure should not be read to suggest any waiver of any rights conferred by federal or state securities laws.
This
Prospectus and the SAI do not contain all of the information set forth in the Registration Statement that the Fund has filed with
the SEC (file No. 333-201041). The complete Registration Statement may be obtained from the SEC at sec.gov. See the cover page
of this Prospectus for information about how to obtain a paper copy of the Registration Statement or SAI without charge.
Table
of Contents of the Statement of Additional Information
|
Page
|
Organization of the Fund
|
2
|
Additional Investment
Policies and Risks
|
2
|
Investment Restrictions
|
21
|
Portfolio Turnover
|
23
|
Those Responsible for
Management
|
23
|
Shareholders of the Fund
|
34
|
Investment Advisory and
Other Services
|
34
|
Determination of Net Asset
Value
|
40
|
Brokerage Allocation
|
42
|
Additional Information
Concerning Taxes
|
45
|
Other Information
|
52
|
Custodian and Transfer
Agent
|
52
|
Independent Registered
Public Accounting Firm
|
53
|
Reports to Shareholders
|
53
|
Legal and Regulatory Matters
|
53
|
Codes of Ethics
|
53
|
Additional Information
|
53
|
Appendix A: Description
of Ratings
|
A-1
|
Appendix B: Proxy Voting
Policies and Procedures
|
B-1
|
The
Fund’s Privacy Policy
The
Fund is committed to maintaining the privacy of its shareholders and to safeguarding their non-public personal information. The
following information is provided to help you understand what personal information the Fund collects, how the Fund protects that
information and why, in certain cases, the Fund may share information with select other parties.
Generally,
the Fund does not receive any non-public personal information relating to its shareholders, although certain non-public personal
information of its shareholders may become available to the Fund. The Fund does not disclose any non-public personal information
about its shareholders or former shareholders to anyone, except as permitted by law (which includes disclosure to employees necessary
to service your account). The Fund may share information with unaffiliated third parties that perform various required services,
such as transfer agents, custodians and broker/dealers.
The
Fund restricts access to non-public personal information about its shareholders to employees of the Fund’s investment advisor
and its affiliates with a legitimate business need for the information. The Fund maintains physical, electronic and procedural
safeguards designed to protect the non-public personal information of its shareholders.
1,000,000
Shares
John
Hancock Investors Trust
Common
Shares
PROSPECTUS
March
1, 2021
As
of January 1, 2021, paper copies of the Fund’s shareholder reports will no longer be sent by mail. Instead, the reports
will be made available on a website, and you will be notified and provided with a link each time a report is posted to the website.
You may request to receive paper reports from the Fund or from your financial intermediary, free of charge, at any time. You may
also request to receive documents through e-delivery.
The information in this SAI is not complete and
may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission
is effective. This SAI is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
JOHN HANCOCK INVESTORS TRUST
Statement of Additional Information
March 1, 2021
200 Berkeley Street
Boston, Massachusetts 02116
800-225-6020
TABLE OF CONTENTS
This Statement of Additional Information (“SAI”)
is not a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by the prospectus
of John Hancock Investors Trust (the “Fund”) dated March 1, 2021 (the “Prospectus”) and any related supplement
thereto (“Prospectus Supplements”), which are incorporated herein by reference. This SAI should be read in conjunction
with such Prospectus and any related Prospectus Supplements, copies of which may be obtained without charge by contacting your
financial intermediary or calling the Fund at 800-225-6020.
Capitalized terms used in this SAI and not otherwise
defined have the meanings given them in the Fund’s Prospectus and any related Prospectus Supplements.
Organization of the Fund
The Fund is a diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund was organized
on October 26, 1970 as a Delaware corporation and was reorganized on October 5, 1984 as a Massachusetts business trust pursuant
to an Agreement and Declaration of Trust, which was amended and restated effective January 22, 2016 (the “Declaration of
Trust”).
John Hancock Investment Management LLC (the
“Advisor” or “JHIM”) is the Fund’s investment advisor and is registered with the Securities and Exchange
Commission (the “SEC”) as an investment advisor under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”). The Advisor is responsible for overseeing the management of the Fund, including its day-to-day business operations
and monitoring the subadvisor. The Advisor has been managing closed-end funds since 1971.
Founded in 1968, the Advisor is an indirect
principally owned subsidiary of John Hancock Life Insurance Company (U.S.A.), a subsidiary of Manulife Financial Corporation (“Manulife
Financial” or the “Company”). John Hancock Life Insurance Company (U.S.A.) and its subsidiaries (“John
Hancock”) today offer a broad range of financial products, including life insurance, annuities, investments, 401(k) plans,
college savings plans, and certain forms of business insurance. Additional information about John Hancock may be found on the Internet
at johnhancock.com.
The Advisor’s parent company has been
helping individuals and institutions work toward their financial goals since 1862. The Advisor offers investment solutions managed
by institutional money managers, taking a disciplined team approach to portfolio management and research, leveraging the expertise
of seasoned investment professionals.
Manulife Financial is a leading Canada-based
financial services group with principal operations in Asia, Canada and the United States. Operating as Manulife in Canada and Asia,
and primarily as John Hancock in the United States, the Manulife Financial group of companies offers clients a diverse range of
financial protection products and wealth management services through its extensive network of employees, agents, and distribution
partners.
The Fund’s subadvisor is Manulife Investment
Management (US) LLC (the “Subadvisor”), formerly John Hancock Asset Management a Division of Manulife Asset Management
(US) LLC). The Subadvisor is responsible for the day-to-day management of the Fund’s portfolio investments. The Subadvisor,
organized in 1968, is a wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife Financial).
Additional Investment Policies
and Risks
The principal strategies and risks of investing
in the Fund are described in the Prospectus. Unless otherwise stated in the Prospectus or this SAI, the investment objective and
policies of the Fund may be changed without shareholder approval. The Fund may invest in the instruments below, in accordance with
its principal and non-principal investment strategies and such instruments and investment policies apply to the Fund, but only
if and to the extent that such policies are consistent with and permitted by the Fund’s investment objective and policies.
The Fund may also have indirect exposure to the instruments described below through derivative contracts.
Ratings as Investment Criteria. In general,
the ratings of Moody’s and S&P represent the opinions of these agencies as to the quality of the securities which they
rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. There
is no guarantee that these institutions will continue to provide ratings. These ratings will be used by the Fund as initial criteria
for the selection of debt securities. Among the factors which will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. Appendix A contains further information concerning the ratings of Moody’s
and S&P and their significance. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund.
Repurchase Agreements, Reverse Repurchase Agreements, and Sale-Buybacks.
Repurchase agreements are arrangements involving the purchase of an obligation and the simultaneous agreement to resell the
same obligation
on demand or at a specified future date and at an agreed-upon price.
A repurchase agreement can be viewed as a loan made by a fund to the seller of the obligation with such obligation serving as collateral
for the seller’s agreement to repay the amount borrowed with interest. Repurchase agreements provide the opportunity to earn
a return on cash that is only temporarily available. Repurchase agreements may be entered with banks, brokers, or dealers. However,
a repurchase agreement will only be entered with a broker or dealer if the broker or dealer agrees to deposit additional collateral
should the value of the obligation purchased decrease below the resale price.
Generally, repurchase agreements are of a short duration, often less than one week but on occasion for longer periods. Securities
subject to repurchase agreements will be valued every business day and additional collateral will be requested if necessary so
that the value of the collateral is at least equal to the value of the repurchase obligation, including the interest accrued thereon.
A subadvisor shall engage in a repurchase agreement transaction only
with those banks or broker dealers who meet the subadvisor’s quantitative and qualitative criteria regarding creditworthiness,
asset size and collateralization requirements. The Advisor also may engage in repurchase agreement transactions on behalf of the
fund. The counterparties to a repurchase agreement transaction are limited to a:
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Federal Reserve System member bank;
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primary government securities dealer reporting to the Federal Reserve Bank of New York’s Market Reports Division;
or
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broker dealer that reports U.S. government securities positions to the Federal Reserve Board.
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A fund also may participate in repurchase agreement transactions utilizing the settlement services of clearing firms that meet
the subadvisors’ creditworthiness requirements.
The Advisor and the subadvisors will continuously monitor repurchase
agreement transactions to ensure that the collateral held with respect to a repurchase agreement equals or
exceeds the amount of the obligation.
The risk of a repurchase agreement transaction is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date. In the event of bankruptcy or other default by the seller,
the instrument purchased may decline in value, interest payable on the instrument may be lost and there may be possible difficulties
and delays in obtaining collateral and delays and expense in liquidating the instrument. If an issuer of a repurchase agreement
fails to repurchase the underlying obligation, the loss, if any, would be the difference between the repurchase price and the underlying
obligation’s market value. A fund also might incur certain costs in liquidating the underlying obligation. Moreover, if bankruptcy
or other insolvency proceedings are commenced with respect to the seller, realization upon the underlying obligation might be delayed
or limited.
Under a reverse repurchase agreement, a fund sells a debt security
and agrees to repurchase it at an agreed-upon time and at an agreed-upon price. The fund retains record ownership of the security
and the right to receive interest and principal payments thereon. At an agreed-upon future date, the fund repurchases the security
by remitting the proceeds previously received, plus interest. The difference between the amount the fund receives for the security
and the amount it pays on repurchase is payment of interest. In certain types of agreements, there is no agreed-upon repurchase
date and interest payments are calculated daily, often based on the prevailing overnight repurchase rate. A reverse repurchase
agreement may be considered a form of leveraging and may, therefore, increase fluctuations in a fund’s NAV per share. A fund
will cover its repurchase agreement transactions by maintaining in a segregated custodial account cash, Treasury bills, other U.S.
government securities, or other liquid assets having an aggregate value at least equal to the amount of such commitment to repurchase
including accrued interest, until payment is made.
A fund may effect simultaneous purchase and sale transactions that
are known as “sale-buybacks.” A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback,
the counterparty that purchases the security is entitled to receive any principal or interest payments made on the underlying security
pending settlement of the fund’s repurchase of the underlying security. A fund’s obligations under a sale-buyback typically
would be offset by liquid assets equal in value to the amount of the fund’s forward commitment to repurchase the subject
security.
Foreign Repurchase Agreements. Foreign repurchase agreements
involve an agreement to purchase a foreign security and to sell that security back to the original seller at an agreed-upon price
in either U.S. dollars or foreign currency. Unlike typical U.S. repurchase agreements, foreign repurchase agreements may not be
fully collateralized at all times. The value of a security purchased may be more or less than the price at which the counterparty
has agreed to repurchase the security. In the event of default by the counterparty, a fund may suffer a loss if the value of the
security purchased is less than the agreed-upon repurchase price, or if it is unable to successfully assert a claim to the collateral
under foreign laws. As a result, foreign repurchase agreements may involve higher credit risks than repurchase agreements in U.S.
markets, as well as risks associated with currency fluctuations. In addition, as with other emerging market investments, repurchase
agreements with counterparties located in emerging markets, or relating to emerging markets, may involve issuers or counterparties
with lower credit ratings than typical U.S. repurchase agreements.
Short-Term Bank and Corporate Obligations.
The Fund may invest in depository-type obligations of banks and savings and loan associations and other high-quality money market
instruments consisting of short-term obligations of the U.S. government or its agencies and commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance
companies. Depository-type obligations in which the Fund may invest include certificates of deposit, bankers’ acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return.
Bankers’ acceptances are negotiable drafts
or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted”
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument at maturity. Fixed
time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions
and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest
in a fixed time deposit to a third party, although there is no market for such deposits. Bank notes and bankers’ acceptances
rank junior to domestic deposit liabilities of the bank and pari passu with other senior, unsecured obligations of the bank.
Bank notes are not insured by the Federal Deposit Insurance Corporation or any other insurer. Deposit notes are insured by the
Federal Deposit Insurance Corporation only to the extent of $100,000 per depositor per bank.
Preferred Securities. The Fund may invest
in preferred securities. Preferred securities, like common stock, represent an equity ownership in an issuer. Generally, preferred
securities have a priority of claim over common stock in dividend payments and upon liquidation of the issuer. Unlike common stock,
preferred securities do not usually have voting rights. Preferred securities in some instances are convertible into common stock.
Although they are equity securities, preferred securities have characteristics of both debt and common stock. Like debt, their
promised income is contractually fixed. Like common stock, they do not have rights to precipitate bankruptcy proceedings or collection
activities in the event of missed payments. Other equity characteristics are their subordinated position in an issuer’s capital
structure and that their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims
to specific assets or cash flows.
Distributions on preferred securities must be
declared by the board of directors and may be subject to deferral, and thus they may not be automatically payable. Income payments
on preferred securities may be cumulative, causing dividends and distributions to accrue even if not declared by the board or otherwise
made payable, or they may be non-cumulative, so that skipped dividends and distributions do not continue to accrue. There is no
assurance that dividends on preferred securities in which the Fund invests will be declared or otherwise made payable. The Fund
may invest in non-cumulative preferred securities.
Shares of preferred securities have a liquidation
value that generally equals the original purchase price at the date of issuance. The market values of preferred securities may
be affected by favorable and unfavorable changes impacting the issuers’ industries or sectors, including companies in the
utilities and financial services sectors, which are prominent issuers of preferred securities. They may also be affected by actual
and anticipated changes or ambiguities in the tax status of the security and by actual and anticipated changes or ambiguities in
tax laws, such as changes in corporate and individual income tax rates, and in the dividends received deduction for corporate taxpayers
or the characterization of dividends as tax-advantaged as described herein.
Because the claim on an issuer’s earnings
represented by preferred securities may become onerous when interest rates
fall below the rate payable on the stock or
for other reasons, the issuer may redeem preferred securities, generally after an initial period of call protection during which
the stock is not redeemable. Thus, in declining interest rate environments in particular, the Fund’s holdings of higher dividend-paying
preferred securities may be reduced and the Fund may be unable to acquire securities paying comparable rates with the redemption
proceeds.
Foreign Government Securities. Foreign
government securities include securities issued or guaranteed by foreign governments (including political subdivisions) or their
authorities, agencies, or instrumentalities or by supra-national agencies. Different kinds of foreign government securities have
different kinds of government support. For example, some foreign government securities are supported by the full faith and credit
of a foreign national government or political subdivision and some are not. Foreign government securities of some countries may
involve varying degrees of credit risk as a result of financial or political instability in those countries and the possible inability
of the Fund to enforce its rights against the foreign government issuer. As with other fixed income securities, sovereign issuers
may be unable or unwilling to make timely principal or interest payments. Supra-national agencies are agencies whose member nations
make capital contributions to support the agencies’ activities.
Investments in Non-U.S. Securities. The
Fund may invest directly in the securities of non-U.S. issuers as well as securities in the form of sponsored or unsponsored American
Depository Receipts (“ADRs”), European Depository Receipts (“EDRs”) and Global Depository Receipts (“GDRs”)
or other securities convertible into non-U.S. securities. The Fund may invest up to 30% of its total assets in securities denominated
in non-U.S. currencies. ADRs are receipts typically issued by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a non-U.S. corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement.
Issuers of unsponsored ADRs are not contractually obligated to disclose material information, including financial information,
in the United States. Generally, ADRs are designed for use in the United States securities markets and EDRs are designed for use
in European securities markets.
An investment in non-U.S. securities including
ADRs may be affected by changes in currency rates and in exchange control regulations. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information, including financial information, in the United States and, therefore, there may not
be a correlation between such information and the market value of the unsponsored ADR. Non-U.S. companies may not be subject to
accounting standards or government supervision comparable to U.S. companies, and there is often less publicly available information
about their operations. Non-U.S. companies may also be affected by political or financial instability abroad. These risk considerations
may be intensified in the case of investments in ADRs of non-U.S. companies that are located in emerging market countries. ADRs
of companies located in these countries may have limited marketability and may be subject to more abrupt or erratic price movements.
Emerging Markets Risk. In addition,
the Fund may invest in the securities of issuers based in countries with “emerging market” economies. Funds that invest
a significant portion of their assets in the securities of issuers based in countries with “emerging market” economies
are subject to greater levels of foreign investment risk than funds investing primarily in more-developed foreign markets, since
emerging market securities may present market, credit, currency, liquidity, legal, political and other risks greater than, or in
addition to, the risks of investing in developed foreign countries. These risks include: high currency exchange-rate fluctuations;
increased risk of default (including both government and private issuers); greater social, economic and political uncertainty and
instability (including the risk of war); more substantial governmental involvement in the economy; less governmental supervision
and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation
of invested capital and on the Fund’s ability to exchange local currencies for U.S. dollars; unavailability of currency hedging
techniques in certain emerging market countries; the fact that companies in emerging market countries may be newly organized, smaller
and less seasoned; the difference in, or lack of, auditing and financial reporting standards, which may result in the unavailability
of material information about issuers; different clearance and settlement procedures, which may be unable to keep pace with the
volume of securities transactions or otherwise make it difficult to engage in such transactions; difficulties in obtaining and/or
enforcing legal judgments in foreign jurisdictions; and significantly smaller market capitalizations of emerging market issuers.
Restrictions on Investments. There may be unexpected
restrictions on investments in companies located in certain foreign countries. For example, on November 12, 2020, the President
of the United States signed an Executive Order prohibiting U.S. persons from purchasing or investing in publicly-traded securities
of companies identified by the U.S. government as “Communist Chinese military companies.” As a result of forced sales
of a security, or inability to participate in an investment the manager otherwise believes is attractive, a fund may incur losses.
European Risk. Countries in Europe may be significantly
affected by fiscal and monetary controls implemented by the European Union (“EU”) and European Economic and Monetary
Union (“EMU”), which require member countries to comply with restrictions on inflation rates, deficits, interest rates,
debt levels and fiscal and monetary controls. Decreasing imports or exports, changes in governmental or other regulations on trade,
changes in the exchange rate or dissolution of the Euro, the default or threat of default by one or more EU member countries on
its sovereign debt, and/or an economic recession in one or more EU member countries may have a significant adverse effect on the
other European economies and major trading partners outside Europe.
In recent years, the European financial
markets have experienced volatility and adverse trends due to concerns about economic downturns, rising government debt levels
and the possible default of government debt in several European countries. The European Central Bank and IMF have previously bailed-out
several European countries. There is no guarantee that these institutions will continue to provide financial support, and markets
may react adversely to any reduction in financial support. A default or debt restructuring by any European country can adversely
impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness,
which may be located in countries other than those listed above, and can affect exposures to other EU countries and their financial
companies as well.
Uncertainties regarding the viability of the EU have impacted and
may continue to impact markets in the United States and around the world. If one or more countries leave the EU or the EU dissolves,
securities markets would likely be significantly disrupted. On January 31, 2020, the UK left the EU, commonly referred to as “Brexit,”
and the UK ceased to be a member of the EU. Following a transition period during which the EU and the UK Government engaged in
a series of negotiations regarding the terms of the UK’s future relationship with the EU, the EU and the UK Government signed
an agreement on December 30, 2020 regarding the economic relationship between the UK and the EU. This agreement became effective
on a provisional basis on January 1, 2021. There remains significant market uncertainty regarding Brexit’s ramifications,
and the range and potential implications of possible political, regulatory, economic, and market outcomes are difficult to predict.
This uncertainty may affect other countries in the EU and elsewhere, and may cause volatility within the EU, triggering prolonged
economic downturns in certain countries within the EU. It is also possible that various countries within the UK, such as Scotland
or Northern Ireland, could seek to separate and remain a part of the EU. Other secessionist movements including countries seeking
to abandon the Euro or withdraw from the EU may cause volatility and uncertainty in the EU.
The UK has one of the largest economies
in Europe and is a major trading partner with the other EU countries and the United States. If implemented, Brexit might negatively
affect The City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff
and comply with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create
additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the British
pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct
investment. Brexit may also adversely affect UK-based financial firms that have counterparties in the EU or participate in market
infrastructure (trading venues, clearing houses, settlement facilities) based in the EU. The events and the resulting market volatility
may have an adverse effect on the performance of the Fund.
Investing in the securities of Eastern
European issuers is highly speculative and involves risks not usually associated with investing in the more developed markets of
Western Europe. Securities markets of Eastern European countries typically are less efficient and have lower trading volume, lower
liquidity, and higher volatility than more developed markets. Eastern European economies also may be particularly susceptible to
disruption in the international credit market due to their reliance on bank related inflows of capital.
To the extent that the Fund invests in European
securities, it may be exposed to these risks through its direct investments in such securities, including sovereign debt, or indirectly
through investments in money market funds and financial institutions with significant investments in such securities. In addition,
Russia’s increasing international assertiveness could negatively impact EU and Eastern European economic activity.
Hedging and Other Strategies.
Hedging refers to protecting against possible changes in the market value of securities or other assets that the Fund already owns
or plans to buy, or protecting unrealized gains in the Fund. When securities prices are falling, the Fund can seek to offset a
decline in the value of its current portfolio securities through the sale
of futures contracts. When securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases.
If, in the opinion of the Advisor, there is
a sufficient degree of correlation between price trends for the Fund’s portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of
its hedging strategy. Although under some circumstances prices of securities in the Fund’s portfolio may be more or less
volatile than prices of such futures contracts, the Advisor will attempt to estimate the extent of this volatility difference based
on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund’s portfolio securities.
When a short hedging position is successful,
any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of the Fund’s portfolio securities would be substantially
offset by a decline in the value of the futures position. On other occasions, the Fund may take a “long” position by
purchasing futures contracts.
Options on Securities and Securities Indices.
The Fund may purchase and write (sell) call and put options on any securities and securities indices. These options may be listed
on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a substitute for the purchase or sale of securities or
to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired.
Writing Covered Options. A call option
on securities written by the Fund obligates the Fund to sell specified securities to the holder of the option at a specified price
if the option is exercised at any time before the expiration date. A put option on securities written by the Fund obligates the
Fund to purchase specified securities from the option holder at a specified price if the option is exercised at any time before
the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities
index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than
price fluctuations in a single security. Writing covered call options may deprive the Fund of the opportunity to profit from an
increase in the market price of the securities in its portfolio. Writing covered put options may deprive the Fund of the opportunity
to profit from a decrease in the market price of the securities to be acquired for its portfolio.
All call and put options written by the Fund
are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities in a segregated account
with a value at least equal to the Fund’s obligation under the option, (ii) entering into an offsetting forward commitment
and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the
Fund’s net exposure on its written option position. A written call option on securities is typically covered by maintaining
the securities that are subject to the option in a segregated account. The Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under
an exchange-traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter
options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases
are referred to as “closing purchase transactions.”
Hong Kong Stock Connect Program and Bond Connect Program Risk.
The Fund may invest in eligible renminbi-denominated class A shares of equity securities that are listed and traded on
certain Chinese stock exchanges (“China A-Shares”) through Stock Connect, a mutual market access program designed to,
among others, enable foreign investment in the PRC; and in renminbi-denominated bonds issued in the PRC by Chinese credit, government
and quasi-governmental issuers (“RMB Bonds”), which are available on the CIBM to eligible foreign investors through,
among others, the “Mutual Bond Market Access between Mainland China and Hong Kong” (“Bond Connect”) program.
Trading in China A-Shares through Stock Connect and bonds through Bond Connect is subject to certain restrictions and risks. The
Fund’s investment in China A-Shares may only be traded through Stock Connect and is not otherwise transferable. The list
of securities eligible to be traded on either program may change from time to time. Securities
listed on either program may lose purchase eligibility, which could
adversely affect the Fund’s performance.
While Stock Connect is not subject to individual investment quotas,
daily and aggregate investment quotas apply to all Stock Connect participants, which may restrict or preclude the Fund’s
ability to invest in China A-Shares. For example, these quota limitations require that buy orders for China A-Shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although the fund will be permitted
to sell China A-Shares regardless of the quota balance). These limitations may restrict the Fund from investing in China A-Shares
on a timely basis, which could affect the Fund’s ability to effectively pursue its investment strategy. Investment quotas
are also subject to change. Bond Connect is not subject to investment quotas.
Chinese regulations prohibit over-selling of China A-Shares. If the
Fund intends to sell China A-shares it holds, it must transfer those securities to the accounts of the Fund’s participant
broker before the market opens. As a result, the Fund may not be able to dispose of its holdings of China A-Shares in a timely
manner.
Stock Connect also is generally available only on business days when
both the exchange on which China A-Shares are offered and the Stock Exchange of Hong Kong are open and when banks in both markets
are open on the corresponding settlement days. Therefore, an investment in China A-Shares through Stock Connect may subject the
Fund to a risk of price fluctuations on days where Chinese stock markets are open, but Stock Connect is not operating. Similarly,
Bond Connect is only available on days when markets in both China and Hong Kong are open, which may limit the Fund’s ability
to trade when it would be otherwise attractive to do so.
Stock Connect launched in November 2014 and Bond Connect launched
in July 2017. Therefore, trading through Stock Connect and Bond Connect is subject to trading, clearance, and settlement procedures
that may continue to develop as the programs mature, which could pose risks to the Fund. Bond Connect is relatively new and its
effects on the CIBM are uncertain. In addition, the trading, settlement and information technology systems required for non-Chinese
investors in Bond Connect are relatively new. In the event of systems malfunctions or extreme market conditions, trading via Bond
Connect could be disrupted. In addition, the rules governing the operation of Stock Connect and Bond Connect may be subject to
further interpretation and guidance. There can be no assurance as to the programs’ continued existence or whether future
developments regarding the programs may restrict or adversely affect the Fund’s investments or returns. Additionally, the
withholding tax treatment of dividends, interest, and capital gains payable to overseas investors may be subject to change. Furthermore,
there is currently no specific formal guidance by the PRC tax authorities on the treatment of income tax and other tax categories
payable in respect of trading in CIBM by eligible foreign institutional investors via Bond Connect. Any changes in PRC tax law,
future clarifications thereof, and/or subsequent retroactive enforcement by the PRC tax authorities of any tax may result in a
material loss to the Fund.
Stock Connect and Bond Connect regulations provide that investors,
such as the Fund, enjoy the rights and benefits of equities purchased through Stock Connect and bonds purchased through Bond Connect.
However, the nominee structure under Stock Connect requires that China A-Shares be held through the HKSCC as nominee on behalf
of investors. For investments via Bond Connect, the relevant filings, registration with People’s Bank of China, and account
opening have to be carried out via an onshore settlement agent, offshore custody agent, registration agent, or other third parties
(as the case may be). As such, the Fund is subject to the risks of default or errors on the part of such third parties.
While the Fund’s ownership of China A-Shares will be reflected
on the books of the custodian’s records, the Fund will only have beneficial rights in such A-Shares. The precise nature and
rights of the Fund as the beneficial owner of the equities through the HKSCC as nominee is not well defined under the law of the
PRC. Although the China Securities Regulatory Commission has issued guidance indicating that participants in Stock Connect will
be able to exercise rights of beneficial owners in the PRC, the exact nature and methods of enforcement of the rights and interests
of the Fund under PRC law is uncertain. In particular, the courts may consider that the nominee or custodian as registered holder
of China A-Shares, has full ownership over the securities rather than the Fund as the underlying beneficial owner. The HKSCC, as
nominee holder, does not guarantee the title to China A-Shares held through it and is under no obligation to enforce title or other
rights associated with ownership on behalf of beneficial owners. Consequently, title to these securities, or the rights associated
with them, such as participation in corporate actions or shareholder meetings, cannot be assured.
While certain aspects of the Stock Connect trading process are subject
to Hong Kong law, PRC rules applicable to share ownership will apply. In addition, transactions using Stock Connect are not subject
to the Hong Kong investor
compensation Fund, which means that the Fund will be unable to make
monetary claims on the investor compensation Fund that it might otherwise be entitled to with respect to investments in Hong Kong
securities. Other risks associated with investments in PRC securities apply fully to China A-Shares purchased through Stock Connect.
Similarly, in China, the Hong Kong Monetary Authority Central Money
Markets Unit holds Bond Connect securities on behalf of ultimate investors (such as the Fund) in accounts maintained with a China-based
custodian (either the China Central Depository & Clearing Co. or the Shanghai Clearing House). This recordkeeping system subjects
the Fund to various risks, including the risk that the Fund may have a limited ability to enforce rights as a bondholder and the
risks of settlement delays and counterparty default of the Hong Kong sub-custodian. In addition, enforcing the ownership rights
of a beneficial holder of Bond Connect securities is untested and courts in China have limited experience in applying the concept
of beneficial ownership. China A-Shares traded via Stock Connect and bonds trading through Bond Connect are subject to various
risks associated with the legal and technical framework of Stock Connect and Bond Connect, respectively. In the event that the
relevant systems fail to function properly, trading through Stock Connect or Bond Connect could be disrupted. In the event of high
trade volume or unexpected market conditions, Stock Connect and Bond Connect may be available only on a limited basis, if at all.
Both the PRC and Hong Kong regulators are permitted, independently of each other, to suspend Stock Connect in response to certain
market conditions. Similarly, in the event that the relevant Mainland Chinese authorities suspend account opening or trading on
the CIBM via Bond Connect, the Fund’s ability to invest in 41. Chinese bonds will be adversely affected and limited. In such
event, the Fund’s ability to achieve its investment objective will be negatively affected and, after exhausting other trading
alternatives, the Fund may suffer substantial losses as a result.
Illiquid and Restricted Securities Risk. The Fund may have significant exposure to restricted
securities. Restricted securities are securities with restrictions on public resale, such as securities offered in accordance with
an exemption under Rule 144A under the Securities Act of 1933 (the “1933 Act”), or commercial paper issued under Section
4(a)(2) of the 1933 Act. Restricted securities are often required to be sold in private sales to institutional buyers, markets
for restricted securities may or may not be well developed, and restricted securities can be illiquid. The extent (if at all) to
which a security may be sold or a derivative position closed without negatively impacting its market value may be impaired by reduced
market activity or participation, legal restrictions or other economic and market impediments. Funds with principal investment
strategies that involve investments in securities of companies with smaller market capitalizations, foreign securities, derivatives,
or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk. Exposure to liquidity
risk may be heightened for funds that invest in securities of emerging markets and related derivatives that are not widely traded,
and that may be subject to purchase and sale restrictions.
The capacity of traditional
dealers to engage in fixed-income trading has not kept pace with the bond market’s growth. As a result, dealer inventories
of corporate bonds, which indicate the ability to “make markets,” i.e., buy or sell a security at the quoted bid and
ask price, respectively, are at or near historic lows relative to market size. Because market makers provide stability to fixed-income
markets, the significant reduction in dealer inventories could lead to decreased liquidity and increased volatility, which may
become exacerbated during periods of economic or political stress.
Libor Discontinuation Risk. The
LA utilizes LIBOR as the reference or benchmark rate for interest rate calculations. LIBOR is a measure of the average interest
rate at which major global banks can borrow from one another. Following allegations of rate manipulation and concerns regarding
its thin liquidity, in July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will stop encouraging
banks to provide the quotations needed to sustain LIBOR. The ICE Benchmark Administration Limited, the administrator of LIBOR,
is expected to cease publishing most LIBOR maturities, including some US LIBOR maturities, on December 31, 2021, and the remaining
and most liquid US LIBOR maturities on June 30, 2023. Before the end of 2021, it is expected that market participants such as the
fund and SSB will transition to the use of alternative reference or benchmark rates. However, although regulators have encouraged
the development and adoption of alternative rates such as the Secured Overnight Financing Rate (“SOFR”), there is currently
no definitive information regarding the future utilization of LIBOR or of any particular replacement rate.
Although the transition process away from LIBOR
has become increasingly well-defined in advance of the anticipated discontinuation dates, the impact on the LA remains uncertain.
It is expected that market participants will amend financial instruments referencing LIBOR, such as the LA, to include fallback
provisions and other measures that contemplate the discontinuation of LIBOR or other similar market disruption events, but neither
the effect of the
transition process nor the viability of such
measures is known. To facilitate the transition of legacy derivatives contracts referencing LIBOR, the International Swaps and
Derivatives Association, Inc. launched a protocol to incorporate fallback provisions. However, there are obstacles to converting
certain longer term securities and transactions to a new benchmark or benchmarks and the effectiveness of one alternative reference
rate versus multiple alternative reference rates in new or existing financial instruments and products has not been determined.
Certain proposed replacement rates to LIBOR, such as SOFR, which is a broad measure of secured overnight US Treasury repo rates,
are materially different from LIBOR, and changes in the applicable spread for financial instruments transitioning away from LIBOR
will need to be made to accommodate the differences. Furthermore, the risks associated with the expected discontinuation of LIBOR
and transition to replacement rates may be exacerbated if an orderly transition to an alternative reference rate is not completed
in a timely manner.
As market participants transition away from
LIBOR, LIBOR’s usefulness may deteriorate. The transition process may lead to increased volatility and illiquidity in markets
that currently rely on LIBOR to determine interest rates. LIBOR’s deterioration may adversely affect the liquidity and/or
market value of securities that use LIBOR as a benchmark interest rate. The use of an alternative reference rate, or the transition
process to an alternative reference rate, may result in increases to the interest paid by the fund pursuant to the LA and, therefore,
may adversely affect the fund’s performance.
Multinational Companies Risk.
To the extent that the Fund invests in the securities of companies with foreign business operations, it may be riskier than funds
that focus on companies with primarily U.S. operations. Multinational companies may face certain political and economic risks,
such as foreign controls over currency exchange; restrictions on monetary repatriation; possible seizure, nationalization or expropriation
of assets; and political, economic or social instability. These risks are greater for companies with significant operations in
developing countries.
Negative Interest Rates. Certain
countries have recently experienced negative interest rates on deposits and debt instruments have traded at negative yields. A
negative interest rate policy is an unconventional central bank monetary policy tool where nominal target interest rates are set
with a negative value (i.e., below zero percent) intended to help create self-sustaining growth in the local economy. Negative
interest rates may become more prevalent among non-U.S. issuers, and potentially within the U.S. For example, if a bank charges
negative interest, instead of receiving interest on deposits, a depositor must pay the bank fees to keep money with the bank.
These market conditions may increase the Fund’s
exposures to interest rate risk. To the extent the Fund has a bank deposit or holds a debt instrument with a negative interest
rate to maturity, the Fund would generate a negative return on that investment. While negative yields can be expected to reduce
demand for fixed-income investments trading at a negative interest rate, investors may be willing to continue to purchase such
investments for a number of reasons including, but not limited to, price insensitivity, arbitrage opportunities across fixed-income
markets or rules-based investment strategies. If negative interest rates become more prevalent in the market, it is expected that
investors will seek to reallocate assets to other income-producing assets such as investment grade and high-yield debt instruments,
or equity investments that pay a dividend. This increased demand for higher yielding assets may cause the price of such instruments
to rise while triggering a corresponding decrease in yield and the value of debt instruments over time.
Responsible Investing Risk. Certain
subadvisors may integrate research on environmental, social and governance (ESG) factors into a fund’s investment process.
ESG investments may be viewed as “sustainable,” “responsible,” or “socially conscious,” among
other names. A subadvisor may also be a signatory of the United Nations Principles for Responsible Investment (PRI), which works
to support its investor signatories in incorporating ESG factors into their investment and ownership decisions, or other similar
global or regional initiatives. ESG factors may be utilized and evaluated differently by different subadvisors, and may mean different
things to different people. The successful application of ESG factors is dependent on the subadvisor’s skill in properly
identifying and analyzing material ESG issues, and the suitability of ESG investments may change over time. Integration of ESG
factors into a fund’s investment process may impact its investment exposure, performance and proxy voting, among other elements.
Risks of Non-U.S. Securities.
Investments in non-U.S. securities may involve a greater degree of risk than those in domestic securities. There is generally less
publicly available information about non-U.S. companies in the form of reports and ratings similar to those that are published
about issuers in the United States. Also, non-U.S. issuers generally are not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to U.S. issuers.
Because non-U.S. securities may be denominated
in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the Fund’s net asset value
(“NAV”), the value of dividends and interest earned, gains and losses realized on the sale of securities, and any net
investment income and gains that the Fund distributes to shareholders. Securities transactions undertaken in some non-U.S. markets
may not be settled promptly so that the Fund’s investments on non-U.S. exchanges may be less liquid and subject to the risk
of fluctuating currency exchange rates pending settlement.
Non-U.S. securities will be purchased in the
best available market, whether through OTC markets or exchanges located in the countries where principal offices of the issuers
are located. Non-U.S. securities markets generally are not as developed or efficient as those in the United States. While growing
in volume, they usually have substantially less volume than the NYSE, and securities of some non-U.S. issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Fixed commissions on non-U.S. exchanges generally are higher than negotiated
commissions on U.S. exchanges; nevertheless, the Fund will endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain non-U.S. countries,
there is the possibility of adverse changes in investment or exchange control regulations, expropriation, nationalization or confiscatory
taxation limitations on the removal of funds or other assets of the Fund, political or social instability, or diplomatic developments,
which could affect United States investments in those countries. Moreover, individual non-U.S. economies may differ favorably or
unfavorably from the United States’ economy in terms of growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
The dividends, in some cases capital gains and
interest payable on certain of the Fund’s non-U.S. portfolio securities, may be subject to non-U.S. withholding or other
non-U.S. taxes, thus reducing the net amount of income or gains available for distribution to the Fund’s shareholders.
These risks may be intensified in the case of
investments in emerging markets or countries with limited or developing capital markets.
The Fund’s ability and decision to purchase
or sell portfolio securities may be affected by laws or regulations relating to the convertibility and repatriation of assets.
Under present conditions, it is not believed that this consideration will have any significant effect on the Fund’s portfolio
strategies.
Russian Securities Risk. The United
States and the European Union have imposed economic sanctions against companies in certain sectors of the Russian economy, including,
but not limited to: financial services, energy, metals and mining, engineering, and defense and defense-related materials. These
sanctions could impair the ability of a fund that invests in Russian issuers to continue to invest in such issuers. For example,
the Fund may be prohibited from investing in securities issued by companies subject to such sanctions. In addition, retaliatory
measures by the Russian government in response to such sanctions may result in a freeze of Russian assets held by the Fund, thereby
prohibiting the Fund from selling or otherwise transacting in these investments. In such circumstances, the Fund might be forced
to liquidate non-restricted assets in order to satisfy shareholder redemptions. Such liquidation of Fund assets might also result
in the Fund receiving substantially lower prices for its portfolio securities.
Purchasing Options. The Fund would normally
purchase call options in anticipation of an increase, or put options in anticipation of a decrease (“protective puts”),
in the market value of securities of the type in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle
the Fund, in return for the premium paid, to purchase specified securities or currency at a specified price during the option period.
The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities
or currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the
Fund, in exchange for the premium paid, to sell specified securities at a specified price during the option period. The purchase
of protective puts is designed to offset or hedge against a
decline in the market value of the Fund’s
portfolio securities. Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value
of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise
the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options
may be offset by countervailing changes in the value of the Fund’s portfolio securities.
The Fund’s options transactions will be
subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options
are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different
exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers.
Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment
advisory clients of the Advisor. An exchange, board of trade or other trading facility may order the liquidation of positions found
to be in excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions.
There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular
exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying securities or dispose of assets held in a segregated
account until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs
upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide
or be compelled at some future date to discontinue the trading of options (or a particular class or series of options). If trading
were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The Fund’s ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions
will not fulfill their obligations. The Advisor will determine the liquidity of each over-the-counter option in accordance with
guidelines adopted by the Board of Trustees of the Fund (the “Board”).
The writing and purchase of options is a highly
specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The successful use of options depends in part on the Advisor’s ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and securities or currency markets.
Futures Contracts and Options on Futures
Contracts. The Fund may purchase and sell futures contracts based on various securities (such as U.S. government securities)
and securities indices, and any other financial instruments and indices and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options.
All futures contracts entered into by the Fund are traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated
or approved by the Commodity Futures Trading Commission (“CFTC”).
Futures Contracts. A futures contract
may generally be described as an agreement between two parties to buy and sell particular financial instruments or currencies for
an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to
an index or otherwise not calling for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not
normally held to maturity but are instead liquidated through offsetting transactions, which may result in a profit or a loss. While
futures contracts on securities will usually be liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous to do so. A clearing corporation associated with
the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
The Fund may, for example, take a “short”
position in the futures market by selling futures contracts in an attempt to hedge against an anticipated decline in market prices
that would adversely affect the value of the Fund’s portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with characteristics similar to those of the Fund’s portfolio
securities.
Options on Futures Contracts. The purchase
of put and call options on futures contracts will give the Fund the right (but not the obligation) for a specified price to sell
or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option
on a futures contract, the Fund obtains the benefit of the futures position if prices move in a favorable direction but limits
its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract
generates a premium which may partially offset a decline in the value of the Fund’s assets. By writing a call option, the
Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised,
which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates
a premium which may partially offset an increase in the price of securities that the Fund intends to purchase. However, the Fund
becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received.
The holder or writer of an option on a futures
contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that
such closing transactions can be effected. The Fund’s ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
Other Considerations. The Fund
will engage in futures and related options transactions either for bona fide hedging or to facilitate portfolio management.
The Fund will not engage in futures or related options for speculative purposes. To the extent that the Fund is using futures and
related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities that
the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities it intends
to purchase. The Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects
to purchase. To the extent that the Fund engages in non-hedging transactions in futures contracts and options on futures to facilitate
portfolio management, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed
5% of the net asset value of the Fund’s portfolio, after taking into account unrealized profits and losses on any such positions
and excluding the amount by which such options were in-the-money at the time of purchase.
Transactions in futures contracts and options
on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating the Fund to purchase
securities, require the Fund to establish a segregated account consisting of cash or liquid securities in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and
options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated
changes in interest rates or securities prices may result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between the Fund’s
futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation between a futures
position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may
be exposed to risk of loss.
Some futures contracts or options on futures
may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may
suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid
and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract
or related option can vary from the previous day’s settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out positions and limiting its losses.
Interest Rate Swaps, Collars, Caps and
Floors. In order to hedge the value of the Fund’s portfolio against interest rate fluctuations or to facilitate portfolio
management, the Fund may, but is not required to, enter into various interest rate transactions such as interest rate swaps and
the purchase or sale of interest rate caps and floors. To the extent that the Fund enters into these transactions, the Fund expects
to do so primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later date or to manage the Fund’s interest rate
exposure on any debt securities or preferred shares issued by the Fund for leverage purposes. The Fund intends to use these transactions
only as a hedge or to facilitate portfolio management. The Fund is not required to hedge its portfolio and may choose not to do
so. The Fund cannot guarantee that any hedging strategies it uses will work.
Interest Rate Swaps. In an interest
rate swap, the Fund exchanges with another party their respective commitments to pay or receive interest (e.g., an exchange
of fixed rate payments for floating rate payments). For example, if the Fund holds a debt instrument with an interest rate that
is reset only once each year, it may swap the right to receive interest at this fixed rate for the right to receive interest at
a rate that is reset every week. This would enable the Fund to offset a decline in the value of the debt instrument due to rising
interest rates but would also limit its ability to benefit from falling interest rates. Conversely, if the Fund holds a debt instrument
with an interest rate that is reset every week and it would like to lock in what it believes to be a high interest rate for one
year, it may swap the right to receive interest at this variable weekly rate for the right to receive interest at a rate that is
fixed for one year. Such a swap would protect the Fund from a reduction in yield due to falling interest rates and may permit the
Fund to enhance its income through the positive differential between one week and one year interest rates, but would preclude it
from taking full advantage of rising interest rates.
The Fund usually will enter into interest rate
swaps on a net basis (i.e., the two payment streams are netted out with the trust receiving or paying, as the case may be,
only the net amount of the two payments). The net amount of the excess, if any, of the Fund’s obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and an amount of cash or liquid instruments having an
aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Fund’s custodian.
If the interest rate swap transaction is entered into on other than a net basis, the full amount of the Fund’s obligations
will be accrued on a daily basis, and the full amount of the Fund’s obligations will be maintained in a segregated account
by the Fund’s custodian.
Interest Rate Collars, Caps and Floors.
The Fund also may engage in interest rate transactions in the form of purchasing or selling interest rate caps or floors.
The Fund will not sell interest rate caps or floors that it does not own. The purchase of an interest rate cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest equal to the difference
of the index and the predetermined rate on a notional principal amount (i.e., the reference amount with respect to which
interest obligations are determined although no actual exchange of principal occurs) from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor.
Typically, the parties with which the Fund will
enter into interest rate transactions will be broker-dealers and other financial institutions. The Fund will not enter into any
interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto
is rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering
into such transaction or whose creditworthiness is believed by the Advisor to be equivalent to such rating. If there is a default
by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps and floors, however, are less liquid than swaps.
Certain federal income tax requirements may limit the Fund’s ability to engage in interest rate swaps.
Credit Default Swap Agreements. The
Fund may enter into credit default swap agreements. The “buyer” in a credit default contract is obligated to pay the
“seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying
reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the “par value” (full
notional value) of the reference obligation in exchange for the reference obligation. The Fund may be either the buyer or seller
in the transaction. If the Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing.
However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little
or no value. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, which can run between six
months and ten years but is typically structured between three and five years, provided that there is no default event. If an event
of default occurs, the seller must pay the buyer the full notional value of the reference obligation. Credit default swaps involve
greater risks than if the Fund had invested in the reference obligation directly. In addition to general market risks, credit default
swaps are subject to illiquidity risk, counterparty risk and credit risks. The Fund will enter into swap agreements only with counterparties
who are rated investment grade by at least one nationally recognized statistical rating organization at the time of entering into
such transaction or whose creditworthiness is believed by the Advisor to be equivalent to such rating. A buyer also will lose its
investment and recover nothing should an event of default occur. If an event of default were to occur, the value of the reference
obligation received by the seller, coupled with the periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the Fund.
If the Fund enters into a credit default swap,
the Fund may be required to report the swap as a “listed transaction” for tax shelter reporting purposes on the Fund’s
federal income tax return. If the Internal Revenue Service (the “IRS”) were to determine that the credit default swap
is a tax shelter, the Fund could be subject to penalties under the Internal Revenue Code of 1986, as amended (the “Code”).
Warrants and Rights. Warrants
and rights generally give the holder the right to receive, upon exercise and prior to the expiration date, a security of the issuer
at a stated price. Funds typically use warrants and rights in a manner similar to their use of options on securities, as described
in “General Characteristics of Options” above and elsewhere in this SAI. Risks associated with the use of warrants
and rights are generally similar to risks associated with the use of options. Unlike most options, however, warrants and rights
are issued in specific amounts, and warrants generally have longer terms than options. Warrants and rights are not likely to be
as liquid as exchange-traded options backed by a recognized clearing agency. In addition, the terms of warrants or rights may limit
the Fund’s ability to exercise the warrants or rights at such time, or in such quantities, as the Fund would otherwise wish.
The Fund may in the future employ new or additional
investment strategies and hedging instruments if those strategies and instruments are consistent with the Fund’s investment
objectives and are permissible under applicable regulations governing the Fund.
Additional Regulatory Limitations on the
Use of Futures and Related Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency Swap Contracts. The
CFTC has adopted regulations that subject registered investment companies and/or their investment advisors to regulation by the
CFTC if the registered investment company invests more than a prescribed level of its NAV in commodity futures, options on commodities
or commodity futures, swaps, or other financial instruments regulated under the Commodity Exchange Act (“CEA”) (“commodity
interests”), or if the registered investment company markets itself as providing investment exposure to such commodity interests.
The Advisor is registered as a commodity pool operator (“CPO”) under the CEA and is a National Futures Association
member firm; however, the Advisor does not act in the capacity of a registered CPO with respect to the Fund.
Although the Advisor is a registered commodity
pool operator (“CPO”) under the CEA and is a National Futures Association member firm, the Advisor has claimed an exclusion
from CPO registration pursuant to CFTC Rule 4.5 with respect to the Fund. To remain eligible for this exclusion, the Fund must
comply with certain limitations, including limits on trading in commodity interests, and restrictions on the manner in which the
Fund markets its commodity interests trading activities. These limitations may restrict the Fund’s ability to pursue its
investment strategy, increase the costs of implementing its strategy, increase its expenses and/or adversely affect its total return.
Please see “Risk of Additional Government
Regulation of Derivatives” for more information regarding governmental regulations of derivatives and similar transactions
Risk of Additional Government Regulation
of Derivatives.
The regulation of the U.S. and non-U.S. derivatives
markets has undergone substantial change in recent years and such change may continue. In particular, new Rule 18f-4 (the “Derivatives
Rule”), adopted by the SEC on October 28, 2020, replaces the asset segregation regime of Investment Company Act Release No.
10666 (Release 10666) with a new framework for the use of derivatives by registered funds. For funds using a significant amount
of derivatives, , the Derivatives Rule mandates a fund adopt and/or implement: (i) value at risk limitations in lieu of asset segregation
requirements; (ii) a written derivatives risk management program; (iii) new Board oversight responsibilities, and (iv) new reporting
and recordkeeping requirements. The Derivative Rule provides an exception for funds with derivative exposure to 10% of its net
assets, excluding certain currency and interest rate hedging transactions. In addition, the Derivatives Rule provides special treatment
for reverse repurchase agreements, similar financing transactions and unfunded commitment agreements. On August 19, 2022, the SEC
will rescind Release 10666 and withdraw letters and similar guidance addressing a fund’s use of derivatives and require funds
to satisfy the requirements of the Derivatives Rule. Unless a Fund elects to comply early with the Derivatives Rule, a Fund may
continue to engage in certain asset segregation practices in accordance with Release 10666 and related staff letters and guidance
until August 19, 2022.
It is possible that additional government regulation
of various types of derivative instruments, including futures, options on futures and swap agreements, may limit or prevent a fund
from using such instruments as part of its investment strategy, which could negatively impact the fund. While many provisions of
the Dodd-Frank Act have yet to be fully implemented and any regulatory or legislative activity may not necessarily have a direct,
immediate effect upon a fund, it is possible that, upon implementation of these measures or any future measures, they could potentially
limit or completely restrict the ability of a fund to use these instruments as a part of its investment strategy, increase the
costs of using these instruments or make them less effective. In particular, new position limits imposed on a fund or its counterparty
may impact the fund’s ability to invest in futures, options, and swaps in a manner that efficiently meets its investment
objective.
Short-Term Trading and Portfolio Turnover.
Short-term trading means the purchase and subsequent sale of a security after it has been held for a relatively brief period of
time. The Fund may engage in short-term trading in response to stock market conditions, changes in interest rates or other economic
trends and developments, or to take advantage of yield disparities between various fixed-income securities in order to realize
capital gains or improve income. Short-term trading may have the effect of increasing portfolio turnover rate. A high rate of portfolio
turnover (100% or greater) involves correspondingly greater brokerage expenses. The portfolio turnover rate for the Fund for the
fiscal years ended October 31, 2020 and October 31, 2019 was 62% and 40%, respectively.
Real Estate Securities. Investing
in securities of companies in the real estate industry subjects the Fund to the risks associated with the direct ownership of real
estate. These risks include:
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Declines in the value of real estate;
|
|
•
|
Risks related to general and local economic conditions;
|
|
•
|
Possible lack of availability of mortgage funds;
|
|
•
|
Extended vacancies of properties;
|
|
•
|
Increases in property taxes and operating expenses;
|
|
•
|
Changes in zoning laws;
|
|
•
|
Losses due to costs resulting from the cleanup of environmental problems;
|
|
•
|
Liability to third parties for damages resulting from environmental problems;
|
|
•
|
Casualty or condemnation losses;
|
|
•
|
Changes in neighborhood values and the appeal of properties to tenants;
|
|
•
|
Changes in interest rates; and
|
Therefore, to the extent that the Fund invests
a substantial amount of its assets in securities of companies in the real estate industry, the value of the Fund’s shares
may change at different rates compared to the value of shares of the Fund with investments in a mix of different industries.
Securities of companies in the real estate industry
include equity real estate investment trusts (“REITs”) and mortgage REITs. Equity REITs may be affected by changes
in the value of the underlying property owned by the REIT, while mortgage REITs may be affected by the quality of any credit extended.
Further, equity and mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and mortgage
REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidations. In addition, equity and mortgage
REITs could possibly fail to qualify for tax-free pass-through of income under the Code, as amended, or to maintain their exemptions
from registration under the 1940 Act. The above factors may also adversely affect a borrower’s or a lessee’s ability
to meet its obligations to a REIT. In the event of a default by a borrower or lessee, a REIT may experience delays in enforcing
its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
In addition, even the larger REITs in the industry
tend to be small- to medium-sized companies in relation to the equity markets as a whole. Moreover, shares of REITs may trade less
frequently and, therefore, are subject to more erratic price movements, than securities of larger issuers.
Gaming-Tribal Authority Investments.
The Fund may invest in securities issued by gaming companies, including gaming facilities operated by Indian (Native American)
tribal authorities. The value of the Fund’s investments in gaming companies is subject to legislative or regulatory changes,
adverse market conditions, and/or increased competition affecting the gaming sector. Securities of gaming companies may be considered
speculative, and generally exhibit greater volatility than the overall market. The market value of gaming company securities may
fluctuate widely due to unpredictable earnings, due in part to changing consumer tastes and intense competition, strong reaction
to technological developments, and the threat of increased government regulation.
Securities issued by Indian tribal authorities
are subject to particular risks. Indian tribes enjoy sovereign immunity, which is the legal privilege by which the United States
federal, state, and tribal governments cannot be sued without their consent. In order to sue an Indian tribe (or an agency or instrumentality
thereof), the tribe must have effectively waived its sovereign immunity with respect to the matter in dispute. Certain Indian tribal
authorities have agreed to waive their sovereign immunity in connection with their outstanding debt obligations. Generally, waivers
of sovereign immunity have been held to be enforceable against Indian tribes. Nevertheless, if a waiver of sovereign immunity is
held to be ineffective, claimants, including investors in Indian tribal authority securities (such as the Fund), could be precluded
from judicially enforcing their rights and remedies.
Further, in most commercial disputes with Indian
tribes, it may be difficult or impossible to obtain federal court jurisdiction. A commercial dispute may not present a federal
question, and an Indian tribe may not be considered a citizen of any state for purposes of establishing diversity jurisdiction.
The U.S. Supreme Court has held that jurisdiction in a tribal court must be exhausted before any dispute can be heard in an appropriate
federal court. In cases where the jurisdiction of the tribal forum is disputed, the tribal court first must rule as to the limits
of its own jurisdiction. Such jurisdictional issues, as well as the general view that Indian tribes are not considered to be subject
to ordinary bankruptcy proceedings, may be disadvantageous to holders of obligations issued by Indian tribal authorities, including
the Fund.
Cybersecurity and Operational Risk.
Cybersecurity breaches are either intentional or unintentional events that allow an unauthorized party to gain access to Fund assets,
customer data, or proprietary information, or cause the Fund or a
Fund service provider to suffer data corruption
or lose operational functionality. Intentional cybersecurity incidents include: unauthorized access to systems, networks, or devices
(such as through “hacking” activity); infection from computer viruses or other malicious software code; and attacks
that shut down, disable, slow, or otherwise disrupt operations, business processes, or website access or functionality. In addition,
unintentional incidents can occur, such as the inadvertent release of confidential information.
A cybersecurity breach could result in the loss
or theft of customer data or funds, the inability to access electronic systems (“denial of services”), loss or theft
of proprietary information or corporate data, physical damage to a computer or network system, or costs associated with system
repairs, any of which could have a substantial impact on the Fund. For example, in a denial of service, Fund shareholders could
lose access to their electronic accounts indefinitely, and employees of the Advisor, a Subadvisor, or the Fund’s other service
providers may not be able to access electronic systems to perform critical duties for the Fund, such as trading, NAV calculation,
shareholder accounting, or fulfilment of Fund share purchases and redemptions. Cybersecurity incidents could cause the Fund, the
Advisor, a Subadvisor, or other service provider to incur regulatory penalties, reputational damage, compliance costs associated
with corrective measures, or financial loss. They may also result in violations of applicable privacy and other laws. In addition,
such incidents could affect issuers in which the Fund invests, thereby causing the Fund’s investments to lose value.
Cyber-events have the potential to materially
affect the Fund and the Advisor’s relationships with accounts, shareholders, clients, customers, employees, products, and
service providers. The Fund has established risk management systems reasonably designed to seek to reduce the risks associated
with cyber-events. There is no guarantee that the Fund will be able to prevent or mitigate the impact of any or all cyber-events.
The Fund is exposed to operational risk arising
from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the fund’s
service providers, counterparties, or other third parties, failed or inadequate processes and technology or system failures.
The Advisor, each subadvisor, and their affiliates
have established risk management or operational failure systems that seek to reduce cybersecurity and operational risks, and business
continuity plans in the event of a cybersecurity breach or operational failure. However, there are inherent limitations in such
plans, including that certain risks have not been identified, and there is no guarantee that such efforts will succeed, especially
since none of the Advisor, the Subadvisors, or their affiliates controls the cybersecurity or operational systems of the Fund’s
third-party service providers (including the Fund’s custodian), or those of the issuers of securities in which the Fund invests.
In addition, other disruptive events, including
(but not limited to) natural disasters and public health crises (such as the novel coronavirus (COVID-19) pandemic), may adversely
affect the Fund’s ability to conduct business, in particular if the Fund’s employees or the employees of its service
providers are unable or unwilling to perform their responsibilities as a result of any such event. Even if the Fund’s employees
and the employees of its service providers are able to work remotely, those remote work arrangements could result in the Fund’s
business operations being less efficient than under normal circumstances, could lead to delays in its processing of transactions,
and could increase the risk of cyber-events.
Market Events. Events in certain sectors have
resulted, and may in the future result, in an unusually high degree of volatility in the financial markets, both domestic and foreign.
These events have included, but are not limited to : bankruptcies, corporate restructurings, and other events related to the sub-prime
mortgage crisis in 2008; governmental efforts to limit short selling and high frequency trading; measures to address U.S. federal
and state budget deficits, social, political, and economic instability in Europe; economic stimulus by the Japanese central bank;
steep declines in oil prices; dramatic changes in energy prices and currency exchange rates; and China’s economic slowdown.
Interconnected global economies and financial markets increase the possibility that conditions in one country or region might adversely
impact issuers in a different country or region. Both domestic and foreign equity markets have experienced increased volatility
and turmoil, with issuers that have exposure to the real estate, mortgage, and credit markets particularly affected, and it is
uncertain when these conditions will recur. Banks and financial services companies could suffer losses if interest rates were to
rise or economic conditions deteriorate.
In addition to relatively high market
volatility and reduced liquidity in credit and fixed-income markets may adversely affect many issuers worldwide. Actions taken
by the U.S. Federal Reserve (Fed) or foreign central banks to stimulate or stabilize economic growth, such as interventions in
currency markets, could cause high volatility in the equity and fixed-income markets. Reduced liquidity may result in less money
being available to purchase raw materials, goods, and services from emerging markets, which may, in turn, bring down the prices
of these economic staples. It may also
result in emerging-market issuers having
more difficulty obtaining financing, which may, in turn, cause a decline in their securities prices.
In addition, while interest rates have
been unusually low in recent years in the United States and abroad, any decision by the Fed to adjust the target fed funds rate,
among other factors, could cause markets to experience continuing high volatility. A significant increase in interest rates may
cause a decline in the market for equity securities. Also, regulators have expressed concern that rate increases may contribute
to price volatility. These events and the possible resulting market volatility may have an adverse effect on the Fund. The U.S.
is also considering significant new investments in infrastructure and national defense which, coupled with lower federal taxes,
could lead to increased government borrowing and higher interest rates. While these proposed policies are going through the political
process, the equity and debt markets may react strongly to expectations, which could increase volatility, especially if the market’s
expectations for changes in government policies are not borne out. The U.S. is also renegotiating many of its global trade relationships
and has imposed or threatened to impose significant import tariffs. These actions could lead to price volatility and overall declines
in U.S. and global investment markets.
Political turmoil within the United States
and abroad may also impact the Funds. Although the U.S. government has honored its credit obligations, it remains possible that
the United States could default on its obligations. While it is impossible to predict the consequences of such an unprecedented
event, it is likely that a default by the United States would be highly disruptive to the United States and global securities markets
and could significantly impair the value of the Fund’s investments. Similarly, political events within the United States
at times have resulted, and may in the future result, in a shutdown of government services, which could negatively affect the U.S.
economy, decrease the value of many Fund investments, and increase uncertainty in or impair the operation of the United States
or other securities markets. The U.S. is also renegotiating many of its global trade relationships and has imposed or threatened
to impose significant import tariffs. These actions could lead to price volatility and overall declines in U.S. and global investment
markets.
Uncertainties surrounding the sovereign
debt of a number of EU countries and the viability of the EU have disrupted and may in the future disrupt markets in the United
States and around the world. If one or more countries leave the EU or the EU dissolves, the world’s securities markets likely
will be significantly disrupted. On January 31, 2020, the UK left the EU, commonly referred to as “Brexit.”, and there
commenced a transition period during which the EU and UK will negotiate and agree on the nature of their future relationship. Negotiators
representing the United Kingdom and EU came to a preliminary trade agreement on December 24, 2020. The trade agreement was ratified
by the UK Parliament and the European Parliament and took effect on January 1, 2021. Many aspects of the United Kingdom-EU trade
relationship remain subject to further negotiation. There is significant market uncertainty regarding Brexit’s ramifications,
and the range and potential implications of possible political, regulatory, economic, and market outcomes are difficult to predict.
This uncertainty may affect other countries in the EU and elsewhere, and may cause volatility within the EU, triggering prolonged
economic downturns in certain countries within the EU. In addition, Brexit may create additional and substantial economic stresses
for the UK, including a contraction of the UK economy and price volatility in UK stocks, decreased trade, capital outflows, devaluation
of the British pound, wider corporate bond spreads due to uncertainty and declines in business and consumer spending as well as
foreign direct investment. Brexit may also adversely affect UK-based financial firms that have counterparties in the EU or participate
in market infrastructure (trading venues, clearing houses, settlement facilities) based in the EU. Additionally, the spread of
the novel coronavirus (COVID-19) pandemic will stretch the resources and deficits of many countries in the EU and throughout the
world, increasing the risk of default on their sovereign debt. These events and the resulting market volatility may have an adverse
effect on the performance of the Fund.
A widespread health crisis such as a global
pandemic could cause substantial market volatility, exchange trading suspensions and closures, impact the ability to complete redemptions,
and affect Fund performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global
business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the
global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing
political, social and economic risks. Any such impact could adversely affect the fund’s performance, resulting in losses
to your investment.
The United States has responded to the novel coronavirus (COVID-19) pandemic and resulting economic distress with fiscal and monetary
stimulus packages. In late March 2020, the government passed the Coronavirus Aid, Relief, and Economic Security Act, a stimulus
package providing for over $2.2 trillion in resources to small businesses, state and
local governments, and individuals that have
been adversely impacted by the novel coronavirus (COVID-19) pandemic. In addition, in mid-March 2020 the Fed cut interest rates
to historically low levels and promised unlimited and open-ended quantitative easing, including purchases of corporate and municipal
government bonds. The Fed also enacted various programs to support liquidity operations and funding in the financial markets, including
expanding its reverse repurchase agreement operations, adding $1.5 trillion of liquidity to the banking system, establishing swap
lines with other major central banks to provide dollar funding, establishing a program to support money market funds, easing various
bank capital buffers, providing funding backstops for businesses to provide bridging loans for up to four years, and providing
funding to help credit flow in asset-backed securities markets. The Fed also plans to extend credit to small- and medium-sized
businesses.
Political and military events, including in
North Korea, Venezuela, Iran, Syria, and other areas of the Middle East, and nationalist unrest in Europe and South America, also
may cause market disruptions.
In addition, there is a risk that the prices
of goods and services in the United States and many foreign economies may decline over time, known as deflation. Deflation may
have an adverse effect on stock prices and creditworthiness and may make defaults on debt more likely. If a country’s economy
slips into a deflationary pattern, it could last for a prolonged period and may be difficult to reverse.
Use of Segregated and Other Special Accounts
As noted under “Risk of Additional Government
Regulation of Derivatives”, on October 28, 2020, the SEC announced it would rescind Release 10666. However, unless the Fund
elects to comply early with the Derivatives Rule, the Fund may continue to engage in certain asset segregation practices in accordance
with Release 10666 and related staff letters and guidance until June 21, 2022, as described in this subsection.
Use of extensive hedging and other strategic
transactions by the Fund will require, among other things, that the Fund post collateral with counterparties or clearinghouses
and/or segregate cash or other liquid assets with its custodian, or a designated subcustodian, to the extent that the Fund’s
obligations are not otherwise “covered” through ownership of the underlying security, financial instrument or currency.
In general, either the full amount of any obligation
by the Fund to pay or deliver securities or assets under a transaction or series of transactions must be covered at all times by
(a) holding the securities, instruments or currency required to meet the Fund’s obligations under such transactions or series
of transactions, or (b) subject to any regulatory restrictions, segregating an amount of cash or other liquid assets at least equal
to the current amount of the obligation. The segregated assets cannot be sold or transferred unless equivalent assets are substituted
in their place or it is no longer necessary to segregate them. Some examples of cover requirements are set forth below.
Call Options. A call option on securities
written by the Fund will require the Fund to hold the securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or other liquid assets sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by the Fund on an index will require the Fund to own portfolio securities
that correlate with the index or to segregate cash or other liquid assets equal to its obligations under the option.
Put Options. A put option on securities
written by the Fund will require the Fund to segregate cash or other liquid assets equal to the exercise price.
OTC Options. OTC options entered into
by the Fund, including those on securities, currency, financial instruments or indices, and OTC-issued and exchange-listed index
options generally will provide for cash settlement, although the Fund will not be required to do so. As a result, when the Fund
sells these instruments it will segregate an amount of cash or other liquid assets equal to its obligations under the options.
OTC-issued and exchange-listed options sold by the Fund other than those described above generally settle with physical delivery,
and the Fund will segregate an amount of cash or liquid high grade debt securities equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery or cash settlement will be treated the same as
other options settling with physical delivery.
Currency Contracts. Except when the Fund
enters into a forward contract in connection with the purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract that obligates the Fund to buy or sell a foreign currency
generally will require the Fund to hold an
amount of that currency or liquid securities
denominated in that currency equal to the Fund’s obligations or to segregate cash or other liquid assets equal to the amount
of the Fund’s obligations.
Futures Contracts and Options on Futures
Contracts. In the case of a futures contract or an option on a futures contract, the Fund must deposit initial margin
and, in some instances, daily variation margin, in addition to segregating assets sufficient to meet its obligations under the
contract. These assets may consist of cash, cash equivalents, liquid debt, equity securities or other acceptable assets.
Swaps. The Fund will calculate the net
amount, if any, of its obligations relating to swaps on a daily basis and will segregate an amount of cash or other liquid assets
having an aggregate value at least equal to this net amount.
Caps, Floors and Collars. Caps, floors
and collars require segregation of assets with a value equal to the Fund’s net obligation, if any.
Hedging and other strategic transactions may
be covered by means other than those described above when consistent with applicable regulatory policies. The Fund also may enter
into offsetting transactions so that its combined position, coupled with any segregated assets, equals its net outstanding obligation.
The Fund could purchase a put option, for example, if the exercise price of that option is the same or higher than the exercise
price of a put option sold by the Fund. In addition, if it holds a futures contract or a forward contract, the Fund could, instead
of segregating assets, purchase a put option on the same futures contract or forward contract with an exercise price as high as
or higher than the price of the contract held. Other hedging and strategic transactions also may be offset in combinations. If
the offsetting transaction terminates on or after the time the primary transaction terminates, no segregation is required, but
if it terminates prior to that time, assets equal to any remaining obligation would need to be segregated.
Investment Restrictions
The investment policies and strategies of the
Fund described in this SAI and the Prospectus, except for the nine investment restrictions designated as fundamental policies under
this caption, are not fundamental and may be changed by the Board without shareholder approval.
Fundamental Investment Restrictions
As referred to above, the following nine investment
restrictions of the Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders
of a majority of the Fund’s outstanding voting securities, which as used in this SAI means the lesser of (a) 67% of the shares
of the Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present
or represented at the meeting or (b) more than 50% of outstanding shares of the Fund. As a matter of fundamental policy, the Fund
may not:
|
(1)
|
Issue senior securities, except as permitted by the Investment Company Act of 1940 Act, as amended
(the “1940 Act”) and the rules and interpretive positions of the Securities and Exchange Commission (the “SEC”)
thereunder. Senior securities that the Fund may issue in accordance with the 1940 Act include preferred shares, borrowing, futures,
when-issued and delayed delivery securities and forward foreign currency exchange transactions.
|
|
(2)
|
Borrow money, except as permitted by the 1940 Act and the rules and interpretive positions of the
SEC thereunder.
|
|
(3)
|
Act as an underwriter, except to the extent that the Fund may be deemed to be an underwriter for
the purposes of the Securities Act of 1933, as amended (the “1933 Act”), in connection with the disposition of portfolio
securities or purchase any security which is subject to legal or contractual delays in or restrictions on resale if after such
purchase more than 50% of the Fund’s total assets would be invested in such securities.
|
|
(4)
|
Purchase real estate or any interest therein, except through the purchase of corporate or certain
government securities (including securities secured by mortgage or a leasehold interest or other interest in real estate and securities
of companies investing in real estate) in accordance with the Fund’s investment objectives.
|
|
(5)
|
Make loans except through the lending of portfolio securities and the purchase of securities in
accordance with the Fund’s investment objectives. The Fund does not for this purpose consider repurchase agreements and bank
obligations to be the making of a loan.
|
|
(6)
|
Invest in commodities or in commodity contracts or in puts, calls or combinations of both except
options on securities and securities indices, and futures contracts on securities and securities indices and options on such futures.
|
|
(7)
|
Invest more than 5% of its total assets taken at market value at the time of purchase in securities
of any one issuer, other than obligations of the United States government and its agencies and instrumentalities and repurchase
agreements collateralized by such obligations.
|
|
(8)
|
Purchase securities of any issuer if such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by the Fund.
|
|
(9)
|
Purchase securities of issuers conducting their principal business activity in the same industry
if immediately after such purchase the value of its investment in such industry would exceed 25% of its total assets taken at market
value. For purposes of construing this fundamental restriction No. 9, tax-exempt municipal securities shall not be considered to
represent industries.
|
The Fund does not have a fundamental policy
with respect to short sales and purchases on margin.
In regard to restriction (2), the Fund may borrow
money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of Fund securities. The 1940 Act currently requires
that the Fund have 300% asset coverage at the time of borrowing with respect to all borrowings other than temporary borrowings.
With respect to restriction (7), a diversified
fund, as to at least 75% of the value of its total assets, generally may not, except with respect to government securities and
securities of other investment companies, invest more than 5% of its total assets in the securities, or own more than 10% of the
outstanding voting securities, of any one issuer. In determining the issuer of a municipal security, each state, each political
subdivision, agency, and instrumentality of each state and each multi-state agency of which such state is a member is considered
a separate issuer. In the event that securities are backed only by assets and revenues of a particular instrumentality, facility
or subdivision, such entity is considered the issuer.
For purposes of construing restriction (9),
securities of the U.S. government, its agencies, or instrumentalities are not considered to represent industries. Tax-exempt municipal
obligations backed by the credit of a governmental entity also are not considered to represent industries.
Whenever an investment policy or investment
restriction set forth in the Prospectus or this SAI states a maximum percentage of assets that may be invested in any security
or other asset or describes a policy regarding quality standards, such percentage limitation or standard shall be determined immediately
after and as a result of the Fund’s acquisition of such security or asset. Accordingly, any later increase or decrease resulting
from a change in values, assets or other circumstances or any subsequent rating change made by a rating agency (or as determined
by the Subadvisor if the security is not rated by a rating agency) will not compel the Fund to dispose of such security or other
asset. Notwithstanding the foregoing, the Fund must always be in compliance with the borrowing policies set forth above.
Non-fundamental Investment Restrictions
The Fund has adopted the following non-fundamental
investment policies, which may be changed by the Board without approval of the Fund’s shareholders:
|
(1)
|
The Fund intends to purchase securities through private placements, but no purchase will be made
if as a result more than 20% of the value of the Fund’s total assets would be invested in such securities.
|
|
(2)
|
If a percentage restriction on investment or utilization of assets as set forth above is adhered
to at the time an investment is made, a later change in percentage resulting from changes in the value of the Fund’s assets
will not be considered a violation of the restriction.
|
|
(3)
|
The Fund may also be subject to certain restrictions and guidelines imposed by lenders if the Fund
engages in
|
borrowings. The Fund does not anticipate
that such guidelines would have a material adverse effect on its common shareholders or the Fund’s ability to achieve its
investment objectives.
|
(4)
|
The Fund will invest only in countries on the Advisor’s Approved Country Listing. The Approved
Country Listing is a list maintained by the Advisor’s investment department that outlines all countries, including the United
States that have been approved for investment by funds managed by the Advisor.
|
|
(5)
|
If allowed by the Fund’s other investment policies and restrictions, the Fund may invest
up to 5% of its total assets in Russian equity securities and up to 10% of its total assets in Russian fixed-income securities.
All Russian securities must be: (a) denominated in U.S. dollars; (b) traded on a major exchange; and (c) held physically outside
of Russia.
|
Portfolio Turnover
The Fund may engage in short-term trading strategies, and securities
may be sold without regard to the length of time held when, in the opinion of the Subadvisor, investment considerations warrant
such action. The Fund’s annual rate of portfolio turnover may vary from year to year as well as within a year. A high rate
of portfolio turnover (100% or more) generally involves correspondingly greater brokerage commission expenses, which must be borne
directly by the Fund and could generate short-term capital gain taxable as ordinary income, which could have a negative impact
on the Fund’s performance over time. Portfolio turnover is calculated by dividing the lesser of purchases or sales of Fund
securities during the fiscal year by the monthly average of the value of the Fund’s securities. (Excluded from the computation
are all securities, including options, with maturities at the time of acquisition of one year or less.) The portfolio turnover
rate for the Fund for the fiscal years ended October 31, 2020 and October 31, 2019 was 62% and 40%, respectively.
Those Responsible for Management
The business of the Fund is managed by the Board, including certain
Trustees who are not “interested persons” (as defined in the 1940 Act) of the fund (the “Independent Trustees”).
The Trustees elect officers who are responsible for the day-to-day operations of the fund and who execute policies formulated by
the Trustees. Several of the Trustees and officers of the Fund also are officers or directors of the Advisor. Each Trustee oversees
the fund and other funds in the John Hancock Fund Complex (as defined below).
The tables below present certain information
regarding the Trustees and officers of the Fund, including their principal occupations which, unless specific dates are shown,
are of at least five years’ duration. In addition, the table includes information concerning other directorships held by
each Trustee in other registered investment companies or publicly traded companies. Information is listed separately for each Trustee
who is an “interested person” (as defined in the 1940 Act) of the Fund (each a “Non-Independent Trustee”)
and the Independent Trustees. As of October 31, 2020, the John Hancock Fund Complex consisted of 196 funds (including separate
series of series mutual funds). The Board appointed Ms. Rathke to serve as Independent Trustee on September 15, 2020. As of March
22, 2018, James R. Boyle is considered an Independent Trustee. The address of each Trustee and officer of the Fund is 200 Berkeley
Street, Boston, Massachusetts 02116. The Board consists of thirteen members.
Non-Independent Trustees
|
|
Name
(Birth Year)
|
Positions with
the Fund1
|
Principal Occupation(s) and Other
Directorships During the Past 5 Years
|
Number of
Funds in John
Hancock Fund
Complex
Overseen by
Trustee
|
Andrew G. Arnott2
(1971)
|
Trustee (since 2017);
President (Since 2014)
|
Head of Wealth and Asset Management, United States and Europe,
for John Hancock and Manulife (since 2018); Director and Executive Vice President, John Hancock Investment Management LLC (since
2005, including prior positions); Director and Executive Vice President, John Hancock Variable Trust Advisers LLC (since 2006,
including prior positions); President, John Hancock Investment Management Distributors LLC (since 2004, including prior positions);
President of various trusts within the John Hancock Fund Complex (since 2007, including prior positions).
Trustee of various trusts within the John Hancock Fund Complex (since
2017).
|
196
|
Marianne Harrison2
(1963)
|
Trustee
(since 2018)
|
President and CEO, John Hancock (since 2017); President and CEO,
Manulife Canadian Division (2013 – 2017); Member, Board of Directors, CAE Inc. (since 2019); Member, Board of Directors,
MA Competitive Partnership Board (since 2018); Member, Board of Directors, American Council of Life Insurers (ACLI) (since 2018);
Member, Board of Directors, Communitech, an industry-led innovation center that fosters technology companies in Canada (2017 -
2019); Member, Board of Directors, Manulife Assurance Canada (2015-2017); Board Member, St. Mary’s General Hospital Foundation
(2014-2017); Member, Board of Directors, Manulife Bank of Canada (2013-2017); Member, Standing Committee of the Canadian Life &
Health Assurance Association (2013-2017); Member, Board of Directors, John Hancock USA, John Hancock Life & Health, John Hancock
New York (2012 – 2013).
Trustee of various trusts within the John Hancock Fund Complex (since
2018).
|
196
|
|
|
|
|
|
Independent Trustees
Name
(Birth Year)
|
Position(s) with
the Fund1
|
Principal Occupation(s) and Other
Directorships During the Past 5 Years
|
Number of
Funds in John
Hancock Fund
Complex
Overseen by
Trustee
|
Charles L. Bardelis
(1941)
|
Trustee
(since 2012)
|
Director, Island Commuter Corp. (marine transport).
Trustee of various trusts within the John Hancock Fund Complex (since
1988).
|
196
|
James R. Boyle (1959)
|
Trustee
(since 2015)
|
Chief Executive Officer, Foresters Financial (since 2018); Chairman and Chief Executive Officer, Zillion Group, Inc. (formerly HealthFleet, Inc.) (healthcare) (2014-2018);
|
196
|
Name
(Birth Year)
|
Position(s) with
the Fund1
|
Principal Occupation(s) and Other
Directorships During the Past 5 Years
|
Number of
Funds in John
Hancock Fund
Complex
Overseen by
Trustee
|
|
|
Executive Vice President and Chief Executive Officer, U.S. Life Insurance
Division of Genworth Financial, Inc. (insurance) (January 2014–July 2014); Senior Executive Vice President, Manulife Financial,
President and Chief Executive Officer, John Hancock (1999-2012); Chairman and Director, John Hancock Investment Management LLC,
John Hancock Investment Management Distributors LLC, and John Hancock Variable Trust Advisers LLC (2005–2010).
Trustee of various trusts within the John Hancock Fund Complex (2005–2014
and since 2015).
|
|
Peter S. Burgess
(1942)
|
Trustee
(since 2012)
|
Consultant (financial, accounting, and auditing
matters) (since 1999); Certified Public Accountant; Partner, Arthur Andersen (independent public accounting firm) (prior to 1999);
Director, Lincoln Educational Services Corporation (since 2004); Director, Symetra Financial Corporation (2010–2016); Director,
PMA Capital Corporation (2004–2010).
Trustee of various trusts within the John Hancock
Fund Complex (since 2005).
|
196
|
William H. Cunningham
(1944)
|
Trustee
(since 2005)
|
Professor, University of Texas, Austin, Texas (since 1971); former
Chancellor, University of Texas System and former President of the University of Texas, Austin, Texas; Chairman (since 2009) and
Director (since 2006), Lincoln National Corporation (insurance); Director, Southwest Airlines (since 2000); former Director, LIN
Television (2009-2014).
Trustee of various trusts within the John Hancock Fund Complex (since 1986).
|
196
|
Grace K. Fey
(1946)
|
Trustee
(since 2012)
|
Chief Executive Officer, Grace Fey Advisors
(since 2007); Director and Executive Vice President, Frontier Capital Management Company (1988–2007); Director, Fiduciary
Trust (since 2009).
Trustee of various trusts within the John Hancock Fund Complex (since 2008).
|
196
|
Deborah C. Jackson
(1952)
|
Trustee
(since 2008)
|
President, Cambridge College, Cambridge, Massachusetts (since 2011); Board of Directors, Amwell Corporation (since 2020); Board of Directors, Massachusetts Women’s Forum (2018-2020); Board of Directors, National Association of Corporate Directors/New England (2015-2020); Board of
|
196
|
Name
(Birth Year)
|
Position(s) with
the Fund1
|
Principal Occupation(s) and Other
Directorships During the Past 5 Years
|
Number of
Funds in John
Hancock Fund
Complex
Overseen by
Trustee
|
|
|
Directors, Association of Independent Colleges
and Universities of Massachusetts (2014-2017); Chief Executive Officer, American Red Cross of Massachusetts Bay (2002–2011);
Board of Directors of Eastern Bank Corporation (since 2001); Board of Directors of Eastern Bank Charitable Foundation (since 2001);
Board of Directors of American Student Assistance Corporation (1996–2009); Board of Directors of Boston Stock Exchange (2002–2008);
Board of Directors of Harvard Pilgrim Healthcare (health benefits company) (2007–2011).
Trustee of various trusts within the John Hancock
Fund Complex (since 2008).
|
|
Hassell H. McClellan
(1945)
|
Trustee
(since 2012) and
Chairperson of the Board (since 2017)
|
Director/Trustee, Virtus Funds (since 2008);
Director, The Barnes Group (since 2010); Associate Professor, The Wallace E. Carroll School of Management, Boston College (retired
2013).
Trustee (since 2005) and Chairperson of the Board (since 2017) of various trusts within the John Hancock Fund Complex.
|
196
|
James M. Oates
(1946)
|
Trustee
(since 2012)
|
Managing Director, Wydown Group (financial consulting
firm) (since 1994); Chairman and Director, Emerson Investment Management, Inc. (2000–2015); Independent Chairman, Hudson
Castle Group, Inc. (formerly IBEX Capital Markets, Inc.) (financial services company) (1997–2011); Director, Stifel Financial
(since 1996); Director, Investor Financial Services Corporation (1995–2007); Director, Connecticut River Bancorp (1998–2014);
Director/Trustee, Virtus Funds (since 1988).
Trustee (since 2004) and Chairperson of the
Board (2005–2016) of various trusts within the John Hancock Fund Complex.
|
196
|
Steven R. Pruchansky
(1944)
|
Trustee (since 2005) and Vice Chairperson of the Board
(since 2012)
|
Managing Director, Pru Realty (since 2017);
Chairman and Chief Executive Officer, Greenscapes of Southwest Florida, Inc. (2014-2020); Director and President, Greenscapes of
Southwest Florida, Inc. (until 2000); Member, Board of Advisors, First American Bank (until 2010); Managing Director, Jon James,
LLC (real estate) (since 2000); Partner, Right Funding, LLC (2014-2017); Director, First Signature Bank & Trust Company (until
1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991).
Trustee (since 1992), Chairperson of the Board (2011–2012), and Vice Chairperson of the Board (since 2012) of various trusts
within the John Hancock Fund Complex.
|
196
|
Name
(Birth Year)
|
Position(s) with
the Fund1
|
Principal Occupation(s) and Other
Directorships During the Past 5 Years
|
Number of
Funds in John
Hancock Fund
Complex
Overseen by
Trustee
|
Frances G. Rathke
(1960)
|
Trustee
(since 2020)
|
Director, Northern New England Energy Corporation (since 2017);
Director, Audit Committee Chair and Compensation Committee Member, Green Mountain Power Corporation (since 2016); Director, Treasurer
and Finance & Audit Committee Chair, Flynn Center for Performing Arts (since 2016); Director, Audit Committee Chair and Compensation
Committee Member, Planet Fitness (since 2016); Director, Citizen Cider, Inc. (high-end hard cider and hard seltzer company) (since
2016); Chief Financial Officer and Treasurer, Keurig Green Mountain, Inc. (2003-retired 2015); Independent Financial Consultant,
Frances Rathke Consulting (strategic and financial consulting services) (2001-2003); Chief Financial Officer and Secretary, Ben
& Jerry’s Homemade, Inc. (1989-2000, including prior positions); Senior Manager, Coopers & Lybrand, LLC (independent
public accounting firm) (1982-1989).
Trustee of various trusts within the John Hancock Fund Complex (since 2020).
|
196
|
Gregory A. Russo
(1949)
|
Trustee
(since 2008)
|
Director and Audit Committee Chairman (2012-2020),
and Member, Audit Committee and Finance Committee (2011-2020), NCH Healthcare System, Inc. (holding company for multi-entity healthcare
system); Director and Member (2012-2018), and Finance Committee Chairman (2014-2018), The Moorings, Inc. (nonprofit continuing
care community); Vice Chairman, Risk & Regulatory Matters, KPMG LLP (KPMG) (2002–2006); Vice Chairman, Industrial Markets,
KPMG (1998–2002); Chairman and Treasurer, Westchester County, New York, Chamber of Commerce (1986–1992); Director,
Treasurer and Chairman of Audit and Finance Committees, Putnam Hospital Center (1989–1995); Director and Chairman of Fundraising
Campaign, United Way of Westchester and Putnam Counties, New York (1990–1995).
Trustee of various trusts within the John Hancock
Fund Complex (since 2008).
|
196
|
|
1
|
Each Trustee holds office until his or her successor is elected and qualified, or until the Trustee’s
death, retirement, resignation or removal. The Fund holds annual meetings of shareholders, at which Trustees are elected. Each
Trustee was most recently elected to serve on the Board at a shareholder meeting held on February 16, 2021.
|
|
2
|
The Trustee is a Non-Independent Trustee due to his position with the Advisor and certain of its
affiliates.
|
|
3
|
Mr. Boyle served as Trustee at various time periods prior to 2015.
|
Correspondence intended for any of the
Trustees may be sent to the attention of the individual Trustee or to the Board c/o the Secretary of the Fund at 200 Berkeley Street,
Boston, Massachusetts 02116-2805. All communications addressed to the Board or individual Trustee will be logged and sent to the
Board or individual Trustee. The Secretary may determine not to forward any letter to Trustees that does not relate to the business
of the Fund.
Principal Officers who are not Trustees
The following table presents information regarding
the current principal officers of the Fund who are not Trustees, including their principal occupations which, unless specific dates
are shown, are of at least five years’ duration. Each of the officers is an affiliated person of the Advisor. All of the
officers listed are officers or employees of the Advisor or its affiliates. All of the officers also are officers of all of the
other funds for which the Advisor serves as investment advisor.
Principal Officers who are not Trustees
Name
(Birth Year)
|
Position(s) with
the Fund1
|
|
Principal Occupation(s) During Past 5 Years
|
Charles A. Rizzo
(1957)
|
Chief Financial Officer (since 2007)
|
|
Vice President, John Hancock Financial Services
(since 2008); Senior Vice President, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (since
2008); Chief Financial Officer of various trusts within the John Hancock Fund Complex (since 2007).
|
Salvatore Schiavone
(1965)
|
Treasurer (2007-2009 and since 2010, including prior positions)
|
|
Assistant Vice President, John Hancock Financial Services (since
2007); Vice President, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (since 2007); Treasurer
of various trusts within the John Hancock Fund Complex (since 2007, including prior positions).
|
Christopher (Kit)
Sechler
(1973)
|
Secretary and Chief Legal Officer (Since 2018); Assistant Secretary (2009-2018)
|
|
Vice President and Deputy Chief Counsel, John Hancock Investment
Management (since 2015); Assistant Vice President and Senior Counsel (2009–2015), John Hancock Investment Management; Chief
Legal Officer and Secretary of various trusts within the John Hancock Fund Complex (since 2018); Assistant Secretary of John Hancock
Investment Management LLC and John Hancock Variable Trust Advisers LLC (since 2009).
|
Trevor Swanberg
(1979)
|
Chief Compliance Officer
(since 2020)
|
|
Chief Compliance Officer, various trusts within the John Hancock Fund Complex, John Hancock Investment Management LLC, and John Hancock Variable Trust Advisers LLC (since 2020); Deputy Chief Compliance Officer, various trusts within the John Hancock Fund Complex (2018–2020); Deputy Chief Compliance Officer, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (2019–2020); Assistant Chief Compliance Officer, various trusts within the John Hancock Fund Complex (2016–2018); Assistant Chief Compliance Officer, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (2016–2019); Vice President, State Street Global Advisors (2015–2016).
|
|
1
|
Each officer holds office for an indefinite term until his or her successor is duly elected and
qualified or until he/she dies, retires, resigns, is removed or becomes disqualified.
|
Additional Information about the Trustees
In addition to the description of each Trustee’s
Principal Occupation(s) and Other Directorships set forth above, the following provides further information about each Trustee’s
specific experience, qualifications, attributes or skills with respect to the Fund. The information in this section should not
be understood to mean that any of the Trustees is an “expert” within the meaning of the U.S. federal securities laws.
There are no specific required qualifications
for Board membership. The Board believes that the different perspectives, viewpoints, professional experience, education, and individual
qualities of each Trustee represent a diversity of experiences and a variety of complementary skills. Each Trustee has experience
as a Trustee of the Fund, as well as experience as a Trustee of other John Hancock funds. It is the Trustees’ belief that
this allows the Board, as a whole, to oversee the business of the Fund in a manner consistent with the best interests of the Fund’s
shareholders. When considering potential nominees to fill vacancies on the Board, and as part of its annual self-evaluation, the
Board reviews the mix of skills and other relevant experiences of the Trustees.
Independent Trustees
Charles L. Bardelis — As a director and former chief
executive of an operating company, Mr. Bardelis has experience with a variety of financial, staffing, regulatory and operational
issues. He also has experience as a director of publicly traded companies.
James R. Boyle — Through his former positions as chairman and director of the Advisor, position as a senior executive
of MFC, the Advisor’s parent company, and positions with other affiliates of the Advisor, Mr. Boyle has leadership and operational
experience in the development and management of registered investment companies, variable annuities and retirement products, enabling
him to provide management input to the Board. He also has experience as a senior executive of healthcare and insurance companies,
and an auditor.
Peter S. Burgess — As a financial consultant,
Certified Public Accountant, and former partner in a major international public accounting firm, Mr. Burgess has experience in
the auditing of financial services companies and mutual funds. He also has experience as a director of publicly traded operating
companies.
William H. Cunningham — Mr. Cunningham has management
and operational oversight experience as a former Chancellor and President of a major university. Mr. Cunningham regularly teaches
a graduate course in corporate governance at the law school and at the Red McCombs School of Business at The University of Texas
at Austin. He also has oversight and corporate governance experience as a current and former director of a number of operating
companies, including an insurance company.
Grace K. Fey — Ms. Fey has significant governance, financial services, and asset management industry expertise based
on her extensive non-profit board experience, as well as her experience as a consultant to non-profit and corporate boards, and
as a former director and executive of an investment management firm.
Deborah C. Jackson — Ms. Jackson has leadership,
governance, management, and operational oversight experience as the lead director of a large bank, president of a college, and
as the former chief executive officer of a major charitable organization. She also has expertise in financial services matters
and oversight and corporate governance experience as a current and former director of various other corporate organizations, including
an insurance company, a regional stock exchange, a telemedicine company, and non-profit entities.
Hassell H. McClellan — As a former professor of finance and policy in the graduate management department of a major
university, a current director of a public company, and as a former director of several privately held companies, Mr. McClellan
has experience in corporate and financial matters. He also has experience as a director of other investment companies not affiliated
with the Trust.
James M. Oates — As a senior officer and director of
investment management companies, Mr. Oates has experience in investment management. Mr. Oates previously served as chief executive
officer of one bank and president and chief operating officer of another bank. He also has experience as a director of publicly
traded companies and investment companies not affiliated with the Trust.
Steven R. Pruchansky — Mr. Pruchansky has entrepreneurial,
executive and financial experience as a senior officer and chief executive of business in the retail, service and distribution
companies and a current and former director of real estate and banking companies.
Frances G. Rathke — Through her former positions in senior financial roles, as a former certified public accountant,
and as a consultant on strategic and financial matters, Ms. Rathke has experience as a leader overseeing, conceiving, implementing,
and analyzing strategic and financial growth plans, and financial statements. Ms. Rathke also has experience in the auditing of
financial statements and related materials. In addition, she has experience as a director of various organizations, including a
publicly traded company and a non-profit entity.
Gregory A. Russo — As a retired Certified Public Accountant, Mr. Russo served as a partner and Global Vice Chairman in
a major independent registered public accounting firm as well as a member of its geographic boards of directors and International
Executive Team. He has also served on a number of boards of directors for various operating entities. As a result of Mr. Russo’s
diverse global responsibilities, he possesses accounting, finance and executive operating experience.
Non-Independent Trustees
Andrew G. Arnott — Through his positions as Executive
Vice President of John Hancock Financial Services; Director and Executive Vice President of the Advisor and an affiliated investment
advisor, John Hancock Variable Trust Advisers LLC; President of John Hancock Investment Management Distributors LLC; and President
of the John Hancock Fund Complex, Mr. Arnott has experience in the management of investments, registered investment companies,
variable annuities and retirement products, enabling him to provide management input to the Board.
Marianne Harrison — Through her position as President
and CEO, John Hancock, and previous experience as President and CEO, Manulife Canadian Division, President and General Manager
for John Hancock Long-Term Care Insurance, and Executive Vice President and Controller for Manulife, Ms. Harrison has experience
as a strategic business builder expanding product offerings and distribution, enabling her to provide management input to the Board.
Duties of Trustees; Committee Structure
The Fund is organized as a Massachusetts business
trust. Under the Declaration of Trust, the Trustees are responsible for managing the affairs of the Fund, including the appointment
of advisors and subadvisors. Each Trustee has the experience, skills, attributes or qualifications described above (see “—Principal
Occupation(s) and Other Directorships” and “—Additional Information about the Trustees” above). The Board
appoints officers who assist in managing the day-to-day affairs of the Fund. The Board met 6 times during the latest fiscal year.
The Board has appointed an Independent Trustee
as Chairperson. The Chairperson presides at meetings of the Trustees and may call meetings of the Board and any Board committee
whenever he deems it necessary. The Chairperson participates in the preparation of the agenda for meetings of the Board and the
identification of information to be presented to the Board with respect to matters to be acted upon by the Board. The Chairperson
also acts as a liaison with the Fund’s management, officers, attorneys, and other Trustees generally between meetings. The
Chairperson may perform such other functions as may be requested by the Board from time to time. The Board has also designated
a Vice Chairperson to serve in the absence of the Chairperson. Except for any duties specified in this SAI or pursuant to the Fund’s
Declaration of Trust or Amended and Restated By-Laws (the “By-Laws), or as assigned by the Board, the designation of a Trustee
as Chairperson or Vice Chairperson does not impose on that Trustee any duties, obligations or liability that are greater than the
duties, obligations or liability imposed on any other Trustee, generally. The Board has designated a number of standing committees
as further described below, each of which has a Chairperson. The Board also may designate working groups or ad hoc committees as
it deems appropriate.
The Board believes that this leadership structure
is appropriate because it allows the Board to exercise informed and independent judgment over matters under its purview, and it
allocates areas of responsibility among committees or working groups of Trustees and the full Board in a manner that enhances effective
oversight. The Board considers leadership by an Independent Trustee as Chairperson to be integral to promoting effective independent
oversight of the Fund’s operations and meaningful representation of the shareholders’ interests. The Board also believes
that having a super-majority of Independent Trustees is appropriate and in the best interest of the Fund’s shareholders.
Nevertheless, the Board also believes that having interested persons serve on the Board brings corporate and financial
viewpoints that are, in the Board’s view,
helpful elements in its decision-making process. In addition, the Board believes that Messrs. Arnott and Boyle and Ms. Harrison,
as current or former executives of the Advisor (or of its parent company, MFC), and of other affiliates of the Advisor, provide
the Board with the perspective of the Advisor in managing and sponsoring the Fund. The leadership structure of the Board may be
changed, at any time and in the discretion of the Board, including in response to changes in circumstances or the characteristics
of the Fund.
Board Committees
The Board has established an Audit Committee;
Compliance Committee; Contracts, Legal & Risk Committee; Nominating and Governance Committee; and Investment Committee.
Audit Committee. The Board has
a standing Audit Committee composed solely of Independent Trustees (Messrs. Bardelis, Burgess and Oates, and Ms. Rathke). Mr. Burgess
serves as Chairperson of this Committee. This Committee met 4 times during the fiscal year ended October 31, 2020, to review the
internal and external accounting and auditing procedures of the Fund and, among other things, to consider the selection of an independent
registered public accounting firm for the Fund, to approve all significant services proposed to be performed by its independent
registered public accounting firm and to consider the possible effect of such services on its independence.
Compliance Committee. The Board
also has a standing Compliance Committee (Mses. Fey and Jackson and Mr. Cunningham). This Committee reviews and makes recommendations
to the full Board regarding certain compliance matters relating to the Fund. Ms. Fey serves as Chairperson of this Committee. This
Committee met 4 times during the fiscal year ended October 31, 2020.
Contracts, Legal & Risk Committee.
The Board also has a standing Contracts, Legal & Risk Committee (Messrs. Boyle, Pruchansky and Russo). This Committee oversees
the initiation, operation, and renewal of the various contracts between the funds and other entities. These contracts include advisory
and subadvisory agreements, custodial and transfer agency agreements and arrangements with other service providers. The Committee
also reviews the significant legal affairs of the funds, as well as any significant regulatory and legislative actions or proposals
affecting or relating to the funds or their service providers. The Committee also assists the Board in its oversight role with
respect to the processes pursuant to which the Advisor and the Subadvisor identify, manage and report the various risks that affect
or could affect the funds. Mr. Russo serves as Chairperson of this Committee. The Contracts, Legal & Risk Committee held 4
meetings during the fiscal year ended October 31, 2020.
Nominating and Governance Committee. The Board also has a
Nominating and Governance Committee composed of all of the Independent Trustees. This Committee will consider nominees recommended
by Trust shareholders. Nominations should be forwarded to the attention of the Secretary of the Trust at 200 Berkeley Street, Boston,
Massachusetts 02116. Any shareholder nomination must be submitted in compliance with all of the pertinent provisions of Rule 14a-8
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in order to be considered by this Committee.
This Committee met 5 times during the fiscal year ended October 31, 2020.
Investment Committee. The Board also has an Investment Committee
composed of all of the Trustees. The Investment Committee has 5 subcommittees with the Trustees divided among the five subcommittees
(each an “Investment Sub- Committee”). Ms. Jackson and Messrs. Bardelis, Boyle, Cunningham, and Oates serve as Chairpersons
of the Investment Sub-Committees. Each Investment Sub-Committee reviews investment matters relating to a particular group of funds
in the John Hancock Fund Complex and coordinates with the full Board regarding investment matters. The Investment Committee met
5 times during the fiscal year ended October 31, 2020.
Annually, the Board evaluates its performance and that of its Committees,
including the effectiveness of the Board’s Committee structure.
Risk Oversight
As a registered investment company, the Fund
is subject to a variety of risks, including investment risks (such as, among others, market risk, credit risk and interest rate
risk), financial risks (such as, among others, settlement risk, liquidity risk and valuation risk), compliance risks, and operational
risks. As a part of its overall activities, the Board
oversees the Fund’s risk management activities
that are implemented by the Advisor, the Fund’s Chief Compliance Officer (“CCO”) and other service providers
to the Fund. The Advisor has primary responsibility for the Fund’s risk management on a day-to-day basis as a part of its
overall responsibilities. The Fund’s Subadvisor, subject to oversight of the Advisor, is primarily responsible for managing
investment and financial risks as a part of its day-to-day investment responsibilities, as well as operational and compliance risks
at its firm. The Advisor and the CCO also assist the Board in overseeing compliance with investment policies of the Fund and regulatory
requirements, and monitor the implementation of the various compliance policies and procedures approved by the Board as a part
of its oversight responsibilities.
The Advisor identifies to the Board the risks
that it believes may affect the Fund and develops processes and controls regarding such risks. However, risk management is a complex
and dynamic undertaking and it is not always possible to comprehensively identify and/or mitigate all such risks at all times since
risks are at times impacted by external events. In discharging its oversight responsibilities, the Board considers risk management
issues throughout the year with the assistance of its various Committees as described below. Each Committee meets at least quarterly
and presents reports to the Board, which may prompt further discussion of issues concerning the oversight of the Fund’s risk
management. The Board as a whole also reviews written reports or presentations on a variety of risk issues as needed and may discuss
particular risks that are not addressed in the Committee process.
The Board has established an Investment Committee,
which consists of five Investment Sub-Committees. Each Investment Sub-Committee assists the Board in overseeing the significant
investment policies of the Fund and the performance of its subadvisors. The Advisor monitors these policies and subadvisor activities
and may recommend changes in connection with the Fund to the relevant Investment Sub-Committee in response to subadvisor requests
or other circumstances. On at least a quarterly basis, the Investment Sub-Committee reviews reports from the Advisor regarding
the Fund’s investment performance, which include information about investment and financial risks and how they are managed,
and from the CCO or his/her designee regarding subadvisor compliance matters. In addition, the Investment Sub-Committee meets periodically
with the portfolio managers of the Fund’s subadvisor to receive reports regarding management of the Fund, including with
respect to risk management processes.
The Audit Committee assists the Board in reviewing
with the independent auditors, at various times throughout the year, matters relating to the Fund’s financial reporting.
In addition, this Committee oversees the process of the Fund’s valuation of its portfolio securities, assisted by the Fund’s
Pricing Committee (composed of officers of the Fund), which calculates fair value determinations pursuant to procedures adopted
by the Board.
The Compliance Committee assists the Board in overseeing the activities
of the Fund’s CCO with respect to the compliance programs of the Fund, the Advisor, the subadvisor, and certain of the Fund’s
other service providers (the distributor and transfer agent). This Committee and the Board receive and consider periodic reports
from the CCO throughout the year, including the CCO’s annual written report, which, among other things, summarizes material
compliance issues that arose during the previous year and any remedial action taken to address these issues, as well as any material
changes to the compliance programs
The Contracts, Legal & Risk Committee assists
the Board in its oversight role with respect to the processes pursuant to which the Advisor and the subadvisor identify, assess,
manage and report the various risks that affect or could affect the Fund. This Committee reviews reports from the Fund’s
Advisor on a periodic basis regarding the risks facing the Fund, and makes recommendations to the Board concerning risks and risk
oversight matters as the Committee deems appropriate. This Committee also coordinates with the other Board Committees regarding
risks relevant to the other Committees, as appropriate.
In addressing issues regarding the Fund’s
risk management between meetings, appropriate representatives of the Advisor communicate with the Chairperson of the Board, the
relevant Committee Chair, or the Fund’s CCO, who is directly accountable to the Board. As appropriate, the Chairperson of
the Board, the Committee Chairs and the Trustees confer among themselves, with the Fund’s CCO, the Advisor, other service
providers, external fund counsel, and counsel to the Independent Trustees, to identify and review risk management issues that may
be placed on the full Board’s agenda and/or that of an appropriate Committee for review and discussion.
In addition, in its annual review of the Fund’s
advisory, subadvisory and distribution agreements, the Board reviews information provided by the Advisor, the subadvisor and the
distributor relating to their operational capabilities, financial condition, risk management processes and resources.
The Advisor also has its own, independent interest
in risk management. In this regard, the Advisor has appointed a Risk and Investment Operations Committee, consisting of senior
personnel from each of the Advisor’s functional departments. This Committee reports periodically to the Board and the Contracts,
Legal & Risk Committee on risk management matters. The Advisor’s risk management program is part of the overall risk
management program of John Hancock, the Advisor’s parent company. John Hancock’s Chief Risk Officer supports the Advisor’s
risk management program, and at the Board’s request will report on risk management matters.
Compensation of Trustees
The Fund pays fees to its Independent Trustees.
Trustees also are reimbursed for travel and other out-of-pocket expenses. Each Independent Trustee receives in the aggregate from
the Fund and the other closed-end funds in the John Hancock Fund Complex an annual retainer of $40,000.
The following table provides information regarding
the compensation paid by the Fund and the other investment companies in the John Hancock Fund Complex to the Independent Trustees
for their services during the Fund’s fiscal year ended October 31, 2020.
Compensation Table1
Independent Trustees
|
Fund
|
John Hancock Fund Complex
|
Charles L. Bardelis
|
$4,000
|
$410,000
|
James R. Boyle
|
$4,000
|
$388,000
|
Peter S. Burgess
|
$4,000
|
$430,000
|
William H. Cunningham
|
$4,000
|
$410,000
|
Grace K. Fey
|
$4,000
|
$430,000
|
Deborah C. Jackson
|
$4,000
|
$410,000
|
Hassell H. McClellan
|
$4,000
|
$550,000
|
James M. Oates
|
$4,000
|
$410,000
|
Steven R. Pruchansky
|
$4,000
|
$410,000
|
Frances G. Rathke2
|
$1,000
|
$104,082
|
Gregory A. Russo
|
$4,000
|
$430,000
|
Non-Independent Trustees
|
|
|
Andrew G. Arnott
|
$0
|
$0
|
Marianne Harrison
|
$0
|
$0
|
1 The Trust does not have a pension or retirement plan
for any of its Trustees or officers.
2 Appointed to the Board on September 15, 2020.
Trustee Ownership of Shares of John Hancock
Funds
The table below sets forth the aggregate dollar
range of equity securities beneficially owned by the Trustees in the Fund and in all John Hancock funds overseen by each Trustee
as of December 31, 2020. The information as to beneficial ownership is based on statements furnished to the Fund by the Trustees.
Each of the Trustees has all voting and investment powers with respect to the shares indicated.
Trustees
|
Fund
|
John Hancock Fund Complex
|
Independent Trustees
|
|
|
Charles L. Bardelis
|
$10,001-$50,000
|
Over $100,000
|
James R. Boyle
|
$10,001-$50,000
|
Over $100,000
|
Peter S. Burgess
|
$10,001-$50,000
|
Over $100,000
|
William H. Cunningham
|
$10,001-$50,000
|
Over $100,000
|
Grace K. Fey
|
$10,001-$50,000
|
Over $100,000
|
Deborah C. Jackson
|
$10,001-$50,000
|
Over $100,000
|
Hassell H. McClellan
|
$10,001-$50,000
|
Over $100,000
|
James M. Oates
|
$10,001-$50,000
|
Over $100,000
|
Steven R. Pruchansky
|
$50,001-$100,000
|
Over $100,000
|
Frances G. Rathke1
|
$1-$10,000
|
$50,001-$100,000
|
Trustees
|
Fund
|
John Hancock Fund Complex
|
Gregory A. Russo
|
$10,001-$50,000
|
Over $100,000
|
Non-Independent Trustees
|
|
|
Andrew G. Arnott
|
None
|
Over
$100,000
|
Marianne
Harrison
|
None
|
Over $100,000
|
1 Appointed to the Board on September 15, 2020.
Shareholders of the Fund
As of February 1, 2021, the officers and Trustees
of the Fund as a group owned beneficially less than 1% of the outstanding shares of the Fund.
To the best knowledge of the Fund, the shareholders
(principal holders) listed below owned more than 5% of the fund’s shares as of February 1, 2021. Information related to these
shareholders is as of the date indicated and may be different as of February 1, 2021. A shareholder who owns beneficially more
than 25% of a fund is deemed to be a control person of that fund.
Name and Address of Owner
|
|
Amount
|
Percent
|
1607 Capital Partners, LLC
13 S. 13th Street, Suite 400
Richmond, VA 23219
|
|
835,806
|
9.60%1
|
1 Based on a Schedule 13G filing dated February
14, 2020.
Investment Advisory
and Other Services
A discussion regarding the basis for the Trustees’
approval of the Advisory Agreement and the Subadvisory Agreements is available in the Fund’s most recent shareholder report
for the fiscal year ended October 31.
THE ADVISOR
The Advisor is a Delaware limited liability
company whose principal offices are located at 200 Berkeley Street, Boston, Massachusetts 02116 and serves as the Fund’s
investment advisor. The Advisor is registered with the SEC as an investment advisor under the Advisers Act.
Founded in 1968, the Advisor is an indirect
principally owned subsidiary of John Hancock Life Insurance Company (U.S.A.), a subsidiary of Manulife Financial Corporation (“Manulife
Financial” or the “Company”). Manulife Financial is the holding company of The Manufacturers Life Insurance Company
(the “Life Company”) and its subsidiaries. John Hancock Life Insurance Company (U.S.A.) and its subsidiaries (“John
Hancock”) today offer a broad range of financial products and services, including whole, term, variable, and universal life
insurance, as well as college savings products, mutual funds, fixed and variable annuities, long-term care insurance and various
forms of business insurance. Additional information about John Hancock may be found on the Internet at johnhancock.com.
The Advisor has contractually agreed to
waive a portion of its management fee and/or reimburse expenses for certain funds of the John Hancock group of funds complex, including
the fund (the participating portfolios). This waiver is based upon aggregate net assets of all the participating portfolios. The
amount of the reimbursement is calculated daily and allocated among all the participating portfolios in proportion to the daily
net assets of each fund. During the year ended October 31, 2020, this waiver amounted to 0.01% of the fund’s average daily
net assets. This arrangement expires on July 31, 2022, unless renewed by mutual agreement of the fund and the Advisor based upon
a determination that this is appropriate under the circumstances at that time.
The Advisor’s parent company has been
helping individuals and institutions work toward their financial goals since 1862. The Advisor offers investment solutions managed
by institutional money managers, taking a disciplined team approach to portfolio management and research, leveraging the expertise
of seasoned investment professionals. The Advisor has been managing closed-end funds since 1971. As of December 31, 2020, the Advisor
had total assets under management of approximately $153.3 billion.
Manulife Financial Corporation is a leading international financial
services group with principal operations in Asia,
Canada and the United States. Operating primarily as John Hancock
in the United States and Manulife elsewhere, it provides financial protection products and advice, insurance, as well as wealth
and asset management services through its extensive network of solutions for individuals, groups and institutions. As of December
31, 2020, it had over C$1.3 trillion (US$1.0 trillion) in assets under management and administration. Its global headquarters are
in Toronto, Canada, and it trades as ‘MFC’ on the Toronto Stock Exchange, New York Stock Exchange (the “NYSE”),
and the Philippine Stock Exchange, and under ‘945’ in Hong Kong. Manulife Financial Corporation can be found on the
Internet at manulife.com.
The Advisor serves as investment advisor to
the Fund and is responsible for monitoring the Subadvisor’s services to the Fund.
Advisory Agreement. The Fund has
entered into an investment management contract dated July 1, 2009 (the “Advisory Agreement”) with the Advisor. As compensation
for its advisory services under the Advisory Agreement, the Advisor receives a fee from the Fund, calculated and paid daily, at
an annual rate of the Fund’s average daily managed assets.
The following table shows the advisory fee that
the Fund incurred and paid to the Advisor for the last three fiscal years ended October 31, 2020, October 31, 2019, and October
31, 2018.
October 31, 2020
|
October 31, 2019
|
October 31, 2018
|
$1,287,865
|
$1,302,264
|
$1,311,009
|
Pursuant to the Advisory Agreement and subject
to the general supervision of the Trustees, the Advisor selects, contracts with, and compensates the Subadvisor to manage the investments
and determine the composition of the assets of the Fund; provided, that any contract with a Subadvisor (a “Subadvisory Agreement”)
shall be in compliance with and approved as required by the 1940 Act, except for such exemptions therefrom as may be granted to
the Fund or the Advisor. The Advisor monitors the Subadvisor’s management of the Fund’s investment operations in accordance
with the investment objectives and related investment policies of the Fund, reviews the performance of the Subadvisor and reports
periodically on such performance to the Board.
Pursuant to the Advisory Agreement, the Advisor
has entered into a Subadvisory Agreement with the Subadvisor to provide day-to-day portfolio management of the Fund and to implement
the Fund’s portfolio management strategies and investment objective. The Advisory Agreement provides that the Advisor may
terminate the Subadvisory Agreement entered into and directly assume any functions performed by the Subadvisor, upon approval of
the Board.
The Fund pays all expenses of its organization,
operations and business.
The Advisory Agreement had an initial period
of two years and continues from year to year so long as such continuance is approved at least annually: (i) by the vote of a majority
of the Independent Trustees; and (ii) either by the Board or by the vote of a majority of the outstanding shares of the Fund.
The Advisory Agreement may be terminated at
any time without penalty upon sixty (60) days’ written notice by the Board or the Advisor, as applicable, or by the vote
of the majority of the outstanding shares of the Fund. The Advisory Agreement will terminate automatically in the event of its
assignment. The Subadvisory Agreement terminates automatically upon the termination of the Advisory Agreement.
The Advisory Agreement provides that, in the
absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations or duties to the Fund under
such agreements on the part of the Advisor, the Advisor shall not be liable to the Fund or to any shareholder for any loss sustained
in connection with the purchase, holding, redemption or sale of any security on behalf of the Fund.
Service Agreement. The Fund has
entered into a management-related service contract dated July 1, 2009 and re-executed on January 1, 2014 (the “Service Agreement”)
with JHIM, under which the Fund receives Non-Advisory Services. These “Non-Advisory Services” include, but are not
limited to, legal, tax, accounting, valuation, financial reporting and performance, compliance, service provider oversight, portfolio
and cash management, project management office, EDGAR conversion and filing, graphic design, and other services that are not investment
advisory in nature.
JHIM is reimbursed by the Fund for its costs
in providing Non-Advisory Services to the Fund under the Service
Agreement. The following table shows the expenses
incurred by JHIM in providing services under the Services Agreement for the last three fiscal years ended October 31, 2020, October
31, 2019, and October 31, 2018.
October 31, 2020
|
October 31, 2019
|
October 31, 2018
|
$27,017
|
$24,878
|
$50,658
|
The Service Agreement had an initial period
of two years and continues from year to year so long as such continuance is specifically approved at least annually by a majority
of the Board and a majority of the Independent Trustees. The Fund or JHIM may terminate the Service Agreement at any time without
penalty upon 60 days’ written notice to the other party. The Service Agreement may be amended by mutual written agreement
of the parties, without obtaining shareholder approval.
JHIM is not liable for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with the matters to which the Service Agreement relates, except
losses resulting from willful misfeasance, bad faith or negligence by JHIM in the performance of its duties or from reckless disregard
by JHIM of its obligations under the Service Agreement.
THE SUBADVISOR
Subadvisory Agreement. The Advisor
entered into a Subadvisory Agreement dated December 31, 2005 with the Subadvisor (the “Subadvisory Agreement”). The
Subadvisor handles the fund’s portfolio management activity, subject to oversight by the Advisor. The Subadvisor, organized
in 1968, is a wholly owned subsidiary of John Hancock Life Insurance Company (U.S.A.) (a subsidiary of Manulife Financial, a publicly
held, Canadian-based company). As of December 31, 2020, the Subadvisor had total assets under management of approximately $221.31
billion. The Subadvisor is located at 200 Berkeley Street, Boston, Massachusetts 02116.
Under the terms of the Subadvisory Agreement,
the Subadvisor is responsible for managing the investment and reinvestment of the assets of the Fund, subject to the supervision
and control of the Board and the Advisor.
The Subadvisory Agreement had an initial period
of two years and continues from year to year so long as such continuance is approved at least annually: (i) by the Board or by
the holders of a majority of its outstanding voting securities and (ii) by a majority of the Trustees who are not “interested
persons” (as defined in the 1940 Act) of any party to the Subadvisory Agreement. The Subadvisory Agreement terminates automatically
in the event of its assignment or upon termination of the Advisory Agreement and may be terminated without penalty upon 60 days’
written notice at the option of the Advisor, the Subadvisor, by the Board or by a vote of a majority of the Fund’s outstanding
shares. As discussed above, the Advisor may terminate the Subadvisory Agreement and directly assume responsibility for the services
provided by the Subadvisor upon approval by the Board without the need for approval of the shareholders of the Fund.
The Subadvisory Agreement provides that in the
absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, the
Subadvisor is not liable for any error or judgment or mistake of law or for any loss suffered by the Fund.
Both the Advisor and the Subadvisor are controlled
by Manulife Financial. Advisory arrangements involving an affiliated subadvisor may present certain potential conflicts of interest.
Manulife Financial benefits not only from the net advisory fee retained by the Advisor, but also from the subadvisory fee paid
by the Advisor to the Subadvisor. Consequently, Manulife may be viewed as benefiting financially from the appointment of or continued
service of the Subadvisor to manage the Fund. However, both the Advisor, in recommending to the Board the appointment or continued
service of an affiliated subadvisor, and the Subadvisor have a fiduciary duty to act in the best interests of the Fund and its
shareholders. The Independent Trustees are aware of and monitor these potential conflicts of interest.
PORTFOLIO MANAGERS
The Subadvisor handles the Fund’s portfolio management activities,
subject to oversight by the Advisor. The individuals jointly and primarily responsible for the day-to-day management of the Fund’s
portfolio are listed below.
The following tables present information regarding
accounts other than the Fund for which each portfolio manager has day-to-day management responsibilities. Accounts are grouped
into three categories: (i) other investment companies, (ii) other pooled investment vehicles, and (iii) other accounts. To the
extent that any of these accounts pay advisory fees based on account performance, information on those accounts is specifically
broken out. In addition,
any assets denominated in foreign currencies
have been converted into U.S. dollars using the exchange rates as of the applicable date. Also shown below the chart is each portfolio
manager’s investment in the Fund.
The following table reflects approximate information
as of October 31, 2020:
|
Registered Investment Companies
|
|
Other Pooled Investment Vehicles
|
|
Other Accounts
|
|
Number of Accounts
|
|
Total Assets $Million
|
|
Number of Accounts
|
|
Total Assets $Million
|
|
Number of Accounts
|
|
Total Assets $Million
|
John F. Addeo, CFA
|
1
|
|
1,282
|
|
7
|
|
1,559
|
|
4
|
|
342
|
Jeffrey N. Given, CFA
|
20
|
|
41,125
|
|
27
|
|
4,337
|
|
21
|
|
12,891
|
Dennis F. McCafferty, CFA
|
1
|
|
1,282
|
|
10
|
|
4,841
|
|
0
|
|
0
|
Performance-Based Fees for Other Accounts Managed
Number and value of accounts within the total accounts that are
subject to a performance-based advisory fee: None.
Portfolio Manager Ownership of Shares of the Fund
The following table indicates as of October 31, 2020, the value of
shares beneficially owned by the portfolio managers in the Fund.
Portfolio Manager
|
Range of Beneficial Ownership in the Fund
|
John F. Addeo
|
$100,001-$500,000
|
Jeffrey N. Given
|
$1-10,000
|
Dennis F. McCafferty
|
$100,001-$500,000
|
Conflicts of Interest. When a
portfolio manager is responsible for the management of more than one account, the potential arises for the portfolio manager to
favor one account over another. The principal types of potential conflicts of interest that may arise are discussed below. For
the reasons outlined below, the Fund does not believe that any material conflicts are likely to arise out of a portfolio manager’s
responsibility for the management of the Fund as well as one or more other accounts. The Advisor and Subadvisor have adopted procedures
that are intended to monitor compliance with the policies referred to in the following paragraphs. Generally, the risks of such
conflicts of interests are increased to the extent that a portfolio manager has a financial incentive to favor one account over
another. The Advisor and Subadvisor have structured their compensation arrangements in a manner that is intended to limit such
potential for conflicts of interests. See “Compensation of Portfolio Managers” below.
|
•
|
A portfolio manager could favor one account over another in allocating new investment opportunities
that have limited supply, such as initial public offerings and private placements. If, for example, an initial public offering
that was expected to appreciate in value significantly shortly after the offering was allocated to a single account, that account
may be expected to have better investment performance than other accounts that did not receive an allocation on the initial public
offering. The Subadvisor has policies that require a portfolio manager to allocate such investment opportunities in an equitable
manner and generally to allocate such investments proportionately among all accounts with similar investment objectives.
|
|
•
|
A portfolio manager could favor one account over another in the order in which trades for the accounts
are placed. If a portfolio manager determines to purchase a security for more than one account in an aggregate amount that may
influence the market price of the security, accounts that purchased or sold the security first may receive a more favorable price
than accounts that made subsequent transactions. The less liquid the market for the security or the greater the percentage that
the proposed aggregate purchases or sales represent of average daily trading volume, the greater the potential for accounts that
make subsequent purchases or
|
sales to receive a less favorable
price. When a portfolio manager intends to trade the same security for more than one account, the policies of the Subadvisor generally
require that such trades be “bunched,” which means that the trades for the individual accounts are aggregated and each
account receives the same price. There are some types of accounts as to which bunching may not be possible for contractual reasons
(such as directed brokerage arrangements). Circumstances may also arise where the trader believes that bunching the orders may
not result in the best possible price. Where those accounts or circumstances are involved, the Subadvisor will place the order
in a manner intended to result in as favorable a price as possible for such client.
|
•
|
A portfolio manager could favor an account if the portfolio manager’s compensation is tied
to the performance of that account rather than all accounts managed by the portfolio manager. If, for example, the portfolio manager
receives a bonus based upon the performance of certain accounts relative to a benchmark while other accounts are disregarded for
this purpose, the portfolio manager will have a financial incentive to seek to have the accounts that determine the portfolio manager’s
bonus achieve the best possible performance to the possible detriment of other accounts. Similarly, if the Subadvisor receives
a performance-based advisory fee, the portfolio manager may favor that account, whether or not the performance of that account
directly determines the portfolio manager’s compensation. The investment performance on specific accounts is not a factor
in determining the portfolio manager’s compensation. See “Compensation of Portfolio Managers” below. Neither
the Advisor nor the Subadvisor receives a performance-based fee with respect to any of the accounts managed by the portfolio managers.
|
|
•
|
A portfolio manager could favor an account if the portfolio manager has a beneficial interest in
the account, in order to benefit a large client or to compensate a client that had poor returns. For example, if the portfolio
manager held an interest in an investment partnership that was one of the accounts managed by the portfolio manager, the portfolio
manager would have an economic incentive to favor the account in which the portfolio manager held an interest. The Subadvisor imposes
certain trading restrictions and reporting requirements for accounts in which a portfolio manager or certain family members have
a personal interest in order to confirm that such accounts are not favored over other accounts.
|
|
•
|
If the different accounts have materially and potentially conflicting investment objectives or
strategies, a conflict of interest may arise. For example, if a portfolio manager purchases a security for one account and sells
the same security short for another account, such trading pattern could disadvantage either the account that is long or short.
In making portfolio manager assignments, the Subadvisor seeks to avoid such potentially conflicting situations. However, where
a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio
manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues
to hold or increase the holding in such security.
|
Compensation of Portfolio Managers
The Subadvisor has adopted a system of compensation
for portfolio managers and others involved in the investment process that is applied systematically among investment professionals.
At the Subadvisor, the structure of compensation of investment professionals is currently composed of the following basic components:
base salary and short-and long-term incentives. The following describes each component of the compensation package for the individuals
identified as a portfolio manager for the Funds.
|
•
|
Base salary. Base compensation is fixed and normally reevaluated on an annual basis. The Subadvisor
seeks to set compensation at market rates, taking into account the experience and responsibilities of the investment professional.
|
|
•
|
Incentives. Only investment professionals are eligible to participate in the short-and long-term
incentive plan. Under the plan, investment professionals are eligible for an annual cash award. The plan is intended
|
to provide a competitive level of
annual bonus compensation that is tied to the investment professional achieving superior investment performance and aligns the
financial incentives of the Subadvisor and the investment professional. Any bonus under the plan is completely discretionary, with
a maximum annual bonus that may be well in excess of base salary. Payout of a portion of this bonus may be deferred for up to five
years. While the amount of any bonus is discretionary, the following factors are generally used in determining bonuses under the
plan:
|
•
|
Investment Performance: The investment performance of all accounts managed by the investment
professional over one, three and five-year periods are considered. With respect to fixed income accounts, relative yields are also
used to measure performance. The pre-tax performance of each account is measured relative to an appropriate benchmark and universe
as identified in the table below.
|
|
•
|
Financial Performance: The profitability of the Subadvisor and its parent company are also
considered in determining bonus awards.
|
|
•
|
Non-Investment Performance: To a lesser extent, intangible contributions, including the
investment professional’s support of client service and sales activities, new fund/strategy idea generation, professional
growth and development, and management, where applicable, are also evaluated when determining bonus awards.
|
|
•
|
In addition to the above, compensation may also include a revenue component for an investment team
derived from a number of factors including, but not limited to, client assets under management, investment performance, and firm
metrics.
|
|
•
|
Manulife Equity Awards. A limited number of senior investment professionals may receive options
to purchase shares of Manulife Financial stock. Generally, such option would permit the investment professional to purchase a set
amount of stock at the market price on the date of grant. The option can be exercised for a set period (normally a number of years
or until termination of employment) and the investment professional would exercise the option if the market value of Manulife Financial
stock increases. Some investment professionals may receive restricted stock grants, where the investment professional is entitled
to receive the stock at no or nominal cost, provided that the stock is forgone if the investment professional’s employment
is terminated prior to a vesting date.
|
|
•
|
Deferred Incentives. Investment professionals may receive deferred incentives which are fully invested
in strategies managed by the team/individuals as well as other Manulife Asset Management strategies.
|
The Subadvisor also permits investment professionals
to participate on a voluntary basis in a deferred compensation plan, under which the investment professional may elect on an annual
basis to defer receipt of a portion of their compensation until retirement. Participation in the plan is voluntary.
Other Services
Proxy voting
The Fund’s proxy voting policies and procedures
(the “Fund’s Procedures”) delegate to the Subadvisor the responsibility to vote all proxies relating to securities
held by the Fund in accordance with the Subadvisor’s proxy voting policies and procedures. The Subadvisor has a duty to vote
such proxies in the best interests of the Fund and its shareholders. Complete descriptions of the Fund’s Procedures and the
proxy voting procedures of the Subadvisor are set forth in Appendix B to this SAI.
It is possible that conflicts of interest could
arise for the Subadvisor when voting proxies. Such conflicts could arise, for example, when the Subadvisor or its affiliate has
a client or other business relationship with the issuer of the security being voted or with a third party that has an interest
in the vote. A conflict of interest also could arise when the Fund, its investment advisor or principal underwriter or any of their
affiliates has an interest in the vote.
In the event that the Subadvisor becomes aware
of a material conflict of interest, the Fund’s Procedures generally require the Subadvisor to follow any conflicts procedures
that may be included in the Subadvisor’s proxy voting procedures. The conflict procedures generally will include one or more
of the following:
|
(a)
|
voting pursuant to the recommendation of a third party voting service;
|
|
(b)
|
voting pursuant to pre-determined voting guidelines; or
|
|
(c)
|
referring voting to a special compliance or oversight committee.
|
The specific conflicts procedures of the Subadvisor
are set forth in the Subadvisor’s proxy voting procedures included in Appendix B. While these conflicts procedures may reduce,
they will not necessarily eliminate, any influence on proxy voting of conflicts of interest.
Although the Subadvisor has a duty to vote all
proxies on behalf of the Fund, it is possible that the Subadvisor may not be able to vote proxies under certain circumstances.
For example, it may be impracticable to translate in a timely manner voting materials that are written in a foreign language or
to travel to a foreign country when voting in person rather than by proxy is required. In addition, if the voting of proxies for
shares of a security prohibits the Subadvisor from trading the shares in the marketplace for a period of time, the Subadvisor may
determine that it is not in the best interests of the Fund to vote the proxies. The Subadvisor also may choose not to recall securities
that have been lent in order to vote proxies for shares of the security since the Fund would lose security lending income if the
securities were recalled.
Information regarding how the Fund voted proxies
relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, on jhinvestments.com
and (ii) on the SEC’s website at http://www.sec.gov.
Determination of Net Asset Value
The Fund’s net asset value per Common
Share (“NAV”) is normally determined each business day at the close of regular trading on the NYSE (typically 4:00
p.m. Eastern Time, on each business day that the NYSE is open) by dividing the Fund’s net assets by the number of Common
Shares outstanding. In case of emergency or other disruption resulting in the NYSE not opening for trading or the NYSE closing
at a time other than the regularly scheduled close, the NAV may be determined as of the regularly scheduled close of the NYSE pursuant
to the Fund’s Valuation Policies and Procedures. The time at which shares and transactions are priced and until which orders
are accepted may vary to the extent permitted by the Securities and Exchange Commission and applicable regulations. On holidays
or other days when the NYSE is closed, the NAV is not calculated. Trading of securities that are primarily listed on foreign exchanges
may take place on weekends and U.S. business holidays on which the Fund’s NAV is not calculated. Consequently, the Fund’s
portfolio securities may trade and the NAV of the Fund’s Common Shares may be significantly affected on days when a shareholder
will not be able to purchase or sell the Fund’s Common Shares.
Portfolio securities are valued by various
methods that are generally described below. Portfolio securities also may be fair valued by the Fund’s Pricing Committee
in certain instances pursuant to procedures established by the Trustees. Equity securities are generally valued at the last sale
price or, for certain markets, the official closing price as of the close of the relevant exchange. Securities not traded on a
particular day are valued using last available bid prices. A security that is listed or traded on more than one exchange is typically
valued at the price on the exchange where the security was acquired or most likely will be sold. In certain instances, the Pricing
Committee may determine to value equity securities using prices obtained from another exchange or market if trading on the exchange
or market on which prices are typically obtained did not open for trading as scheduled, or if trading closed earlier than scheduled,
and trading occurred as normal on another exchange or market. Equity securities traded principally in foreign markets are typically
valued using the last sale price or official closing
price in the relevant exchange or market,
as adjusted by an independent pricing vendor to reflect fair value. On any day a foreign market is closed and the NYSE is open,
any foreign securities will typically be valued using the last price or official closing price obtained from the relevant exchange
on the prior business day adjusted based on information provided by an independent pricing vendor to reflect fair value. Debt obligations
are typically valued based on evaluated prices provided by an independent pricing vendor. The value of securities denominated in
foreign currencies is converted into U.S. dollars at the exchange rate supplied by an independent pricing vendor. Forward foreign
currency contracts are valued at the prevailing forward rates which are based on foreign currency exchange spot rates and forward
points supplied by an independent pricing vendor. Exchange-traded options are valued at the mid-price of the last quoted bid and
ask prices. Futures contracts whose settlement prices are determined as of the close of the NYSE are typically valued based on
the settlement price while other futures contracts are typically valued at the last traded price on the exchange on which they
trade. Foreign equity index futures that trade in the electronic trading market subsequent to the close of regular trading may
be valued at the last traded price in the electronic trading market as of the close of the NYSE, or may be fair valued based on
fair value adjustment factors provided by an independent pricing vendor in order to adjust for events that may occur between the
close of foreign exchanges or markets and the close of the NYSE. Swaps and unlisted options are generally valued using evaluated
prices obtained from an independent pricing vendor. Shares of open-end investment companies that are not exchange-traded funds
(“ETFs”) held by the Fund are valued based on the NAVs of such other investment companies.
Pricing vendors may use matrix pricing or
valuation models that utilize certain inputs and assumptions to derive values, including transaction data, broker-dealer quotations,
credit quality information, general market conditions, news, and other factors and assumptions. The Fund may receive different
prices when it sells odd-lot positions than it would receive for sales of institutional round lot positions. Pricing vendors generally
value securities assuming orderly transactions of institutional round lot sizes, but the Fund may hold or transact in such securities
in smaller, odd lot sizes.
The Pricing Committee engages in oversight
activities with respect to the Fund’s pricing vendors, which includes, among other things, monitoring significant or unusual
price fluctuations above predetermined tolerance levels from the prior day, back-testing of pricing vendor prices against actual
trades, conducting periodic due diligence meetings and reviews, and periodically reviewing the inputs, assumptions and methodologies
used by these vendors. Nevertheless, market quotations, official closing prices, or information furnished by a pricing vendor could
be inaccurate, which could lead to a security being valued incorrectly.
If market quotations, official closing prices,
or information furnished by a pricing vendor are not readily available or are otherwise deemed unreliable or not representative
of the fair value of such security because of market- or issuer-specific events, a security will be valued at its fair value as
determined in good faith by the Trustees. The Trustees are assisted in their responsibility to fair value securities by the Fund’s
Pricing Committee, and the actual calculation of a security’s fair value may be made by the Pricing Committee acting pursuant
to the procedures established by the Trustees. In certain instances, therefore, the Pricing Committee may determine that a reported
valuation does not reflect fair value, based on additional information available or other factors, and may accordingly determine
in good faith the fair value of the assets, which may differ from the reported valuation.
Fair value pricing of securities is intended
to help ensure that the Fund’s NAV reflects the fair market value of the Fund’s portfolio securities as of the close
of regular trading on the NYSE (as opposed to a value that no longer reflects market value as of such close). The use of fair value
pricing has the effect of valuing a security based upon the price the Fund might reasonably expect to receive if it sold that security
in an orderly transaction between market participants, but does not guarantee that the security can be sold at the fair value price.
Further, because of the inherent uncertainty and subjective nature of fair valuation, a fair valuation price may differ significantly
from the value that would have been used had a readily available market price for the investment existed and these differences
could be material.
Regarding the Fund’s investment in
an open-end investment company that is not an ETF, which (as noted above) is valued at such investment company’s NAV, the
prospectus for such investment company explains the circumstances and effects of fair value pricing for that investment company.
Brokerage Allocation
Pursuant to the Subadvisory Agreement, the Subadvisor
is responsible for placing all orders for the purchase and sale of portfolio securities of the Fund. The Subadvisor has no formula
for the distribution of the Fund’s brokerage business; rather it places orders for the purchase and sale of securities with
the primary objective of obtaining the most favorable overall results for the Fund and the Subadvisor’s other clients. The
cost of securities transactions for the Fund primarily consists of brokerage commissions or dealer or underwriter spreads. Fixed-income
securities and money market instruments generally are traded on a net basis and normally do not involve either brokerage commissions
or transfer taxes.
Occasionally, securities may be purchased directly
from the issuer. For securities traded primarily in the OTC market, the Subadvisor will, where possible, deal directly with dealers
who make a market in the securities unless better prices and execution are available elsewhere. Such dealers usually act as principals
for their own account.
Brokerage Commissions Paid
The following table shows the aggregate amount
of brokerage commissions paid by the Fund for the last three fiscal years ended October 31, 2020, October 31, 2019, and October
31, 2018.
October 31, 2020
|
October 31, 2019
|
October 31, 2018
|
$0
|
$75
|
$2,411
|
No brokerage commissions paid by the Fund during
the last three fiscal years were to any broker that: (i) is an affiliated person of the Fund; (ii) is an affiliated person of an
affiliated person of the Fund; or (iii) has an affiliated person that is an affiliated person of the Fund, Advisor, Subadvisor,
or principal underwriter.
Approved Trading Counterparties
The Subadvisor maintains and periodically updates
a list of approved trading counterparties. Portfolio managers may execute trades only with pre-approved broker-dealer/counterparties.
A sub-group of the Subadvisor’s Brokerage Practices Committee, through a delegation from the Subadvisor’s Senior Investment
Policy Committee, reviews and approves all broker-dealers/counterparties.
Selection of Brokers, Dealers, and Counterparties
In placing orders for purchase and sale of securities
and selecting trading counterparties (including banks or broker-dealers) to effect these transactions, the Subadvisor seeks prompt
execution of orders at the most favorable prices reasonably obtainable. The Subadvisor will consider a number of factors when selecting
trading counterparties, including the overall direct net economic result to the Fund (including commissions, which may not be the
lowest available, but which ordinarily will not be higher than the generally prevailing competitive range), the financial strength,
reputation and stability of the counterparty, the efficiency with which the transaction is effected, the ability to effect the
transaction when a large block trade is involved, the availability of the counterparty to stand ready to execute possibly difficult
transactions in the future, and other matters involved in the receipt of brokerage and research services.
The Subadvisor periodically prepares and maintains
a list of broker-dealer firms that have been deemed to provide valuable research as determined periodically by the investment staff,
together with a suggested non-binding amount of brokerage commissions (“non-binding target”) to be allocated to each
of these research firms, subject to certain requirements. Neither the Subadvisor nor any client has an obligation to any research
firm if the amount of brokerage commissions paid to the research firms is less than the applicable non-binding target.
In seeking best execution, traders have a variety
of venues available for execution. Traders may, in their discretion, use algorithmic strategies through direct market access (“DMA”)
tools and electronic crossing networks (“ECNs”). DMA allows the trader to act in the market without a full service
or other broker. ECNs give the trader additional options when searching for liquidity and the ability to trade block positions
in a more efficient manner. In selecting a broker, dealer or trading venue, traders consider the full range of available trading
platforms in seeking best execution.
Best Execution
The Subadvisor owes a duty to its clients to
seek best execution when executing trades on behalf of clients. “Best execution” generally is understood to mean the
most favorable cost or net proceeds reasonably obtainable under the circumstances. The Subadvisor is not obligated to choose the
broker-dealer offering the lowest available commission rate if, in the Subadvisor’s reasonable judgment, there is a material
risk that the total cost or proceeds from the transaction might be less favorable than may be obtained elsewhere, or, if a higher
commission is justified by the trading provided by the broker-dealer, or if other considerations dictate using a different broker-dealer.
Negotiated commission rates generally will reflect overall execution requirements of the transaction without regard to whether
the broker may provide other services in addition to execution.
The Subadvisor may pay higher or lower commissions
to different brokers that provide different categories of services. Under this approach, the Subadvisor periodically may classify
different brokers in different categories based on execution abilities, the quality of research, brokerage services, block trading
capability, speed and responsiveness, or other services provided by the brokers. Some examples of these categories may include,
without limitation, full service brokers, alternative trading systems, client commission and execution-only brokers.
The reasonableness of brokerage commission is
evaluated on an ongoing basis and at least annually on a formal basis.
When more than one broker-dealer is believed
to be capable of providing the best combination of price and execution with respect to a particular portfolio transaction, the
Subadvisor often selects a broker-dealer that furnishes research and other related services or products. The amount of brokerage
allotted to a particular broker-dealer is not made pursuant to any binding agreement or commitment with any selected broker-dealer.
However, the Subadvisor maintains an internal allocation procedure to identify those broker-dealers who have provided us with effective
research and the amount of research provided, and the Subadvisor endeavors to direct sufficient commissions to it to ensure the
continued receipt of research that the Subadvisor believes is useful.
Soft Dollar Considerations
The Subadvisor may pay for research and brokerage
services with the commission dollars generated by Fund account transactions (known as “soft dollar benefits”), subject
to certain conditions. Further, the Subadvisor may cause the Fund to pay up in return for soft dollar benefits (pay commissions,
markups or markdowns higher than those charged by other broker-dealers).
The research provided may be either proprietary
(created and provided by the broker-dealer, including tangible research products as well as access to analysts, traders and issuers)
or third-party (created by a third party, but provided by broker-dealer). Proprietary research is generally part of a “bundle”
of brokerage and research and the research is not separately priced. In the case of third party research, the cost of products
and services is generally more transparent, and payment is made by the broker to the preparer in “hard dollars.” The
Subadvisor may receive both proprietary and third party research and execution services.
The Subadvisor considers three factors with
respect to all third-party research and execution services received through soft dollars:
|
•
|
Whether the product or service is eligible research or brokerage under SEC rules and regulations;
|
|
•
|
Whether an eligible product or service actually provides “lawful and appropriate assistance”
in the performance of the Subadvisor’s investment decision-making responsibilities; and
|
|
•
|
Whether the amount of the commission paid is reasonable in light of the value of the product or
service provided by the broker-dealer (viewed in terms of the particular transaction or the Subadvisor’s overall responsibilities
with respect to the Subadvisor’s client accounts).
|
Research services currently purchased with soft
dollars include: reports on the economy, industries, sectors and individual companies or issuers; introduction to issuers, invitations
to trade conferences, statistical information; statistical models; political and country analyses; reports on legal developments
affecting portfolio securities; information on technical market actions; and credit analyses.
The overriding consideration in selecting brokers
to execute trade orders is the maximization of client profits through
a combination of controlling transaction and
securities costs and seeking the most effective use of brokers’ proprietary research and execution capabilities, while maintaining
relationships with those broker-dealers who consistently provide superior service. When the Subadvisor uses client brokerage commissions
(or markups or markdowns) to obtain research or other products or services, the Subadvisor receives a soft dollar benefit because
the Subadvisor does not have to produce or pay for the research, products or services. The Subadvisor may have an incentive to
select a broker-dealer based on the Subadvisor’s interest in receiving research or other products or services, rather than
on the Subadvisor’s clients’ interest in receiving most favorable execution.
Any research received is used to service all
clients to which it is applicable, whether or not the client’s commissions were used to obtain the research. For example,
commissions of equity clients may be used to obtain research that is used with respect to fixed-income clients. The Subadvisor
does not attempt to allocate the relative costs or benefits of research among client accounts because the Subadvisor believe that,
in the aggregate, the research the Subadvisor receives benefits clients and assists the Subadvisor in fulfilling its overall duty
to its clients.
The Subadvisor does not enter into any agreement
or understanding with any broker-dealer which would obligate it to direct a specific amount of brokerage transactions or commissions
in return for such services. However, certain broker-dealers may state in advance the amount of brokerage commissions they expect
for certain services and the applicable cash equivalent.
The Subadvisor may seek to obtain client commission
benefits through client commission arrangements in compliance with applicable laws and regulations. Under these types of arrangements,
the Subadvisor can request that executing brokers allocate a portion of total commissions paid to a pool of “credits”
maintained by the broker that can be used to obtain client commission benefits. After accumulating a number of credits within the
pool, the Subadvisor may subsequently direct that those credits be used to pay appropriate parties in return for eligible client
commission benefits provided by the broker to the Subadvisor.
In summary, as noted above, the Sub advisor has three types of “soft
dollar” arrangements through which the Subadvisor receives benefits:
|
(1)
|
Full service brokers – In addition to receiving execution services, the Subadvisor also receives a variety of
research and related services from these brokers, including, for example, proprietary research reports on companies, markets or
investment related reports, meetings with senior management teams of companies, and discussions with the broker’s analysis
and market experts.
|
|
(2)
|
Client commission arrangements (“CCA”) - Through CCA arrangements with brokers with whom the Subadvisor
places equity trades for execution, the Subadvisor generates commission credits with these CCA brokers that the Subadvisor can
direct and use to compensate third party research providers, including other brokers, for research received. The level of compensation
to such research providers is determined by the equity portfolio management teams using a quarterly voting process. The number
of votes determines the relative level of compensation paid to a research provider.
|
|
(3)
|
Third party research vendors - The Subadvisor may have soft dollar arrangements. Under these
arrangements, the Subadvisor will identify research services that it wants to obtain and subject to the approval of the soft dollar
broker, the soft dollar broker will directly contract with research providers for services provided to the Subadvisor. When the
Subadvisor executes equity trades with the soft dollar broker, the soft dollar broker allocates and pays a portion of the commission
to the research providers.
|
Trade Aggregation by the Subadvisor
Because investment decisions often affect more
than one client, the Subadvisor frequently will attempt to acquire or dispose of the same security for more than one client at
the same time. The Subadvisor, to the extent permitted by applicable law, regulations and advisory contracts, may aggregate purchases
and sales of securities on behalf of its various clients for which it has discretion, provided that in the Subadvisor’s opinion,
all client accounts are treated equitably and fairly and that block trading will result in a more favorable overall execution.
Trades will not be combined when a client has directed transactions to a particular broker-dealer or when the Subadvisor determines
that combined orders would not be efficient or practical.
When appropriate, the Subadvisor will allocate
such block orders at the average price obtained or according to a system that the Subadvisor considers to be fair to all clients
over time. Generally speaking, such allocations are made on the basis of proportional capital under management in the respective
client accounts.
Affiliated Underwriting Transactions by the Subadvisor
The Board has approved procedures in conformity
with Rule 10f-3 under the 1940 Act whereby the Fund may purchase securities that are offered in underwritings in which an affiliate
of the Advisor or a Subadvisor participates. These procedures prohibit the Fund from directly or indirectly benefiting an Advisor
or Subadvisor affiliate in connection with such underwritings. In addition, for underwritings where an Advisor or Subadvisor affiliate
participates as a principal underwriter, certain restrictions may apply that could, among other things, limit the amount of securities
that the Fund could purchase.
Commission Recapture Program
The Board has approved the Fund’s participation
in a commission recapture program. Commission recapture is a form of institutional discount brokerage that returns commission dollars
directly to the Fund. It provides a way to gain control over the commission expenses incurred by the Subadvisor, which can be significant
over time and thereby reduces expenses, improves cash flow and conserves assets. The Fund can derive commission recapture dollars
from both equity trading commissions and fixed-income (commission equivalent) spreads. From time to time, the Board reviews whether
participation in the recapture program is in the best interests of the Fund.
Additional Information Concerning
Taxes
The following discussion of U.S. federal income
tax matters is based on the advice of K&L Gates LLP, counsel to the Fund. The Fund intends to elect to be treated and to qualify
each year as a regulated investment company (“RIC”) under the Code.
To qualify as a RIC for income tax purposes,
the Fund must derive at least 90% of its annual gross income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to its business of investing in stock, securities and
currencies, and net income derived from an interest in a qualified publicly traded partnership. A “qualified publicly traded
partnership” is a publicly traded partnership that meets certain requirements with respect to the nature of its income. To
qualify as a RIC, the Fund must also satisfy certain requirements with respect to the diversification of its assets. The Fund must
have, at the close of each quarter of the taxable year, at least 50% of the value of its total assets represented by cash, cash
items, U.S. government securities, securities of other regulated investment companies, and other securities that, in respect of
any one issuer, do not represent more than 5% of the value of the assets of the Fund nor more than 10% of the voting securities
of that issuer. In addition, at those times not more than 25% of the market value (or fair value if market quotations are unavailable)
of the Fund’s assets can be invested in securities (other than United States government securities or the securities of other
regulated investment companies) of any one issuer, or of two or more issuers, which the Fund controls and which are engaged in
the same or similar trades or businesses or related trades or businesses, or of one or more qualified publicly traded partnerships.
If the Fund fails to meet the annual gross income test described above, the Fund will nevertheless be considered to have satisfied
the test if (i) (a) such failure is due to reasonable cause and not due to willful neglect and (b) the Fund reports the failure,
and (ii) the Fund pays an excise tax equal to the excess non-qualifying income. If the Fund fails to meet the asset diversification
test described above with respect to any quarter, the Fund will nevertheless be considered to have satisfied the requirements for
such quarter if the Fund cures such failure within 6 months and either (i) such failure is de minimis or (ii) (a) such failure
is due to reasonable cause and not due to willful neglect and (b) the Fund reports the failure and pays an excise tax.
As a RIC, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but without regard to
the deductions for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss),
if any, that it distributes in each taxable year to its shareholders; provided that it distributes at least the sum of 90% of its
investment company taxable income and 90% of its net tax-exempt interest income for such taxable year. The Fund intends to distribute
to its shareholders, at least annually, substantially all of its investment company taxable income, net tax-exempt interest income
and net
capital gain. In order to avoid incurring a
nondeductible 4% U.S. federal excise tax obligation, the Code requires that the Fund distribute (or be deemed to have distributed)
by December 31 of each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income for such year, (ii)
98.2% of its capital gain net income (which is the excess of its realized net long-term capital gain over its realized net short-term
capital loss), generally computed on the basis of the one-year period ending on October 31 of such year, after reduction by any
available capital loss carryforwards and (iii) 100% of any ordinary income and capital gain net income from the prior year (as
previously computed) that were not paid out during such year and on which the Fund paid no U.S. federal income tax. Under current
law, provided that the Fund qualifies as a RIC for U.S. federal income tax purposes, the Fund should not be liable for any income,
corporate excise or franchise tax in the Commonwealth of Massachusetts.
If the Fund does not qualify as a RIC or fails to satisfy the 90%
distribution requirement for any taxable year, subject to the opportunity to cure such failures under applicable provisions of
the Code as described above, the Fund’s taxable income will be subject to corporate income taxes, and distributions from
earnings and profits, including distributions of net capital gain (if any), will generally constitute ordinary dividend income
for U.S. federal income tax purposes. To the extent so designated by the Fund, such distributions generally would be eligible (i)
to be treated as qualified dividend income in the case of individual and other noncorporate shareholders and (ii) for the dividends
received deduction (“DRD”) in the case of corporate shareholders. In addition, in order to requalify for taxation as
a RIC, the Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
For U.S. federal income tax purposes, distributions
paid out of the Fund’s current or accumulated earnings and profits will, except in the case of distributions of qualified
dividend income and capital gain dividends described below, be taxable as ordinary dividend income. Certain income distributions
paid by the Fund (whether paid in cash or reinvested in additional Fund shares) to individual taxpayers that are attributable to
the Fund’s qualified dividend income and capital gain are taxed at rates applicable to net long-term capital gains (maximum
rates of 20% 15%, or 0% for individuals depending on the amount of their taxable income for the year). This tax treatment applies
only if certain holding period requirements and other requirements are satisfied by the shareholder and the dividends are attributable
to qualified dividend income received by the Fund itself. For this purpose, “qualified dividend income” means dividends
received by the Fund from United States corporations and “qualified foreign corporations,” provided that the Fund satisfies
certain holding period and other requirements in respect of the stock of such corporations. Only a small portion, if any of the
distributions from the Fund may consist of income eligible to be treated as qualified dividend income. An additional 3.8% Medicare
tax will also apply in the case of some individuals.
Shareholders receiving any distribution from
the Fund in the form of additional shares pursuant to the dividend reinvestment plan will be treated as receiving a taxable distribution
in an amount equal to the fair market value of the shares received, determined as of the reinvestment date.
Distributions of net capital gain, if any, reported
as capital gains dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has
held Fund shares. A distribution of an amount in excess of the Fund’s current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and reduces the shareholder’s basis in his or her
shares. To the extent that the amount of any such distribution exceeds the shareholder’s basis in his or her shares, the
excess will be treated by the shareholder as gain from a sale or exchange of the shares. Distributions of gains from the sale of
investments that the Fund owned for one year or less will be taxable as ordinary income.
The Fund may elect to retain its net capital
gain or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate
the retained amount as undistributed capital gains in a notice to its shareholders who will be treated as if each received a distribution
of his pro rata share of such gain, with the result that each shareholder will (i) be required to report his pro rata
share of such gain on his tax return as long-term capital gain, (ii) receive a refundable tax credit for his pro rata share
of tax paid by the Fund on the gain and (iii) increase the tax basis for his shares by an amount equal to the deemed distribution
less the tax credit.
Selling shareholders generally will recognize
gain or loss in an amount equal to the difference between the shareholder’s adjusted tax basis in the shares sold and the
sale proceeds. If the shares are held as a capital asset, the gain or loss will be a capital gain or loss. The current maximum
tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is (i) the same as the maximum
ordinary income tax rate for gains recognized on the sale of capital assets held for one year or less, or (ii) for gains recognized
on the sale of capital
assets held for more than one year (as well
as certain capital gain distributions) (20%, 15%, or 0% for individuals depending on the amount of their taxable income for the
year). An additional 3.8% Medicare tax will also apply in the case of some individuals.
Any loss realized upon the sale or exchange
of Fund shares with a holding period of six months or less will be treated as a long-term capital loss to the extent of any capital
gain distributions received (or amounts designated as undistributed capital gains) with respect to such shares. In addition, all
or a portion of a loss realized on a sale or other disposition of Fund shares may be disallowed under “wash sale” rules
to the extent the shareholder acquires other shares of the Fund (whether through the reinvestment of distributions or otherwise)
within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Common Shares. Any
disallowed loss will result in an adjustment to the shareholder’s tax basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares
cannot be taken into account for purposes of determining gain or loss on a sale of the shares before the 91st day after their purchase
to the extent a sales charge is reduced or eliminated in a subsequent acquisition of shares of the Fund (or of another fund), during
the period beginning on the date of such sale and ending on January 31 of the calendar year following the calendar year in which
such sale was made, pursuant to the reinvestment or exchange privilege. Any disregarded amounts will result in an adjustment to
the shareholder’s tax basis in some or all of any other shares acquired.
For federal income tax purposes, a fund is permitted to carry forward
a net capital loss incurred in any year to offset net capital gains, if any, in any subsequent year until such loss carry forwards
have been fully used. Capital losses carried forward will retain their character as either short-term or long-term capital losses.
The fund’s ability to utilize capital losses in a given year or in total may be limited. To the extent subsequent net capital
gains are offset by such losses, they would not result in federal income tax liability to the fund and would not be distributed
as such to shareholders.
Below are the capital loss carryforwards available to the fund as
of October 31, 2020 to the extent provided by regulations, to offset future net realized capital
gains:
Fund
|
Short-term Losses
|
Long-term Losses
|
Total
|
John Hancock Investors Trust
|
$3,670,337
|
$18,005,385
|
$21,675,722
|
Certain net investment income received by an
individual having adjusted gross income in excess of $200,000 (or $250,000 for married individuals filing jointly) will be subject
to a tax of 3.8%. Undistributed net investment income of trusts and estates in excess of a specified amount will also be subject
to this tax. Dividends and capital gains distributed by the Fund, and gain realized on redemption of Fund shares, will constitute
investment income of the type subject to this tax.
Only a small portion, if any, of the distributions
from the Fund may qualify for the dividends-received deduction for corporations, subject to the limitations applicable under the
Code. The qualifying portion is limited to properly designated distributions attributed to dividend income (if any) the Fund receives
from certain stock in U.S. domestic corporations and the deduction is subject to holding period requirements and debt-financing
limitations under the Code.
If the Fund should have dividend income that
qualifies for the reduced tax rate applicable to qualified dividend income, the maximum amount allowable will be designated by
the Fund. This amount will be reflected on Form 1099-DIV for the current calendar year.
Dividends and distributions on the Fund’s
shares generally are subject to U.S. federal income tax as described herein to the extent they do not exceed the Fund’s realized
income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder’s
investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund’s net asset value
reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed
even when the Fund’s net asset value also reflects unrealized losses. Certain distributions declared in October, November
or December to shareholders
of record of such month and paid in the following
January will be taxed to shareholders as if received on December 31 of the year in which they were declared. In addition, certain
other distributions made after the close of a taxable year of the Fund may be “spilled back” and treated as paid by
the Fund (except for purposes of the non-deductible 4% U.S. federal excise tax) during such taxable year. In such case, shareholders
will be treated as having received such dividends in the taxable year in which the distributions were actually made.
The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar year.
Legislation passed by Congress in 2008 requires
the Fund (or its administrative agent) to report to the IRS and furnish to shareholders the cost basis information and holding
period for the Fund’s shares purchased on or after January 1, 2012, and repurchased by the Fund on or after that date. The
Fund will permit shareholders to elect from among several permitted cost basis methods. In the absence of an election, the Fund
will use a default cost basis method. The cost basis method a shareholder elects may not be changed with respect to a repurchase
of shares after the settlement date of the repurchase. Shareholders should consult with their tax advisors to determine the best
permitted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting rules
apply to them.
The benefits of the reduced tax rates applicable
to long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual
shareholders.
Special tax rules apply to investments through
defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisor to determine the suitability
of shares of the Fund as an investment through such plans.
The Fund may invest in debt obligations that
are in the lowest rating categories or are unrated, including debt obligations of issuers not currently paying interest or who
are in default. Investments in debt obligations that are at risk of or in default present special tax issues for the Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount or market
discount, when and to what extent deductions may be taken for bad debts or worthless securities and how payments received on obligations
in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by the Fund if it acquires such obligations in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and to seek to avoid becoming subject to federal income
or excise tax.
The Fund is required to accrue income on any
debt securities that have more than a de minimis amount of original issue discount (or debt securities acquired at a market
discount, if the Fund elects to include market discount in income currently) prior to the receipt of the corresponding cash payments.
The mark to market or constructive sale rules applicable to certain options, futures, forwards, short sales or other transactions
also may require the Fund to recognize income or gain without a concurrent receipt of cash. Additionally, some countries restrict
repatriation, which may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings or assets in
those countries. However, the Fund must distribute to shareholders for each taxable year substantially all of its net income and
net capital gains, including such income or gain, to qualify as a regulated investment company and avoid liability for any federal
income or excise tax. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or borrow cash, to satisfy these distribution requirements.
The Fund may recognize gain (but not loss) from
a constructive sale of certain “appreciated financial positions” if the Fund enters into a short sale, offsetting notional
principal contract, or forward contract transaction with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment include interests (including options and forward contracts
and short sales) in stock and certain other instruments. Constructive sale treatment does not apply if the transaction is closed
out not later than thirty days after the end of the taxable year in which the transaction was initiated, and the underlying appreciated
securities position is held unhedged for at least the next sixty days after the hedging transaction is closed.
Gain or loss from a short sale of property generally
is considered as capital gain or loss to the extent the property used to close the short sale constitutes a capital asset in the
Fund’s hands. Except with respect to certain situations where the property used to close a short sale has a long-term holding
period on the date the short sale is entered into, gains on short sales generally are short-term capital gains. A loss on a short
sale will be treated as a long-term capital loss
if, on the date of the short sale, “substantially
identical property” has been held by the Fund for more than one year. In addition, entering into a short sale may result
in suspension of the holding period of “substantially identical property” held by the Fund.
Gain or loss on a short sale generally will
not be realized until such time as the short sale is closed. However, as described above in the discussion of constructive sales,
if the Fund holds a short sale position with respect to securities that have appreciated in value, and it then acquires property
that is the same as or substantially identical to the property sold short, the Fund generally will recognize gain on the date it
acquires such property as if the short sale were closed on such date with such property. Similarly, if the Fund holds an appreciated
financial position with respect to securities and then enters into a short sale with respect to the same or substantially identical
property, the Fund generally will recognize gain as if the appreciated financial position were sold at its fair market value on
the date it enters into the short sale. The subsequent holding period for any appreciated financial position that is subject to
these constructive sale rules will be determined as if such position were acquired on the date of the constructive sale.
The Fund’s transactions in futures contracts
and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Fund and may defer Fund losses. These rules could, therefore, affect the character, amount
and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of
the positions in its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to satisfy the 90% distribution requirement for qualifying
to be taxed as a RIC and the distribution requirement for avoiding excise taxes. The Fund will monitor its transactions, will make
the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any futures contract,
option or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund from being
taxed as a RIC.
For the Fund’s options and futures contracts
that qualify as “section 1256 contracts,” Code Section 1256 generally will require any gain or loss arising from the
lapse, closing out or exercise of such positions to be treated as 60% long-term and 40% short-term capital gain or loss. In addition,
the Fund generally will be required to “mark to market” (i.e., treat as sold for fair market value) each outstanding
“section 1256 contract” position at the close of each taxable year (and on October 31 of each year for excise tax purposes).
If a “section 1256 contract” held by the Fund at the end of a taxable year is sold in the following year, the amount
of any gain or loss realized on such sale will be adjusted to reflect the gain or loss previously taken into account under the
“mark to market” rules. The Fund’s options that do not qualify as “section 1256 contracts” under
the Code generally will be treated as equity options governed by Code Section 1234. Pursuant to Code Section 1234, if a written
option expires unexercised, the premium received is short-term capital gain to the Fund. If the Fund enters into a closing transaction,
the difference between the premium received for writing the option, and the amount paid to close out its position generally is
short-term capital gain or loss. If a call option written by the Fund that is not a “section 1256 contract” is cash
settled, any resulting gain or loss will be short-term.
The Code contains special rules that apply to
“straddles,” defined generally as the holding of “offsetting positions with respect to personal property.”
For example, the straddle rules normally apply when a taxpayer holds stock and an offsetting option with respect to such stock
or substantially identical stock or securities. In general, investment positions will be offsetting if there is a substantial diminution
in the risk of loss from holding one position by reason of holding one or more other positions. If two or more positions constitute
a straddle, recognition of a realized loss from one position generally must be deferred to the extent of unrecognized gain in an
offsetting position. In addition, long-term capital gain may be recharacterized as short-term capital gain, or short-term capital
loss as long-term capital loss. Interest and other carrying charges allocable to personal property that is part of a straddle are
not currently deductible but must instead be capitalized. Similarly, “wash sale” rules apply to prevent the recognition
of loss by the Fund from the disposition of stock or securities at a loss in a case in which identical or substantially identical
stock or securities (or an option to acquire such property) is or has been acquired within a prescribed period.
The Code allows a taxpayer to elect to offset
gain and loss from positions that are part of a “mixed straddle.” A “mixed straddle” is any straddle in
which one or more but not all positions are “section 1256 contracts.” The Fund may be eligible to elect to establish
one or more mixed straddle accounts for certain of its mixed straddle trading positions. The mixed straddle account rules require
a daily “marking to market” of all open positions in the account and a daily netting of gain and loss from all positions
in the account. At the end of a taxable year, the annual net gain or loss from
the mixed straddle account are recognized for
tax purposes. The net capital gain or loss is treated as 60% long-term and 40% short-term capital gain or loss if attributable
to the “section 1256 contract” positions, or all short-term capital gain or loss if attributable to the non-section
1256 contract positions.
Further, certain of the Fund’s investment
practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) convert dividends
that would otherwise constitute qualified dividend income into short-term capital gain or ordinary income taxed at the higher rate
applicable to ordinary income, (ii) treat dividends that would otherwise be eligible for the corporate dividends received deduction
as ineligible for such treatment, (iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv)
convert long-term capital gain into short-term capital gain or ordinary income, (v) convert an ordinary loss or deduction into
a capital loss (the deductibility of which is more limited), (vi) cause the Fund to recognize income or gain without a corresponding
receipt of cash, (vii) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (viii)
adversely alter the characterization of certain complex financial transactions, and (ix) produce income that will not qualify as
good income for purposes of the 90% annual gross income requirement described above. While it may not always be successful in doing
so, the Fund will seek to avoid or minimize any adverse tax consequences of its investment practices.
Dividends and interest received, and gains realized,
by the Fund on non-U.S. securities may be subject to income, withholding or other taxes imposed by foreign countries and United
States possessions (collectively “foreign taxes”) that would reduce the return on its securities. Tax conventions between
certain countries and the United States, however, may reduce or eliminate foreign taxes, and many foreign countries do not impose
taxes on capital gains in respect of investments by U.S. investors. Depending on the number of non-U.S. shareholders in the Fund,
however, such reduced foreign withholding tax rates may not be available for investments in certain jurisdictions.
The Fund may invest in the stock of “passive
foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50%
of its assets produce, or are held for the production of, passive income. Under certain circumstances, the Fund will be subject
to U.S. federal income tax on a portion of any “excess distribution” received on the stock of a PFIC or of any gain
from disposition of that stock (collectively “PFIC income”), plus interest thereon, even if the Fund distributes the
PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in the Fund’s investment
company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders.
If the Fund invests in a PFIC and elects to
treat the PFIC as a “qualified electing fund” (“QEF”), then in lieu of the foregoing tax and interest obligation,
the Fund will be required to include in income each year its pro rata share of the QEF’s annual ordinary earnings and net
capital gain—which it may have to distribute to satisfy the distribution requirement and avoid imposition of the excise tax—even
if the QEF does not distribute those earnings and gain to the Fund. In most instances it will be very difficult, if not impossible,
to make this election because of certain of its requirements.
The Fund may elect to “mark-to-market”
its stock in any PFIC. “Marking-to-market,” in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of a PFIC’s stock over the Fund’s adjusted basis therein as of the end of
that year. Pursuant to the election, the Fund also would be allowed to deduct (as an ordinary, not capital, loss) the excess, if
any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent
of any net mark-to-market gains (reduced by any prior deductions) with respect to that stock included by the Fund for prior taxable
years under the election. The Fund’s adjusted basis in each PFIC’s stock with respect to which it has made this election
will be adjusted to reflect the amounts of income included and deductions taken thereunder. The reduced rates for “qualified
dividend income” are not applicable to (i) dividends paid by a foreign corporation that is a PFIC, (ii) income inclusions
from a QEF election with respect to a PFIC, and (iii) ordinary income from a “mark-to-market” election with respect
to a PFIC.
Under Section 988 of the Code, gains or losses
attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other liabilities
denominated in a non-U.S. currency and the time the Fund actually collects such income or receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, gains or losses on non-U.S. currency forward contracts and the disposition
of debt securities denominated in a non-U.S. currency, to the extent attributable to fluctuations in exchange rate between the
acquisition and disposition dates, also are treated as ordinary income or loss.
If a shareholder realizes a loss on disposition of the Fund’s
shares of $2 million or more in any single taxable year (or $4 million or more in any combination of taxable years in which the
transaction is entered into and the five succeeding taxable years) for an individual shareholder, corporation or Trust or $10 million
or more in any single taxable year (or $20 million or more in any combination of taxable years in which the transaction is entered
into and the five succeeding taxable years) for a corporate shareholder, the shareholder must file with the IRS a disclosure statement
on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under
current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting
requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the
legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisers
to determine the applicability of these regulations in light of their individual circumstances.
Amounts paid by the Fund to individuals and
certain other shareholders who have not provided the Fund with their correct taxpayer identification number (“TIN”)
and certain certifications required by the IRS as well as shareholders with respect to whom the Fund has received certain information
from the IRS or a broker may be subject to “backup” withholding of U.S. federal income tax arising from the Fund’s
taxable dividends and other distributions as well as the gross proceeds of sales of shares, at a rate of 24%. An individual’s
TIN generally is his or her social security number. Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or credited against such shareholder’s U.S.
federal income tax liability, if any; provided that the required information is furnished to the IRS.
Distributions will not be subject to backup
withholding to the extent they are subject to the withholding tax on foreign persons described in the next paragraph.
Dividend distributions are in general subject
to a U.S. withholding tax of 30% when paid to a nonresident alien individual, foreign estate or trust, a foreign corporation, or
a foreign partnership (“foreign shareholder”). Persons who are resident in a country, such as the U.K., that has an
income tax treaty with the U.S. may be eligible for a reduced withholding rate (upon filing of appropriate forms), and are urged
to consult their tax advisors regarding the applicability and effect of such a treaty. Distributions of capital gain dividends
paid by the Fund to a foreign shareholder, and any gain realized upon the sale of Fund shares by such a shareholder, will ordinarily
not be subject to U.S. taxation, unless the recipient or seller is a nonresident alien individual who is present in the United
States for more than 182 days during the taxable year. Such distributions and sale proceeds may be subject, however, to backup
withholding, unless the foreign investor certifies his non-U.S. residency status. Also, foreign shareholders with respect to whom
income from the Fund is “effectively connected” with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on a net basis on the income derived from the Fund at the graduated rates applicable
to U.S. citizens, residents or domestic corporations, whether such income is received in cash or reinvested in shares, and, in
the case of a foreign corporation, also may be subject to a branch profits tax. Properly-designated dividends are generally exempt
from U.S. federal withholding tax where they are (i) “interest-related dividends” paid in respect of the Fund’s
“qualified net interest income” (generally, the Fund’s U.S. source interest income, other than certain contingent
interest and interest from obligations of a corporation or partnership in which the Fund is at least a 10% shareholder, reduced
by expenses that are allocable to such income) or (ii) “short-term capital gain dividends” paid in respect of the Fund’s
“qualified short-term gains” (generally, the excess of the Fund’s net short-term capital gain over the Fund’s
long-term capital loss for such taxable year). Depending on its circumstances, the Fund may designate all, some or none of its
potentially eligible dividends as such interest-related dividends or as short-term capital gain dividends and/or treat such dividends,
in whole or in part, as ineligible for this exemption from withholding. The Fund’s capital gain distributions are also exempt
from such withholding. Foreign shareholders who are residents in a country with an income tax treaty with the United States may
obtain different tax results, and are urged to consult their tax advisors.
The Foreign Account Tax Compliance Act (FATCA),
imposes a 30% U.S. withholding tax on certain U.S. source payments, including interest (even if the interest is otherwise exempt
from the withholding rules described above), dividends and other fixed or determinable annual or periodical income (“Withholdable
Payments”), if paid to a foreign financial institution, unless such institution registers with the IRS and enters into an
agreement with the IRS or a governmental authority in its own jurisdiction to collect and provide substantial information regarding
U.S. account holders, including certain account holders that are foreign entities with U.S. owners, with such institution. The
legislation also generally imposes a withholding tax of 30% on Withholdable Payments made to a non-financial foreign entity unless
such entity provides the withholding agent with a certification that it does not have any substantial U.S. owners or a certification
identifying the direct and indirect substantial U.S. owners of the entity. These withholding and reporting requirements generally
apply to income payments made after June 30, 2014. A withholding
tax that would apply to the gross proceeds from
the disposition of certain investment property and that was scheduled to go into effect in 2019 would be eliminated by proposed
regulations (having an immediate effect while pending). Holders are urged to consult with their own tax advisors regarding the
possible implications of this recently enacted legislation on their investment in the Fund.
The foregoing briefly summarizes some of the
important U.S. federal income tax consequences to Common Shareholders of investing in Common Shares, reflects U.S. federal tax
law as of the date of this SAI, and does not address special tax rules applicable to certain types of investors, such as corporate
and non-U.S. investors. Unless otherwise noted, this discussion assumes that an investor is a United States person and holds Common
Shares as a capital asset. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder,
and judicial and administrative ruling authorities, all of which are subject to change or differing interpretations by the courts
or the IRS retroactively or prospectively. Investors should consult their tax advisors regarding other U.S. federal, state or local
tax considerations that may be applicable to their particular circumstances, as well as any proposed tax law changes.
Other Information
The Fund is an organization of the type commonly
known as a “Massachusetts business trust.” Under Massachusetts law, shareholders of such a trust may, in certain circumstances,
be held personally liable as partners for the obligations of the trust. The Declaration of Trust contains an express disclaimer
of shareholder liability in connection with Fund property or the acts, obligations or affairs of the Fund. The Declaration of Trust
also provides for indemnification out of Fund property of any shareholder held personally liable for the claims and liabilities
to which a shareholder may become subject by sole reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself is unable to
meet its obligations. The Fund has been advised by its counsel that the risk of any shareholder incurring any liability for the
obligations of the Fund is remote.
The Declaration of Trust provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or law; but nothing in the Declaration of Trust protects a Trustee
against any liability to the Fund or its shareholders to which he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Voting rights are
not cumulative with respect to the election of Trustees, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees and, in such event, the holders of the remaining less than 50% of the shares
voting on the matter will not be able to elect any Trustees.
Effective January 22, 2016, the Board of Trustees
of the Fund amended and restated in its entirety the Declaration of Trust and the By-Laws for the Fund. The amendments to the Declaration
of Trust include, among other changes, provisions that: (i) clarify certain duties, responsibilities, and powers of the Trustees;
and (ii) clarify that shareholders are not intended to be third-party beneficiaries of Fund contracts. The amendments to the By-Laws
include, among other changes, provisions that: (i) clarify that, other than as provided under federal securities laws, the shareholders
may only bring actions involving the Fund derivatively; and (ii) provide that any action brought by a shareholder related to the
Fund will be brought in Massachusetts state or federal court, and that, if a claim is brought in a different jurisdiction and subsequently
changed to a Massachusetts venue, the shareholder will be required to reimburse the Fund for such expenses. The foregoing description
of the Declaration of Trust and By-Laws are qualified in their entirety by the full text of the Declaration of Trust and By-Laws,
each effective as of January 22, 2016, which is available by writing to the Secretary of the Fund at 200 Berkeley Street, Boston,
Massachusetts 02116, and are available on the SEC’s website. The Declaration of Trust also is available on the Secretary
of the Commonwealth of Massachusetts’ website.
Custodian and Transfer Agent
The Fund’s portfolio securities are held
pursuant to a custodian agreement between the Fund and State Street Bank and Trust Company (“State Street”), State
Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111. Under the custodian agreement, State Street performs
custody, foreign custody manager and fund accounting services.
Computershare Trust Company, N.A., P.O. Box
505000, Louisville, KY 40233 is the transfer agent, dividend paying agent and registrar of the Fund.
Independent Registered Public
Accounting Firm
The financial statements of the Fund for the
fiscal year ended October 31, 2020, including the related financial highlights that appear in the Prospectus have been audited
by PricewaterhouseCoopers LLP (“PwC”), independent registered public accounting firm, as indicated in their report
with respect thereto, and are incorporated herein by reference.
PwC is the independent registered public accounting
firm for the Fund, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation
of filings with the SEC.
Reports to Shareholders
The financial statements of the Fund for the
fiscal year ended October 31, 2020 are incorporated herein by reference from the Fund’s most recent Annual Report to Shareholders
filed with the Securities and Exchange Commission (the “SEC”) on Form N-CSR pursuant to Rule 30b2-1 under the 1940
Act.
Legal and Regulatory Matters
There are no legal proceedings to which the
Fund, the Advisor, or any of its affiliates is a party that are likely to have a material adverse effect on the Fund, or the ability
of the Advisor to perform its contract with the Fund.
Codes of Ethics
The Fund, the Advisor, the Subadvisor and John
Hancock Funds, LLC each have adopted Codes of Ethics that comply with Rule 17j-1 under the 1940 Act. Each Code of Ethics permits
personnel subject to that Code of Ethics to invest in securities, including securities that may be purchased or held by the Fund.
These Codes of Ethics can be reviewed and copied
at the SEC’s Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may
be obtained by calling the SEC at 202-942-8090. These Codes of Ethics also are available on the EDGAR Database on the SEC’s
website at sec.gov. Copies of these Codes of Ethics may be obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: public info@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
Additional Information
The Fund’s Prospectus, any related Prospectus
Supplements, and this SAI do not contain all of the information set forth in the Registration Statement that the Fund has filed
with the SEC. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its Rules
and Regulations.
John Hancock Investors Trust
Statement of Additional Information
March 1, 2021
Investment Advisor
John Hancock Investment Management LLC
200 Berkeley Street
Boston, Massachusetts 02116
1-800-225-6020
Subadvisor
Manulife Investment Management (US) LLC
200 Berkeley Street
Boston, Massachusetts 02116
Custodian
State Street Bank and Trust Company
State Street Financial Center
One Lincoln Street
Boston, Massachusetts 02111
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
101 Seaport Boulevard, Suite 500
Boston, Massachusetts 02210
APPENDIX A
DESCRIPTION OF BOND RATINGS
DESCRIPTIONS OF CREDIT RATING SYMBOLS AND
DEFINITIONS
The ratings of Moody’s Investors
Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P Global Ratings”)
and Fitch Ratings (“Fitch”) represent their respective opinions as of the date they are expressed and not statements
of fact as to the quality of various long-term and short-term debt instruments they undertake to rate. It should be emphasized
that ratings are general and are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon
and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the
same yield.
Ratings do not constitute recommendations
to buy, sell, or hold any security, nor do they comment on the adequacy of market price, the suitability of any security for a
particular investor, or the tax-exempt nature or taxability of any payments of any security.
IN GENERAL
Moody’s. Ratings assigned
on Moody’s global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial
obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles,
and public sector entities.
Note that the content of this Appendix
A, to the extent that it relates to the ratings determined by Moody’s, is derived directly from Moody’s electronic
publication of “Ratings Symbols and Definitions” which is available at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
S&P Global Ratings. . An S&P Global Ratings issue credit rating is a forward-looking opinion about the creditworthiness
of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness
of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the
obligation is denominated. The opinion reflects S&P Global Ratings’ view of the obligor’s capacity and willingness
to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination,
which could affect ultimate payment in the event of default.
Issue ratings are an assessment of
default risk but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations
are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy.
Note that the content of this Appendix
A, to the extent that it relates to the ratings determined by S&P Global Ratings, is derived directly from S&P Global Ratings’
electronic publication of “S&P’s Global Ratings Definitions,” which is available at: https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352.
Fitch. Fitch’s opinions
are forward looking and include Fitch’s views of future performance. In many cases, these views on future performance may
include forecasts, which may in turn (i) be informed by non-disclosable management projections, (ii) be based on a trend (sector
or wider economic cycle) at a certain stage in the cycle, or (iii) be based on historical performance. As a result, while ratings
may include cyclical considerations and attempt to assess the likelihood of repayment at “ultimate/final maturity,”
material changes in economic conditions and expectations (for a particular issuer) may result in a rating change.
The terms “investment grade”
and “speculative grade” have established themselves over time as shorthand to describe the categories ‘AAA’
to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade). The terms investment grade
and speculative grade are market conventions and do not imply any recommendation or endorsement of a specific security for investment
purposes. Investment grade categories indicate relatively low to
moderate credit risk, while ratings
in the speculative categories either signal a higher level of credit risk or that a default has already occurred. For the convenience
of investors, Fitch may also include issues relating to a rated issuer that are not and have not been rated on its web page. Such
issues are also denoted as ‘NR’.
Note that the content of this Appendix
A, to the extent that it relates to the ratings determined by Fitch, is derived directly from Fitch’s electronic publication
of “Definitions of Ratings and Other Forms of Opinion” which is available at: https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/Rating%20Definitions%20-%20Jan%2024%202018.pdf.
GENERAL PURPOSE RATINGS
LONG-TERM ISSUE RATINGS
MOODY’S GLOBAL LONG-TERM RATING SCALE
Long-term ratings are assigned to
issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment
on contractual financial obligations and the expected financial loss suffered in the event of default or impairment.
Aaa: Obligations rated Aaa
are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa: Obligations rated Aa are
judged to be of high quality and are subject to very low credit risk.
A: Obligations rated A are
considered upper-medium grade and are subject to low credit risk.
Baa: Obligations rated Baa
are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba: Obligations rated Ba are
judged to be speculative and are subject to substantial credit risk.
B: Obligations rated B are
considered speculative and are subject to high credit risk.
Caa: Obligations rated Caa
are judged to be speculative of poor standing and are subject to very high credit risk.
Ca: Obligations rated Ca are
highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations rated C are
the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Addition of a Modifier 1,
2 or 3: Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The
modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)”
indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms. By
their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially
result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of
principal that could result in impairment.
Together with the hybrid indicator,
the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that
security.
S&P GLOBAL RATINGS LONG-TERM
ISSUE CREDIT RATINGS
Long-term ratings are assigned to
issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment
on contractual financial obligations and the expected financial loss suffered in the event of default or impairment.
AAA: An obligation rated ‘AAA’
has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated ‘AA’
differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment
on the obligation is very strong.
A: An obligation rated ‘A’
is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated
categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated ‘BBB’
exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken
the obligor’s capacity to meet its financial commitments on the obligation.
BB, B, CCC, CC and C: Obligations
rated ‘BB’, ‘B’, ‘CCC’ ‘CC’ and ‘C’ are regarded as having significant
speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While
such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated ‘BB’
is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated ‘B’
is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its
financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s
capacity or willingness to meet its financial commitments on the obligation.
CCC: An obligation rated ‘CCC’
is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitments on the obligation. In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitments on the obligation.
CC: An obligation rated ‘CC’
is currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a default has not yet occurred but S&P
Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An obligation rated ‘C’
is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
D: An obligation rated ‘D’
is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D’ rating category is used
when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be
made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar
days. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’s rating is
lowered to ‘D’ if it is subject to a distressed exchange offer.
Note: Addition of a Plus (+) or minus
(-) sign: The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Dual Ratings – Dual ratings
may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood
of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first
component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term
rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example,
‘AAA/A-1+’ or ‘A-1+/A-1’). With U. S. municipal short-term demand debt, the U.S. municipal short-term note
rating symbols are used for the first component of the rating (for example, ‘SP-1+/A-1+’).
FITCH CORPORATE FINANCE OBLIGATIONS
– LONG-TERM RATING SCALES
Ratings of individual securities or
financial obligations of a corporate issuer address relative vulnerability to default on an ordinal scale. In addition, for financial
obligations in corporate finance, a measure of recovery given default on that liability is also included in the rating assessment.
This notably applies to covered bond ratings, which incorporate both an indication of the probability of default and of the recovery
given a default of this debt instrument.
AAA: Highest credit quality.
‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong
capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality.
‘AA’ ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. ‘A’
ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit quality. ‘BBB’
ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered
adequate but adverse business or economic conditions are more likely to impair this capacity.
BB: Speculative. ‘BB’
ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic
conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.
B: Highly speculative. ‘B’
ratings indicate that material credit risk is present.
CCC: Substantial credit risk. “CCC” ratings indicate that substantial credit risk is present.
CC: Very high levels of credit
risk. “CC” ratings indicate very high levels of credit risk.
C: Exceptionally high levels of
credit risk. “C” indicates exceptionally high levels of credit risk.
Corporate finance defaulted obligations
typically are not assigned ‘RD’ or ‘D’ ratings but are instead rated in the ‘CCC’ to ‘C’
rating categories, depending on their recovery prospects and other relevant characteristics. This approach better aligns obligations
that have comparable overall expected loss but varying vulnerability to default and loss.
Note: Addition of a Plus (+) or
minus (-) sign: Within rating categories, Fitch may use modifiers. The modifiers “+” or “-” may be
appended to a rating to denote relative status within major rating categories. For example, the rating category ‘AA’
has three notch-specific rating levels (‘AA+’; ‘AA’; ‘AA-’; each a rating level). Such suffixes
are not added to ‘AAA’
ratings and ratings below the ‘CCC’ category. For the short-term rating category of ‘F1’, a ‘+’
may be appended. For Viability Ratings, the modifiers ‘+’ or ‘-’ may be appended to a rating to denote
relative status within categories from ‘aa’ to ‘ccc’.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
SHORT-TERM ISSUE RATINGS
MOODY’S GLOBAL SHORT-TERM RATING SCALE
Ratings assigned on Moody’s global long-term and short-term rating scales are forward-looking opinions of the relative
credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles,
project finance vehicles, and public sector entities. Short-term ratings are assigned to obligations with an original maturity
of thirteen months or less and reflect both the likelihood of a default or impairment on contractual financial obligations and
the expected financial loss suffered in the event of default or impairment.
Moody’s employs the following designations
to indicate the relative repayment ability of rated issuers:
P-1: Issuers (or supporting
institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2: Issuers (or supporting
institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3: Issuers (or supporting
institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP: Issuers (or supporting
institutions) rated Not Prime do not fall within any of the Prime rating categories.
The following indicates the long-term
ratings consistent with different short-term ratings when such long-term ratings exist. (Note: Structured finance short-term ratings
are usually based either on the short-term rating of a support provider or on an assessment of cash flows available to retire the
financial obligation).
S&P’S SHORT-TERM ISSUE
CREDIT RATINGS
S&P Global Ratings’ short-term
ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used
to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium term notes are assigned
long-term ratings. Ratings are graded into several categories, ranging from ‘A’ for the highest-quality obligations
to ‘D’ for the lowest. These categories are as follows:
A-1: A short-term obligation
rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial
commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitments on these obligations is extremely strong.
A-2: A short-term obligation
rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitments on the obligation
is satisfactory.
A-3: A short-term obligation
rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances
are more likely to weaken an obligor’s capacity to meet its financial commitments on the obligation.
B: A short-term obligation
rated ‘B’ is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the obligor’s
inadequate capacity to meet its financial commitments.
C: A short-term obligation
rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitments on the obligation.
D: A short-term obligation
rated ‘D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D’
rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that
such payments will be made within any stated grace period. However, any stated grace period longer than five business days will
be treated as five business days. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange offer.
Dual Ratings - Dual ratings
may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood
of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first
component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term
rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example,
‘AAA/A-1+’ or ‘A-1+/A-1’). With U.S. municipal short-term demand debt, the U.S. municipal short-term note
rating symbols are used for the first component of the rating (for example, ‘SP-1+/A-1+’).
FITCH’S SHORT-TERM ISSUER OR OBLIGATION RATINGS
A short-term issuer or obligation
rating is based in all cases on the short-term vulnerability to default of the rated entity and relates to the capacity to meet
financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be
adjusted for loss severity. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months
for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
F1: Highest short-term credit
quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added (“+”)
to denote any exceptionally strong credit feature.
F2: Good short-term credit
quality. Good intrinsic capacity for timely payment of financial commitments.
F3: Fair short-term credit
quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative short-term credit
quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes
in financial and economic conditions.
C: High short-term default
risk. Default is a real possibility.
RD: Restricted default. Indicates
an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations.
Typically applicable to entity ratings only.
D: Default. Indicates a broad-based
default event for an entity, or the default of a short-term obligation.
TAX-EXEMPT NOTE RATINGS
MOODY’S U.S. MUNICIPAL SHORT-TERM DEBT RATINGS
While the global short-term ‘prime’
rating scale is applied to US municipal tax-exempt commercial A-8 paper, these programs are typically backed by external letters
of credit or liquidity facilities and their short-term prime ratings usually map to the long-term rating of the enhancing bank
or financial institution and not to the municipality’s rating. Other short-term municipal obligations, which generally have
different funding sources for repayment, are rated using two additional short-term rating scales (i.e., the MIG and VMIG scale
discussed below).
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to five years maturity. Municipal notes rated on the MIG scale
may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire
at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating.
MIG ratings are divided into three levels—MIG 1 through MIG 3—while speculative grade short-term obligations are designated
SG.
MIG 1: This designation denotes
superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing.
MIG 2: This designation denotes
strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3: This designation denotes
acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be
less well-established.
SG: This designation denotes
speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Variable Municipal Investment Grade
(VMIG) ratings of demand obligations with unconditional liquidity support are mapped from the short-term debt rating (or counterparty
assessment) of the support provider, or the underlying obligor in the absence of third party liquidity support, with VMIG 1 corresponding
to P-1, VMIG 2 to P-2, VMIG 3 to P-3 and SG to not prime. For example, the VMIG rating for an industrial revenue bond with Company
XYZ as the underlying obligor would normally have the same numerical modifier as Company XYZ’s prime rating. Transitions
of VMIG ratings of demand obligations with conditional liquidity support, as shown in the diagram below, differ from transitions
on the Prime scale to reflect the risk that external liquidity support will terminate if the issuer’s long-term rating drops
below investment grade.
VMIG 1: This designation denotes
superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 2: This designation denotes
strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 3: This designation denotes
acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase price upon demand.
SG: This designation denotes
speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment
of purchase price upon demand.
* For VRDBs supported with conditional
liquidity support, short-term ratings transition down at higher long-term ratings to reflect the risk of termination of liquidity
support as a result of a downgrade below investment grade.
VMIG ratings of VRDBs with unconditional
liquidity support reflect the short-term debt rating (or counterparty assessment) of the liquidity support provider with VMIG 1
corresponding to P-1, VMIG 2 to P-2, VMIG 3 to P-3 and SG to not prime.
For more complete discussion of these
rating transitions, please see Annex B of Moody’s Methodology titled Variable Rate Instruments Supported by Conditional Liquidity
Facilities.
S&P’S GLOBAL RATINGS’
MUNICIPAL SHORT-TERM NOTE RATINGS
MUNICIPAL SHORT-TERM NOTE RATINGS
An S&P Global Ratings municipal note rating reflects S&P Global Ratings’ opinion about the liquidity factors and
market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original
maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any,
to assign, S&P Global Ratings’ analysis will review the following considerations:
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Amortization schedule – the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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■
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Source of payment – the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
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Note rating symbols are as follows:
SP-1: Strong capacity to pay
principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2: Satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3: Speculative capacity
to pay principal and interest.
D: ‘D’ is assigned
upon failure to pay the note when due, completion of a distressed exchange offer, or the filing of a bankruptcy petition or the
taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions.
FITCH PUBLIC FINANCE RATINGS
See FITCH SHORT-TERM ISSUER OR OBLIGATIONS RATINGS
above.
APPENDIX B
PROXY VOTING POLICIES OF THE ADVISOR, THE
JOHN HANCOCK FUNDS AND THE SUBADVISOR
JOHN HANCOCK INVESTMENT MANAGEMENT LLC
PROXY VOTING POLICIES AND PROCEDURES
General
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The SEC adopted Rule 206(4)-6 under the Advisers
Act, which requires investment advisers with voting authority to adopt and implement written policies and procedures that are reasonably
designed to ensure that the investment adviser votes client securities in the best interest of clients. The procedures must include
how the investment adviser addresses material conflicts that may arise between the interests of the investment adviser and those
of its clients. The Advisers are registered investment advisers under the Advisers Act and serve as the investment advisers to
the Funds. The Advisers generally retain one or more sub-advisers to manage the assets of the Funds, including voting proxies with
respect to a Fund’s portfolio securities. From time to time, however, the Advisers may elect to manage directly the assets
of a Fund, including voting proxies with respect to such Fund’s portfolio securities, or a Fund’s Board may otherwise
delegate to the Advisers authority to vote such proxies. Rule 206(4)-6 under the Advisers Act requires that a registered investment
adviser adopt and implement written policies and procedures reasonably designed to ensure that it votes proxies with respect to
a client’s securities in the best interest of the client.
Firms are required by Advisers Act Rule 204-2(c)(2)
to maintain records of their voting policies and procedures, a copy of each proxy statement that the investment adviser receives
regarding client securities, a record of each vote cast by the investment adviser on behalf of a client, a copy of any document
created by the investment adviser that was material to making a decision how to vote proxies on behalf of a client, and a copy
of each written client request for information on how the adviser voted proxies on behalf of the client, as well as a copy of any
written response by the investment adviser to any written or oral client request for information on how the adviser voted that
client’s proxies.
Investment companies must disclose information
about the policies and procedures used to vote proxies on the investment company’s portfolio securities and must file the
fund’s proxy voting record with the SEC annually on Form N-PX.
Pursuant thereto, the Advisers have adopted and implemented these
proxy voting policies and procedures (the “Proxy Procedures”).
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Policy
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It is the Advisers’ policy to comply with Rule 206(4)-6 and Rule 204-2(c)(2) under the Advisers Act as described above. In general, the Advisers delegate proxy voting decisions to the sub-advisers managing the funds. If an instance occurs where a conflict of interest arises between the shareholders and a particular sub-adviser, however, the Adviser retains the right to influence and/or direct the conflicting proxy voting decisions.
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Procedure
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Fiduciary Duty
The Advisers have a fiduciary duty to vote proxies
on behalf of a Fund in the best interest of the Fund and its shareholders.
Voting of Proxies
The Advisers will vote proxies with respect
to a Fund’s portfolio securities when authorized to do so by the Fund and subject to the Fund’s proxy voting policies
and procedures and any further direction or delegation of authority by the Fund’s Board. The decision on how to vote a proxy
will be made by the person(s) to whom the Advisers have from time to time delegated such responsibility (the “Designated
Person”). The Designated Person may include the Fund’s portfolio manager(s) or a Proxy Voting Committee, as described
below.
When voting proxies with respect to a Fund’s
portfolio securities, the following standards will apply:
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• The
Designated Person will vote based on what it believes is in the best interest of the Fund and its shareholders and in accordance
with the Fund’s investment guidelines.
• Each
voting decision will be made independently. To assist with the analysis of voting issues and/or to carry out the actual voting
process the Designated Person may enlist the services of (1) reputable professionals (who may include persons employed by or otherwise
associated with the Advisers or any of its affiliated persons) or (2) independent proxy evaluation services such as Institutional
Shareholder Services. However, the ultimate decision as to how to vote a proxy will remain the responsibility of the Designated
Person.
• The
Advisers believe that a good management team of a company will generally act in the best interests of the company. Therefore, the
Designated Person will take into consideration as a key factor in voting proxies with respect to securities of a company that are
held by the Fund the quality of the company’s management. In general, the Designated Person will vote as recommended by company
management except in situations where the Designated Person believes such recommended vote is not in the best interests of the
Fund and its shareholders.
• As
a general principle, voting with respect to the same portfolio securities held by more than one Fund should be consistent among
those Funds having substantially the same investment mandates.
• The
Advisers will provide the Fund, from time to time in accordance with the Fund’s proxy voting policies and procedures and
any applicable laws and regulations, a record of the Advisers’ voting of proxies with respect to the Fund’s portfolio
securities.
Material Conflicts of Interest
In carrying out its proxy voting responsibilities,
the Advisers will monitor and resolve potential material conflicts (“Material Conflicts”) between the interests of
(a) a Fund and (b) the Advisers or any of its affiliated persons. Affiliates of the Advisers include Manulife Financial Corporation
and its subsidiaries. Material Conflicts may arise, for example, if a proxy vote relates to matters involving any of these companies
or other issuers in which the Advisers or any of their affiliates has a substantial equity or other interest.
If the Advisers or a Designated Person become
aware that a proxy voting issue may present a potential Material Conflict, the issue will be referred to the Advisers’ Legal
Department and/or the Office of the CCO. If the Legal Department and/or the Office of the CCO, as applicable determines that a
potential Material Conflict does exist, a Proxy Voting Committee will be appointed to consider and resolve the issue. The Proxy
Voting Committee may make any determination that it considers reasonable and may, if it chooses, request the advice of an independent,
third-party proxy service on how to vote the proxy.
Voting Proxies of Underlying Funds of a Fund of Funds
The Advisers or the Designated Person will vote
proxies with respect to the shares of a Fund that are held by another Fund that operates as a Fund of Funds”) in the manner
provided in the proxy voting policies and procedures of the Fund of Funds (including such policies and procedures relating to material
conflicts of interest) or as otherwise directed by the board of trustees or directors of the Fund of Funds.
Proxy Voting Committee(s)
The Advisers will from time to time, and on
such temporary or longer-term basis as they deem appropriate, establish one or more Proxy Voting Committees. A Proxy Voting Committee
shall include the Advisers’ CCO and may include legal counsel. The terms of reference and the procedures under which a Proxy
Voting Committee will operate will be reviewed from time to time by the Legal and Compliance Department. Records of the deliberations
and proxy voting recommendations of a Proxy Voting Committee will be maintained in accordance with applicable law, if any, and
these Proxy Procedures. Requested shareholder proposals or other Shareholder Advocacy must be submitted for consideration pursuant
to the Shareholder Advocacy Policy and Procedures.
Records Retention
The Advisers will retain (or arrange for the
retention by a third party of) such records relating to proxy voting pursuant to these Proxy Procedures as may be required from
time to time by applicable law and regulations, including the following:
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1. These
Proxy Procedures and all amendments hereto;
2. All
proxy statements received regarding Fund portfolio securities;
3. Records
of all votes cast on behalf of a Fund;
4. Records
of all Fund requests for proxy voting information;
5. Any
documents prepared by the Designated Person or a Proxy Voting Committee that were material to or memorialized the basis for a voting
decision;
6. All
records relating to communications with the Funds regarding Conflicts; and
7. All
minutes of meetings of Proxy Voting Committees.
The Office of the CCO, and/or the Legal Department are responsible
for maintaining the documents set forth above as needed and deemed appropriate. Such documents will be maintained in the Office
of the CCO, and/or the Legal Department for the period set forth in the Records Retention Schedule.
Voting of Proxies – SubAdvisers
In the case of proxies voted by a sub-adviser
to a Fund pursuant to the Fund’s proxy voting procedures, the Advisers will request the sub-adviser to certify to the Advisers
that the sub-adviser has voted the Fund’s proxies as required by the Fund’s proxy voting policies and procedures and
that such proxy votes were executed in a manner consistent with these Proxy Procedures and to provide the Advisers with a report
detailing any instances where the sub-adviser voted any proxies in a manner inconsistent with the Fund’s proxy voting policies
and procedures. The COO of the Advisers will then report to the Board on a quarterly basis regarding the sub-adviser certification
and report to the Board any instance where the sub-adviser voted any proxies in a manner inconsistent with the Fund’s proxy
voting policies and procedures.
The Fund Administration Department maintains
procedures affecting all administration functions for the mutual funds. These procedures detail the disclosure and administration
of the Trust’s proxy voting records.
The Trust’s Chief Legal Counsel is responsible
for including, in the SAI of each Trust, information about the proxy voting of the Advisers and each sub-adviser.
Reporting to Fund Boards
The CCO of the Advisers will provide the Board
with a copy of these Proxy Procedures, accompanied by a certification that represents that the Proxy Procedures have been adopted
by the Advisers in conformance with Rule 206(4)-6 under the Advisers Act. Thereafter, the Advisers will provide the Board with
notice and a copy of any amendments or revisions to the Procedures and will report quarterly to the Board all material changes
to these Proxy Procedures.
The CCO’s annual written compliance report
to the Board will contain a summary of material changes to the Proxy Procedures during the period covered by the report.
If the Advisers or the Designated Person vote
any proxies in a manner inconsistent with either these Proxy Procedures or a Fund’s proxy voting policies and procedures,
the CCO will provide the Board with a report detailing such exceptions.
December 1, 2019
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JOHN HANCOCK INVESTMENT MANAGEMENT DISTRIBUTORS
LLC
PROXY VOTING POLICIES AND PROCEDURES
The Majority of the Independent Board of Trustees
(the “Board”) of each registered investment company of the Trusts, has adopted these proxy voting policies and procedures
(the “Trust Proxy Policy”).
Each fund of the Trust or any other registered
investment company (or series thereof) (each, a “fund”) is required to disclose its proxy voting policies and procedures
in its registration statement and, pursuant to Rule 30b1-4 under the 1940 Act, file annually with the Securities and Exchange Commission
and make available to shareholders its actual proxy voting record. In this regard, the Trust Policy is set forth below.
Policy
It is the Advisers’ policy to comply with
Rule 206(4)-6 of the Advisers Act and Rule 30b1-4 of the 1940 Act as described above. In general, Advisers defer proxy voting decisions
to the sub-advisers managing the Funds. It is the policy of the Trusts to delegate the responsibility for voting proxies relating
to portfolio securities held by a Fund to the Fund’s respective Adviser or, if the Fund’s Adviser has delegated portfolio
management responsibilities to one or more investment sub-adviser(s), to the fund’s sub-adviser(s), subject to the Board’s
continued oversight. The sub-adviser for each Fund shall vote all proxies relating to securities held by each Fund and in that
connection, and subject to any further policies and procedures contained herein, shall use proxy voting policies and procedures
adopted by each sub-adviser in conformance with Rule 206(4)-6 under the Advisers Act.
If an instance occurs where a conflict of interest
arises between the shareholders and the designated sub-adviser, however, Advisers retain the right to influence and/or direct the
conflicting proxy voting decisions in the best interest of shareholders.
Investment Company Act
An investment company is required to disclose
in its SAI either (a) a summary of the policies and procedures that it uses to determine how to vote proxies relating to portfolio
securities or (b) a copy of its proxy voting policies.
A fund is also required by Rule 30b1-4 of the
Investment Company Act of 1940 to file Form N-PX annually with the SEC, which contains a record of how the fund voted proxies relating
to portfolio securities. For each matter relating to a portfolio security considered at any shareholder meeting, Form N-PX is required
to include, among other information, the name of the issuer of the security, a brief identification of the matter voted on, whether
and how the fund cast its vote, and whether such vote was for or against management. In addition, a fund is required to disclose
in its SAI and its annual and semi-annual reports to shareholders that such voting record may be obtained by shareholders, either
by calling a toll-free number or through the fund’s website, at the fund’s option.
Advisers Act
Under Advisers Act Rule 206(4)-6, investment
advisers are required to adopt proxy voting policies and procedures, and investment companies typically rely on the policies of
their advisers or sub-advisers.
Delegation of Proxy Voting Responsibilities
It is the policy of the Trust to delegate the
responsibility for voting proxies relating to portfolio securities held by a fund to the fund’s investment adviser (“adviser”)
or, if the fund’s adviser has delegated portfolio management responsibilities to one or more investment sub-adviser(s), to
the fund’s sub-adviser(s), subject to the Board’s continued oversight. The sub-adviser for each fund shall vote all
proxies relating to securities held by each fund and in that connection, and subject to any further policies and procedures contained
herein, shall use proxy voting policies and procedures adopted by each sub-adviser in conformance with Rule 206(4)-6 under the
Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Except as noted below under Material Conflicts
of Interest, the Trust Proxy Policy with respect to a Fund shall incorporate that adopted by the Fund’s sub-adviser with
respect to voting proxies held by its clients (the “Sub-adviser Proxy Policy”). Each Sub-adviser Policy, as it may
be amended from time to time, is hereby incorporated by reference into the Trust Proxy Policy. Each sub-adviser to a Fund is directed
to comply with these policies and procedures in voting proxies relating to portfolio securities held by a fund, subject to oversight
by the Fund’s adviser and by the Board. Each Adviser to a Fund retains the responsibility, and is directed, to oversee each
sub-adviser’s
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compliance with these policies and procedures,
and to adopt and implement such additional policies and procedures as it deems necessary or appropriate to discharge its oversight
responsibility. Additionally, the Trust’s Chief Compliance Officer (“CCO”) shall conduct such monitoring and
supervisory activities as the CCO or the Board deems necessary or appropriate in order to appropriately discharge the CCO’s
role in overseeing the sub-advisers’ compliance with these policies and procedures.
The delegation by the Board of the authority
to vote proxies relating to portfolio securities of the funds is entirely voluntary and may be revoked by the Board, in whole or
in part, at any time.
Voting Proxies of Underlying Funds of a Fund
of Funds
A. Where
the Fund of Funds is not the Sole Shareholder of the Underlying Fund
With respect to voting proxies relating
to the shares of an underlying fund (an “Underlying Fund”) held by a Fund of the Trust operating as a fund of funds
(a “Fund of Funds”) in reliance on Section 12(d)(1)(G) of the 1940 Act where the Underlying Fund has shareholders other
than the Fund of Funds which are not other Fund of Funds, the Fund of Funds will vote proxies relating to shares of the Underlying
Fund in the same proportion as the vote of all other holders of such Underlying Fund shares.
B. Where
the Fund of Funds is the Sole Shareholder of the Underlying Fund
In the event that one or more Funds
of Funds are the sole shareholders of an Underlying Fund, the Adviser to the Fund of Funds or the Trusts will vote proxies relating
to the shares of the Underlying Fund as set forth below unless the Board elects to have the Fund of Funds seek voting instructions
from the shareholders of the Funds of Funds in which case the Fund of Funds will vote proxies relating to shares of the Underlying
Fund in the same proportion as the instructions timely received from such shareholders.
1. Where
Both the Underlying Fund and the Fund of Funds are Voting on Substantially Identical Proposals
In the event that the Underlying Fund and the
Fund of Funds are voting on substantially identical proposals (the “Substantially Identical Proposal”), then the Adviser
or the Fund of Funds will vote proxies relating to shares of the Underlying Fund in the same proportion as the vote of the shareholders
of the Fund of Funds on the Substantially Identical Proposal.
2. Where
the Underlying Fund is Voting on a Proposal that is Not Being Voted on by the Fund of Funds
(a) Where
there is No Material Conflict of Interest Between the Interests of the Shareholders of the Underlying Fund and the Adviser Relating
to the Proposal
In the event that the Fund of Funds
is voting on a proposal of the Underlying Fund and the Fund of Funds is not also voting on a substantially identical proposal and
there is no material conflict of interest between the interests of the shareholders of the Underlying Fund and the Adviser relating
to the Proposal, then the Adviser will vote proxies relating to the shares of the Underlying Fund pursuant to its Proxy Voting
Procedures.
(b) Where
there is a Material Conflict of Interest Between the Interests of the Shareholders of the Underlying Fund and the Adviser Relating
to the Proposal
In the event that the Fund of Funds
is voting on a proposal of the Underlying Fund and the Fund of Funds is not also voting on a substantially identical proposal and
there is a material conflict of interest between the interests of the shareholders of the Underlying Fund and the Adviser relating
to the Proposal, then the Fund of Funds will seek voting instructions from the shareholders of the Fund of Funds on the proposal
and will vote proxies relating to shares of the Underlying Fund in the same proportion as the instructions timely received from
such shareholders. A material conflict is generally defined as a proposal involving a matter in which the Adviser or one of its
affiliates has a material economic interest.
Material Conflicts of Interest
If (1) a sub-adviser to a Fund becomes aware
that a vote presents a material conflict between the interests of (a) shareholders of the Fund; and (b) the Fund’s Adviser,
sub-adviser, principal underwriter, or any of their affiliated persons, and (2) the sub-adviser does not propose to vote on the
particular issue in the manner prescribed by its
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Sub-adviser Proxy Policy or the material conflict
of interest procedures set forth in its Sub-adviser Proxy Policy are otherwise triggered, then the sub-adviser will follow the
material conflict of interest procedures set forth in its Sub-adviser Proxy Policy when voting such proxies.
If a Sub-adviser Proxy Policy provides that
in the case of a material conflict of interest between Fund shareholders and another party, the sub-adviser will ask the Board
to provide voting instructions, the sub-adviser shall vote the proxies, in its discretion, as recommended by an independent third
party, in the manner prescribed by its Sub-adviser Proxy Policy or abstain from voting the proxies.
Proxy Voting Committee(s)
The Advisers will from time to time, and on
such temporary or longer-term basis as they deem appropriate, establish one or more Proxy Voting Committees. A Proxy Voting Committee
shall include the Advisers’ CCO and may include legal counsel. The terms of reference and the procedures under which a Proxy
Voting Committee will operate will be reviewed from time to time by the Legal and Compliance Department. Records of the deliberations
and proxy voting recommendations of a Proxy Voting Committee will be maintained in accordance with applicable law, if any, and
these Proxy Procedures. Requested shareholder proposals or other Shareholder Advocacy in the name of a Fund must be submitted for
consideration pursuant to the Shareholder Advocacy Policy and Procedures.
Securities Lending Program
Certain of the Funds participate in a securities
lending program with the Trusts through an agent lender. When a Fund’s securities are out on loan, they are transferred into
the borrower’s name and are voted by the borrower, in its discretion. Where a sub-adviser determines, however, that a proxy
vote (or other shareholder action) is materially important to the client’s account, the sub-adviser should request that the
agent recall the security prior to the record date to allow the sub-adviser to vote the securities.
Disclosure of Proxy Voting Policies and Procedures
in the Trust’s Statement of Additional Information (“SAI”)
The Trust shall include in its SAI a summary
of the Trust Proxy Policy and of the Sub-adviser Proxy Policy included therein. (In lieu of including a summary of these policies
and procedures, the Trust may include each full Trust Proxy Policy and Sub-adviser Proxy Policy in the SAI.)
Disclosure of Proxy Voting Policies and Procedures
in Annual and Semi-Annual Shareholder Reports
The Trusts shall disclose in annual and semi-annual
shareholder reports that a description of the Trust Proxy Policy, including the Sub-adviser Proxy Policy, and the Trusts’
proxy voting record for the most recent 12 months ended June 30 are available on the Securities and Exchange Commission’s
(“SEC”) website, and without charge, upon request, by calling a specified toll-free telephone number. The Trusts will
send these documents within three business days of receipt of a request, by first-class mail or other means designed to ensure
equally prompt delivery. The Fund Administration Department is responsible for preparing appropriate disclosure regarding proxy
voting for inclusion in shareholder reports and distributing reports. The Legal Department supporting the Trusts is responsible
for reviewing such disclosure once it is prepared by the Fund Administration Department.
Filing of Proxy Voting Record on Form N-PX
The Trusts will annually file their complete
proxy voting record with the SEC on Form N-PX. The Form N-PX shall be filed for the twelve months ended June 30 no later than August
31 of that year. The Fund Administration department, supported by the Legal Department supporting the Trusts, is responsible for
the annual filing.
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Procedure
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Review of Sub-advisers’ Proxy Voting
The Trusts have delegated proxy voting authority
with respect to Fund portfolio securities in accordance with the Trust Policy, as set forth above.
Consistent with this delegation, each sub-adviser
is responsible for the following:
1. Implementing
written policies and procedures, in compliance with Rule 206(4)-6 under the Advisers Act, reasonably designed to ensure that the
sub-adviser votes portfolio securities in the best interest of shareholders of the Trusts.
2. Providing the Advisers
with a copy and description of the Sub-adviser Proxy Policy prior to being approved by the Board as a sub-adviser, accompanied
by a certification that represents that the Sub-adviser
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Proxy
Policy has been adopted in conformance with Rule 206(4)-6 under the Advisers Act. Thereafter, providing the Advisers with notice
of any amendment or revision to that Sub-adviser Proxy Policy or with a description thereof. The Advisers are required to report
all material changes to a Sub-adviser Proxy Policy quarterly to the Board. The CCO’s annual written compliance report to
the Board will contain a summary of the material changes to each Sub-adviser Proxy Policy during the period covered by the report.
3. Providing
the Adviser with a quarterly certification indicating that the sub-adviser did vote proxies of the funds and that the proxy votes
were executed in a manner consistent with the Sub-adviser Proxy Policy. If the sub-adviser voted any proxies in a manner inconsistent
with the Sub-adviser Proxy Policy, the sub-adviser will provide the Adviser with a report detailing the exceptions.
Adviser Responsibilities
The Trusts have retained a proxy voting service
to coordinate, collect, and maintain all proxy-related information, and to prepare and file the Trust’s reports on Form N-PX
with the SEC.
The Advisers, in accordance with their general oversight responsibilities,
will periodically review the voting records maintained by the proxy voting service in accordance with the following procedures:
1. Receive
a file with the proxy voting information directly from each sub-adviser on a quarterly basis.
2. Select
a sample of proxy votes from the files submitted by the sub-advisers and compare them against the proxy voting service files for
accuracy of the votes.
3. Deliver
instructions to shareholders on how to access proxy voting information via the Trust’s semi-annual and annual shareholder
reports.
The Fund Administration Department, in conjunction with the Legal
Department supporting the Trusts, is responsible for the foregoing procedures.
Proxy Voting Service Responsibilities
Proxy voting services retained by the Trusts are required to undertake
the following procedures:
• Aggregation
of Votes:
The proxy voting service’s proxy disclosure
system will collect fund-specific and/or account-level voting records, including votes cast by multiple sub-advisers or third-party
voting services.
• Reporting:
The proxy voting service’s proxy disclosure
system will provide the following reporting features:
1. multiple
report export options;
2. report
customization by fund-account, portfolio manager, security, etc.; and
3. account
details available for vote auditing.
• Form N-PX Preparation
and Filing:
The Advisers will be responsible for oversight
and completion of the filing of the Trusts’ reports on Form N-PX with the SEC. The proxy voting service will prepare the
EDGAR version of Form N-PX and will submit it to the adviser for review and approval prior to filing with the SEC. The proxy voting
service will file Form N-PX for each twelve-month period ending on June 30. The filing must be submitted to the SEC on or before
August 31 of each year. The Fund Administration Department, in conjunction with the Legal Department supporting the Trusts, is
responsible for the foregoing procedures.
The Fund Administration Department in conjunction
with the CCO oversees compliance with this policy.
The Fund Administration Department maintains
operating procedures affecting the administration and disclosure of the Trusts’ proxy voting records.
The Trusts’ Chief Legal Counsel is responsible
for including in the Trusts’ SAI information regarding the Advisers’ and each sub-advisers proxy voting policies as
required by applicable rules and form requirements.
The Fund Administration Department and The CCO’s Office is
responsible for maintaining all documentation
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created in connection with this policy. Documents will be maintained
for the period set forth in the Records Retention Schedule.
December 10, 2019
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Manulife Investment Management Global Proxy
Voting Policy and Procedures (External)
March 2020
Executive Summary
Each investment team at Manulife Investment
Management (“Manulife IM”)1 is responsible for investing in line with its investment philosophy and clients’
objectives. Manulife IM’s approach to proxy voting aligns with its organizational structure and encourages best practices
in governance and management of environmental and social risks and opportunities. Manulife IM has adopted and implemented proxy
voting policies and procedures to ensure that proxies are voted in the best interests of its clients for whom it has proxy voting
authority.
This Global Proxy Voting Policy and Procedures
(“Policy”) applies to each of the Manulife IM advisory affiliates listed in Appendix A. In seeking to adhere to local
regulatory requirements of the jurisdiction in which an advisory affiliate operates, additional procedures specific to that affiliate
may be implemented to ensure compliance, where applicable. The Policy is not intended to cover every possible situation that may
arise in the course of business, but rather to act as a decision-making guide. It is therefore subject to change and interpretation
from time-to-time as facts and circumstances dictate.
Statement of Policy
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The right to vote is a basic component of share ownership and is an important control mechanism to ensure that a company is
managed in the best interests of its shareholders. Where clients delegate proxy voting authority to Manulife IM, Manulife IM has
a fiduciary duty to exercise voting rights responsibly.
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Where Manulife IM is granted and accepts responsibility for voting proxies for client accounts, it will seek to ensure proxies
are received and voted in the best interests of the client with a view to maximize the economic value of their equity securities,
unless it determines that it is in the best interests of the client to refrain from voting a given proxy.
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If there is any potential material proxy-related conflict of interest between Manulife IM and its clients, identification and
resolution processes are in place to provide for determination in the best interests of the client.
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Manulife IM will disclose information about its proxy voting policies and procedures to its clients.
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Manulife IM will maintain certain records relating to proxy voting.
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Philosophy on Sustainable Investment
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Manulife IM’s commitment to sustainable investment2 is focused on protecting and enhancing the value of our
clients’ investments and, as active owners in the companies in which we invest, we believe that voting at shareholder meetings
can contribute to the long-term sustainability of our investee companies. Manulife IM will seek to exercise the rights and responsibilities
associated with equity ownership, on behalf of its clients, with a focus on maximizing long-term shareholder returns, as well as
enhancing and improving the operating strength of the companies to create sustainable value for shareholders.
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Manulife IM invests in a wide range of securities across the globe, ranging from large multinationals to smaller early stage
companies, and from well-developed markets to emerging and frontier markets. Expectations of those companies vary by market to
reflect local standards, regulations and laws. Manulife IM believes, however, that successful companies across regions are generally
better positioned over the long-term if they have:
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Robust oversight including a strong and
effective board with independent and objective leaders working on behalf of shareholders;
Mechanisms to mitigate risk such as effective
internal controls, board expertise covering a firm’s unique risk profile, and routine use of KPIs to measure and assess long-term
risks;
A management team aligned with shareholders
through remuneration structures that incentivize long-term performance through the judicious and sustainable stewardship of company
resources;
Transparent and thorough reporting of the
components of the business that are most significant to shareholders and stakeholders with focus on the firm’s long-term
success and,
Management focused on all forms of capital
including environmental, social and human capital.
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•
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The Manulife Investment Management Voting Principles (“Voting Principles”) outlined in Appendix B provide guidance
for our voting decisions. An active decision to invest in a firm reflects a positive conviction in the investee company and we
generally expect to be supportive of management for that reason. Manulife IM may seek to challenge management’s recommendations,
however, if they contravene these Voting Principles or Manulife IM otherwise determines that doing so is in the best interest of
its clients.
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Manulife IM also regularly engages with boards and management on environmental, social or corporate governance issues consistent
with the principles stipulated in our Sustainable Investing Policy and our Engagement Policy. Manulife IM may, through these engagements,
request certain changes of the portfolio company to mitigate risks or maximize opportunities. In the context of preparing for a
shareholder meeting, Manulife IM will review progress on requested changes for those companies engaged. In an instance where Manulife
IM determines that the issuer has not made sufficient improvements on an issue, then we may take voting action to demonstrate our
concerns.
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In rare circumstances Manulife IM may consider filing, or co-filing, a shareholder resolution at an investee company. This
may occur where our team has engaged with management regarding a material sustainability risk or opportunity, and where we determine
that the company has not made satisfactory progress on the matter within a reasonable time period. Any such decision will be in
the sole discretion of Manulife IM and acted on where we believe filing, or co-filing, a proposal is in the best interests of our
clients.
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Manulife IM may also divest of holdings in a company where Portfolio Managers are dissatisfied with company financial performance,
strategic direction and/or management of material sustainability risks or opportunities.
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Procedures
Receipt of Ballots and Proxy Materials
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•
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Proxies received are reconciled against the client’s holdings, and the custodian bank will be notified if proxies have
not been forwarded to the proxy service provider when due.
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Manulife IM has adopted the Voting Principles contained in Appendix B of this Policy.
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Manulife IM has deployed the services of a proxy voting services provider to ensure the timely casting of votes, and to provide
relevant and timely proxy voting research to inform our voting decisions. Manulife IM periodically reviews the detailed policies
created by the proxy voting service provider to ensure consistency with our Voting Principles, to the extent this is possible.
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Portfolio managers actively review voting options and make voting decisions for their holdings. Where Manulife IM holds a significant
ownership position in an issuer, the rationale for a portfolio manager’s voting decision is specifically recorded, including
whether the vote cast aligns with the recommendations of the proxy voting services provider or has been voted differently. A significant
ownership position in an investment is defined as those cases where Manulife IM holds at least 2% of a company’s issued share
capital in aggregate across all Manulife IM client accounts.
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The Manulife IM ESG Research and Integration Team (“ESG Team”) is an important resource for portfolio management
teams on proxy matters. This team provides advice on specific proxy votes for individual issuers if needed. ESG Team advice is
supplemental to the research and recommendations provided by our proxy voting services provider. In particular, ESG analysts actively
review voting resolutions for companies in which:
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Manulife IM’s aggregated holdings
across all client accounts represent 2% or greater of issued capital;
A meeting agenda includes shareholder resolutions
related to environmental and social risk management issues, or where the subject of a shareholder resolution is deemed to be material
to our investment decision; or
The issuer has been engaged by Manulife
IM within the past two years seeking a change in behavior
After review, the ESG Team may provide research
and advice to investment staff in line with the Voting Principles.
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Manulife IM also has an internal Proxy Voting Working Group (“Working Group”) comprising senior managers from across
Manulife IM including the equity investment team, Legal, Compliance, and the ESG Team. The Working Group operates under the auspices
of the Manulife IM Public Markets Sustainable Investment Committee. The Working Group regularly meets to review and discuss voting
decisions on shareholder proposals or instances where a portfolio manager recommends a vote different than the recommendation of
the proxy voting services provider.
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Manulife IM clients retain the authority, and may choose, to lend shareholdings. Manulife IM, however, generally retains the
ability to recall shares in order to execute proxy votes. Manulife IM will, where feasible, weigh the benefit of casting votes
at a given meeting when deciding whether to recall lent shares for voting.
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Manulife IM may refrain from voting a proxy where we have agreed with a client in advance to limit the situations in which
we will execute votes. Manulife may also refrain from voting due to logistical considerations that may have a detrimental effect
on our ability to vote. These issues may include, but are not limited to:
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1. Costs associated with voting the proxy
exceed the expected benefits to clients;
2. Underlying securities have been lent
out pursuant to a client’s securities lending program and have not been subject to recall;
3. Short notice of a shareholder meeting;
4. Requirements to vote proxies in person;
5. Restrictions on a non-national’s
ability to exercise votes, determined by local market regulation;
6. Restrictions on the sale of securities
in proximity to the shareholder meeting (i.e. “share blocking”);
7. Requirements to disclose commercially
sensitive information that may be made public (i.e. “re-registration”);
8. Requirements to provide local agents
with power of attorney to facilitate the voting instructions (such proxies are voted on a best-efforts basis); or
9. Inability of a client’s custodian
to forward and process proxies electronically.
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If a Manulife IM portfolio manager believes it is in the best interest of a client to vote proxies in a manner inconsistent
with the Policy, the portfolio manager will submit new voting instructions to a member of the ESG Team with rationale for the new
instructions. The ESG Team will then support the PM in developing voting decision rationale that aligns with this Policy and the
Voting Principles. The ESG Team will then submit the vote change to the Proxy Voting Working Group. The Proxy Voting Working Group
will review the change and ensure that the rationale is sound and the decision will promote the long-term success of the issuer.
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On occasion, there may be proxy votes which are not within the research and recommendation coverage universe of the proxy voting
service provider. Portfolio managers responsible for the proxy votes will provide voting recommendations to the ESG Team and those
items may be escalated to the Proxy Voting Working Group for review to ensure that the voting decision rationale is sound and the
decision will promote the long-term success of the issuer. the Manulife IM Proxy Operations Team will be notified of the voting
decisions and execute the votes accordingly.
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Manulife IM does not engage in the practice of “empty voting” (a term embracing a variety of factual circumstances
that result in a partial, or total, separation of the right to vote at a shareholders meeting from beneficial ownership of the
shares on the meeting date). Manulife IM prohibits investment managers from creating large hedge positions solely to gain the vote
while avoiding economic exposure to the market. Manulife IM will not knowingly vote borrowed shares (for example, shares borrowed
for short sales and hedging transactions).
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Engagement of the Proxy Voting Service
Provider
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Manulife IM has contracted with a third-party proxy service provider to assist with the proxy voting process. Except in instances
where a client retains voting authority, Manulife IM will instruct custodians of client accounts to forward all proxy statements
and materials received in respect of client accounts to the proxy service provider.
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Manulife IM has engaged its proxy voting
service provider to:
1. Research and make voting recommendations;
2. Ensure proxies are voted and submitted in a timely manner;
3. Perform other administrative functions of proxy voting;
4. Maintain records of proxy statements and provide copies of such proxy statements promptly upon request;
5. Maintain records of votes cast; and
6. Provide recommendations with respect to proxy voting matters in general.
Scope of Proxy Voting Authority
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Manulife IM and our clients shape the proxy voting relationship by agreement provided there is full and fair disclosure and
informed consent. Manulife IM may agree with clients to other proxy voting arrangements in which Manulife IM does not assume proxy
voting responsibility or will only vote in limited circumstances.3
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While the application of our fiduciary duty in the context of proxy voting will vary with the scope of the voting authority
we assume, we acknowledge the relationship in all cases remains that of a fiduciary to the client. Beyond the general discretion
retained by Manulife IM to withhold from voting as outlined above, Manulife IM may enter a specific agreement with a client not
to exercise voting authority on certain matters where the cost of voting would be high or the benefit to the client would be low.
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Disclosure of Proxy Votes
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Manulife IM may inform company management of our voting intentions ahead of casting the vote. This is in line with Manulife
IM’s objective to provide the opportunity for companies to better understand our investment process, policies and objectives.
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We will not intentionally disclose to anyone else, including other investors, our voting intention prior to casting the vote.
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Manulife IM keeps records of proxy voting available for inspection by clients, regulatory authorities or government agencies.
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Manulife IM will annually disclose voting records aggregated across funds.
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Conflicts of Interest
Manulife IM has an established infrastructure
designed to identify conflicts of interest throughout all aspects of the business. Proxy voting proposals may raise conflicts between
the interests of Manulife IM’s clients and the interests of Manulife IM, its affiliates, or employees. Apparent conflicts
are reviewed by the Working Group to determine whether there is a conflict of interest and, if so, whether the conflict is material.
Manulife IM shall consider any of the following circumstances a potential material conflict of interest:
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Manulife IM has a business relationship or potential relationship with the issuer;
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Manulife IM has a business relationship with the proponent of the proxy proposal; or
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Manulife IM members, employees or consultants have a personal or other business relationship with managers of the business
such as top-level executives, corporate directors or director candidates.
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In addressing any such potential material conflict
Manulife IM will seek to ensure proxy votes are cast in the advisory client’s best interests and are not affected by Manulife
IM’s potential conflict. In the event a potential material conflict of interest exists, the Proxy Voting Working Group or
its designee will either (i) review the proxy voting decisions to ensure robust rationale, that the voting decision will protect
or enhance shareholder value over the long-term, and is in line with the best interest of the client; (ii) vote such proxy according
to the specific recommendation of the proxy voting services provider; (iii) abstain; or (iv) request the client vote such proxy.
The basis for the voting decision, including the process for the determination of the decision that is in the best interests of
the client, is recorded.
Voting Shares of Manulife Financial Company
Manulife Financial (“MFC”) is the
publicly listed parent company of Manulife IM. Generally, legislation restricts the ability of a public company (and its subsidiaries)
to hold shares in itself within its own accounts. Accordingly, the MFC Share Investment Policy outlines the limited circumstances
in which MFC or its subsidiaries may, or may not, invest or hold shares in MFC on behalf of MFC or its subsidiaries.4
The MFC Share Investment Policy does not apply
to investments made on behalf of unaffiliated third parties, which remain assets of the client.5 Such investing may
be restricted, however, by specific client guidelines, other Manulife policies or other applicable laws.
Where Manulife IM is charged with voting MFC
shares we will execute votes in proportion with all other shareholders (i.e. proportional or ‘echo’ vote). This is
intended to neutralize the effect of our vote on the meeting outcome.
Policy Responsibility and Oversight
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The Working Group oversees and monitors the Voting Policy and Manulife IM’s proxy voting function. The Working Group
is responsible for reviewing regular reports, potential conflicts of interest, vote changes and non-routine proxy voting items.
The Working Group also oversees the third-party proxy voting service provider. The Working Group will meet at least monthly and
report to the Public Markets Sustainable Investing Committee and, where requested, the Manulife IM Operating Committee.
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Manulife IM’s Proxy Operations Team is responsible for the daily administration of the proxy voting process for all Manulife
IM operations that have contracted with a third-party proxy voting services provider. Significant proxy voting issues identified
by Manulife IM’s Proxy Operations Team are escalated to the Chief Compliance Officer or its designee and the Working Group.
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The Working Group is responsible for the proper oversight of any service providers hired by Manulife IM to assist it in the
proxy voting process. This oversight includes:
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Annual Due Diligence: Manulife IM
conducts an annual due diligence review of the proxy voting research service provider. This oversight includes an evaluation of
the service provider’s industry reputation, points of risk, compliance with laws and regulations and technology infrastructure.
Manulife IM also reviews the provider’s capabilities to meet Manulife IM’s requirements including reporting competencies;
the adequacy and quality of the proxy advisory firm’s staffing and personnel; the quality and accuracy of sources of data
and information; the strength of policies and procedures that enable it to make proxy voting recommendations based on current and
accurate information; and the strength of policies and procedures to address conflicts of interest of the service provider related
to its voting recommendations.
Regular Updates: Manulife also requests
that the proxy voting research service provider deliver updates regarding any business changes that alter that firm’s ability
to provide independent proxy voting advice and services aligned with our policies.
Additional Oversight in Process:
Manulife IM has additional control mechanisms built into the proxy voting process to act as checks on the service provider and
ensure that decisions are made in the best interest of our clients. These mechanisms include:
Sampling pre-populated votes: Where
we utilize a third-party research provider for either voting recommendations or voting execution (or both), we may assess “pre-populated”
votes shown on the vendor’s electronic voting platform before such votes are cast to ensure alignment with the Voting Principles.
Consideration of additional information:
Where Manulife IM utilizes a proxy service provider for voting recommendations, we consider additional information that may become
available regarding voting items. This additional information may include filings by an issuer or shareholder proponent that are
issued subsequent to the filing of meeting materials.
Decision scrutiny from the Working Group:
Where our voting policies and procedures do not address how to vote on a particular matter, or where the matter is highly contested
or controversial (e.g. major acquisitions involving takeovers or contested director elections where a shareholder has proposed
its own slate of directors), review by the Working Group may be necessary or appropriate to ensure votes cast on behalf of its
client are cast in the client’s best interest.
Record-Keeping and Reporting
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Manulife IM provides clients with a copy of the Voting Policy upon request and it is also available on our website at www.manulifeam.com.
Manulife IM describes its proxy voting procedures to its clients in the relevant or required disclosure document and discloses
to its clients the process to obtain information on how Manulife IM voted that client’s proxies.
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Manulife IM keeps records of proxy voting activities and those records include proxy voting policies and procedures, records
of votes cast on behalf of clients, records of client requests for proxy voting information; and any documents generated in making
a vote decision. These documents are available for inspection by clients, regulatory authorities or government agencies.
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Manulife IM will disclose voting records on its website and those records will be updated on an annual basis. The voting records
will generally reflect the voting decisions made for retail, institutional and other client funds in the aggregate.
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Policy Amendments and Exceptions
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This policy is subject to periodic review by the Proxy Voting Working Group. The Working Group may suggest amendments to this
policy and any such amendments must be approved by the Manulife IM Public Markets Sustainable Investing Committee and the Manulife
IM Operating Committee.
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Any deviation from this policy will only be permitted with the prior approval of the Chief Investment Officer or Chief Administrative
Officer (or their designee), with the counsel of the Chief Compliance Officer / General Counsel.
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APPENDIX A
MANULIFE IM ADVISORY AFFILIATES IN SCOPE
OF POLICY
+Investment management business only.
Manulife Investment Management Limited
Manulife Investment Management (North America)
Limited
Manulife Investment Management (Hong Kong)
Limited
PT Manulife Aset Manajemen Indonesia*
Manulife Investment Management (Japan) Limited
Manulife Investment Management (Malaysia) Bhd.
Manulife Investment Management and Trust Corporation
Manulife Investment Management (Singapore)
Pte. Ltd.
Manulife IM (Switzerland) LLC
Manulife Investment Management (Taiwan) Co.,
Ltd.*
Manulife Investment Management (Europe) Limited
Manulife Investment Management (US) LLC
Manulife Investment Fund Management (Vietnam)
Company Limited*
*By reason of certain local regulations and
laws with respect to voting, e.g.: manual/physical voting processes or the absence of a third-party proxy voting service provider
for those jurisdictions, Manulife Investment Fund Management (Vietnam) Company Limited, and PT Manulife Aset Manajemen Indonesia
do not engage a third-party service provider to assist in their proxy voting processes. Manulife Investment Management (Taiwan)
Co., Ltd. Uses the third-party proxy voting service provider to execute votes for non-Taiwanese entities only.
APPENDIX B
MANULIFE IM VOTING PRINCIPLES
Manulife Investment Management (“Manulife
IM”) believes that strong management of all forms of corporate capital, whether financial, social or environmental will mitigate
risks, create opportunities and drive value over the long-term. Manulife IM reviews and considers environmental, social and corporate
governance risks and opportunities in our investment decisions. Once invested, Manulife IM continues its oversight through active
ownership which includes portfolio company engagement and proxy voting of underlying shares. We believe proxy voting is a vital
component of this continued oversight as it provides a voice for minority shareholders regarding management actions.
Manulife IM has developed some key principles
that drive our proxy voting decisions and engagements. We believe these principles preserve value and generally lead to outcomes
that drive positive firm performance. These principles dictate our voting on issues ranging from director elections and executive
compensation to the preservation of shareholder rights and stewardship of environmental and social capital. The facts and circumstances
of each issuer are unique, and Manulife IM may deviate from these principles where we believe doing so will preserve or create
value over the long-term. These principles also do not address the specific content of all proposals voted around the globe, but
provide a general lens of value preservation, value creation, risk management and protection of shareholder rights through which
Manulife IM analyzes all voting matters.
I. Boards and Directors: Manulife IM
uses the following principles to review proposals covering director elections and board structure in the belief that they encourage
engaged and accountable leadership of a firm.
a. Board Independence: The most effective
boards are composed of directors with a diverse skill set that can provide an objective view of the business, oversee management,
and make decisions in the best interest of the shareholder body at large. To create and preserve this voice, boards should have
a significant number of non-executive, independent directors. The actual number of independent directors can vary by market and
Manulife IM accounts for these differences when reviewing the independence of the board. Ideally, however, there is an independent
majority among directors at a given firm.
b. Committee Independence: Manulife
IM also prefers that key board committees are composed of independent directors. Specifically, the audit, nomination and compensation
committees should be entirely or majority composed of independent directors.
c. Attendance: A core part of a director’s
duties is to remain an engaged and productive participant at board and committee meetings. Directors should, therefore, attend
at least 75% of board and committee meetings in the aggregate over the course of a calendar year.
d. Gender Diversity: In line with the
principles expressed in relation to ‘Board Independence’ above, Manulife IM believes boards with strong gender representation
are better equipped to manage risks and oversee business resilience over the long-term compared to firms with low gender balance.
Manulife IM generally expects boards to have at least one woman on the board and encourages companies to aspire to a higher balance
of gender representation.
e. Classified/Staggered Boards: Manulife
IM prefers that directors be subject to election and re-election on an annual basis. Annual elections operate to hold directors
accountable for their actions in a given year in a timely manner. Shareholders should have the ability to voice concerns through
a director vote and to potentially remove problematic directors if necessary. Manulife IM generally opposes the creation of classified
or staggered director election cycles designed to extend director terms beyond one year. Manulife IM also supports proposals to
eliminate these structures.
f. Overboarding: Manulife IM believes
directors should limit their outside board seats in order to ensure that they have the time and attention to provide their director
role at a firm in question. Generally, this means directors should not sit on more than 5 public company boards. The
role of CEO requires an individual’s significant time and attention. Directors holding the role of CEO at any public firm,
therefore, should not sit on more than 3 public company boards inclusive of the firm at which they hold the CEO role.
g. Independent Chair/CEO: Governance
failures can occur where a manager has firm control over a board through the combination of the Chair/CEO roles. Manulife IM generally
supports the separation of the Chair/CEO roles as a means to prevent board ‘capture’ by management. We will evaluate
proposals to separate the Chair/CEO roles on a case-by-case basis, for example, however considering such factors as the establishment
of a strong lead independent director role or the temporary need for the combination of the CEO/Chair roles to help the firm through
a leadership transition.
h. Vote Standard: Manulife IM supports
a vote standard that allows resolutions to pass, or fail, based on a majority voting standard. Manulife IM expects companies to
adopt a majority vote standard for director elections and supports the elimination of a plurality vote standard except in the case
of contested elections.
i. Contested Elections: Where there
is a proxy contest or a director’s election is otherwise contested, Manulife IM evaluates the proposals on a case-by-case
basis. Consideration is given to firm performance, whether there have been significant failures of oversight, and whether the proponent
for change makes a compelling case that board turnover will drive firm value.
j. Significant and Problematic Actions or
Omissions: Manulife IM believes boards should be held accountable to shareholders in instances where there is a significant
failure of oversight that has led to a loss of firm value or otherwise curtailed shareholder rights. Manulife IM considers withholding
from, or voting against, certain directors where the board acted, or failed to act, in a way that significantly affected shareholder
rights or otherwise negatively affected firm value. Some examples of actions that might warrant a vote against directors include,
but are not limited to, the following:
i. Failure of Oversight: Manulife IM
may take action against directors where there has been a significant negative event leading to a loss of shareholder value and
stakeholder confidence. A failure may manifest itself in multiple ways including adverse auditor opinions, material misstatements,
failures of leadership and governance and environmental or human rights violations.
ii. Adoption of Anti-Takeover Mechanism:
Boards should generally review takeover offers independently and objectively in consideration of the potential value created or
lost for shareholders. Manulife IM holds boards accountable when they create or prolong certain mechanisms, bylaws or article amendments
that act to frustrate genuine offers that may lead to value creation for shareholders. These can include ‘poison pills’;
classes of shares with differential voting rights; classified, or staggered, board structures; unilateral bylaw amendments and
supermajority voting provisions.
iii. Problematic Executive Compensation
Practices: Manulife IM encourages companies to adopt best practices for executive compensation in the markets in which they
operate. Generally, this means that pay should be aligned with performance. Manulife IM may hold directors accountable where this
alignment is not robust. We may also hold boards accountable where they have not adequately responded to shareholder votes against
a previous proposal on remuneration or have adopted problematic agreements or practices (e.g. ‘golden parachutes’,
repricing of options).
iv. Bylaw/Article Adoption and Amendments:
Shareholders should have the ability to vote on any change to company articles or bylaws that will materially change their rights
as shareholders. Any amendments should require only a majority of votes to pass. Manulife IM will hold directors accountable where
a board has amended or adopted bylaw and/or article provisions that significantly curtail shareholder rights.
v. Engagement Responsiveness: Manulife
IM regularly engages with issuers to discuss ESG risks and opportunities and may request changes from firms during these discussions.
Manulife IM may vote against certain directors where we have engaged with an issuer and requested certain changes but the firm
has not made sufficient progress on those matters.
II. Environmental and Social Proposals:
Manulife IM expects its portfolio companies to manage material environmental and social issues affecting its business, whether
risks or opportunities, with a view towards long-term value preservation and creation.6 Manulife IM expects firms to
identify material environmental and social risks and opportunities specific to their business, to develop strategies to manage
those matters, and to provide meaningful, substantive reporting while demonstrating progress year-over-year against their plans.
Proposals touching on management of risks and opportunities related to environmental and social issues are often put forth as shareholder
proposals but can be proposed by management as well. Manulife IM reviews these proposals on a case-by-case basis considering, among
other factors:
a. The Magnitude of the Risk/Opportunity:
Manulife IM evaluates the level of materiality of a certain environmental or social issue identified in a proposal as it pertains
to the firm’s ability to generate value over the long-term. This review includes deliberation of the effect an issue will
have on the financial statements and/or the cost of capital.
b. The Firm’s Current Management of
the Risk/Opportunity: Manulife IM analyzes a firm’s current approach to an issue to determine whether the firm has robust
plans, infrastructure and reporting to mitigate the risk or embrace the opportunity.
c. Firm’s Current Disclosure Framework:
Manulife IM expects firms to disclose enough information for shareholders to assess the company’s management of environmental
and social risks and opportunities material to the business. Manulife IM may support proposals calling for enhanced firm disclosure
regarding environmental and social issues where additional information would help our evaluation of a company’s exposure,
and response, to those factors.
d. Legislative or Regulatory Action of a
Risk/Opportunity: When reviewing proposals on environmental or social factors, Manulife IM considers whether a given risk or
opportunity is currently addressed by local regulation or law in the markets in which a firm operates and whether those rules are
designed to adequately manage an issue. Manulife IM also considers whether a firm should proactively address a matter in anticipation
of future legislation or regulation.
e. Cost to, or Disruption of, the Business:
When reviewing environmental and social proposals Manulife IM assesses the potential cost of the requested action against the benefit
provided to the firm and its shareholders. Particular attention is paid to proposals that request actions that are overly prescriptive
on management or that request a firm exit markets or operations that are essential to its business.
III. Shareholder Rights: Manulife IM
generally supports management or shareholder proposals that protect, or improve, shareholder rights and opposes proposals that
remove, or curtail, existing rights.
a. Shareholder Rights Plans (“Poison
Pills”): Manulife IM opposes mechanisms intended to frustrate genuine takeover offers. Manulife IM may, however, support
shareholder rights plans where the plan has a trigger of 20% ownership or more and will expire in three years or less. In conjunction
with these requirements Manulife IM evaluates the company’s strategic rationale for adopting the poison pill.
b. Supermajority Voting: Shareholders
should have the ability to direct change at a firm based on a majority vote. Manulife IM opposes the creation, or continuation,
of any bylaw, charter or article provisions that require approval of more than a majority of shareholders for amendment of those
documents. Manulife IM may consider supporting such a standard where the supermajority requirement is intended to protect minority
shareholders.
c. Proxy Access: Manulife IM believes
that shareholders have a right to appoint representatives to the board that best protect their interests. The power to propose
nominees without holding a proxy contest is a way to protect that right and is potentially less costly to management and shareholders.
Accordingly, Manulife IM supports creation of a proxy access right (or similar power at non-U.S. firms) provided there are reasonable
thresholds of ownership and a reasonable number of shareholders can aggregate ownership to meet those thresholds.
d. Written Consent: Written consent
provides shareholders the power to formally demand board action outside of the context of an annual general meeting. Shareholders
can use written consent as a nimble method of holding boards accountable. Manulife IM supports the right of written consent so
long as that right is reasonably tailored to reflect the will of a majority of shareholders. Manulife IM may not support such a
right, however, where there is a holder with a significant, or controlling, stake. Manulife IM evaluates the substance of any written
actual consent proposal in-line with these principles.
e. Right to Call a Special Meeting:
Manulife IM is supportive of the shareholder right to call a special meeting. This right allows shareholders to quickly respond
to events which can significantly affect firm value. Manulife IM believes that a 10% ownership threshold to call a special meeting
reasonably protects this shareholder right while reducing the possibility of undue distraction for management.
IV. Executive Compensation: Manulife
IM encourages companies to align executive incentives with shareholder interests when designing executive compensation plans. Companies
should provide shareholders with transparent, comprehensive and substantive disclosure regarding executive compensation that aids
shareholder assessment of the alignment between executive pay and firm performance. Companies should also have the flexibility
to design remuneration programs that fit a firm’s business model, business sector and industry and overall corporate strategy.
No one template of executive remuneration can fit all companies.
a. Advisory Votes on Executive Compensation:
While acknowledging that there is no singular model for executive compensation, Manulife IM scrutinizes companies closely that
have certain practices. Some concerning practices can include:
i. Misalignment Between Pay and Company
Performance: Pay should generally move in tandem with corporate performance. Firms where CEO pay remains flat, or increases,
though corporate performance remains down relative to peers are particularly concerning.
ii. One-Time Grants: A firm’s
one-time grant to an executive, outside of the normal salary, bonus and long-term award structure, may be indicative of an overall
failure of the board to design an effective remuneration plan. A company should have a robust justification for making grants outside
of the normal remuneration framework.
iii. Significant Quantity of Non-Performance
Based Pay: Executive pay should generally be weighted more heavily towards performance-based remuneration to create the alignment
between pay and performance. Companies should provide a robust explanation for any significant awards made that vest solely based
on time or are not otherwise tied to performance.
iv. Lack of Rigor in Performance Targets:
Performance targets should challenge managers to improve corporate performance and outperform peers. Targets should, where applicable,
generally align with, or even outpace, guidance; incentivize outperformance against a peer group; and otherwise remain challenging.
v. Lack of Disclosure: Transparency
is essential to shareholder analysis and understanding of executive remuneration at a company. Manulife IM expects firms to clearly
disclose all major components of remuneration. This includes disclosure of amounts, performance metrics and targets, vesting terms,
and pay outcomes.
vi. Repricing of Options: Resetting
the exercise price of outstanding options significantly undermines the incentive nature of the initial option grant. Though a firm
may have a strong justification for repricing options, Manulife IM believes that firms should put such decisions to a shareholder
vote. Manulife IM may oppose an advisory vote on executive compensation where a company has repriced outstanding options for executives
without that shareholder approval.
vii. Adoption of Problematic Severance Agreements
(“Golden Parachutes”): Manulife IM believes managers should be incentivized to pursue and complete transactions
that may benefit shareholders. Severance agreements, if structured appropriately, can provide such inducements. At the same time,
however, the significant payment associated with severance agreements could potentially drive managers to pursue transactions at
the expense of shareholder value. Manulife IM may oppose an executive remuneration proposal where a firm has adopted, or amended,
an agreement with an executive that contains an excise tax gross-up provision, permits accelerated vesting of equity upon a change-in-control,
allows an executive to unilaterally trigger the severance payment, or pays out in an amount greater than 300% of salary and bonus
combined.
b. Frequency of Advisory Votes on Executive
Compensation: Manulife IM supports an annual advisory vote on executive compensation to provide shareholders with a regular
channel to voice concerns regarding executive pay at a firm.
c. Proposals to Approve Executive Severance:
Manulife IM may oppose a vote on an executive severance agreement where a firm has adopted, or amended, an agreement with an executive
that contains an excise tax gross-up provision, permits accelerated vesting of equity upon a change-in-control, allows an executive
to unilaterally trigger the severance payment, or pays out in an amount greater than 300% of salary and bonus combined.
d. Equity Plans: Manulife IM encourages
companies to pay executives in equity as a way for management to tie their personal wealth to the long-term interests of shareholders.
Equity plans should, however, manage equity responsibly by reasonably limiting both the quantum of shares available and the potential
dilution to shareholders. Manulife IM may oppose plans with ‘evergreen’ provisions that regularly refresh shares available
without shareholder approval, plans that permit options to be priced less than market value on grant date, or plans that permit
repricing of options without shareholder approval. In line with our position on golden-parachutes above, Manulife IM may oppose
plans that permit acceleration of vesting of equity upon a change-in-control.
V. Capital Structure: Manulife IM believes
firms should balance the need to raise capital and encourage investment with the rights and interests of the existing shareholder
body. Evaluation of proposals to issue shares, repurchase shares, conduct stock splits or otherwise restructure capital are evaluated
on a case-by-case basis with some specific requests covered here:
a. Common Stock Authorization: Requests
to increase the pool of shares authorized for issuance are evaluated on a case-by-case basis with consideration given to the size
of the current pool, recent use of authorized shares by management, and the company rationale for the proposed increase. Manulife
IM also supports these increases where the company intends to execute a split of shares or pay a stock dividend.
b. Reverse Stock Splits: Manulife IM
generally supports proposals for a reverse stock split if the company plans to proportionately reduce the number of shares authorized
for issue in order to mitigate against the risk of excessive dilution to our holdings. We may also support these proposals in instances
where the firm needs to quickly raise capital in order to continue operations.
c. Dual Class Voting Structure: Voting
power should align with economic interest at a given firm. Manulife IM opposes the creation of new classes of stock with differential
voting rights and supports the elimination of these structures.
VI. Corporate Transactions and Restructurings:
Manulife IM reviews mergers, acquisitions, restructurings and reincorporations on a case-by-case basis through the lens of whether
the transaction will create shareholder value.
Considerations include fairness of the terms,
valuation of the event, changes to management and leadership, realization of synergies and efficiencies and whether the rationale
for a strategic shift is compelling.
VII. Audit-related Issues: Manulife
IM believes that an effective auditor will remain independent and objective in their review of company reporting. Firms should
be transparent regarding auditor fees and other services provided by an auditor which may create a conflict of interest. Manulife
IM uses the below principles to guide voting decisions related to auditors.
a. Auditor Ratification: Manulife IM
generally approves the reappointment of the auditor absent evidence that they have either failed in their duties or appear to have
a conflict that may not allow independent and objective oversite of a firm.
b. Auditor Rotation: If Manulife IM
believes that the independence and objectivity of an auditor may be impaired at a firm, we may support a proposal requesting a
rotation of auditor. Reasons to support the rotation of the auditor can include a significant failure in the audit function and
excessive tenure of the auditor at the firm.
1 Manulife Investment Management
is the unified global brand for Manulife’s Global Wealth and Asset Management (GWAM) business which serves individual investors
and institutional clients in three businesses: Retirement, Retail and Institutional Asset Management (Public Markets and Private
Markets).
2 Further information on Sustainable Investing at Manulife IM can be found at manulifeim.com/institutional.
3 We acknowledge SEC guidance on this issue from August 2019 which lists several non-exhaustive examples of possible
voting arrangements between the client and investment advisor including: (i) an agreement with the client to exercise voting authority
pursuant to specific parameters designed to serve the client’s best interest; (ii) an agreement with the client to vote in
favor of all proposals made by particular shareholder proponents; or (iii) an agreement with the client to vote in accordance with
the voting recommendations of management of the issuer. All such arrangements could be subject to conditions depending on instruction
from the client.
4 This includes general funds, affiliated segregated funds or separate accounts, and affiliated mutual / pooled funds.
5 This includes assets managed or advised for unaffiliated third parties, such as unaffiliated mutual/pooled funds and
unaffiliated institutional advisory portfolios.
6 For more information on issues generally of interest to our firm please see the Manulife Investment Management Engagement
Policy and the Manulife Investment Management Sustainable Investing Policy.
JOHN
HANCOCK INVESTORS TRUST
PART
C
OTHER
INFORMATION
Item
25. Financial Statements and Exhibits
|
(1)
|
FINANCIAL
STATEMENTS:
|
Included
in Part A: Financial Highlights
Included
in Part B: Financial Statements are
incorporated in Part B by reference to the Fund’s October 31, 2020 annual shareholder report (audited) on Form N-CSR as
filed with the Securities and Exchange Commission (“SEC”) on December 21, 2020 (Accession No 0001193125-20-323071).
(1)
Amendment dated December 13, 2018 to the Amended and Restated Agreement and Declaration of Trust dated January 22, 2016 -
previously filed as exhibit 99.(2)(a)
to the Fund’s shelf registration statement on Form N-2 filed with the SEC on February 22, 2019 (Accession No. 0001133228-19-000525).
(1)
Amendment dated March 10, 2016 to the Amended and Restated By-Laws dated January 22, 2016 – previously
filed as exhibit 99.(2)(b)(1) to post-effective amendment No. 2 to the Fund’s Registration Statement on Form N-2 filed with
the SEC on February 24, 2017 (Accession No. 0001133228-17-000929).
|
(c)
|
Voting
Trust Agreements. Not applicable.
|
|
(d)
|
Instruments
Defining Rights of Security Holders. See exhibits 99.(2)(a) and 99.(2)(b), above.
|
|
(f)
|
Instruments
Defining Rights of Long-term Debt Holders. Not applicable.
|
|
(g)
|
Investment
Advisory Contracts.
|
|
(h)
|
Underwriting
or Distribution Contracts.
|
|
(1)
|
Distribution
Agreement between John Hancock Investment Management Distributors LLC3 (the
“Distributor”), and the Fund – FILED HEREWITH.
|
|
(2)
|
Dealer
Agreement between the Distributor and the Dealer – FILED HEREWITH.
|
|
(i)
|
Bonus
or Profit Sharing Contracts. Not applicable.
|
(1)
Amendment dated October 1, 2015 to the Master Custodian Agreement dated September 10, 2008 between the Fund and State Street Bank
and Trust Company – previously
filed as exhibit 99.(2)(j)(1) to the Fund’s Shelf Registration Statement on Form N-2 filed with the SEC on December 15,
2020 (Accession No. 0001133228-20-007870).
|
(k)
|
Other
Material Contracts.
|
|
(l)
|
Legal
Opinion – FILED HEREWITH.
|
|
(m)
|
Non-resident
Consent to Service of Process. Not applicable.
|
|
(n)
|
Other
Opinions. Consent of Independent Registered Public Accounting Firm - FILED HEREWITH.
|
|
(o)
|
Omitted
Financial Statements. Not applicable.
|
|
(p)
|
Agreement
Related to Initial Capital. Not applicable.
|
|
(q)
|
Model
Retirement Plan. Not applicable.
|
|
(1)
|
John
Hancock Code of Ethics dated January 1, 2008 (as revised September 17, 2020) for John
Hancock Investment Management LLC1 and John Hancock Variable Trust Advisers
LLC (each, a “John Hancock Adviser”) and John Hancock Investment Management
Distributors LLC, John Hancock Distributors, LLC, each open-end fund, closed-end fund,
and exchange traded fund advised by a John Hancock Adviser (the “John Hancock Affiliated
Funds”), (together, called “John Hancock”) – previously
filed as exhibit 99.(2)(r)(1) to the Fund's Shelf Registration Statement on Form N-2
filed with the SEC on December 15, 2020 (Accession No. 000113328-20-007870).
|
|
1
|
Prior
to June 28, 2019, John Hancock Investment Management LLC was known as John Hancock Advisers,
LLC.
|
|
2
|
Prior
to May 7, 2019, Manulife Investment Management (US) LLC was known as John Hancock Asset
Management a division of Manulife Asset Management (US) LLC (formerly known as MFC Global
Investment Management (U.S.) LLC).
|
|
3
|
Prior
to June 28, 2019, John Hancock Investment Management Distributors LLC was known as John
Hancock Funds, LLC (formerly known as John Hancock Broker Distribution Services, Inc.).
|
|
4
|
Computershare
Inc. was previously known as Computershare Shareowner Services LLC (formerly, Mellon
Investor Services, LLC).
|
ITEM
26. MARKETING ARRANGEMENTS
See
Form of Distribution Agreement and Form of Dealer Agreement – filed herewith as exhibits 99.(2)(h)(1) and 99.(2)(h)(2),
respectively.
ITEM
27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The
approximate expenses in connection with the offering are as follows:
Registration
and Filing Fees
|
$2,657
|
Financial
Industry Regulatory Authority Fee
|
$4,924
|
New
York Stock Exchange Fee
|
$2,228
|
Cost
of Printing and Engraving
|
$48,579
|
Accounting
Fee and Expenses
|
$7,040
|
Legal
Fees and Expenses
|
$180,723
|
Total
|
$246,151
|
ITEM
28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
John
Hancock Investment Management LLC (the “Advisor”) is the investment advisor to the Fund. The Advisor is a an indirect
principally owned subsidiary of John Hancock Life Insurance Company (U.S.A.), which in turn is a subsidiary of Manulife Financial
Corporation (“Manulife Financial”), a publicly traded company based in Toronto, Canada. A corporate organization list
is set forth below.
ITEM
29. NUMBER OF HOLDERS OF SECURITIES
Set
forth below is the number of record holders as of December 1, 2020 of each class of securities of the Fund:
Title
of Class
|
Number
of Record Holders
|
Shares of Common Stock,
no par value
|
1,137
|
ITEM
30. INDEMNIFICATION
Indemnification
provisions relating to the Fund’s Trustees, officers, employees and agents are set forth in Section 4.3 of Article IV
of Fund’s Declaration of Trust, as previously filed.
The
form of Underwriting Agreement contains provisions limiting the liability and providing for indemnification of the Trustees and
officers under certain circumstances.
The
Fund’s Trustees and officers are insured under a standard investment company errors and omissions insurance policy covering
loss incurred by reason of negligent errors and omissions committed in their official capacities as such. Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to Trustees,
officers and controlling persons of the Fund pursuant to the provisions described in this Item 30, or otherwise, the Fund
has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the Fund of expenses incurred or paid by a Trustee, officer or controlling person of the Fund in the successful defense of
any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being
registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Article
V of the Limited Liability Company Agreement of the Advisor provides as follows:
“Section
5.06. Indemnity and Exculpation.
|
(a)
|
No
Indemnitee, and no shareholder, director, officer, member, manager, partner, agent, representative,
employee or Affiliate of an Indemnitee, shall have any liability to the Company or to
any Member for any loss suffered by the Company (or the Corporation) which arises out
of any action or inaction by such Indemnitee with respect to the Company (or the Corporation)
if such Indemnitee so acted or omitted to act (i) in the good faith (A) belief that such
course of conduct was in, or was not opposed to, the best interests of the Company (or
the Corporation), or (B) reliance on the provisions of this Agreement, and (ii) such
course of conduct did not constitute gross negligence or willful misconduct of such Indemnitee.
|
|
(b)
|
The
Company shall, to the fullest extent permitted by applicable law, indemnify each person
who was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he is or was, or has agreed to become, a Director or Officer,
or is or was serving, or has agreed to serve, at the request of the Company (or previously
at the request of the Corporation), as a director, officer, manager or trustee of, or
in a similar capacity with, another corporation, partnership, limited liability company,
joint venture, trust or other enterprise (including any employee benefit plan) (all such
persons being referred to hereafter as an “Indemnitee”), or by reason of
any action alleged to have been taken or omitted in such capacity, against all expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by or on behalf of an Indemnitee in connection with such action,
suit or proceeding and any appeal therefrom.
|
|
(c)
|
As
a condition precedent to his right to be indemnified, the Indemnitee must notify the
Company in writing as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity hereunder will or could be sought. With respect to
any action, suit, proceeding or investigation of which the Company is so notified, the
Company will be entitled to participate therein at its own expense and/or to assume the
defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee.
|
|
(d)
|
In
the event that the Company does not assume the defense of any action, suit, proceeding
or investigation of which the Company receives notice under this Section 5.06, the Company
shall pay in advance of the final disposition of such matter any expenses (including
attorneys’ fees) incurred by an Indemnitee in defending a civil or criminal action,
suit, proceeding or investigation or any appeal therefrom; provided, however, that the
payment of such expenses incurred by an Indemnitee in advance of the final disposition
of such matter shall be made only upon receipt of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced in the event that it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified by the Company as authorized
in this Section 5.06, which undertaking shall be accepted without reference to the financial
ability of the Indemnitee to make such repayment; and further provided that no such advancement
of expenses shall be made if it is determined that (i) the Indemnitee did not act in
good faith and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company, or (ii) with respect to any criminal action or proceeding,
the Indemnitee had reasonable cause to believe his conduct was unlawful.
|
|
(e)
|
The
Company shall not indemnify an Indemnitee seeking indemnification in connection with
a proceeding (or part thereof) initiated by such Indemnitee unless the initiation thereof
was approved by the Board of Directors. In addition, the Company shall not indemnify
an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance,
and in the event the Company makes any indemnification payments to an Indemnitee and
such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee
shall promptly refund such indemnification payments to the Company to the extent of such
insurance reimbursement.
|
|
(f)
|
All
determinations hereunder as to the entitlement of an Indemnitee to indemnification or
advancement of expenses shall be made in each instance by (a) a majority vote of the
Directors consisting of persons who are not at that time parties to the action, suit
or proceeding in question (“Disinterested Directors”), whether or not a quorum,
(b) a majority vote of a quorum of the outstanding Common Shares, which quorum shall
consist of Members who are not at that time parties to the action, suit or proceeding
in question, (c) independent legal counsel (who may, to the extent permitted by law,
be regular legal counsel to the Company), or (d) a court of competent jurisdiction.
|
|
(g)
|
The
indemnification rights provided in this Section 5.06 (i) shall not be deemed exclusive
of any other rights to which an Indemnitee may be entitled under any law, agreement or
vote of Members or Disinterested Directors or otherwise, and (ii) shall inure to the
benefit of the heirs, executors and administrators of the Indemnitees. The Company may,
to the extent authorized from time to time by its Board of Directors, grant indemnification
rights to other employees or agents of the Company or other persons serving the Company
and such rights may be equivalent to, or greater or less than, those set forth in this
Section 5.06. Any indemnification to be provided hereunder may be provided although the
person to be indemnified is no longer a Director or Officer.”
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ITEM
31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
For
information as to the business, profession, vocation or employment of a substantial nature of each of the directors and executive
officers of the Advisor and the Subadvisor, reference is made to the information set forth under: (i) the caption “Investment
Advisory and Other Services” in the Statement of Additional Information; (ii) Item 6 of the Form ADV Part II of John
Hancock Investment Management LLC (File No. 801-8124) filed with the SEC; and (iii) Item 6 of the Form ADV Part II of Manulife
Investment Management (US) LLC (File No. 801-42023) filed with the SEC, all of which are incorporated herein by reference.
ITEM
32. LOCATION OF ACCOUNTS AND RECORDS
All
applicable accounts, books and documents required to be maintained by the Fund by Section 31(a) of the Investment Company Act
of 1940, as amended, and the rules promulgated thereunder are in the possession and custody of the Fund’s custodian, State
Street Bank and Trust Company, Corporate Headquarters, State Street Financial Center, One Lincoln Street, Boston, Massachusetts
02111, and its transfer agent, Computershare, Inc., 250 Royall Street, Canton, Massachusetts, 02021, with the exception of certain
corporate documents and portfolio trading documents that are in the possession and custody of the Advisor, 200 Berkeley Street,
Boston, Massachusetts, 02116, and the Subadvisor, 101 Huntington Avenue, Boston, MA 02199-7603. The Fund is informed that all
applicable accounts, books and documents required to be maintained by registered investment advisors are in the custody and possession
of the Advisor and the Subadvisor.
ITEM
33. MANAGEMENT SERVICES
Not
applicable.
ITEM
34. UNDERTAKINGS
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1.
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The
Fund undertakes to suspend the offering of Common Shares until the Prospectus and any
applicable Prospectus Supplement are amended if (a) subsequent to the effective
date of this registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of this Registration Statement or (b) the
net asset value increases to an amount greater than its net proceeds as stated in the
Prospectus and any other applicable Prospectus Supplement.
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3.
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The
Common Shares being registered will be offered on a delayed or continuous basis in reliance
on Rule 415 under the Securities Act. Accordingly, the Fund undertakes:
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a.
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To
file, during any period in which offers or sales are being made, a post-effective amendment
to the Registration Statement:
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(1)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act;
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(2)
|
To
reflect in the prospectus any facts or events after the effective date of the Registration
Statement (or the most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum aggregate offering price set forth in the “Calculation
of Registration Fee” table in the Registration Statement; and
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(3)
|
To
include any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such information in
the Registration Statement.
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b.
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That,
for the purpose of determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of those securities at that time shall be deemed to
be the initial bona fide offering thereof; and
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c.
|
To
remove from registration by means of a post-effective amendment any of the Common Shares
being registered which remain unsold at the termination of the offering.
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|
d.
|
That,
for the purpose of determining liability under the Securities Act to any purchaser, if
the Fund is subject to Rule 430C: Each prospectus filed pursuant to Rule 424(b) under
the Securities Act as part of a Registration Statement relating to an offering, other
than registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A under the Securities Act, shall be deemed to be part of and included
in the Registration Statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a Registration Statement or prospectus that is part
of the Registration Statement or made in a document incorporated or deemed incorporated
by reference into the Registration Statement or prospectus that is part of the Registration
Statement will, as to a purchaser with a time of contract of sale prior to such first
use, supersede or modify any statement that was made in the Registration Statement or
prospectus that was part of the Registration Statement or made in any such document immediately
prior to such date of first use.
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|
e.
|
That
for the purpose of determining liability of the Fund under the Securities Act to any
purchaser in the initial distribution of Common Shares:
|
The
undersigned Fund undertakes that in a primary offering of securities of the undersigned Fund pursuant to this Registration Statement,
regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned Fund will be a seller to the purchaser and will be
considered to offer or sell such securities to the purchaser:
|
(1)
|
any
preliminary prospectus or prospectus of the undersigned Fund relating to the offering
required to be filed pursuant to Rule 424 under the Securities Act;
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|
(2)
|
free
writing prospectus relating to the offering prepared by or on behalf of the undersigned
Fund or used or referred to by the undersigned Fund;
|
|
(3)
|
the
portion of any advertisement pursuant to Rule 482 under the Securities Act relating to
the offering containing material information about the undersigned Fund or its securities
provided by or on behalf of the undersigned Fund; and
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|
(4)
|
any
other communication that is an offer in the offering made by the undersigned Fund to
the purchaser.
|
|
4.
|
The
Fund undertakes that, for the purpose of determining any liability under the Securities
Act:
|
|
a.
|
the
information omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the Fund
pursuant to 424(b)(1) under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
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|
b.
|
each
post- effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering
thereof.
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|
7.
|
The
Fund undertakes to send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of an oral or written request, its
Statement of Additional Information.
|
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and The Commonwealth of Massachusetts,
on the 25th day of February 2021.
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|
JOHN HANCOCK INVESTORS TRUST
|
|
|
|
By:
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/s/ Andrew G. Arnott
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|
|
|
Name:
|
Andrew G. Arnott
|
|
|
|
Title:
|
President and Trustee
|
Pursuant to the requirements
of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/Andrew G. Arnott
|
President and Trustee
|
February 25, 2021
|
Andrew G. Arnott
|
|
|
|
|
|
/s/ Charles A. Rizzo
|
Chief Financial Officer
|
February 25, 2021
|
Charles A. Rizzo
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
|
/s/ Charles L. Bardelis *
|
Trustee
|
February 25, 2021
|
Charles L. Bardelis
|
|
|
|
|
|
/s/ James R. Boyle *
|
Trustee
|
February 25, 2021
|
James R. Boyle
|
|
|
|
|
|
/s/ Peter S. Burgess *
|
Trustee
|
February 25, 2021
|
Peter S. Burgess
|
|
|
|
|
|
/s/ William H. Cunningham *
|
Trustee
|
February 25, 2021
|
William H. Cunningham
|
|
|
|
|
|
/s/ Grace K. Fey *
|
Trustee
|
February 25, 2021
|
Grace K. Fey
|
|
|
|
|
|
/s/ Marianne Harrison *
|
Trustee
|
February 25, 2021
|
Marianne Harrison
|
|
|
|
|
|
/s/ Deborah C. Jackson *
|
Trustee
|
February 25, 2021
|
Deborah C. Jackson
|
|
|
|
|
|
/s/ Hassell H. McClellan *
|
Trustee
|
February 25, 2021
|
Hassell H. McClellan
|
|
|
|
|
|
/s/ James M. Oates *
|
Trustee
|
February 25, 2021
|
James M. Oates
|
|
|
|
|
|
/s/ Steven R. Pruchansky *
|
Trustee
|
February 25, 2021
|
Steven R. Pruchansky
|
|
|
Signature
|
Title
|
Date
|
|
|
|
/s/ Frances G. Rathke*
|
Trustee
|
February 25, 2021
|
Frances G. Rathke
|
|
|
|
|
|
/s/ Gregory A. Russo *
|
Trustee
|
February 25, 2021
|
Gregory A. Russo
|
|
|
|
|
|
*By: Power of Attorney
|
|
|
By:
|
/s/ Ariel Ayanna
|
|
|
|
Ariel Ayanna
|
|
|
|
Attorney-In-Fact
|
|
|
|
|
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*Pursuant to Power of Attorney previously filed with Pre-Effective Amendment No. 1 to the Trust’s Registration Statement on December 15, 2020.
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