The Gabelli
Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
|
|
|
|
|
Corresponding |
|
|
|
|
|
|
|
|
|
Net
Asset |
|
Corresponding |
|
|
|
|
|
Value |
|
Premium
or |
|
|
|
|
|
(“NAV”)
Per |
|
Discount
as a % |
|
Market
Price |
|
Share |
|
of
NAV |
Quarter
Ended |
High |
|
Low |
|
High |
|
Low |
|
High |
|
Low |
March
31, 2020 |
$6.13 |
|
$3.42 |
|
$5.95 |
|
$4.22 |
|
3.02% |
|
(18.95)% |
June
30, 2020 |
$5.48 |
|
$3.97 |
|
$5.48 |
|
$4.36 |
|
0.00% |
|
(8.94)% |
September
30, 2020 |
$5.70 |
|
$5.15 |
|
$6.13 |
|
$5.44 |
|
(7.01)% |
|
(5.33)% |
December
31, 2020 |
$6.28 |
|
$5.17 |
|
$6.81 |
|
$5.75 |
|
(7.78)% |
|
(10.08)% |
March
31, 2021 |
$6.77 |
|
$5.90 |
|
$7.47 |
|
$6.59 |
|
(9.37)% |
|
(10.47)% |
June
30, 2021 |
$6.64 |
|
$6.12 |
|
$6.88 |
|
$6.33 |
|
(3.48)% |
|
(3.31)% |
September
30, 2021 |
$6.64 |
|
$6.08 |
|
$7.00 |
|
$6.52 |
|
(5.14)% |
|
(6.74)% |
December
31, 2021 |
$7.05 |
|
$6.01 |
|
$6.34 |
|
$6.47 |
|
11.19% |
|
(7.11)% |
The
last reported price for our common shares on December 31, 2021 was $6.88 per share. As of December 31, 2021, the net asset value
per share of the Fund’s common shares was $6.32. Accordingly, the Fund’s common shares traded at a premium to net
asset value of 8.9% on December 31, 2021.
Unresolved
SEC Staff Comments
The
Fund does not believe that there are any material unresolved written comments, received 180 days or more before December 31, 2021
from the Staff of the SEC regarding any of the Fund’s periodic or current reports under the Securities Exchange Act of 1934
or the Investment Company Act of 1940, or its registration statement.
The Gabelli
Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Financial
Highlights
Selected
data for a common share outstanding throughout each year:
| |
|
Year Ended December
31, | |
| |
|
2016 | | |
|
2015 | | |
|
2014 | | |
|
2013 | | |
|
2012 | |
Operating
Performance: | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Net
asset value, beginning of year | |
|
$ | 5.30 | | |
|
$ | 6.09 | | |
|
$ | 6.49 | | |
|
$ | 5.62 | | |
|
$ | 5.48 | |
Net investment income | |
|
| 0.12 | | |
|
| 0.07 | | |
|
| 0.07 | | |
|
| 0.09 | | |
|
| 0.10 | |
Net
realized and unrealized gain/(loss) on investments, securities sold short, swap contracts, and foreign currency transactions | |
|
| 0.39 | | |
|
| (0.28 | ) | |
|
| 0.14 | | |
|
| 1.37 | | |
|
| 0.63 | |
Total
from investment operations | |
|
| 0.51 | | |
|
| (0.21 | ) | |
|
| 0.21 | | |
|
| 1.46 | | |
|
| 0.73 | |
Distributions
to Preferred Shareholders: (a) | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Net investment income | |
|
| (0.03 | ) | |
|
| (0.01 | ) | |
|
| (0.03 | ) | |
|
| (0.03 | ) | |
|
| (0.06 | ) |
Net
realized gain | |
|
| (0.07 | ) | |
|
| (0.09 | ) | |
|
| (0.07 | ) | |
|
| (0.08 | ) | |
|
| (0.05 | ) |
Total
distributions to preferred shareholders | |
|
| (0.10 | ) | |
|
| (0.10 | ) | |
|
| (0.10 | ) | |
|
| (0.11 | ) | |
|
| (0.11 | ) |
Net
Increase/(Decrease) in Net Assets Attributable to Common Shareholders
Resulting from Operations | |
|
| 0.41 | | |
|
| (0.31 | ) | |
|
| 0.11 | | |
|
| 1.35 | | |
|
| 0.62 | |
Distributions
to Common Shareholders: | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Net investment income | |
|
| (0.10 | ) | |
|
| (0.05 | ) | |
|
| (0.08 | ) | |
|
| (0.09 | ) | |
|
| (0.05 | ) |
Net realized gain | |
|
| (0.30 | ) | |
|
| (0.32 | ) | |
|
| (0.19 | ) | |
|
| (0.31 | ) | |
|
| (0.04 | ) |
Return of capital | |
|
| (0.01 | ) | |
|
| (0.11 | ) | |
|
| (0.24 | ) | |
|
| (0.08 | ) | |
|
| (0.39 | ) |
Total
distributions to common shareholders | |
|
| (0.41 | ) | |
|
| (0.48 | ) | |
|
| (0.51 | ) | |
|
| (0.48 | ) | |
|
| (0.48 | ) |
Fund Share Transactions: | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Increase/(decrease)
in net asset value from common share transactions | |
|
| — | | |
|
| (0.00 | )(b) | |
|
| (0.00 | )(b) | |
|
| (0.00 | )(b) | |
|
| 0.00 | (b) |
Net
Asset Value Attributable to Common Shareholders, End of Year | |
|
$ | 5.30 | | |
|
$ | 5.30 | | |
|
$ | 6.09 | | |
|
$ | 6.49 | | |
|
$ | 5.62 | |
NAV
total return † | |
|
| 8.34 | % | |
|
| (5.39 | )% | |
|
| 1.75 | % | |
|
| 24.83 | % | |
|
| 11.69 | % |
Market value,
end of year | |
|
$ | 4.69 | | |
|
$ | 4.78 | | |
|
$ | 6.08 | | |
|
$ | 6.16 | | |
|
$ | 5.34 | |
Investment
total return †† | |
|
| 6.97 | % | |
|
| (14.18 | )% | |
|
| 7.07 | % | |
|
| 24.73 | % | |
|
| 13.81 | % |
The Gabelli
Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Financial
Highlights (Continued)
Selected
data for a common share outstanding throughout each year:
| |
Year Ended December
31, | |
| |
2016 | | |
2015 | | |
2014 | | |
2013 | | |
2012 | |
Ratios to Average net assets and
Supplemental Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net assets including liquidation value
of preferred shares, end of year (in 000’s) | |
$ | 98,733 | | |
$ | 98,742 | | |
$ | 109,219 | | |
$ | 113,795 | | |
$ | 101,064 | |
Net assets attributable to common shares, end of year
(in 000’s) | |
$ | 74,594 | | |
$ | 74,603 | | |
$ | 85,080 | | |
$ | 89,656 | | |
$ | 76,925 | |
Ratio of net investment income to average net assets
attributable to common shares before preferred share distributions | |
| 2.37 | % | |
| 1.19 | % | |
| 1.05 | % | |
| 1.43 | % | |
| 1.77 | % |
Ratio of operating expenses to average net assets
attributable to common shares before fees waived | |
| 1.95 | %(c)(d)(e) | |
| 1.88 | %(c)(d) | |
| 1.90 | % | |
| 1.80 | % | |
| 1.94 | % |
Ratio of operating expenses to average net assets
attributable to common shares net of advisory fee reduction, if any | |
| 1.95 | %(c)(d)(e) | |
| 1.59 | %(c)(d) | |
| 1.62 | % | |
| 1.80 | % | |
| 1.94 | % |
Ratio of operating expenses to average net assets
including liquidation value of preferred shares before fees waived | |
| 1.46 | %(c)(d)(e) | |
| 1.46 | %(c)(d) | |
| 1.49 | % | |
| 1.40 | % | |
| 1.47 | % |
Ratio of operating expenses to average net assets
including liquidation value of preferred shares net of advisory fee reduction, if any | |
| 1.46 | %(c)(d)(e) | |
| 1.23 | %(c)(d) | |
| 1.27 | % | |
| 1.40 | % | |
| 1.47 | % |
Portfolio turnover rate | |
| 71 | % | |
| 24 | % | |
| 22 | % | |
| 35 | % | |
| 18 | % |
Preferred Stock: | |
| | | |
| | | |
| | | |
| | | |
| | |
6.000% Series B Cumulative Preferred
Stock | |
| | | |
| | | |
| | | |
| | | |
| | |
Liquidation value, end of year (in 000’s) | |
$ | 24,139 | | |
$ | 24,139 | | |
$ | 24,139 | | |
$ | 24,139 | | |
$ | 24,139 | |
Total shares outstanding (in 000’s) | |
| 966 | | |
| 966 | | |
| 966 | | |
| 966 | | |
| 966 | |
Liquidation preference per share | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | | |
$ | 25.00 | |
Average market value (f) | |
$ | 26.52 | | |
$ | 25.81 | | |
$ | 25.44 | | |
$ | 25.30 | | |
$ | 25.78 | |
Asset coverage per share | |
$ | 102.26 | | |
$ | 102.26 | | |
$ | 113.12 | | |
$ | 117.85 | | |
$ | 104.67 | |
Asset Coverage | |
| 409 | % | |
| 409 | % | |
| 452 | % | |
| 471 | % | |
| 419 | % |
† | For
the years ended December 31, 2016, 2015, 2014, and 2013 based on net asset value per
share, adjusted for reinvestment of distributions at net asset value on the ex-dividend
date. The year ended 2012 was based on net asset value per share, adjusted for reinvestment
of distributions at prices determined under the Fund’s dividend reinvestment plan. |
†† | Based
on market value per share, adjusted for reinvestment of distributions at prices determined
under the Fund’s dividend reinvestment plan. |
(a) | Calculated
based upon average common shares outstanding on the record dates throughout the years. |
(b) | Amount
represents less than $0.005 per share. |
(c) | The
Fund received credits from a designated broker who agreed to pay certain Fund operating
expenses. For the years ended December 31, 2016 and 2015, there was no impact on the
expense ratios. |
(d) | The
Fund incurred dividend expenses on securities sold short. If this expense had not been
incurred, the expense ratios for the year ended December 31, 2015 would have been 1.87%
attributable to common shares before fees waived, 1.57% attributable to common shares
net of advisory fee reduction, 1.44% including liquidation value of preferred shares
before fees waived, and 1.22% including liquidation value of preferred shares net of
advisory fee reduction. For the year ended December 31, 2016, the impact was minimal. |
(e) | During
the year ended December 31, 2016, the Fund received a one time reimbursement of custody
expenses paid in prior years. Had such reimbursement been included in this period, the
expenses ratios would have been 1.69% attributable to common shares before fees waived,
1.69% attributable to common shares net of advisory fee reduction, 1.26% including liquidation
value of preferred shares before fees waived, and 1.26% including liquidation value of
preferred shares net of advisory fee reduction. |
(f) | Based
on weekly prices. |
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
CHANGES
OCCURRING DURING THE PRIOR FISCAL PERIOD
The
following information is a summary of certain changes during the most recent fiscal year ended December 31, 2021. This information
may not reflect all of the changes that have occurred since you purchased shares of the Fund.
During
the Fund’s most recent fiscal year, there were no material changes to the Fund’s investment objectives or policies
that have not been approved by shareholders or in the principal risk factors associated with an investment in the Fund.
INVESTMENT
OBJECTIVES AND POLICIES
Investment
Objectives
The
investment objective of the Fund is to seek a high level of total return on its assets. The Fund seeks to achieve its investment
objective through a combination of current income and capital appreciation. There is no assurance that this objective will be
achieved. It is, however, a fundamental policy of the Fund and cannot be changed without stockholder approval.
Under
normal circumstances the Fund will invest at least 80% of the value of its total assets (taken at current value) in “convertible
securities,” i.e., securities (bonds, debentures, notes, stocks and other similar securities) that are convertible into
common stock or other equity securities, and “income securities,” i.e., nonconvertible debt or equity securities having
a history of regular payments or accrual of income to holders. Securities received upon conversion of a convertible security will
not be included in the calculation of the percentage of Fund assets invested in convertible securities but may be retained in
the Fund’s portfolio to permit orderly disposition or to establish long-term holding periods for federal income tax purposes.
The Fund expects to continue its practice of focusing on convertible securities to the extent attractive opportunities are available.
We cannot assure you that the Fund will achieve its investment objective. The Fund may invest without limit in securities rated
below investment grade by recognized statistical rating agencies or unrated securities of comparable quality, including securities
of issuers in default, which are likely to have the lowest rating; provided, however, that not more than 50% of the Fund’s
portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody’s or, if unrated, are of comparable
quality as determined by the Investment Adviser, and the Fund’s investments in securities of issuers in default will be
limited to not more than 5% of the total assets of the Fund. Securities rated below investment grade, which may be preferred shares
or debt, are predominantly speculative and involve major risk exposure to adverse conditions. Securities that are rated lower
than “BBB” by S&P, or lower than “Baa” by Moody’s or unrated securities considered by the Investment
Adviser to be of comparable quality, are commonly referred to as “junk bonds” or “high yield” securities.
The
Fund may invest up to 25% of its total assets in securities of non-U.S. issuers, which are generally denominated in foreign currencies.
The Fund may also purchase sponsored American Depository Receipts (“ADRs”) or U.S. denominated securities of foreign
issuers, which will not be included in the Fund’s 25% foreign securities limitation. The Fund has no limit on the amount
of its net assets it may invest in unregistered and
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
otherwise
illiquid investments; however, the Fund currently does not intend to invest more than 15% of its total net assets in illiquid
convertible securities or income securities. The Fund may invest up to 20% of its total assets (taken at current value and subject
to any restrictions appearing elsewhere in this Registration Statement) in any combination and quantity of securities that do
not generate any income, such as common stocks that do not pay dividends. In selecting any of the foregoing securities for investment,
the factors that will be considered by the Investment Adviser include the Investment Adviser’s evaluation of the underlying
value of the assets and business of the issuers of the securities, the potential for capital appreciation, the price of the securities,
the issuer’s balance sheet characteristics and the perceived skills and integrity of the issuer’s management.
During
periods when it is deemed necessary for temporary defensive purposes, the Fund may invest without limit in high quality money
market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers’ acceptances
and other obligations of domestic and foreign banks and obligations issued or guaranteed by the United States government, its
instrumentalities or agencies and, subject to statutory limitations, unaffiliated money market mutual funds, unless an exemptive
order permits the Fund to invest in affiliated money market funds. The yield on these securities will, as a general matter, tend
to be lower than the yield on other securities to be purchased by the Fund.
Investment
Methodology of the Fund
In
selecting securities for the Fund, the Investment Adviser normally considers the following factors, among others:
| ● | the
Investment Adviser’s own evaluations of the private market value (as defined below),
cash flow, earnings per share and other |
| ● | fundamental
aspects of the underlying assets and business of the company; |
| ● | the
interest or dividend income generated by the securities; |
| ● | the
potential for capital appreciation of the securities and any underlying common stocks; |
| ● | the
prices of the securities relative to comparable securities; |
| ● | whether
the securities are entitled to the benefits of call protection or other protective covenants; |
| ● | the
existence of any anti-dilution protections or guarantees of the security; and |
| ● | the
diversification of the Fund’s portfolio as to issuers. |
The
Investment Adviser’s investment philosophy with respect to debt and equity securities is to identify assets that are selling
in the public market at a discount to their private market value. The Investment Adviser defines private market value as the value
informed purchasers are willing to pay to acquire assets with similar characteristics. The Investment Adviser also normally evaluates
an issuer’s free cash flow and long-term earnings trends. Finally, the Investment Adviser looks for a catalyst, something
indigenous to the company, its industry or country that will surface additional value.
Certain
Investment Practices
Convertible
Securities. A convertible
security is a bond, debenture, corporate note, preferred stock or other security that may be exchanged or converted into a prescribed
amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified
price or formula. A convertible
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
security
may also be structured so that it is convertible at the option of the holder or the issuer, or subject to mandatory conversion.
Before conversion, convertible securities have the same overall characteristics as non-convertible debt or preferred securities
insofar as they generally provide a stable stream of income with generally higher yields than those of common stock of the same
or similar issuers. Convertible securities rank senior to common stock in an issuer’s capital structure. They are of a higher
credit quality and entail less risk than an issuer’s common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above its value as a fixed income security.
The
Fund believes that the characteristics of convertible securities make them appropriate investments for an investment company seeking
a high level of total return on its assets. These characteristics include the potential for capital appreciation if the value
of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value, relative to the underlying common stock due to their fixed income
nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were not convertible. During periods of rising interest rates, it is possible
that the potential for capital gain on a convertible security may be less than that of a common stock equivalent if the yield
on the convertible security is at a level that causes it to sell at a discount.
Every
convertible security may be valued, on a theoretical basis, as if it did not have a conversion privilege. This theoretical value
is determined by the yield it provides in comparison with the yields of other securities of comparable character and quality that
do not have a conversion privilege. This theoretical value, which may change with prevailing interest rates, the credit rating
of the issuer and other pertinent factors, often referred to as the "investment value," represents the security's theoretical
price support level.
"Conversion
value" is the amount a convertible security would be worth in market value if it were to be exchanged for the underlying
equity security pursuant to its conversion privilege. Conversion value fluctuates directly with the price of the underlying equity
security, usually common stock. If, because of low prices for the common stock, the conversion value is substantially below the
investment value, the price of the convertible security is governed principally by the factors described in the preceding paragraph.
If the conversion value rises near or above its investment value, the price of the convertible security generally will rise above
its investment value and, in addition, will sell at some premium over its conversion value. This premium represents the price
investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege. Accordingly, the conversion value of a convertible security is subject to equity risk, that is,
the risk that the price of an equity security will fall due to general market and economic conditions, perceptions regarding the
industry in which the issuer participates or the issuing company's particular circumstances. If the appreciation potential of
a convertible security is not realized, its conversion value premium may not be recovered.
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
In
its selection of convertible securities for the Fund, the Investment Adviser will not emphasize either investment value or conversion
value, but will consider both in light of the Fund's overall investment objective. See "Convertible Securities" below.
The Fund may convert a convertible security that it holds:
| ● | when
necessary to permit orderly disposition of the investment when a convertible security
approaches maturity or has been called for redemption; |
| ● | to
facilitate a sale of the position; |
| ● | if
the dividend rate on the underlying common stock increases above the yield on the convertible
security; or |
| ● | whenever
the Investment Adviser believes it is otherwise in the best interests of the Fund. |
Convertible
securities are generally not investment grade, that is, not rated within the four highest categories by S&P and Moody's. To
the extent that such convertible securities and other nonconvertible debt securities, which are acquired by the Fund consistent
with the factors considered by the Investment Adviser as described in this Annual Report, are rated lower than investment grade
or are not rated, there would be a greater risk as to the timely repayment of the principal of, and timely payment of interest
or dividends on, those securities. It is expected that not more than 50% of the Fund's portfolio will consist of securities rated
CCC or lower by S&P or Caa or lower by Moody's or, if unrated, are of comparable quality as determined by the Investment Adviser.
Those securities and securities rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the financial
press as "junk bonds" and may include securities of issuers in default. "Junk bonds" are considered by the
rating agencies to be predominantly speculative and may involve major risk exposure to adverse conditions. See "Risk Factors
and Special Considerations- Convertible Securities-Credit Risk." Securities rated BBB by S&P or Baa by Moody's, in the
opinion of the rating agencies, also have speculative characteristics. Securities need not meet a minimum rating standard in order
to be acceptable for investment by the Fund.
The
Fund's investments in securities of issuers in default will be limited to not more than 5% of the total assets of the Fund. Further,
the Fund will invest in securities of issuers in default only when the Investment Adviser believes that such issuers will emerge
from bankruptcy and the value of such securities will appreciate. By investing in securities of issuers in default the Fund bears
the risk that such issuers will not emerge from bankruptcy or that the value of such securities will not appreciate.
The
Fund has no independent limit on the amount of its net assets it may invest in unregistered and otherwise illiquid securities
and other investments. The current intention of the Investment Adviser is not to invest in excess of 15% of the Fund's net assets
in illiquid convertible securities or income securities. Common stockholders will be notified if the Investment Adviser changes
its intention. Investments in unregistered or otherwise illiquid securities entail certain risks related to the fact that they
cannot be sold publicly in the United States without registration under the Securities Act. See "Risk Factors and Special
Considerations—Asset Class Risks."
Synthetic
Convertible Securities. The Fund may also invest in "synthetic" convertible securities, which, for purposes of its
investment policies, the Fund considers to be convertible securities. A "synthetic" convertible security may be created
by the Fund or by a third party by combining separate securities that possess the two principal characteristics of a traditional
convertible security: an income producing component and a convertible component. Synthetic convertible securities differ from
convertible securities whose conversion privilege may be evidenced by warrants attached to the security or acquired as part of
a unit with the security. The
The
Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
income-producing
component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market
instruments. The convertible component is achieved by investing in securities or instruments such as warrants or options to buy
common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single
security having a single market value, a synthetic convertible comprises two or more separate securities, each with its own market
value. Because the "market value" of a synthetic convertible security is the sum of the values of its income producing
component and its convertible component, the value of a synthetic convertible security may respond differently to market fluctuations
than a traditional convertible security. The Fund also may purchase synthetic convertible securities created by other parties,
including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity. Convertible
structured notes have the attributes of a convertible security; however, the issuer of the convertible note (typically an investment
bank), rather than the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated
with the underlying investment and the Fund in turn assumes credit risk associated with the issuer of the convertible note.
Foreign
Securities. The Fund may invest up to 25% of its total assets in securities of non-U.S. issuers, which are generally denominated
in foreign currencies.
The
Investment Adviser believes that investing in foreign securities offers both enhanced investment opportunities and
additional risks beyond those present in U.S. securities. Investing in foreign securities may provide increased
diversification by adding securities from various foreign countries (i) that offer different investment opportunities, (ii)
that generally are affected by different economic trends and (iii) whose stock markets may not be correlated with U.S.
markets. At the same time, these opportunities and trends involve risks that may not be encountered in U.S.
investments.
The
following considerations comprise both risks and opportunities not typically associated with investing in U.S. securities:
fluctuations in exchange rates of foreign currencies; possible imposition of exchange control regulations or currency
restrictions that would prevent cash from being brought back to the United States; less public information with respect to
issuers of securities; less government supervision of stock exchanges, securities brokers and issuers of securities; lack of
uniform accounting, auditing and financial reporting standards; lack of uniform settlement periods and trading practices;
less liquidity and frequently greater price volatility in foreign markets than in the United States; possible imposition of
foreign taxes; the possibility of expropriation or confiscatory taxation, seizure or nationalization of foreign bank deposits
or other assets; the adoption of foreign government restrictions and other adverse political, social or diplomatic
developments that could affect investment; difficulty in obtaining or enforcing a court judgment abroad; sometimes less
advantageous legal, operational and financial protections applicable to foreign sub-custodial arrangements; and the
historically lower level of responsiveness of foreign management to shareholder concerns (such as dividends and return on
investment).
American
Depositary Receipts. The Fund may invest in American Depositary Receipts ("ADRs"). Such investment may entail certain
risks similar to foreign securities. ADRs are certificates representing an ownership interest in a security or a pool of securities
issued by a foreign issuer and deposited with the depositary, typically a bank, and held in trust for the investor. The economies
of many of the countries in which the issuer of a security underlying an ADR principally engages in business may not be as developed
as the United States' economy and may be subject to significantly different forces. Political or social instability, expropriation
or confiscatory
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taxation,
and limitations on the removal of funds or other assets could adversely affect the value of the Fund's investments in such securities.
The value of the securities underlying ADRs could fluctuate as exchange rates change between U.S. dollars and the currency of
the country in which the foreign company is located. In addition, foreign companies are not registered with the SEC and are generally
not subject to the regulatory controls imposed on U.S. issuers and, as a consequence, there is generally less publicly available
information about foreign companies than is available about domestic companies. Foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies.
Emerging
Market Countries. The risks described above for foreign securities, including the risks of nationalization and expropriation
of assets, are typically increased to the extent that the Fund invests in companies headquartered in developing, or emerging market,
countries. Investments in securities of companies headquartered in such countries may be considered speculative and subject to
certain special risks. The political and economic structures in many of these countries may be in their infancy and developing
rapidly, and such countries may lack the social, political and economic characteristics of more developed countries. Certain of
these countries have in the past failed to recognize private property rights and have at times nationalized and expropriated the
assets of private companies. Some countries have inhibited the conversion of their currency to another. The currencies of certain
emerging market countries have experienced devaluation relative to the U.S. dollar, and future devaluations may adversely affect
the value of the Fund's assets denominated in such currencies. Some emerging market countries have experienced substantial rates
of inflation for many years. Continued inflation may adversely affect the economies and securities markets of such countries.
In addition, unanticipated political or social developments may affect the value of the Fund's investments in these countries
and the availability of the Fund of additional investments in these countries. The small size, limited trading volume and relative
inexperience of the securities markets in these countries may make the Fund's investments in such countries illiquid and more
volatile than investments in more developed countries, and the Fund may be required to establish special custodial or other arrangements
before making investments in these countries. There may be little financial or accounting information available with respect to
companies located in these countries, and it may be difficult as a result to assess the value or prospects of an investment in
such companies.
Income
Securities. Although it is the Fund's policy to invest in convertible securities to the extent attractive opportunities are
available, the Fund may also invest in income securities other than convertible securities that are expected to periodically accrue
or generate income for their holders. Such income securities include (i) fixed income securities such as bonds, debentures, notes,
preferred stock, short-term discounted Treasury Bills or certain securities of the U.S. government sponsored instrumentalities,
as well as money market mutual funds that invest in those securities, which, in the absence of an applicable exemptive order,
will not be affiliated with the Investment Adviser, and (ii) common and preferred stocks of issuers that have historically paid
periodic dividends. Fixed income securities obligate the issuer to pay to the holder of the security a specified return, which
may be either fixed or reset periodically in accordance with the terms of the security. Fixed income securities generally are
senior to an issuer's common stock and their holders generally are entitled to receive amounts due before any distributions are
made to common stockholders. Common stocks, on the other hand, generally do not obligate an issuer to make periodic distributions
to holders.
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The
market value of fixed income securities, especially those that provide a fixed rate of return, may be expected to rise and fall
inversely with interest rates and in general is affected by the credit rating of the issuer, the issuer's performance and perceptions
of the issuer in the market place. The market value of callable or redeemable fixed income securities may also be affected by
the issuer's call and redemption rights. In addition, it is possible that the issuer of fixed income securities may not be able
to meet its interest or principal obligations to holders. Further, holders of non-convertible fixed income securities do not participate
in any capital appreciation of the issuer.
The
Fund may also invest in obligations of government sponsored instrumentalities. Unlike non-U.S. government securities, obligations
of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association, are supported
by the "full faith and credit" of the U.S. government; others, such as those of the Export-Import Bank of the U.S.,
are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance
can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities if it is
not obligated to do so by law. Although the Fund may invest in all types of obligations of agencies and instrumentalities of the
U.S. government, the Fund currently intends to invest only in obligations that are supported by the "full faith and credit"
of the U.S. government.
The
Fund also may invest in common stock of issuers that have historically paid periodic dividends or otherwise made distributions
to common stockholders. Unlike fixed income securities, dividend payments generally are not guaranteed and so may be discontinued
by the issuer at its discretion or because of the issuer's inability to satisfy its liabilities. Further, an issuer's history
of paying dividends does not guarantee that it will continue to pay dividends in the future. In addition to dividends, under certain
circumstances the holders of common stock may benefit from the capital appreciation of the issuer.
Common
stocks represent the residual ownership interest in the issuer and holders of common stock are entitled to the income and increase
in the value of the assets and business of the issuer after all of its debt obligations and obligations to preferred shareholders
are satisfied. Common stocks generally have voting rights.
Common
stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of
its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Non-Investment
Grade Securities. The Fund may invest in securities rated below investment grade by recognized rating agencies or unrated
securities of comparable quality. The prices of these lower grade securities are more sensitive to negative developments, such
as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Securities
of below investment grade quality—those securities rated below "Baa" by Moody's or below "BBB" by S&P
(or unrated securities of comparable quality)—are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal when due and therefore involve a greater risk of default. Securities rated below investment grade
commonly are referred to as "junk bonds" or "high yield" securities and generally pay a premium above the
yields of U.S.
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government
securities or securities of investment grade issuers because they are subject to greater risks than these securities. These risks,
which reflect their speculative character, include the following:
| ● | greater
credit risk and risk of default; |
| ● | potentially
greater sensitivity to general economic or industry conditions; |
| ● | potential
lack of attractive resale opportunities (illiquidity); and |
| ● | additional
expenses to seek recovery from issuers who default. |
In
addition, the prices of these non-investment grade securities are more sensitive to negative developments, such as a decline in
the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Non-investment grade securities
tend to be less liquid than investment grade securities. The market value of non-investment grade securities may be more volatile
than the market value of investment grade securities and generally tends to reflect the market's perception of the creditworthiness
of the issuer and short term market developments to a greater extent than investment grade securities, which primarily reflect
fluctuations in general levels of interest rates.
Ratings
are relative and subjective, and not absolute standards of quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial condition.
The
Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies
involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant
financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial
and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually
high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments
or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to
a portfolio investment, the Fund may lose all or part of its investment or may be required to accept collateral with a value less
than the amount of the Fund's initial investment.
As
a part of its investments in non-investment grade securities, the Fund may invest in the securities of issuers in default. The
Fund invests in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their
obligations and emerge from bankruptcy protection and that the value of such issuers' securities will appreciate. By investing
in the securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations
or emerge from bankruptcy protection or that the value of these securities will not otherwise appreciate.
In
addition to using recognized rating agencies and other sources, the Investment Adviser will also perform its own analysis of issuers
in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition of the
issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements,
value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing
and current anticipated results of
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operations.
In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes
in interest rates and the outlook for specific industries.
Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible
that recognized rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis.
Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the
securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue
to hold the securities.
Income
securities, including non-investment grade securities and comparable unrated securities, frequently have call or buy-back features
that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these
rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus
resulting in a decreased return for the Fund.
The
market for non-investment grade and comparable unrated securities has at various times, particularly during times of economic
recession, experienced substantial reductions in market value and liquidity. Past recessions have adversely affected the value
of such securities as well as the ability of certain issuers of such securities to repay principal and pay interest thereon or
to refinance such securities. The market for those securities could react in a similar fashion in the event of any future economic
recession.
Value
Investing. The Fund's portfolio manager will use various value methods in managing its assets. In selecting securities
for the Fund, he evaluates the quality of a company's balance sheet, the level of its cash flows and other measures of a company's
financial condition and profitability. The portfolio manager may also consider other factors, such as a company's unrecognized
asset values, its future growth prospects or its turnaround potential following an earnings disappointment or other business difficulties.
The portfolio manager then uses these factors to assess the company's current worth, basing this assessment on either what he
believes a knowledgeable buyer might pay to acquire the entire company or what he thinks the value of the company should be in
the stock market.
The
Fund's portfolio manager generally invests in securities of companies that are trading significantly below his estimate of the
company's current worth in an attempt to reduce the risk of overpaying for such companies. Seeking long term growth of capital,
he also evaluates the prospects for the market price of the company's securities to increase over a two- to five-year period toward
this estimate.
The
Investment Adviser's value approach strives to reduce some of the other risks of investing in the securities of smaller companies
(for the Fund's portfolio taken as a whole) by evaluating other risk factors. For example, its portfolio manager generally attempts
to lessen financial risk by buying companies with strong balance sheets and low leverage.
While
there can be no assurance that this risk-averse value approach will be successful, the Investment Adviser believes that it can
reduce some of the risks of investing.
Although
the Investment Adviser's approach to security selection seeks to reduce downside risk to the Fund's portfolio, especially during
periods of broad stock market declines, it may also potentially have the effect of limiting gains in strong up markets.
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Risk
Arbitrage. Subject to the requirement of investing at least 80% of its assets in convertible or income securities, the
Fund may invest without limitation in securities pursuant to "risk arbitrage" strategies or in other investment funds
managed pursuant to such strategies. Risk arbitrage investments are made in securities of companies for which a tender or exchange
offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or reorganization
proposal has been announced if, in the judgment of the Investment Adviser, there is a reasonable prospect of total return significantly
greater than the brokerage and other transaction expenses involved. Risk arbitrage strategies attempt to exploit merger activity
to capture the spread between current market values of securities and their values after successful completion of a merger, restructuring
or similar corporate transaction. Transactions associated with risk arbitrage strategies typically involve the purchases or sales
of securities in connection with announced corporate actions which may include, but are not limited to, mergers, consolidations,
acquisitions, transfers of assets, tender offers, exchange offers, re-capitalizations, liquidations, divestitures, spin-offs and
similar transactions. However, a merger or other restructuring or tender or exchange offer anticipated by the Fund and in which
it holds an arbitrage position may not be completed on the terms contemplated or within the time frame anticipated, resulting
in losses to the Fund.
In
general, securities which are the subject of such an offer or proposal sell at a premium to their historic market price immediately
prior to the announcement of the offer but may trade at a discount or premium to what the stated or appraised value of the security
would be if the contemplated transaction were approved or consummated.
Such
investments may be advantageous when the discount significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders as a result of the contemplated transaction; or fails
adequately to recognize the possibility that the offer or proposal may be replaced or superseded by an offer or proposal of greater
value. The evaluation of such contingencies requires unusually broad knowledge and experience on the part of the Investment Adviser
which must appraise not only the value of the issuer and its component businesses as well as the assets or securities to be received
as a result of the contemplated transaction but also the financial resources and business motivation behind the offer and/or the
dynamics and business climate when the offer or proposal is in process. Since such investments are ordinarily short term in nature,
they will tend to increase the turnover ratio of the Fund, thereby increasing its brokerage and other transaction expenses. Risk
arbitrage strategies may also involve short selling, options hedging and other arbitrage techniques to capture price differentials.
Forward
Foreign Currency Exchange Contracts. Subject to guidelines of our Board of Directors, the Fund may enter into forward
foreign currency exchange contracts to protect the value of its portfolio against uncertainty in the level of future currency
exchange rates between a particular foreign currency and the U.S. dollar or between foreign currencies in which its securities
are or may be denominated. The Fund may enter into such contracts on a spot (i.e., cash) basis at the rate then prevailing in
the currency exchange market or on a forward basis by entering into a forward contract to purchase or sell currency. A forward
contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed
number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract. Forward currency
contracts (i) are traded in a market conducted directly between currency traders (typically, commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit
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requirements
and (iii) are typically consummated without payment of any commissions. The Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions. The Fund expects to invest in forward currency contracts for hedging
or currency risk management purposes and not in order to speculate on currency exchange rate movements. The Fund will only enter
into forward currency contracts with parties which it believes to be creditworthy.
In
hedging a specific transaction, the Fund may enter into a forward contract with respect to either the currency in which the transaction
is denominated or another currency deemed appropriate by the Investment Adviser. The amount the Fund may invest in forward currency
contracts is limited to the amount of its aggregate investments in foreign currencies. The use of forward currency contracts may
involve certain risks, including the failure of the counterparty to perform its obligations under the contract, and such use may
not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices
of the currencies hedged or used for cover. The Fund will only enter into forward currency contracts with parties that the Investment
Adviser believes to be creditworthy institutions.
Under
current interpretations of the SEC and its staff under the 1940 Act, the Fund must segregate with its custodian liquid assets,
or engage in other SEC or staff approved measures, to "cover" open positions in certain types of derivative instruments.
The purpose of these requirements is to prevent the Fund from incurring excessive leverage through such instruments. In the case
of futures and forward contracts, for example, that are not required as a result of one or more contractual arrangements to settle
for cash only in an amount equal to the change in value of the contract over its term but rather are, per the terms of the contract,
stated to settle through physical delivery, the Fund must segregate liquid assets equal to such contract's full notional value
while it has an open long position, or is equal to the market value of the deliverable in the case of an open short position.
For this purpose, the "full notional value" of the contract means the purchase price for the assets underlying the contract
(i.e., in the case of a forward currency contract, the aggregate amount one would pay for the underlying currency). With respect
to contracts that the Fund is contractually obligated to settle for cash in an amount equal to the change in value of the contract,
the Fund needs to segregate liquid assets only in an amount equal to the Fund's unpaid mark to market obligation rather than the
entire notional amount. This is because the Fund's maximum potential obligation at that point in time is its net unpaid mark to
market obligation rather than the full notional amount.
Restricted
and Illiquid Securities. The Fund may invest without limit in securities for which there is no readily available trading
market or are otherwise illiquid; however, the Fund currently does not intend to invest more than 15% of its total net assets
in illiquid convertible securities or income securities. Illiquid securities include securities legally restricted as to resale,
such as commercial paper issued pursuant to Section 4(a)(2) of the Securities Act and securities eligible for resale pursuant
to Rule 144A thereunder. Section 4(a)(2) and Rule 144A securities may, however, be treated as liquid by the Investment Adviser
pursuant to procedures adopted by the Board, which require consideration of factors such as trading activity, availability of
market quotations and number of dealers willing to purchase the security. If the Fund invests in Rule 144A securities, the level
of portfolio illiquidity may be increased to the extent that eligible buyers become uninterested in purchasing such securities.
It
may be difficult to sell such securities at a price representing the fair value until such time as such securities may be sold
publicly. Where registration is required, a considerable period may elapse between a decision to
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sell
the securities and the time when it would be permitted to sell. Thus, the Fund may not be able to obtain as favorable a price
as that prevailing at the time of the decision to sell. The Fund may also acquire securities through private placements under
which it may agree to contractual restrictions on the resale of such securities. Such restrictions might prevent their sale at
a time when such sale would otherwise be desirable.
Leverage.
As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities (which may be additional
classes of stock, such as preferred shares, or securities representing debt) so long as its total assets, less certain ordinary
course liabilities, exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred shares and debt
outstanding. The use of leverage magnifies the impact of changes in net asset value, which means that, all else being equal, the
use of leverage results in outperformance on the upside and underperformance on the downside. In addition, if the cost of leverage
exceeds the return on the securities acquired with the proceeds of leverage, the use of leverage will diminish rather than enhance
the return to the Fund. The use of leverage generally increases the volatility of returns to the Fund. Such volatility may increase
the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred
shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous
to do so. The Fund's use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash
to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with any mandatory
redemption terms of any outstanding preferred shares. See "Risk Factors and Special Considerations—Leverage Risk."
In
the event the Fund had both outstanding preferred shares and senior securities representing debt at the same time, the Fund's
obligations to pay dividends or distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred
shares would be subordinate to the Fund's obligations to make any principal and/or interest payments due and owing with respect
to its outstanding senior debt securities. Accordingly, the Fund's issuance of senior securities representing debt would have
the effect of creating special risks for the Fund's preferred shareholders that would not be present in a capital structure that
did not include such securities. See "Risk Factors and Special Considerations—Special Risks Related to Preferred Securities."
Additionally,
the Fund may enter into derivative transactions that have economic leverage embedded in them. Economic leverage exists when the
Fund achieves the right to a return on a capital base that exceeds the investment which the Fund has contributed to the instrument
achieving a return. Derivative transactions that the Fund may enter into and the risks associated with them are described elsewhere
in this Annual Report. The Fund cannot assure you that investments in derivative transactions that have economic leverage embedded
in them will result in a higher return on its common shares.
To
the extent the terms of such transactions obligate the Fund to make payments, the Fund may earmark or segregate cash or liquid
assets in an amount at least equal to the current value of the amount then payable by the Fund under the terms of such transactions
or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the current value
of the amount then payable by the Fund under the terms of such transactions is represented by the notional amounts of such investments,
the Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if
the current value of the amount then payable by the Fund under the terms of such transactions is represented by the market value
of the Fund's current obligations, the Fund would segregate or earmark cash or liquid assets having a
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market
value at least equal to such current obligations. To the extent the terms of such transactions obligate the Fund to deliver particular
securities to extinguish the Fund's obligations under such transactions the Fund may "cover" its obligations under such
transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate
right to acquire such securities or collateral without additional cash consideration (or, if additional cash consideration is
required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover
is intended to provide the Fund with available assets to satisfy its obligations under such transactions. As a result of such
earmarking, segregation or cover, the Fund's obligations under such transactions will not be considered senior securities representing
indebtedness for purposes of the 1940 Act, or considered borrowings, but may create leverage for the Fund. To the extent that
the Fund's obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered
"senior securities representing indebtedness" under the 1940 Act and therefore subject to the 300% asset coverage requirement.
These
earmarking, segregation or cover requirements can result in the Fund maintaining securities positions it would otherwise liquidate,
segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
On
October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment companies ("Rule
18f-4"). The Fund will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented, Rule 18f-4
will impose limits on the amount of derivatives a fund can enter into, eliminate the asset segregation framework currently used
by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the
limits would result in a statutory violation and require funds whose use of derivatives is more than a limited specified exposure
amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
Options.
The Fund may purchase or sell, i.e., write, options on securities, securities indices and foreign currencies which are
listed on a national securities exchange or in the OTC market as a means of achieving additional return or of hedging the value
of the Fund's portfolio. A call option is a contract that, in return for a premium, gives the holder of the option the right to
buy from the writer of the call option the security or currency underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the obligation, upon exercise of the option, to deliver the underlying
security or currency upon payment of the exercise price during the option period. A put option is the reverse of a call option,
giving the holder of the option the right, in return for a premium, to sell the underlying security to the writer, at a specified
price, and obligating the writer to purchase the underlying security from the holder upon exercise of the exercise price.
If
the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished
by purchasing an option of the same series as the option previously written. However, with respect to exchange-traded options,
once the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly,
if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction on an exchange. This
is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either
a closing purchase or sale transaction can be effected when the Fund so desires.
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The
Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing
the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if
the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase
the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from
the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security.
Other principal factors affecting the market value of a put or a call option include supply and demand, prevailing interest rates,
the current market price and price volatility of the underlying security, and the time remaining until the expiration date of
the option. Gains and losses on investments in options depend, in part, on the ability of the Investment Adviser to predict correctly
the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of securities underlying
the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.
An
option position may be closed out only on an exchange which provides a secondary market for an option of the same series or in
a private transaction. Although the Fund will generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on an exchange will persist for any particular option.
In such event, it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
Although
the Investment Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund's writing of put and
call options, there can be no assurance that the Fund will succeed in any option-writing program it undertakes.
The
Fund will not purchase options if, as a result, the aggregate cost of all outstanding options exceed 10% of the Fund's total assets.
Futures
Contracts and Options on Futures. The Fund may purchase and sell financial futures contracts and options thereon which
are traded on a commodities exchange or board of trade for certain hedging, yield enhancement and risk management purposes. A
financial futures contract is an agreement to purchase or sell an agreed amount of securities or currencies at a set price for
delivery in the future. These futures contracts and related options may be on debt securities, financial indices, securities indices,
U.S. government securities and foreign currencies. The Investment Adviser has claimed an exclusion from the definition of the
term "commodity pool operator" under the Commodity Exchange Act.
When
Issued, Delayed Delivery Securities and Forward Commitments. The Fund may enter into forward commitments for the purchase
or sale of securities, including on a "when issued" or "delayed delivery" basis, in excess of customary settlement
periods for the type of security involved. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent
event, such as approval and consummation of a merger, corporate reorganization or debt restructuring (i.e., a when, as and if
issued security). When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery
taking place in the future, generally a month or more after the date of the commitment. While it will only enter into a
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forward
commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if
it is deemed advisable by the Investment Adviser.
Securities
purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior
to the settlement date. The Fund will segregate with its custodian cash or other liquid assets in an aggregate amount at least
equal to the amount of its outstanding forward commitments.
Short
Sales Against the Box. The Fund may from time to time make short sales of securities it owns or has the right to acquire
through conversion or exchange of other securities it owns. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain at no added cost securities identical to those sold short. In a short sale,
the Fund does not immediately deliver the securities sold or receive the proceeds from the sale. The Fund may not make short sales
or maintain a short position if it would cause more than 25% of the Fund's total assets, taken at market value, to be held as
collateral for such sales.
To
secure its obligations to deliver the securities sold short, the Fund will deposit in escrow in a separate account with its custodian
an equal amount to the securities sold short or securities convertible into, or exchangeable for, such securities. The Fund may
close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering
securities already held by the Fund, because the Fund may want to continue to receive interest and dividend payments on securities
in its portfolio that are convertible into the securities sold short.
The
Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing
a decline in the value of a security owned by the Fund or a security convertible into, or exchangeable for, such security, or
when the Fund does not want to sell the security it owns. Such short sale transactions may be subject to special tax rules, one
of the effects of which may be to accelerate income to the Fund. Additionally, the Fund may use short sales in conjunction with
the purchase of a convertible security when it is determined that a convertible security can be bought at a small conversion premium
and has a yield advantage relative to the underlying common stock sold short.
Other
Derivative Instruments. The Fund may also utilize other types of derivative instruments, primarily for hedging or risk
management purposes. These instruments include futures, forward contracts, options on such contracts and interest rate, total
return and other kinds of swaps. These investment management techniques generally will not be considered senior securities if
the Fund establishes in a segregated account cash or other liquid securities or sets aside assets on the accounting records equal
to the Fund's obligations in respect of such techniques.
Limitations
on the Purchase and Sale of Futures Contracts, Certain Options, and Swaps. Subject to the guidelines of the Board, the
Fund may engage in "commodity interest" transactions (generally, transactions in futures, certain options, certain currency
transactions, and certain types of swaps) only for bona fide hedging or other permissible transactions in accordance with the
rules and regulations of the Commodity Futures Trading Commission ("CFTC"). Pursuant to amendments by the CFTC to Rule
4.5 under the Commodity Exchange Act ("CEA"), the Investment Adviser has filed a notice of exemption from registration
as a "commodity pool operator" with respect to the Fund. The Fund and the Investment Adviser are therefore not subject
to registration or regulation as a commodity pool operator under the CEA. In addition, certain trading restrictions are applicable
to the Fund as a result of this status. These trading restrictions permit the Fund to engage in commodity interest
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transactions
that include (i) "bona fide hedging" transactions, as that term is defined and interpreted by the CFTC and its staff,
without regard to the percentage of the Fund's assets committed to margin and options premiums and (ii) non-bona fide hedging
transactions, provided that the Fund does not enter into such non-bona fide hedging transactions if, immediately thereafter,
either (a) the sum of the amount of initial margin deposits on the Fund's existing futures positions or swaps positions and option
or swaption premiums would exceed 5% of the market value of the Fund's liquidating value, after taking into account unrealized
profits and unrealized losses on any such transactions, or (b) the aggregate net notional value of the Fund's commodity interest
transactions would not exceed 100% of the market value of the Fund's liquidating value, after taking into account unrealized profits
and unrealized losses on any such transactions. In addition to meeting one of the foregoing trading limitations, the Fund may
not market itself as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets. Therefore,
in order to claim the Rule 4.5 exemption, the Fund is limited in its ability to invest in commodity futures, options, and certain
types of swaps (including securities futures, broad based stock index futures, and financial futures contracts). As a result,
the Fund is more limited in its ability to use these instruments than in the past, and these limitations may have a negative impact
on the ability of the Investment Adviser to manage the Fund, and on the Fund's performance. If the Investment Adviser was required
to register as a commodity pool operator with respect to the Fund, compliance with additional registration and regulatory requirements
would increase Fund expenses. Other potentially adverse regulatory initiatives could also develop.
Risks
of Currency Transactions. Currency transactions are also subject to risks different from those of other portfolio transactions.
Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions
on repatriation of currency, and manipulation, or exchange restrictions imposed by governments. These forms of governmental action
can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could
also cause hedges it has entered into to be rendered useless, resulting in full currency exposure and incurring transaction costs.
Repurchase
Agreements. Repurchase agreements may be seen as loans by the Fund collateralized by underlying debt securities. Under
the terms of a typical repurchase agreement, the Fund would acquire an underlying debt obligation for a relatively short period
(usually not more than one week) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed price and time. This arrangement results in a fixed rate of return to the Fund that is not subject to market fluctuations
during the holding period. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults
on its obligations and the Fund is delayed in or prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying securities during the period in which it seeks to assert
these rights. The Investment Adviser, acting under the supervision of the Board of Directors, reviews the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements to evaluate these risks, and monitors on an ongoing
basis the value of the securities subject to repurchase agreements to ensure that the value is maintained at the required level.
The Fund will not enter into repurchase agreements with the Investment Adviser or any of its affiliates.
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Swaps.
The Fund may enter into total rate of return, credit default or other types of swaps and related derivatives for various
purposes, including to gain economic exposure to an asset or group of assets that may be difficult or impractical to acquire or
for hedging and risk management. These transactions generally provide for the transfer from one counterparty to another of certain
risks inherent in the ownership of a financial asset such as a common stock or debt instrument. Such risks include, among other
things, the risk of default and insolvency of the obligor of such asset, the risk that the credit of the obligor or the underlying
collateral will decline or the risk that the common stock of the underlying issuer will decline in value. The transfer of risk
pursuant to a derivative of this type may be complete or partial, and may be for the life of the related asset or for a shorter
period. These derivatives may be used as a risk management tool for a pool of financial assets, providing the Fund with the opportunity
to gain or reduce exposure to one or more reference securities or other financial assets (each, a "Reference Asset")
without actually owning or selling such assets in order, for example, to increase or reduce a concentration risk or to diversify
a portfolio. Conversely, these derivatives may be used by the Fund to reduce exposure to an owned asset without selling it.
Because
the Fund would not own the Reference Assets, the Fund may not have any voting rights with respect to the Reference Assets, and
in such cases all decisions related to the obligors or issuers of the Reference Assets, including whether to exercise certain
remedies, will be controlled by the swap counterparties.
Total
rate of return swap agreements are contracts in which one party agrees to make periodic payments to another party based on the
change in market value of the assets underlying the contract, which may include a specified security, basket of securities or
securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or
the total return from other underlying assets.
A
credit default swap consists of an agreement between two parties in which the "buyer" agrees to pay to the "seller"
a periodic stream of payments over the term of the contract and the seller agrees to pay the buyer the par value (or other agreed-upon
value) of a referenced debt obligation upon the occurrence of a credit event with respect to the issuer of the referenced debt
obligation. Generally, a credit event means bankruptcy, failure to pay, obligation acceleration or modified restructuring. The
Fund may be either the buyer or seller in a credit default swap. As the buyer in a credit default swap, the Fund would pay to
the counterparty the periodic stream of payments. If no default occurs, the Fund would receive no benefit from the contract. As
the seller in a credit default swap, the Fund would receive the stream of payments but would be subject to exposure on the notional
amount of the swap, which it would be required to pay in the event of a credit event with respect to the issuer of the referenced
debt obligation. Accordingly, if the Fund sells a credit default swap (or a credit default index swap), it intends at all times
to segregate or designate on its books and records liquid assets in an amount at least equal to the notional amount of the swap
(i.e., the cost of payment to the buyer if a credit event occurs).
The
Fund may also enter into equity contract for difference swap transactions. In an equity contract for difference swap, a set of
future cash flows is exchanged between two counterparties. One of these cash flow streams will typically be based on a reference
interest rate combined with the performance of a notional value of shares of a stock. The other will be based on the performance
of the shares of a stock. Depending on the general state of short term interest rates and the returns on the Fund's portfolio
securities at the time an equity contract for difference swap transaction reaches its scheduled termination date, there is a risk
that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement will not be as favorable
as on the expiring transaction.
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Total
rate of return swaps and similar derivatives are subject to many risks, including the possibility that the market will move in
a manner or direction that would have resulted in gain for the Fund had the swap or other derivative not been utilized (in which
case it would have been better had the Fund not engaged in the hedging transactions), the risk of imperfect correlation between
the risk sought to be hedged and the derivative transactions utilized, the possible inability of the counterparty to fulfill its
obligations under the swap and potential illiquidity of the hedging instrument utilized, which may make it difficult for the Fund
to close out or unwind one or more hedging transactions.
Total
rate of return swaps and related derivatives are a relatively recent development in the financial markets. Consequently, there
are certain legal, tax and market uncertainties that present risks in entering into such arrangements.
There
is currently little or no case law or litigation characterizing total rate of return swaps or related derivatives, interpreting
their provisions, or characterizing their tax treatment. In addition, additional regulations and laws may apply to these types
of derivatives that have not previously been applied. There can be no assurance that future decisions construing similar provisions
to those in any swap agreement or other related documents or additional regulations and laws will not have an adverse effect on
the Fund that utilizes these instruments. The Fund will monitor these risks and seek to utilize these instruments in a manner
that does not lead to undue risk regarding the tax or other structural elements of the Fund. The Fund will not invest in these
types of instruments if the Reference Assets are commodities except for bona fide hedging or risk management purposes.
Significant
Holdings. The Fund may invest up to 25% of its total assets in securities of issuers in a single industry; however, the
Fund does not currently focus and has no current intent to focus on any particular industry or sector. See "Risk Factors
and Special Considerations—General Risks—Significant Holdings Risk."
Investment
Restrictions. The Fund has adopted certain investment restrictions as fundamental policies of the Fund. Under the 1940
Act, a fundamental policy may not be changed without the vote of a majority, as defined in the 1940 Act, of the outstanding voting
securities of the Fund (voting together as a single class). In addition, pursuant to the Fund's Series E Articles Supplementary,
a majority, as defined in the 1940 Act, of the outstanding preferred shares of the Fund (voting separately as a single class)
is also required to change a fundamental policy. The Fund may become subject to rating agency guidelines that are more limiting
than its current investment restrictions in order to obtain and maintain a desired rating on its preferred shares, if any.
The
Fund's investment objective is a fundamental policy. Except as expressly listed under "Investment Restrictions" herein,
none of the Fund's other policies is fundamental, and each may be modified by the Board without shareholder approval.
Temporary
Defensive Investments. When a temporary defensive posture is believed by the Investment Adviser to be warranted
("temporary defensive periods"), the Fund may invest more heavily in securities of U.S. government sponsored
instrumentalities and in money market mutual funds that invest in those securities, which, in the absence of an exemptive
order, are not affiliated with the Investment Adviser. Obligations of certain agencies and instrumentalities of the U.S.
government, such as the Government National Mortgage Association, are supported by the "full faith and credit" of
the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the
discretionary authority of
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the
U.S. government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association,
are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not obligated to do so by law. During temporary defensive periods,
the Fund may be less likely to achieve its investment objective. See "Management of the Fund—General."
Loans
of Portfolio Securities. To increase income, the Fund may lend its portfolio securities to securities broker-dealers or
financial institutions if the loan is collateralized in accordance with applicable regulatory requirements.
If
the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Fund could use the
collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the
collateral. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in collateral
should the borrower of the securities violate the terms of the loan or fail financially. There can be no assurance that borrowers
will not fail financially. On termination of the loan, the borrower is required to return the securities to the Fund, and any
gain or loss in the market price during the loan would inure to the Fund. If the other party to the loan petitions for bankruptcy
or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under
extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
Warrants
and Rights. The Fund may invest without limit in warrants or rights (other than those acquired in units or attached to
other securities) that entitle the holder to buy equity securities at a specific price for a specific period of time but will
do so only if such equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund's portfolio.
RISK
FACTORS AND SPECIAL CONSIDERATIONS
Investors
should consider the following risk factors and special considerations associated with investing in the Fund:
General
Risks
Market
Risk. The market price of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably. Securities
may decline in value due to factors affecting securities markets generally or particular industries represented in the securities
markets. The value of a security may decline due to general market conditions which are not specifically related to a particular
company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes
in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. The value of a security
may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production
costs and competitive conditions within an industry. During a general downturn in the securities markets, multiple asset classes
may decline in value simultaneously. Equity securities generally have greater price volatility than fixed income securities. Credit
ratings downgrades may also negatively affect securities held by the Fund. Even when markets perform well, there is no assurance
that the investments held by the Fund will increase in value along with the broader market.
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In
addition, market risk includes the risk that geopolitical and other events will disrupt the economy on a national or global level.
For instance, war, terrorism, market manipulation, government defaults, government shutdowns, political changes or diplomatic
developments, public health emergencies (such as the spread of infectious diseases, pandemics and epidemics) and natural/environmental
disasters can all negatively impact the securities markets, which could cause the Fund to lose value. These events could reduce
consumer demand or economic output, result in market closures, travel restrictions or quarantines, and significantly adversely
impact the economy. The current contentious domestic political environment, as well as political and diplomatic events within
the United States and abroad, such as the U.S. government's inability at times to agree on a long-term budget and deficit reduction
plan, has in the past resulted, and may in the future result, in a government shutdown, which could have an adverse impact on
the Fund's investments and operations. Additional and/or prolonged U.S. federal government shutdowns may affect investor and consumer
confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Governmental
and quasi-governmental authorities and regulators throughout the world have previously responded to serious economic disruptions
with a variety of significant fiscal and monetary policy changes, including but not limited to, direct capital infusions into
companies, new monetary programs and dramatically lower interest rates. An unexpected or sudden reversal of these policies, or
the ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund's
investments. Any market disruptions could also prevent the Fund from executing advantageous investment decisions in a timely manner.
To the extent that the Fund focuses its investments in a region enduring geopolitical market disruption, it will face higher risks
of loss, although the increasing interconnectivity between global economies and financial markets can lead to events or conditions
in one country, region or financial market adversely impacting a different country, region or financial market. Thus, investors
should closely monitor current market conditions to determine whether the Fund meets their individual financial needs and tolerance
for risk.
Current
market conditions may pose heightened risks with respect to the Fund's investment in fixed income securities. Interest rates in
the U.S. are at or near historically low levels. Any interest rate increases in the future could cause the value of the Fund's
assets to decrease. Recently, there have also been signs of inflationary price movements. As such, fixed income securities markets
may experience heightened levels of interest rate, volatility and liquidity risk.
Exchanges
and securities markets may close early, close late or issue trading halts on specific securities or generally, which may result
in, among other things, the Fund being unable to buy or sell certain securities or financial instruments at an advantageous time
or accurately price its portfolio investments.
Inflation
Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future
as inflation decreases the value of money. Recently, there have been market indicators of a rise in inflation. As inflation increases,
the real value of the Fund's shares and distributions therefore may decline. In addition, during any periods of rising inflation,
dividend rates of any debt securities issued by the Fund would likely increase, which would tend to further reduce returns to
common shareholders. Inflation rates may change frequently and significantly as a result of various factors, including unexpected
shifts in the domestic or global economy and changes in economic policies, and the Fund's investments may not keep pace with inflation,
which may result in losses to Fund shareholders. This risk is greater for fixed-income instruments with longer maturities.
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Additional Fund Information (Continued) (Unaudited)
Coronavirus
("COVID-19") and Global Health Event Risk. As of the filing date of this Annual Report, there is an outbreak
of a highly contagious form of a novel coronavirus known as “COVID-19.” COVID-19 has been declared a pandemic by the
World Health Organization and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health
emergency in the United States. COVID-19 had a devastating impact on the global economy, including the U.S. economy, and resulted
in a global economic recession. Many states issued orders requiring the closure of non-essential businesses and/or requiring residents
to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are
continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods
and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and
financial market instability both globally and in the United States. Such effects will likely continue for the duration of the
pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and
cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their
economies, many cities, both globally and in the United States, continue to experience, from time to time, surges in the reported
number of cases and hospitalizations related to the COVID-19 pandemic. Increases in cases can and have led to the re-introduction
of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue
to lead to the re-introduction of such restrictions elsewhere. Additionally, the vaccine produced by Johnson & Johnson is
currently authorized for emergency use, and the U.S. Food and Drug Administration (“FDA”) has granted full approval
to the vaccines produced by Pfizer-BioNTech and Moderna, which will now be marketed as Comirnaty and Spikevax, respectively. However,
it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will
be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Various factors could
lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time.
Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a
substantial economic downturn or recession, and our business and operations, as well as the business and operations of our portfolio
companies, could be materially adversely affected by a prolonged economic downturn or recession in the United States and other
major markets. Potential consequences of the current unprecedented measures taken in response to the
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Additional Fund Information (Continued) (Unaudited)
spread
of COVID-19, and current market disruptions and volatility that may impact the Fund include, but are not limited to:
| ● | sudden,
unexpected and/or severe declines in the market price of the Fund’s securities
or net asset value; |
| ● | inability
of the Fund to accurately or reliably value its portfolio; |
| ● | inability
of the Fund to comply with certain asset coverage ratios that would prevent the Fund
from paying dividends to the Fund’s common shareholders; |
| ● | inability
of the Fund to pay any dividends and distributions; |
| ● | inability
of the Fund to maintain its status as a RIC under the Code; |
| ● | potentially
severe, sudden and unexpected declines in the value of our investments; |
| ● | increased
risk of default or bankruptcy by the companies in which the Fund invests; |
| ● | increased
risk of companies in which the Fund invests being unable to weather an extended cessation
of normal economic activity and thereby impairing their ability to continue functioning
as a going concern; |
| ● | reduced
economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact the continued
viability of the companies in which we invest; |
| ● | companies
in which the Fund invests being disproportionally impacted by governmental action aimed
at slowing the spread of COVID-19 or mitigating its economic effects; |
| ● | limited
availability of new investment opportunities; and |
| ● | general
threats to the Fund’s ability to continue investment operations and to operate
successfully as a diversified, closed-end investment company. |
Despite
actions of the U.S. federal government and foreign governments, the uncertainty surrounding the COVID-19 pandemic and other factors
has contributed to significant volatility and declines in the global public equity markets and global debt capital markets, including
the net asset value of the Fund’s shares. These events could have, and/or have had, a significant impact on the Fund’s
performance, net asset value, income, operating results and ability to pay distributions, as well as the performance, income,
operating results and viability of issuers in which it invests.
It
is virtually impossible to determine the ultimate impact of COVID-19 at this time. Further, the extent and strength of any economic
recovery after the COVID-19 pandemic abates, including following any “second wave,” “third wave” or other
intensifying of the pandemic, is uncertain and subject to various factors and conditions. Accordingly, an investment in the Fund
is subject to an elevated degree of risk as compared to other market environments.
Convertible
Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities
of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to
increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in
the value of the Fund's holding may occur in the event the underlying stock is subdivided, additional equity securities are issued
for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has
a similar effect.
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The
value of a convertible security is influenced by the value of the underlying equity security. Convertible debt securities and
preferred stocks may depreciate in value if the market value of the underlying equity security declines or if rates of interest
increase. In addition, although debt securities are liabilities of a corporation which the corporation is generally obligated
to repay at a specified time, debt securities, particularly convertible debt securities, are often subordinated to the claims
of some or all of the other creditors of the corporation.
Mandatory
conversion securities (securities that automatically convert into equity securities at a future date) may limit the potential
for capital appreciation and, in some instances, are subject to complete loss of invested capital. Other innovative convertibles
include "equity-linked" securities, which are securities or derivatives that may have fixed, variable, or no interest
payments prior to maturity, may convert (at the option of the holder or on a mandatory basis) into cash or a combination of cash
and common stock, and may be structured to limit the potential for capital appreciation. Equity-linked securities may be illiquid
and difficult to value and may be subject to greater credit risk than that of other convertibles. Moreover, mandatory conversion
securities and equity-linked securities have increased the sensitivity of the convertible securities market to the volatility
of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater
than, those associated with traditional convertible securities.
Preferred
stocks are equity securities in the sense that they do not represent a liability of the corporation. In the event of liquidation
of the corporation, and after its creditors have been paid or provided for, holders of preferred stock are generally entitled
to a preference as to the assets of the corporation before any distribution may be made to the holders of common stock. Debt securities
normally do not have voting rights. Preferred stocks may have no voting rights or may have voting rights only under certain circumstances.
Credit
Risk. Credit risk is the risk that an issuer will fail to pay interest or dividends and principal in a timely manner. Companies
that issue convertible securities may be small to medium-size, and they often have low credit ratings. In addition, the credit
rating of a company's convertible securities is generally lower than that of its conventional debt securities. Convertible securities
are normally considered "junior" securities—that is, the company usually must pay interest on its conventional
debt before it can make payments on its convertible securities. Credit risk could be high for the Fund, because it could invest
in securities with low credit quality. The lower a debt security is rated, the greater its default risk. As a result, the Fund
may incur cost and delays in enforcing its rights against the issuer.
Market
Risk. Although convertible securities do derive part of their value from that of the securities into which they are convertible,
they are not considered derivative financial instruments. However, the Fund's mandatory convertible securities include features
which render them more sensitive to price changes of their underlying securities. Thus they expose the Fund to greater downside
risk than traditional convertible securities, but generally less than that of the underlying common stock.
Interest
Rate Risk for Convertible Securities. The Fund may be subject to a greater risk of rising interest rates due to the current
period of historically low interest rates. There have also been signs of inflationary price movements. There is a possibility
that interest rates may rise, which would likely drive down the prices of income-or dividend-paying securities. These factors
increase the risk that the market interest rates will rise or continue to rise in the future, with a corresponding decline in
the value of convertible
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securities
held by the Fund. Convertible securities are particularly sensitive to interest rate changes when their predetermined conversion
price is much higher than the issuing company's common stock.
Sector
Risk. Sector risk is the risk that returns from the economic sectors in which convertible securities are concentrated will
trail returns from other economic sectors. As a group, sectors tend to go through cycles of doing better-or-worse-than the convertible
securities market in general. These periods have, in the past, lasted for as long as several years. Moreover, the sectors that
dominate this market change over time.
Dilution
Risk. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund's holding
may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock
dividend is declared, or the issuer enters into another type of corporate transaction that has a similar effect.
Fixed
Income Securities Risks. Fixed income securities in which the Fund may invest are generally subject to the following risks:
Interest
Rate Risk. The market value of bonds and other fixed-income or dividend paying securities changes in response to interest
rate changes and other factors. Interest rate risk is the risk that prices of bonds and other income or dividend paying securities
will increase as interest rates fall and decrease as interest rates rise.
The
Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates.
There have also been signs of inflationary price movements. There is a possibility that interest rates may rise, which would
likely drive down the prices of income or dividend paying securities. The magnitude of these fluctuations in the market price
of bonds and other income or dividend paying securities is generally greater for those securities with longer maturities.
Fluctuations in the market price of the Fund's investments will not affect interest income derived from instruments already
owned by the Fund, but will be reflected in the Fund's net asset value. The Fund may lose money if short term or long term
interest rates rise sharply in a manner not anticipated by Fund management. To the extent the Fund invests in debt securities
that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to
changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on
certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and
particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to
the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S.
government securities. A security backed by the "full faith and credit" of the U.S. government is guaranteed only
as to its stated interest rate and face value at maturity, not its current market price. Just like other income or dividend
paying securities, government-guaranteed securities will fluctuate in value when interest rates change.
The
Fund's use of leverage will tend to increase the Fund's interest rate risk. The Fund may utilize certain strategies, including
taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of income or dividend
paying securities held by the Fund and decreasing the Fund's exposure to interest rate risk. The Fund is not required to hedge
its exposure to interest rate risk and may choose not to do
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Additional Fund Information (Continued) (Unaudited)
so.
In addition, there is no assurance that any attempts by the Fund to reduce interest rate risk will be successful or that any hedges
that the Fund may establish will perfectly correlate with movements in interest rates.
The
Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than
longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates
at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating
rate instruments generally will not increase in value if interest rates decline. The Fund also may invest in inverse floating
rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility
than fixed rate debt obligations with similar credit quality. To the extent the Fund holds variable or floating rate instruments,
a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the
income received from such securities, which may adversely affect the net asset value of the Fund's common shares.
| ● | Issuer
Risk. Issuer risk is the risk that the value of an income or dividend paying security
may decline for a number of reasons which directly relate to the issuer, such as management
performance, financial leverage, reduced demand for the issuer's goods and services,
historical and prospective earnings of the issuer and the value of the assets of the
issuer. |
| ● | Credit
Risk. Credit risk is the risk that one or more income or dividend paying securities
in the Fund's portfolio will decline in price or fail to pay interest/distributions or
principal when due because the issuer of the security experiences a decline in its
financial status. Credit risk is increased when a portfolio security is downgraded or
the perceived creditworthiness of the issuer deteriorates. To the extent the Fund invests
in below investment grade securities, it will be exposed to a greater amount of credit
risk than a fund which only invests in investment grade securities. See "Risk Factors
and Special Considerations—General Risks—Non-Investment Grade Securities."
In addition, to the extent the Fund uses credit derivatives, such use will expose it
to additional risk in the event that the bonds underlying the derivatives default. The
degree of credit risk depends on the issuer's financial condition and on the terms of
the securities. |
| ● | Prepayment
Risk. Prepayment risk is the risk that during periods of declining interest rates,
borrowers may exercise their option to prepay principal earlier than scheduled. For income
or dividend paying securities, such payments often occur during periods of declining
interest rates, forcing the Fund to reinvest in lower yielding securities, resulting
in a possible decline in the Fund's income and distributions to shareholders. This is
known as prepayment or "call" risk. Below investment grade securities frequently
have call features that allow the issuer to redeem the security at dates prior to its
stated maturity at a specified price (typically greater than par) only if certain prescribed
conditions are met ("call protection"). For premium bonds (bonds acquired at
prices that exceed their par or principal value) purchased by the Fund, prepayment risk
may be enhanced. |
| ● | Reinvestment
Risk. Reinvestment risk is the risk that income from the Fund's portfolio will decline
if the Fund invests the proceeds from matured, traded or called fixed income securities
at market interest rates that are below the Fund portfolio's current earnings rate. |
| ● | Duration
and Maturity Risk. The Fund has no set policy regarding portfolio maturity or duration
of the fixed-income securities it may hold. The Investment Adviser may seek to adjust
the duration or maturity of the Fund's fixed-income holdings based on its assessment
of current and projected market conditions |
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and
all other factors that the Investment Adviser deems relevant. In comparison to maturity (which is the date on which the issuer
of a debt instrument is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument
as a result in changes in market rates of interest, based on the weighted average timing of the instrument's expected principal
and interest payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage
point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated price
changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years
means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase
by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend
rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price
changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual
price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move (i.e., changes
in the relationship of long term interest rates to short term interest rates), the magnitude of any move in interest rates, actual
and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring,
the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales of securities,
and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise,
as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price movements in relation to
changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market
value of the Fund's shares and that actual price movements in the Fund's portfolio may differ significantly from duration-based
estimates. Duration differs from maturity in that it takes into account a security's yield, coupon payments and its principal
payments in addition to the amount of time until the security matures. As the value of a security changes over time, so will its
duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter
durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate
changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category
of investments will be made based on all pertinent market factors at any given time. The Fund may incur costs in seeking to adjust
the portfolio average duration or maturity. There can be no assurance that the Investment Adviser's assessment of current and
projected market conditions will be correct or that any strategy to adjust duration or maturity will be successful at any given
time.
Corporate
Bonds Risk. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates.
The market value of intermediate and longer term corporate bonds is generally more sensitive to changes in interest rates than
is the market value of shorter term corporate bonds. The market value of a corporate bond also may be affected by factors directly
related to the issuer, such as investors' perceptions of the creditworthiness of the issuer, the issuer's financial performance,
perceptions of the issuer in the market place, performance of management of the issuer, the issuer's capital structure and use
of financial leverage and demand for the issuer's goods and services. Certain risks associated with investments in corporate bonds
are described elsewhere in this Annual Report in further detail, including under “Risk Factors and Special
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Considerations—General
Risks—Fixed Income Securities Risks—Credit Risk,” “—Fixed Income Securities Risks—Interest Rate
Risk” and “—Fixed Income Securities Risks—Prepayment Risk.” There is a risk that the issuers of corporate
bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument. Corporate
bonds of below investment grade quality are often high risk and have speculative characteristics and may be particularly susceptible
to adverse issuer-specific developments. Corporate bonds of below investment grade quality are subject to the risks described
herein under “—Non-Investment Grade Securities Risk.”
Non-Investment
Grade Securities Risk. The Fund may invest in securities rated below investment grade by recognized rating agencies or
unrated securities of comparable quality. The prices of these lower grade securities are more sensitive to negative developments,
such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Securities
of below investment grade quality—those securities rated below "Baa" by Moody's or below "BBB" by S&P
(or unrated securities of comparable quality)—are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal when due and therefore involve a greater risk of default. Securities rated below investment grade
commonly are referred to as "junk bonds" or "high yield" securities and generally pay a premium above the
yields of U.S. government securities or securities of investment grade issuers because they are subject to greater risks than
these securities. These risks, which reflect their speculative character, include the following:
| ● | greater
credit risk and risk of default; |
| ● | potentially
greater sensitivity to general economic or industry conditions; |
| ● | potential
lack of attractive resale opportunities (illiquidity); and |
| ● | additional
expenses to seek recovery from issuers who default. |
In
addition, the prices of these non-investment grade securities are more sensitive to negative developments, such as a decline in
the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Non-investment grade securities
tend to be less liquid than investment grade securities. The market value of non-investment grade securities may be more volatile
than the market value of investment grade securities and generally tends to reflect the market's perception of the creditworthiness
of the issuer and short term market developments to a greater extent than investment grade securities, which primarily reflect
fluctuations in general levels of interest rates.
Ratings
are relative and subjective and not absolute standards of quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial condition.
The
Fund may purchase securities of companies that are experiencing significant financial or business difficulties, including companies
involved in bankruptcy or other reorganization and liquidation proceedings. Although such investments may result in significant
financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial
and legal, necessary for successful investments in issuers experiencing significant business and financial difficulties is unusually
high. There can be no assurance that the Fund will correctly evaluate the value of the assets collateralizing its investments
or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to
a portfolio
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investment,
the Fund may lose all or part of its investment or may be required to accept collateral with a value less than the amount of the
Fund's initial investment.
As
a part of its investments in non-investment grade securities, the Fund may invest in the securities of issuers in default. The
Fund invests in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their
obligations and emerge from bankruptcy protection and that the value of such issuers' securities will appreciate. By investing
in the securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations
or emerge from bankruptcy protection or that the value of these securities will not otherwise appreciate.
In
addition to using statistical rating agencies and other sources, the Investment Adviser will also perform its own analysis of
issuers in seeking investments that it believes to be underrated (and thus higher yielding) in light of the financial condition
of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements,
value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing
and current anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider
general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible
that statistical rating agencies might change their ratings of a particular issue to reflect subsequent events on a timely basis.
Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the
securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue
to hold the securities.
Income
securities, including non-investment grade securities and comparable unrated securities, frequently have call or buy-back features
that permit their issuers to call or repurchase the securities from their holders, such as the Fund. If an issuer exercises these
rights during periods of declining interest rates, the Fund may have to replace the security with a lower yielding security, thus
resulting in a decreased return for the Fund.
The
market for non-investment grade and comparable unrated securities has at various times, particularly during times of economic
recession, experienced substantial reductions in market value and liquidity. Past recessions have adversely affected the value
of such securities as well as the ability of certain issuers of such securities to repay principal and pay interest thereon or
to refinance such securities. The market for those securities could react in a similar fashion in the event of any future economic
recession.
Equity
Risk. The principal risk of investing in equity securities is equity risk. Equity risk is the risk that the price of an
equity security will fall due to general market and economic conditions, perceptions regarding the industry in which the issuer
participates or the issuing company's particular circumstances. Common stock in which the Fund will invest or receive upon conversion
of convertible securities is subject to such equity risk. In the case of convertible securities, it is the conversion value of
a convertible security that is subject to the equity risk; that is, if the appreciation potential of a convertible security is
not realized, the premium paid for its conversion value may not be recovered. See "Investment Objective and Policies—Investment
Practices—Convertible Securities."
Common
Stock Risk. Common stock of an issuer in the Fund's portfolio may decline in price for a variety of reasons, including
if the issuer fails to make anticipated dividend payments because the issuer of the
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Additional Fund Information (Continued) (Unaudited)
security
experiences a decline in its financial condition. Common stock in which the Fund invests is structurally subordinated as to income
and residual value to preferred stock, bonds and other debt instruments in a company's capital structure, in terms of priority
to corporate income, and therefore will be subject to greater dividend risk than preferred stock or debt instruments of such issuers.
In addition, while common stock has historically generated higher average returns than fixed income securities, common stock has
also experienced significantly more volatility in generating those returns.
Distribution
Risk for Equity Income Securities. In selecting equity income securities in which the Fund will invest, the Investment
Adviser will consider the issuer's history of making regular periodic distributions (i.e., dividends) to its equity holders. An
issuer's history of paying dividends, however, does not guarantee that the issuer will continue to pay dividends in the future.
The dividend income stream associated with equity income securities generally is not guaranteed and will be subordinate to payment
obligations of the issuer on its debt and other liabilities. Accordingly, in the event the issuer does not realize sufficient
income in a particular period both to service its liabilities and to pay dividends on its equity securities, it may forgo paying
dividends on its equity securities. In addition, because in most instances issuers are not obligated to make periodic distributions
to the holders of their equity securities, such distributions or dividends generally may be discontinued at the issuer's discretion.
Dividend-producing
equity income securities, in particular those whose market price is closely related to their yield, may exhibit greater sensitivity
to interest rate changes. See "—Fixed Income Securities Risks—Interest Rate Risk." The Fund's investments
in dividend-producing equity income securities may also limit its potential for appreciation during a broad market advance.
The
prices of dividend-producing equity income securities can be highly volatile. Investors should not assume that the Fund's investments
in these securities will necessarily reduce the volatility of the Fund's net asset value or provide "protection," compared
to other types of equity income securities, when markets perform poorly.
Preferred
Stock Risk. There are special risks associated with the Fund investing in preferred securities, including:
Deferral.
Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated
period without any adverse consequences to the issuer. If the Fund owns a preferred security on which distributions are being
deferred by the issuer, the Fund may be required to report income for tax purposes although it has not yet received such deferred
distributions.
Non-Cumulative
Dividends. Some preferred stocks are non-cumulative, meaning that the dividends do not accumulate and need not ever be paid.
A portion of the portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an
obligation to make up any arrearages to its shareholders. Should an issuer of a non-cumulative preferred stock held by the Fund
determine not to pay dividends on such stock, the Fund's return from that security may be adversely affected. There is no assurance
that dividends or distributions on non-cumulative preferred stocks in which the Fund invests will be declared or otherwise made
payable.
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Subordination.
Preferred securities are subordinated to bonds and other debt instruments in a company's capital structure in terms of priority
to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt security
instruments.
Liquidity.
Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. Government
securities.
Limited
Voting Rights. Generally, preferred security holders (such as the Fund) have no voting rights with respect to the issuing
company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security
holders may be entitled to elect a number of directors to the issuer's board. Generally, once all the arrearages have been paid,
the preferred security holders no longer have voting rights.
Special
Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to
a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in federal
income tax or securities laws. As with call provisions, a redemption by the issuer may negatively impact the return of the security
held by the Fund.
Computer
Software/Services Companies Risk. Computer software/services companies can be significantly affected by competitive pressures,
aggressive pricing, technological developments, changing domestic demand, the ability to attract and retain skilled employees
and availability and price of components. The market for products produced by computer software/services companies is characterized
by rapidly changing technology, rapid product obsolescence, cyclical market patterns, evolving industry standards and frequent
new product introductions. The success of computer software/services companies depends in substantial part on the timely and successful
introduction of new products and the ability to service such products. An unexpected change in one or more of the technologies
affecting an issuer's products or in the market for products based on a particular technology could have a material adverse effect
on a participant's operating results.
Many
computer software/services companies rely on a combination of patents, copyrights, trademarks and trade secret laws to establish
and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by computer
software/services companies to protect their proprietary rights will be adequate to prevent misappropriation of their technology
or that competitors will not independently develop technologies that are substantially equivalent or superior to such companies'
technology.
U.S.
Government Securities and Credit Rating Downgrade Risk. The Fund may invest in direct obligations of the government of
the United States or its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities
and backed by the full faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders
of the securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market
values of such obligations may fluctuate. In addition, not all U.S. government securities are backed by the full faith and credit
of the United States; some are the obligation solely of the entity through which they are issued. There is no guarantee that the
U.S. government would provide financial support to its agencies and instrumentalities if not required to do so by law.
In
2011, S&P lowered its long term sovereign credit rating on the U.S. to "AA+" from "AAA." The downgrade
by S&P increased volatility in both stock and bond markets, resulting in higher interest rates and higher Treasury yields,
and increased the costs of all kinds of debt. Repeat occurrences of similar events could have significant
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adverse
effects on the U.S. economy generally and could result in significant adverse impacts on issuers of securities held by the Fund
itself. The Investment Adviser cannot predict the effects of similar events in the future on the U.S. economy and securities markets
or on the Fund's portfolio. The Investment Adviser monitors developments and seeks to manage the Fund's portfolio in a manner
consistent with achieving the Fund's investment objective, but there can be no assurance that it will be successful in doing so
and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments.
Significant
Holdings Risk. The Fund may invest up to 25% of its total assets in securities of a single industry; however, the Fund
does not currently focus and has no current intent to focus on any particular industry or sector. In the event the Fund should
choose to take significant positions in any particular industry or sector, the net asset value of the Fund will be more susceptible
to factors affecting those particular types of companies, which, depending on the particular industry, may include, among others:
governmental regulation; inflation; cost increases in raw materials, fuel and other operating expenses; technological innovations
that may render existing products and equipment obsolete; and increasing interest rates resulting in high interest costs on borrowings
needed for capital investment, including costs associated with compliance with environmental and other regulations. In such circumstances
the Fund's investments may be subject to greater risk and market fluctuation than a fund that had securities representing a broader
range of industries.
Value
Investing Risk. The Fund focuses its investments on the securities of companies that the Investment Adviser believes are
undervalued or inexpensive relative to other investments. These types of securities may present risks in addition to the general
risks associated with investing in common and preferred stocks. These securities generally are selected on the basis of an issuer's
fundamentals relative to current market price. Such securities are subject to the risk of mis-estimation of certain fundamental
factors. In addition, during certain time periods market dynamics may strongly favor "growth" stocks of issuers that
do not display strong fundamentals relative to market price based upon positive price momentum and other factors. Disciplined
adherence to a "value" investment mandate during such periods can result in significant underperformance relative to
overall market indices and other managed investment vehicles that pursue growth style investments and/or flexible equity style
mandates.
Selection
Risk. Different types of stocks tend to shift into and out of favor with stock market investors, depending on market and
economic conditions. The performance of funds that invest in value-style stocks may at times be better or worse than the performance
of stock funds that focus on other types of stocks or that have a broader investment style.
Merger
Arbitrage Risk. The Fund may invest in securities of companies for which a tender or exchange offer has been made or announced,
and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced. The
principal risk of such investments is that certain of such proposed transactions may be renegotiated, terminated or involve a
longer time frame than originally contemplated, in which case the Fund may realize losses. Such risk is sometimes referred to
as "merger arbitrage risk." Among the factors that affect the level of risk with respect to the completion of the transaction
are the deal spread and number of bidders, the friendliness of the buyer and seller, the strategic rationale behind the transaction,
the existence of regulatory hurdles, the level of due diligence completed on the target company and the ability of the buyer to
finance the transaction. If the spread between the purchase price and the current price of the seller's stock is small, the risk
that the transaction will not be completed may outweigh the potential return.
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If
there is very little interest by other potential buyers in the target company, the risk of loss may be higher than where there
are back-up buyers that would allow the arbitrageur to realize a similar return if the current deal falls through. Unfriendly
management of the target company or change in friendly management in the middle of a deal increases the risk that the deal will
not be completed even if the target company's board has approved the transaction and may involve the risk of litigation expense
if the target company pursues litigation in an attempt to prevent the deal from occurring. The underlying strategy behind the
deal is also a risk consideration because the less a target company will benefit from a merger or acquisition, the greater the
risk. There is also a risk that an acquiring company may back out of an announced deal if, in the process of completing its due
diligence of the target company, it discovers something undesirable about such company. In addition, merger transactions are also
subject to regulatory risk because a merger transaction often must be approved by a regulatory body or pass governmental antitrust
review. All of these factors affect the timing and likelihood that the transaction will close. Even if the Investment Adviser
selects announced deals with the goal of mitigating the risks that the transaction will fail to close, such risks may still delay
the closing of such transaction to a date later than the Fund originally anticipated, reducing the level of desired return to
the Fund.
Merger
arbitrage positions are also subject to the risk of overall market movements. To the extent that a general increase or decline
in equity values affects the stocks involved in a merger arbitrage position differently, the position may be exposed to loss.
Finally,
merger arbitrage strategies depend for success on the overall volume of global merger activity, which has historically been cyclical
in nature. During periods when merger activity is low, it may be difficult or impossible to identify opportunities for profit
or to identify a sufficient number of such opportunities to provide balance among potential merger transactions. To the extent
that the number of announced deals and corporate reorganizations decreases or the number of investors in such transactions increases,
it is possible that merger arbitrage spreads will tighten, causing the profitability of investing in such transactions to diminish,
which will in turn decrease the returns to the Fund from such investment activity.
Foreign
Securities Risk. Investments in the securities of foreign issuers involve certain considerations and risks not
ordinarily associated with investments in securities of domestic issuers and such securities may be more volatile than those
of issuers located in the United States. Foreign companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers
and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend
and interest income may be subject to withholding and other foreign taxes, which may adversely affect the net return on such
investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to
effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks
of expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets
of the Fund held in foreign countries. Dividend income the Fund receives from foreign securities may not be eligible for the
special tax treatment applicable to qualified dividend income. Moreover, certain equity investments in foreign issuers
classified as passive foreign investment companies may be subject to additional taxation risk.
There
may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially
less volume than U.S. securities markets and some foreign company securities
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are
less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected
by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign
markets also have different clearance and settlement procedures that could cause the Fund to encounter difficulties in purchasing
and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing
loss. In addition, a portfolio that includes foreign securities can expect to have a higher expense ratio because of the increased
transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities.
Investments
in foreign securities will expose the Fund to the direct or indirect consequences of political, social or economic changes in
the countries that issue the securities or in which the issuers are located. Certain countries in which the Fund may invest have
historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations,
large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty and instability. The cost of servicing external debt will generally
be adversely affected by rising international interest rates because many external debt obligations bear interest at rates which
are adjusted based upon international interest rates.
The
Fund also may purchase ADRs or U.S. dollar-denominated securities of foreign issuers. ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of foreign issuers held on deposit for use in the U.S. securities markets. While ADRs
may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks
associated with foreign securities may also apply to ADRs. In addition, the underlying issuers of certain depositary receipts,
particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications
to the holders of such receipts, or to pass through to them any voting rights with respect to the deposited securities.
The
following provides more detail on certain pronounced risks with foreign investing:
| ● | Foreign
Currency Risk. The Fund may invest in companies whose securities are denominated
or quoted in currencies other than U.S. dollars or have significant operations or markets
outside of the United States. In such instances, the Fund will be exposed to currency
risk, including the risk of fluctuations in the exchange rate between U.S. dollars (in
which the Fund's shares are denominated) and such foreign currencies, the risk of currency
devaluations and the risks of non-exchangeability and blockage. As non-U.S.
securities may be purchased with and payable in currencies of countries other than the U.S. dollar, the value of these assets
measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations.
Fluctuations in currency rates may adversely affect the ability of the Investment Adviser to acquire such securities at advantageous
prices and may also adversely affect the performance of such assets. |
Certain
non-U.S. currencies, primarily in developing countries, have been devalued in the past and might face devaluation in the future.
Currency devaluations generally have a significant and adverse impact on the devaluing country's economy in the short and intermediate
term and on the financial condition and results of companies' operations in that country. Currency devaluations may also be accompanied
by significant declines in the values and liquidity of equity and debt securities of affected governmental and private sector
entities generally. To the extent that affected companies have obligations denominated in currencies other than the devalued currency,
those companies may also have difficulty in meeting those obligations under such circumstances, which in turn
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could
have an adverse effect upon the value of the Fund's investments in such companies. There can be no assurance that current or future
developments with respect to foreign currency devaluations will not impair the Fund's investment flexibility, its ability to achieve
its investment objective or the value of certain of its foreign currency-denominated investments.
| ● | Tax
Consequences of Foreign Investing. The Fund's transactions in foreign currencies,
foreign currency-denominated debt obligations and certain foreign currency options,
futures contracts and forward contracts (and similar instruments) may give rise to ordinary
income or loss to the extent such income or loss results from fluctuations in the value
of the foreign currency concerned. This treatment could increase or decrease the Fund's
ordinary income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital. In certain cases, the Fund
may make an election to treat gain or loss attributable to certain investments as capital
gain or loss. |
| ● | EMU
and Redenomination Risk. As the European debt crisis progressed, the possibility
of one or more Eurozone countries exiting the European Monetary Union ("EMU"),
or even the collapse of the Euro as a common currency arose, creating significant volatility
at times in currency and financial markets. The effects of the collapse of the Euro or
of the exit of one or more countries from the EMU, on the U.S. and global economies and
securities markets are impossible to predict, and any such events could have a significant
adverse impact on the value and risk profile of the Fund's portfolio. Any partial or
complete dissolution of the EMU could have significant adverse effects on currency and
financial markets, and on the values of the Fund's portfolio investments. If one or more
EMU countries were to stop using the Euro as its primary currency, the Fund's investments
in such countries may be redenominated into a different or newly adopted currency. As
a result, the value of those investments could decline significantly and unpredictably.
In addition, securities or other investments that are redenominated may be subject to
foreign currency risk, liquidity risk and valuation risk to a greater extent than similar
investments currently denominated in Euros. To the extent a currency used for redenomination
purposes is not specified in respect of certain EMU-related investments, or should the
Euro cease to be used entirely, the currency in which such investments are denominated
may be unclear, making such investments particularly difficult to value or dispose of.
The Fund may incur additional expenses to the extent it is required to seek judicial
or other clarification of the denomination or value of such securities. |
| ● | Emerging
Markets Risk. The considerations noted above in "Foreign Securities Risk"
are generally intensified for investments in emerging market countries, including countries
that may be considered "frontier" markets. Emerging market countries typically
have economic and political systems that are less fully developed, and can be expected
to be less stable than those of more developed countries. Investing in securities of
companies in emerging markets may entail special risks relating to potential political
and economic instability and the risks of expropriation, nationalization, confiscation
or the imposition of restrictions on foreign investment, the lack of hedging instruments
and restrictions on repatriation of capital invested. Economies of such countries can
be subject to rapid and unpredictable rates of inflation or deflation. Emerging securities
markets are substantially smaller, less developed, less liquid and more volatile than
the major securities markets. The limited size of emerging securities markets and limited
trading volume compared to the volume of trading in U.S. securities could cause prices
to be erratic for reasons apart from factors that affect the quality of the securities.
For example, limited market size may cause prices to be unduly influenced by traders
who control large positions. Adverse publicity and |
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investors'
perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of portfolio securities, especially
in these markets. Other risks include high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; overdependence
on exports, including gold and natural resources exports, making these economies vulnerable to changes in commodity prices; overburdened
infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal systems; and less
reliable securities custodial services and settlement practices. Certain emerging markets may also face other significant internal
or external risks, including the risk of war and civil unrest. For all of these reasons, investments in emerging markets may be
considered speculative.
| ● | Eurozone
Risk. A number of countries in the EU have experienced, and may continue to experience,
severe economic and financial difficulties, increasing the risk of investing in the European
markets. In particular, many EU nations are susceptible to economic risks associated
with high levels of debt, notably due to investments in sovereign debt of countries such
as Greece, Italy, Spain, Portugal, and Ireland. As a result, financial markets in the
EU have been subject to increased volatility and declines in asset values and liquidity.
Responses to these financial problems by European governments, central banks, and others,
including austerity measures and reforms, may not work, may result in social unrest,
and may limit future growth and economic recovery or have other unintended consequences.
Further defaults or restructurings by governments and others of their debt could have
additional adverse effects on economies, financial markets, and asset valuations around
the world. Greece, Ireland, and Portugal have already received one or more "bailouts"
from other Eurozone member states, and it is unclear how much additional funding they
will require or if additional Eurozone member states will require bailouts in the future.
One or more other countries may also abandon the euro and/or withdraw from the EU, placing
its currency and banking system in jeopardy. The impact of these actions, especially
if they occur in a disorderly fashion, is not clear, but could be significant and far-reaching. |
| ● | Brexit
Risk. On January 31, 2020, the United Kingdom officially withdrew from the EU, commonly
referred to as “Brexit”. Following a transition period, the United Kingdom
and the EU signed a Trade and Cooperation Agreement (“UK/EU Trade Agreement”),
which came into full force on May 1, 2021 and set out the foundation of the economic
and legal framework for trade between the United Kingdom and the EU. As the UK/EU Trade
Agreement is a new legal framework, the implementation of the UK/EU Trade Agreement may
result in uncertainty in its application and periods of volatility in both the United
Kingdom and wider European markets. The United Kingdom’s exit from the EU is expected
to result in additional trade costs and disruptions in this trading relationship. Furthermore,
there is the possibility that either party may impose tariffs on trade in the future
in the event that regulatory standards between the EU and the UK diverge. The terms of
the future relationship may cause continued uncertainty in the global financial markets,
and adversely affect our ability, and the ability of our portfolio companies, to execute
our respective strategies and to receive attractive returns. |
In
particular, currency volatility may mean that our returns and the returns of our portfolio companies will be adversely affected
by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency hedging. Potential
declines in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the
United Kingdom’s sovereign
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credit
rating, may also have an impact on the performance of any of our portfolio companies located in the United Kingdom or Europe.
In
addition, certain European countries have recently experienced negative interest rates on certain fixed-income instruments. 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 result in heightened market volatility and may detract from the Fund's performance to the extent the Fund is
exposed to such interest rates. Among other things, these developments have adversely affected the value and exchange rate of
the euro and pound sterling, and may continue to significantly affect the economies of all EU countries, which in turn may have
a material adverse effect on the Fund's investments in such countries, other countries that depend on EU countries for significant
amounts of trade or investment, or issuers with exposure to debt issued by certain EU countries.
To
the extent the Fund has exposure to European markets or to transactions tied to the value of the euro, these events could negatively
affect the value and liquidity of the Fund's investments. All of these developments may continue to significantly affect the economies
of all EU countries, which in turn may have a material adverse effect on the Fund's investments in such countries, other countries
that depend on EU countries for significant amounts of trade or investment, or issuers with exposure to debt issued by certain
EU countries.
Smaller
Companies Investment Risk. The Fund may invest in the securities of smaller, less seasoned companies. Smaller companies
offer investment opportunities and additional risks. They may not be well known to the investing public, may not be significantly
owned by institutional investors and may not have steady earnings growth. These companies may have limited product lines and markets,
as well as shorter operating histories, less experienced management and more limited financial resources than larger companies.
In addition, the securities of such companies may be more vulnerable to adverse general market or economic developments, more
volatile in price, have wider spreads between their bid and ask prices and have significantly lower trading volumes than the securities
of larger capitalization companies. As such, securities of these smaller companies may be less liquid than those of larger companies,
and may experience greater price fluctuations than larger companies. In addition, small-cap or mid-cap company securities may
not be widely followed by investors, which may result in reduced demand.
As
a result, the purchase or sale of more than a limited number of shares of the securities of a smaller company may affect its market
price. The Investment Adviser may need a considerable amount of time to purchase or sell its positions in these securities, particularly
when other Investment Adviser-managed accounts or other investors are also seeking to purchase or sell them.
The
securities of smaller capitalization companies generally trade in lower volumes and are subject to greater and more unpredictable
price changes than larger capitalization securities or the market as a whole. In addition, smaller capitalization securities may
be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in smaller capitalization securities
requires a longer-term view.
Securities
of emerging companies may lack an active secondary market and may be subject to more abrupt or erratic price movements than securities
of larger, more established companies or stock market averages in
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general.
Competitors of certain companies, which may or may not be in the same industry, may have substantially greater financial resources
than the companies in which the Fund may invest.
Investment
Companies. The Fund may invest in the securities of other investment companies to the extent permitted by law. To the
extent the Fund invests in the common equity of investment companies, the Fund will bear its ratable share of any such investment
company's expenses, including management fees. The Fund will also remain obligated to pay management fees to the Investment Adviser
with respect to the assets invested in the securities of other investment companies. In these circumstances holders of the Fund's
common shares will be subject to duplicative investment expenses. The Fund will not purchase the securities of affiliated investment
companies.
Prepayment
Risks on Government Sponsored Mortgage-Backed Securities. The yield and maturity characteristics of government sponsored
mortgage-backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations
may generally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. Prepayment
risks include the following:
| ● | mortgage-backed
securities less potential for growth in value than conventional bonds with comparable
maturities; |
| ● | in
addition, when interest rates fall, the rate of prepayments tends to increase. During
such periods, the reinvestment of prepayment proceeds by the Fund will generally be at
lower rates than the rates that were carried by the obligations that have been prepaid; |
| ● | because
of these and other reasons, a government sponsored mortgage-backed security's total return
and maturity may be difficult to predict; and |
| ● | to
the extent that the Fund purchases government sponsored mortgage-backed securities at
a premium, prepayments may result in loss of the Fund's principal investment to the extent
of premium paid. |
Restricted
and Illiquid Securities. Unregistered securities are securities that cannot be sold publicly in the United States without
registration under the Securities Act. An illiquid investment is a security or other investment that cannot be disposed of within
seven days in the ordinary course of business at approximately the value at which the Fund has valued the investment. Unregistered
securities often can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering
registered under the Securities Act. Considerable delay could be encountered in either event and, unless otherwise contractually
provided for, the Fund's proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties
and delays associated with such transactions could result in the Fund's inability to realize a favorable price upon disposition
of unregistered securities, and at times might make disposition of such securities impossible. The Fund may be unable to sell
illiquid investments when it desires to do so, resulting in the Fund obtaining a lower price or being required to retain the investment.
Illiquid investments generally must be valued at fair value, which is inherently less precise than utilizing market values for
liquid investments, and may lead to differences between the price at which a security is valued for determining the Fund's net
asset value and the price the Fund actually receives upon sale.
Long-Term
Objective; Not a Complete Investment Program. The Fund is intended for investors seeking a high level of total return
over the long-term. The Fund is not meant to provide a vehicle for those who wish to play short-term swings in the stock market.
An investment in shares of the Fund should not be considered a
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complete
investment program. Each shareholder should take into account the Fund's investment objective as well as the shareholder's other
investments when considering an investment in the Fund.
Management
Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Investment Adviser will
apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that
these will produce the desired results.
Dependence
on Key Personnel. The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory
services with respect to the Fund's investments. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability
to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for Mr.
Gabelli in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
Market
Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as localized wars, instability,
new and ongoing pandemics (such as COVID-19), epidemics or outbreaks of infectious diseases in certain parts of the world, natural/environmental
disasters, terrorist attacks in the United States and around the world, social and political discord, debt crises sovereign debt
downgrades, increasingly strained relations between the United States and a number of foreign countries, new and continued political
unrest in various countries, the exit or potential exit of one or more countries from the EU or the EMU, continued changes in
the balance of political power among and within the branches of the U.S. government, government shutdowns, among others, may result
in market volatility, may have long term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties
in the United States and worldwide.
The
current contentious domestic political environment, as well as political and diplomatic events within the United States and abroad,
such as the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, may in the future
result in additional government shutdowns, which could have a material adverse effect on the Fund’s investments and operations.
In addition, the Fund’s ability to raise additional capital in the future through the sale of securities could be materially
affected by a government shutdown. Additional and/or prolonged U.S. government shutdowns may affect investor and consumer confidence
and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree.
While
the extreme volatility and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007
and 2008 had, until the recent coronavirus (COVID-19) outbreak, generally subsided, uncertainty and periods of volatility still
remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest
rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility,
dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Fund's performance or impair
the Fund's ability to achieve its investment objective.
The
occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Fund's portfolio.
The Fund does not know how long the securities markets may be impacted by similar events and cannot predict the effects of similar
events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market
disruptions will not have other material and adverse implications.
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As
previously discussed, Brexit has led to volatility in the financial markets of the UK and more broadly across Europe and may also
lead to weakening in consumer, corporate and financial confidence in such markets. The decision made in the British referendum
may also lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility
in the European and global markets. This mid-to long-term uncertainty may have an adverse effect on the economy generally and
on the ability of the Fund and its investments to execute its respective strategies and to receive attractive returns. In particular,
currency volatility may mean that the returns of the Fund and its investments are adversely affected by market movements and may
make it more difficult, or more expensive, for the Fund to execute prudent currency hedging policies. Potential decline in the
value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the United Kingdom's
sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the UK or
Europe. In light of the above, no definitive assessment can currently be made regarding the impact that Brexit will have on the
Fund, its investments or its organization more generally.
In
addition, the rules dealing with the U.S. federal income taxation are constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among
those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of
individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject
to "sunset" provisions, the elimination or modification of various previously allowed deductions (including substantial
limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes),
certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends
and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers,
and significant changes to the international tax rules. In addition, the Biden administration has indicated that it intends to
modify key aspects of the Code, including by increasing corporate and individual tax rates. The effect of these and other changes
is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund's shares and their indirect effect
on the value of the Fund's assets, the Fund's shares or market conditions generally.
Regulation
and Government Intervention Risk. The global financial crisis led the U.S. government and certain foreign governments
to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets
that experienced extreme volatility, and in some cases a lack of liquidity, including through direct purchases of equity and debt
securities. Federal, state and other governments and certain foreign governments and their regulatory agencies or self-regulatory
organizations may take legislative and regulatory actions that affect the regulation of the instruments in which the Fund invests,
or the issuers of such instruments, in ways that are unforeseeable. Such legislation or regulation may change the way in which
the Fund is regulated and could limit or preclude the Fund's ability to achieve its investment objective.
The
SEC and its staff are also reportedly engaged in various initiatives and reviews that seek to improve and modernize the regulatory
structure governing investment companies. These efforts appear to be focused on risk identification and controls in various areas,
including embedded leverage through the use of derivatives and other trading practices, cybersecurity, liquidity, valuation, enhanced
regulatory and public reporting requirements and the evaluation of systemic risks. Any new rules, guidance or regulatory initiatives
resulting from these efforts
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could
increase the Fund's expenses and impact its returns to shareholders or, in the extreme case, impact or limit its use of various
portfolio management strategies or techniques and adversely impact the Fund.
On
October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment companies ("Rule
18f-4"). The Fund will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented, Rule 18f-4
will impose limits on the amount of derivatives a fund can enter into, eliminate the asset segregation framework currently used
by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the
limits would result in a statutory violation and require funds whose use of derivatives is more than a limited specified exposure
amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
In
the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related
consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case
of transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation
of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk
allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the transaction.
In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as
the Fund and a large financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of
retail investors.
Changes
enacted by the current presidential administration could significantly impact the regulation of financial markets in the United
States. Areas subject to potential change, amendment or repeal include trade and foreign policy, corporate tax rates, energy and
infrastructure policies, the environment and sustainability, criminal and social justice initiatives, immigration, healthcare
and the oversight of certain federal financial regulatory agencies and the Federal Reserve. Certain of these changes can, and
have, been effectuated through executive order. For example, the current administration has taken steps to address the COVID-19
pandemic, rejoin the Paris climate accord of 2015, cancel the Keystone XL pipeline and change immigration enforcement priorities.
Other potential changes that could be pursued by the current presidential administration could include an increase in the corporate
income tax rate; changes to regulatory enforcement priorities; and spending on clean energy and infrastructure. It is not possible
to predict which, if any, of these actions will be taken or, if taken, their effect on the economy, securities markets or the
financial stability of the United States. The Fund may be affected by governmental action in ways that are not foreseeable, and
there is a possibility that such actions could have a significant adverse effect on the Fund and its ability to achieve its investment
objective.
Additional
risks arising from the differences in expressed policy preferences among the various constituencies in the branches of the U.S.
government have led in the past, and may lead in the future, to short term or prolonged policy impasses, which could, and have,
resulted in shutdowns of the U.S. federal government. U.S. federal government shutdowns, especially prolonged shutdowns, could
have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities
markets. Any of these effects could have an adverse impact on companies in the Fund's portfolios and consequently on the value
of their securities and the Fund's net asset values.
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Deflation
Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect
on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund's
portfolio.
Loans
of Portfolio Securities. Consistent with applicable regulatory requirements and the Fund's investment restrictions, the
Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable
at any time by the Fund (subject to notice provisions), and are at all times collateralized in accordance with applicable regulatory
requirements. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which will be invested in short term obligations. The
Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale.
Portfolio
Turnover Risk. The Fund's annual portfolio turnover rate may vary greatly from year to year, as well as within a given
year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher
portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne
by the Fund. High portfolio turnover may result in an increased realization of net short term capital gains by the Fund which,
when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover
may create realized capital losses. For the fiscal years ended December 31, 2020 and 2021, the portfolio turnover rate of the
Fund was 45% and 35%, respectively. The Fund anticipates that its portfolio turnover rate will generally not exceed 100%.
Legal,
Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the
Fund. For example, the regulatory and tax environment for derivative instruments in which the Fund may participate is evolving,
and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative
instruments held by the Fund and the ability of the Fund to pursue its investment strategies. Similarly, the Biden Administration
has indicated that it intends to modify key aspects of the Code, including by increasing corporate and individual tax rates. Changes
to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in the Fund.
We
cannot assure you what percentage of the distributions paid on the Fund's shares, if any, will consist of tax-advantaged qualified
dividend income or long term capital gains or what the tax rates on various types of income will be in future years.
To
qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Fund must, among other things, derive
in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at
least 90% of its "investment company taxable income." Statutory limitations on distributions on the common shares if
the Fund fails to satisfy the 1940 Act's asset coverage requirements could jeopardize the Fund's ability to meet such distribution
requirements. While the Fund presently intends to purchase or redeem notes or preferred shares, if any, to the extent necessary
in order to maintain compliance with such asset coverage requirements, there can be no assurance that such actions can be effected
in time to meet the Code requirements. If for any taxable year the Fund does not qualify as a RIC, all of its taxable income for
that year (including its net capital gain) would be subject to tax at regular corporate rates without any
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deduction
for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Fund's current
and accumulated earnings and profits.
LIBOR
Risk. The Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (“LIBOR”)
to determine payment obligations, financing terms, hedging strategies or investment value. The Fund’s investments may pay
interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund may also obtain
financing at floating rates based on LIBOR. Derivative instruments utilized by the Fund may also reference LIBOR.
In
July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the
end of 2021. LIBOR can no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling,
euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published
or are no longer be representative, and after June 30, 2023, the overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar
LIBOR settings will cease to be published or will no longer be representative. Various financial industry groups have begun planning
for the transition away from LIBOR, but there are challenges to converting certain securities and transactions to a new reference
rate (e.g., the Secured Overnight Financing Rate, which is intended to replace the U.S. dollar LIBOR). Neither the effect of the
LIBOR transition process nor its ultimate success can yet be known.
At
this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal
Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial
institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”). Given
the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many
uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the
referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition,
SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain
market acceptance could adversely affect the return on, value of and market for securities linked to such rates.
Neither
the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased
volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against, instruments whose terms
currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available
by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of
any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting
provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions
in certain existing instruments. Moreover, these alternative rate-setting provisions may not be designed for regular use in an
environment where LIBOR ceases to be published, and may be an ineffective fallback following the discontinuation of LIBOR.
In
addition, a liquid market for newly-issued instruments that use a reference rate other than LIBOR still may be developing. There
may also be challenges for the Fund to enter into hedging transactions against such
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newly-issued
instruments until a market for such hedging transactions develops. All of the aforementioned may adversely affect the Fund’s
performance or net asset value.
Legislation
Risk. At any time after the date of this Annual Report, 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 Investment 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 objective.
Reliance
on Service Providers Risk. The Fund must rely upon the performance of service providers to perform certain functions,
which may include functions that are integral to the Fund's operations and financial performance. Failure by any service provider
to carry out its obligations to the Fund in accordance with the terms of its appointment, to exercise due care and skill or to
perform its obligations to the Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse
effect on the Fund's performance and returns to shareholders. The termination of the Fund's relationship with any service provider,
or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Fund and could
have a material adverse effect on the Fund's performance and returns to shareholders.
Cyber
Security Risk. The Fund and its service providers are susceptible to cyber security risks that include, among other things,
theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial
of service attacks; unauthorized access to relevant systems, compromises to networks or devices that the Fund and its service
providers use to service the Fund’s operations; or operational disruption or failures in the physical infrastructure or
operating systems that support the Fund and its service providers. Cyber attacks are becoming increasingly common and more sophisticated,
and may be perpetrated by computer hackers, cyber-terrorists or others engaged in corporate espionage. Cyber attacks against or
security breakdowns of the Fund or its service providers may adversely impact the Fund and its stockholders, potentially resulting
in, among other things, financial losses; the inability of Fund stockholders to transact business and the Fund to process transactions;
inability to calculate the Fund’s NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational
damage, reimbursement or other compensation costs; and/or additional compliance costs. The Fund may incur additional costs for
cyber security risk management and remediation purposes. In addition, cyber security risks may also impact issuers of securities
in which the Fund invests, which may cause the Fund’s investment in such issuers to lose value. There have been a number
of recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well
as cyberattacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure
to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations
and hostile foreign governments. Although service providers typically have policies and procedures, business continuity plans
and/or risk management systems intended to identify and mitigate cyber incidents, there are inherent limitations in such plans
and systems including the possibility that certain risks have not been identified. Furthermore, the Fund cannot control the cyber
security policies, plans and systems put in place by its service providers or any other third parties whose operations may affect
the Fund or its shareholders. There can be no assurance that the Fund or its service providers will not suffer losses relating
to cyber attacks or other information security breaches in the future.
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Because
technology is consistently changing, new ways to carry out cyber attacks are always developing. Therefore, there is a chance that
some risks have not been identified or prepared for, or that an attack may not be detected, which puts limitations on the Fund’s
ability to plan for or respond to a cyber attack. In addition to deliberate cyber attacks, unintentional cyber incidents can occur,
such as the inadvertent release of confidential information by the Fund or its service providers. Like other funds and business
enterprises, the Fund and its service providers are subject to the risk of cyber incidents occurring from time to time.
Misconduct
of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Adviser or
the Fund's service providers could cause significant losses to the Fund. Employee misconduct may include binding the Fund to transactions
that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading
activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any
of the foregoing. Losses could also result from actions by the Fund's service providers, including, without limitation, failing
to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential
information, which could result in litigation or serious financial harm, including limiting the Fund's business prospects or future
marketing activities. Despite the Investment Adviser's due diligence efforts, misconduct and intentional misrepresentations may
be undetected or not fully comprehended, thereby potentially undermining the Investment Adviser's due diligence efforts. As a
result, no assurances can be given that the due diligence performed by the Investment Adviser will identify or prevent any such
misconduct.
Anti-Takeover
Provisions. The Charter and Bylaws of the Fund include provisions that could limit the ability of other entities or persons
to acquire control of the Fund or convert the Fund to an open-end fund. See "Certain Provisions of the Maryland General Corporation
Law and Our Charter and Bylaws."
Special
Risks Related to Investment in Derivative Transactions. The Fund may participate in derivative transactions. Such transactions
entail certain execution, market, liquidity, counterparty, correlation, volatility, hedging and tax risks. Participation in the
options or futures markets, in currency exchange transactions and in other derivatives transactions involves investment risks
and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Investment Adviser's prediction
of movements in the direction of the securities, foreign currency, interest rate or other referenced instruments or markets is
inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Risks
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inherent
in the use of options, swaps, foreign currency, futures contracts and options on futures contracts, securities indices and foreign
currencies include:
| ● | dependence
on the Investment Adviser's ability to predict correctly movements in the direction of
the relevant measure; |
| ● | imperfect
correlation between the price of the derivative instrument and movements in the prices
of the referenced assets; |
| ● | the
fact that skills needed to use these strategies are different from those needed to select
portfolio securities; |
| ● | the
possible absence of a liquid secondary market for any particular instrument at any time; |
| ● | the
possible need to defer closing out certain hedged positions to avoid adverse tax consequences; |
| ● | the
possible inability of the Fund to purchase or sell a security or instrument at a time
that otherwise would be favorable for it to do so, or the possible need for the Fund
to sell a security or instrument at a disadvantageous time due to a need for the Fund
to maintain "cover" or to segregate securities in connection with the hedging
techniques; and |
| ● | the
creditworthiness of counterparties. |
Options,
futures contracts, swaps contracts, and options thereon and forward contracts on securities and currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve
a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political,
legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii)
delays in the ability of the Fund to act upon economic events occurring in the foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) less trading volume. Exchanges on which options, futures, swaps and options on futures or swaps are traded
may impose limits on the positions that the Fund may take in certain circumstances.
Many
OTC derivatives are valued on the basis of dealers' pricing of these instruments. However, the price at which dealers value a
particular derivative and the price which the same dealers would actually be willing to pay for such derivative should the Fund
wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Fund's
net asset value and may materially adversely affect the Fund in situations in which the Fund is required to sell derivative instruments.
Exchange-traded derivatives and OTC derivative transactions submitted for clearing through a central counterparty have become
subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible margin requirements
mandated by the SEC or the CFTC. These regulators also have broad discretion to impose margin requirements on non-cleared OTC
derivatives. These margin requirements will increase the overall costs for the Fund.
While
hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching
between the derivative and the underlying security, and there can be no assurance that the Fund's hedging transactions will be
effective.
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Derivatives
may give rise to a form of leverage and may expose the Fund to greater risk and increase its costs. Recent legislation calls for
new regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some
time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect
the value or performance of derivatives.
Counterparty
Risk. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased
by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due
to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract
in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such
circumstances.
The
counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a
clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the
parties' performance under the contract as each party to a trade looks only to the clearing organization for performance of financial
obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will
satisfy its obligations to the Fund, or that the Fund would be able to recover the full amount of assets deposited on its behalf
with the clearing organization in the event of the default by the clearing organization or the Fund's clearing broker. In addition,
cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements
applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes
the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of
a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing
the Fund to suffer a loss. Such "counterparty risk" is accentuated for contracts with longer maturities where events
may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties.
Failure
of Futures Commission Merchants and Clearing Organizations Risk. The Fund may deposit funds required to margin open positions
in the derivative instruments subject to the CEA with a clearing broker registered as a "futures commission merchant"
("FCM"). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase
or sale of U.S. domestic futures contracts and cleared swaps from the FCM's proprietary assets. Similarly, the CEA requires each
FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale
of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts.
However, all funds and other property received by a clearing broker from its customers are held by the clearing broker on a commingled
basis in an omnibus account and may be invested by the clearing broker in certain instruments permitted under the applicable regulation.
There is a risk that assets deposited by the Fund with any swaps or futures clearing broker as margin for futures contracts may,
in certain circumstances, be used to satisfy losses of other clients of the Fund's clearing broker. In addition, the assets of
the Fund may not be fully protected in the event of the clearing broker's bankruptcy, as the Fund would be limited to recovering
only a pro rata share of all available funds segregated on behalf of the clearing broker's combined domestic customer accounts.
Similarly,
the CEA requires a clearing organization approved by the CFTC as a derivatives clearing organization to segregate all funds and
other property received from a clearing member's clients in connection with domestic
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futures,
swaps and options contracts from any funds held at the clearing organization to support the clearing member's proprietary trading.
Nevertheless, with respect to futures contracts and options on futures, a clearing organization may use assets of a non-defaulting
customer held in an omnibus account at the clearing organization to satisfy losses in that account resulting from the default
by another customer on its payment obligations that leads to the clearing member's default to the clearing organization. As a
result, in the situation of a double default by a customer of the Fund's clearing member and the clearing member itself with respect
to payment obligations on the customer's futures or options on futures, there is a risk that the Fund's assets in an omnibus account
with the clearing organization may be used to satisfy losses from the double default and that the Fund may not recover the full
amount of any such assets.
Swaps
Risk. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from
a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only
a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange.
Historically,
swap transactions have been individually negotiated non-standardized transactions entered into in OTC markets and have not been
subject to the same type of government regulation as exchange-traded instruments. However, the OTC derivatives markets have recently
become subject to comprehensive statutes and regulations. In particular, in the U.S., the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the "Dodd-Frank Act") requires that certain derivatives with U.S. persons must be executed on
a regulated market and a substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As
a result, swap transactions entered into by the Fund may become subject to various requirements applicable to swaps under the
Dodd-Frank Act, including clearing, exchange-execution, reporting and recordkeeping requirements, which may make it more difficult
and costly for the Fund to enter into swap transactions and may also render certain strategies in which the Fund might otherwise
engage impossible or so costly that they will no longer be economical to implement. Furthermore, the number of counterparties
that may be willing to enter into swap transactions with the Fund may also be limited if the swap transactions with the Fund are
subject to the swap regulation under the Dodd-Frank Act.
Swap
agreements will tend to shift the Fund's investment exposure from one type of investment to another. For example, if the Fund
agreed to pay fixed rates in exchange for floating rates while holding fixed-rate bonds, the swap would tend to decrease the Fund's
exposure to long term interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they
are used, swap agreements may increase or decrease the overall volatility of the Fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the
Fund must be prepared to make such payments when due.
The
Fund may enter into swap agreements that would calculate the obligations of the parties to the agreements on a "net"
basis. Consequently, the Fund's obligations (or rights) under a swap agreement will generally be equal
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Additional Fund Information (Continued) (Unaudited)
only
to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party
to the agreement (the "net amount"). The Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance
of liquid assets in accordance with SEC staff positions on the subject.
The
Fund's use of swap agreements may not be successful in furthering its investment objective, as the Investment Adviser may not
accurately predict whether certain types of investments are likely to produce greater returns than other investments. Moreover,
swap agreements involve the risk that the party with whom a Fund has entered into the swap will default on its obligation to pay
a Fund and the risk that a Fund will not be able to meet its obligations to pay the other party to the agreement. The Fund may
be able to eliminate its exposure under a swap agreement either by assignment or other disposition, or by entering into an offsetting
swap agreement with the same party or a similarly creditworthy party.
Forward
Foreign Currency Exchange Contracts. The Fund may enter into forward foreign currency exchange contracts to protect the
value of its portfolio against uncertainty in the level of future currency exchange rates between a particular foreign currency
and the U.S. dollar or between foreign currencies in which its securities are or may be denominated. The Fund may enter into such
contracts on a spot (i.e., cash) basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on foreign currency is an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract
at a price set on the date of the contract. Forward currency contracts (i) are traded in a market conducted directly between currency
traders (typically, commercial banks or other financial institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. The Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions.
The
dealings of the Fund in forward foreign exchange are limited to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency for another currency with respect to specific receivables
or payables of the Fund accruing in connection with the purchase and sale of its portfolio securities or its payment of distributions.
Position hedging is the purchase or sale of one forward foreign currency for another currency with respect to portfolio security
positions denominated or quoted in the foreign currency to offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of the currency relative to the U.S. dollar. In this situation, the Fund also may, for example, enter
into a forward contract to sell or purchase a different foreign currency for a fixed U.S. dollar amount where it is believed that
the U.S. dollar value of the currency to be sold or bought pursuant to the forward contract will fall or rise, as the case may
be, whenever there is a decline or increase, respectively, in the U.S. dollar value of the currency in which its portfolio securities
are denominated (this practice being referred to as a "cross-hedge").
In
hedging a specific transaction, the Fund may enter into a forward contract with respect to either the currency in which the transaction
is denominated or another currency deemed appropriate by the Investment Adviser. The amount the Fund may invest in forward currency
contracts is limited to the amount of its aggregate investments in foreign currencies.
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The
use of forward currency contracts may involve certain risks, including the failure of the counterparty to perform its obligations
under the contract, and such use may not serve as a complete hedge because of an imperfect correlation between movements in the
prices of the contracts and the prices of the currencies hedged or used for cover. The Fund will only enter into forward currency
contracts with parties which the Investment Adviser believes to be creditworthy institutions.
Under
current interpretations of the SEC and its staff under the 1940 Act, the Fund must segregate with its custodian liquid assets,
or engage in other SEC or staff approved measures, to "cover" open positions in certain types of derivative instruments.
The purpose of these requirements is to prevent the Fund from incurring excessive leverage through such instruments. In the case
of futures and forward contracts, for example, that are not required as a result of one or more contractual arrangements to settle
for cash only in an amount equal to the change in value of the contract over its term but rather may settle through physical delivery
or in the notional amount, the Fund must segregate liquid assets equal to such contract's full notional value while it has an
open long position, or equal to the market value of the contract in the case of an open short position. With respect to contracts
that the Fund is contractually obligated to settle for cash in an amount equal to the change in value of the contract, the Fund
needs to segregate liquid assets only in an amount equal to the Fund's unpaid mark to market obligation rather than the entire
notional amount. This is because the Fund's maximum potential obligation at that point in time is its net unpaid mark to market
obligation rather than the full notional amount.
Futures
Contracts and Options on Futures. Futures and options on futures entail certain risks, including but not limited to the
following: no assurance that futures contracts or options on futures can be offset at favorable prices; possible reduction of
the yield of the Fund due to the use of hedging; possible reduction in value of both the securities hedged and the hedging instrument;
possible lack of liquidity due to daily limits on price fluctuations; imperfect correlation between the contracts and the securities
being hedged; losses from investing in futures transactions that are potentially unlimited; and the segregation requirements for
such transactions.
Options
Risk. To the extent that the Fund purchases options pursuant to a hedging strategy, the Fund will be subject to the following
additional risks. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price
of the underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or
equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option.
Where
a put or call option on a particular security is purchased to hedge against price movements in that or a related security, the
price of the put or call option may move more or less than the price of the security. If restrictions on exercise are imposed,
the Fund may be unable to exercise an option it has purchased. If the Fund is unable to close out an option that it has purchased
on a security, it will have to exercise the option in order to realize any profit or the option may expire worthless.
Dodd-Frank
Act Risk. Title VII of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act)
(the “Derivatives Title”) imposed a new regulatory structure on derivatives markets, with particular emphasis on swaps
and security-based swaps (collectively “swaps”), which are subject to oversight by the CFTC and by the SEC, respectively.
The regulatory framework covers a broad range of swap market participants, including banks, non-banks, credit unions, insurance
companies, broker-dealers and investment advisers.
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Additional Fund Information (Continued) (Unaudited)
The
SEC, other U.S. regulators, and to a lesser extent the CFTC (the “Regulators”) still are in the process of adopting
regulations, making determinations and providing guidance to implement the Derivatives Title, though certain aspects of the new
regulatory structure are substantially complete. Until the Regulators complete their rulemaking efforts, the full extent to which
the Derivatives Title and the rules adopted thereunder will impact the Funds is unclear. It is possible that the continued development
of this new regulatory structure for swaps may jeopardize certain trades and/or trading strategies that may be employed by the
Fund, or at least make them more costly.
Current
regulations require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps and
index credit default swaps (together, “Covered Swaps”). Together, these new regulatory requirements change a fund’s
trading of Covered Swaps. With respect to mandatory central clearing, each Fund is now required to clear its Covered Swaps through
a clearing broker, which requires, among other things, posting initial margin and variation margin to the Fund’s clearing
broker in order to enter into and maintain positions in Covered Swaps. With respect to mandatory exchange trading, the Fund may
be required to become a participant of a type of execution platform called a swap execution facility (“SEF”) or may
be required to access the SEF through an intermediary (such as an executing broker) in order to be able to trade Covered Swaps
for a Fund. In either scenario, the Fund may incur additional legal and compliance costs and transaction fees. Just as with the
other regulatory changes imposed as a result of the implementation of the Derivatives Title, the increased costs and fees associated
with trading Covered Swaps may jeopardize certain trades and/or trading strategies that may be employed by the Fund, or at least
make them more costly.
Additionally,
the Regulators have finalized regulations with a phased implementation that may require swap dealers to collect from, and post
to, the Fund variation margin (and initial margin, if the Fund exceeds a specified exposure threshold) for uncleared derivatives
transactions in certain circumstances. U.S. federal banking regulators have also finalized regulations that would impose upon
swap dealers new capital requirements. The CFTC and SEC have adopted capital requirements for swap dealers, and the SEC has finalized
its uncleared margin rules. Such requirements may make certain types of trades and/or trading strategies more costly or impermissible.
There
may be market dislocations due to uncertainty during the implementation period of any new regulation and the Fund cannot know
how the derivatives market will adjust to new regulations. Until the Regulators complete the rulemaking process for the Derivatives
Title, it is unknown the extent to which such risks may materialize.
Special
Risks to Holders of Notes
An
investment in our notes is subject to special risks. Our notes are not likely to be listed on an exchange or automated quotation
system. We cannot assure you that any market will exist for our notes or if a market does exist, whether it will provide holders
with liquidity. Broker-dealers that maintain a secondary trading market for the notes are not required to maintain this market,
and the Fund is not required to redeem notes if an attempted secondary market sale fails because of a lack of buyers. To the extent
that our notes trade, they may trade at a price either higher or lower than their principal amount depending on interest rates,
the rating (if any) on such notes and other factors.
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Additional Fund Information (Continued) (Unaudited)
Special
Risks to Holders of Preferred Shares
Illiquidity
Prior to Exchange Listing. Prior to the offering of any additional series of preferred shares, there will be no public
market for such shares. In the event any preferred shares are issued, prior application will have been made to list such shares
on the NYSE. However, during an initial period, which is not expected to exceed 30 days after the date of initial issuance, such
shares may not be listed on any securities exchange. During such period, the underwriters may make a market in such shares, though,
they will have no obligation to do so. Consequently, an investment in such shares may be illiquid during such period.
Market
Price Fluctuation. Preferred shares may trade at a premium to or discount from liquidation preference for a variety of
reasons, including changes in interest rates.
Special
Risks to Holders of Notes and Preferred Shares
Common
Share Repurchases. Repurchases of common shares by the Fund may reduce the net asset coverage of the notes and preferred
shares, which could adversely affect their liquidity or market prices.
Common
Share Distribution Policy. In the event the Fund does not generate a total return from dividends and interest received
and net realized capital gains in an amount at least equal to the greater of its stated distribution policy or the minimum distribution
requirements of the Code in a given year, the Fund expects that it would return capital as part of its distribution. This would
decrease the asset coverage per share with respect to the Fund's notes or preferred shares, which could adversely affect their
liquidity or market prices.
For
the fiscal year ended December 31, 2021, the Fund made distributions of $0.56 per common share, none of which constituted a return
of capital. The composition of each distribution is estimated based on the earnings of the Fund as of the record date for each
distribution. The actual composition of each of the current year's distributions will be based on the Fund's investment activity
through the end of the calendar year.
Credit
Quality Ratings. The Fund may obtain credit quality ratings for its preferred shares or notes; however, it is not required
to do so and may issue preferred shares or notes without any rating. If rated, the Fund does not impose any minimum rating necessary
to issue such preferred shares or notes. In order to obtain and maintain attractive credit quality ratings for preferred shares
or borrowings, if desired, the Fund's portfolio must satisfy over-collateralization tests established by the relevant rating agencies.
These tests are more difficult to satisfy to the extent the Fund's portfolio securities are of lower credit quality, longer maturity
or not diversified by issuer and industry. These guidelines could affect portfolio decisions and may be more stringent than those
imposed by the 1940 Act. With respect to ratings (if any) of the notes or preferred shares, a rating by a ratings agency does
not eliminate or necessarily mitigate the risks of investing in our preferred shares or notes, and a rating may not fully or accurately
reflect all of the securities' credit risks. A rating does not address the liquidity or any other market risks of the securities
being rated. A rating agency could downgrade the rating of our notes or preferred shares, which may make such securities less
liquid in the secondary market. If a rating agency downgrades the rating assigned to our preferred shares or notes, we may alter
our portfolio or redeem the preferred shares or notes under certain circumstances.
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Additional Fund Information (Continued) (Unaudited)
Special
Risks of Notes to Holders of Preferred Shares
As
provided in the 1940 Act, and subject to compliance with the Fund's investment limitations, the Fund may issue notes. In the event
the Fund were to issue such securities, the Fund's obligations to pay dividends or make distributions and, upon liquidation of
the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund's obligations to make any principal
and interest payments due and owing with respect to its outstanding notes. Accordingly, the Fund's issuance of notes would have
the effect of creating special risks for the Fund's preferred shareholders that would not be present in a capital structure that
did not include such securities.
Special
Risks to Holders of Common Shares
Dilution
Risk. If the Fund determines to conduct a rights offering to subscribe for common shares, holders of common shares
may experience dilution or accretion of the aggregate net asset value of their common shares. Such dilution or accretion will
depend upon whether (i) such shareholders participate in the rights offering and (ii) the Fund's net asset value per common
share is above or below the subscription price on the expiration date of the rights offering.
Shareholders
who do not exercise their subscription rights may, at the completion of such an offering, own a smaller proportional interest
in the Fund than if they exercised their subscription rights. As a result of such an offering, a shareholder may experience dilution
in net asset value per share if the subscription price per share is below the net asset value per share on the expiration date.
If the subscription price per share is below the net asset value per share of the Fund's shares on the expiration date, a shareholder
will experience an immediate dilution of the aggregate net asset value of such shareholder's shares if the shareholder does not
participate in such an offering and the shareholder will experience a reduction in the net asset value per share of such shareholder's
shares whether or not the shareholder participates in such an offering. The Fund cannot state precisely the extent of this dilution
(if any) if the shareholder does not exercise such shareholder's subscription rights because the Fund does not know what the net
asset value per share will be when the offer expires or what proportion of the subscription rights will be exercised.
There
is also a risk that the Fund's largest shareholders, record date shareholders of more than 5% of the outstanding shares of common
stock of the Fund, may increase their percentage ownership of the Fund through the exercise of the primary subscription and over-subscription
privilege.
Leverage
Risk. The Fund currently uses financial leverage for investment purposes by issuing preferred shares and is also permitted
to use other types of financial leverage, such as through the issuance of debt securities or additional preferred shares and borrowing
from financial institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior
securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such
issuance the value of the Fund's total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt
outstanding and exceeds 200% of the amount of preferred shares and debt outstanding. As of December 31, 2021, the amount of leverage
represented approximately 22% of the Fund's assets.
The
Fund's leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objective
and policies. These include the possibility of greater loss and the likelihood of
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Additional Fund Information (Continued) (Unaudited)
higher
volatility of the net asset value of the Fund and the asset coverage for the preferred shares. Such volatility may increase the
likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares
or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous
to do so. The Fund's use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash
to redeem preferred shares or otherwise de-leverage so as to maintain required asset coverage amounts or comply with the mandatory
redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects
of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in its investment operations,
the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance of preferred shares
will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes leverage, a decline
in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions
could result in the Fund ceasing to qualify as a RIC under the Code.
Any
decline in the net asset value of the Fund's investments would be borne entirely by the holders of common shares. Therefore, if
the market value of the Fund's portfolio declines, the leverage will result in a greater decrease in net asset value to the holders
of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater
decline in the market price for the common shares. The Fund might be in danger of failing to maintain the required asset coverage
of its borrowings, notes or preferred shares or of losing its ratings on its notes or preferred shares or notes or, in an extreme
case, the Fund's current investment income might not be sufficient to meet the distribution or interest requirements on the borrowings,
preferred shares or notes. In order to counteract such an event, the Fund might need to liquidate investments in order to fund
a redemption or repayment of some or all of the borrowings, preferred shares or notes.
Preferred
Share and Note Risk. The issuance of preferred shares or notes causes the net asset value and market value of the common shares
to become more volatile. If the dividend rate on the preferred shares or the interest rate on the notes approaches the net rate
of return on the Fund's investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If
the dividend rate on the preferred shares or the interest rate on the notes plus the management fee rate of 1.00% exceeds the
net rate of return on the Fund's portfolio, the leverage will result in a lower rate of return to the holders of common shares
than if the Fund had not issued preferred shares or notes. If the Fund has insufficient investment income and gains, all or a
portion of the distributions to preferred shareholders or interest payments to note holders would come from the common shareholders'
capital. Such distributions and interest payments reduce the net assets attributable to common shareholders. The Prospectus Supplement
relating to any sale of preferred shares will set forth dividend rate on such preferred shares.
In
addition, the Fund would pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and
ongoing maintenance of the preferred shares or notes, including the advisory fees on the incremental assets attributable to the
preferred shares or notes.
Holders
of preferred shares and notes may have different interests than holders of common shares and may at times have disproportionate
influence over the Fund's affairs. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue senior securities
(which may be stock, such as preferred shares, and/
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
or
securities representing debt, such as notes) only if immediately after the issuance the value of the Fund's total assets, less
certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding (i.e., for every dollar of indebtedness
outstanding, the Fund is required to have at least three dollars of assets) and exceeds 200% of the amount of preferred shares
and debt outstanding (i.e., for every dollar in liquidation preference of preferred stock outstanding, the Fund is required to
have two dollars of assets), which is referred to as the "asset coverage" required by the 1940 Act. In the event the
Fund fails to maintain an asset coverage of 100% for any notes outstanding for certain periods of time, the 1940 Act requires
that either an event of default be declared or that the holders of such notes have the right to elect a majority of the Fund's
Directors until asset coverage recovers to 110%. In addition, holders of preferred shares, voting separately as a single class,
have the right (subject to the rights of noteholders) to elect two members of the Board at all times and in the event dividends
become two full years in arrears would have the right to elect a majority of the Directors until such arrearage is completely
eliminated. In addition, preferred shareholders have class voting rights on certain matters, including changes in fundamental
investment restrictions and conversion of the Fund to open-end status, and accordingly can veto any such changes. Further, interest
on notes will be payable when due as described in a Prospectus Supplement and if the Fund does not pay interest when due, it will
trigger an event of default and the Fund expects to be restricted from declaring dividends and making other distributions with
respect to common shares and preferred shares. Upon the occurrence and continuance of an event of default, the holders of a majority
in principal amount of a series of outstanding notes or the trustee will be able to declare the principal amount of that series
of notes immediately due and payable upon written notice to the Fund. The 1940 Act also generally restricts the Fund from declaring
distributions on, or repurchasing, common or preferred shares unless notes have an asset coverage of 300% (200% in the case of
declaring distributions on preferred shares). The Fund's common shares are structurally subordinated as to income and residual
value to any preferred shares or notes in the Fund's capital structure, in terms of priority to income and payment in liquidation.
Restrictions
imposed on the declarations and payment of dividends or other distributions to the holders of the Fund's common shares and preferred
shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund's ability to maintain its qualification
as a RIC for U.S. federal income tax purposes. While the Fund intends to redeem its preferred shares or notes to the extent necessary
to enable the Fund to distribute its income as required to maintain its qualification as a RIC under the Code, there can be no
assurance that such actions can be effected in time to meet the Code requirements.
Portfolio
Guidelines of Rating Agencies for Preferred Shares and/or Credit Facility. In order to obtain and maintain attractive credit
quality ratings for preferred shares or borrowings, the Fund must comply with investment quality, diversification and other guidelines
established by the relevant rating agencies. These guidelines could affect portfolio decisions and may be more stringent than
those imposed by the 1940 Act. In the event that a rating on the Fund's preferred shares or notes is lowered or withdrawn by the
relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred shares or notes, and
the common shares of the Fund will lose the potential benefits associated with a leveraged capital structure.
Impact
on Common Shares. Assuming that leverage will (1) be equal in amount to approximately 22% of the Fund’s total net assets
(the Fund’s average amount of outstanding financial leverage during the fiscal
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Additional Fund Information (Continued) (Unaudited)
year
ended December 31, 2021), and (2) charge interest or involve dividend payments at a projected blended annual average leverage
dividend or interest rate of 4.00%, (the average dividend rate on the Fund’s outstanding financial leverage during the fiscal
year ended December 31, 2021) then the total return generated by the Fund’s portfolio (net of estimated expenses) must exceed
approximately 0.88% of the Fund’s total net assets in order to cover such interest or dividend payments and other expenses
specifically related to leverage. Of course, these numbers are merely estimates, used for illustration. Actual dividend rates,
interest or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above. The following
table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share
total return, assuming investment portfolio total returns (comprised of net investment income of the Fund, realized gains or losses
of the Fund and changes in the value of the securities held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. These
assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns
experienced or expected to be experienced by the Fund. The table further reflects leverage representing 22% of the Fund’s
net assets (the Fund’s average amount of outstanding financial leverage during the fiscal year ended December 31, 2021),
the Fund’s current projected blended annual average leverage dividend or interest rate of 4.00% (the average dividend rate
on the Fund’s outstanding financial leverage during the fiscal year ended December 31, 2021), a base management fee at an
annual rate of 1.00% of the liquidation preference of any outstanding preferred shares and estimated annual incremental expenses
attributable to any outstanding preferred shares of 0.01% of the Fund’s net assets attributable to common shares.
Assumed Return on Portfolio
(Net of Expenses) |
(10)% |
(5)% |
0% |
5% |
10% |
Corresponding
Return to Common Shareholder |
(14.32)% |
(7.90)% |
(1.49)% |
4.92% |
11.33% |
Common
share total return is composed of two elements—the common share distributions paid by the Fund (the amount of which is largely
determined by the taxable income of the Fund (including realized gains or losses) after paying interest on any debt and/or dividends
on any preferred shares) and unrealized gains or losses on the value of the securities the Fund owns. As required by SEC rules,
the table assumes that the Fund is more likely to suffer capital losses than to enjoy total return. For example, to assume a total
return of 0% the Fund must assume that the income it receives on its investments is entirely offset by expenses and losses in
the value of those investments.
| ● | Market
Discount Risk. As described above in "—General Risks—Market Discount
Risk," common shares of closed-end funds often trade at a discount to their net
asset values and the Fund's common shares may trade at such a discount. This risk may
be greater for investors expecting to sell their common shares of the Fund soon after
completion of a public offering. The common shares of the Fund are de-signed primarily
for long term investors and investors in the shares should not view the Fund as a vehicle
for trading purposes. |
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Additional Fund Information (Continued) (Unaudited)
Special
Risk to Holders of Subscription Rights
There
is a risk that changes in market conditions may result in the underlying common or preferred shares purchasable upon exercise
of the subscription rights being less attractive to investors at the conclusion of the subscription period. This may reduce or
eliminate the value of the subscription rights. Investors who receive subscription rights may find that there is no market to
sell rights they do not wish to exercise. If investors exercise only a portion of the rights, the number of common or preferred
shares issued may be reduced, and the common or preferred shares may trade at less favorable prices than larger offerings for
similar securities.
INVESTMENT
POLICIES
Additional
Investment Policies
Unregistered
Convertible Securities and Other Illiquid Investments. As set forth in the Prospectus, the Fund is not subject to an independent
limitation on the amount it may invest in unregistered securities and other illiquid investments, including repurchase agreements
having a maturity of longer than seven days.
The
staff of the SEC has taken the position that purchased OTC options and the assets used as "cover" for written OTC options
are illiquid. The assets used as cover for OTC options written by the Fund will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the option formula exceeds the intrinsic value of the option.
When
Issued and Delayed Delivery Securities and Forward Commitments. As discussed in the Prospectus, the Fund may purchase
securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence
of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until the Investment Adviser determines that issuance
of the security is probable. At such time, the Fund will record the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the Fund will also establish a segregated account with its custodian bank
in which it will maintain cash or liquid high-grade debt securities at least equal in value to the amount of its commitments.
The Investment Adviser does not believe that the net asset value of the Fund will be adversely affected by its purchase of securities
on this basis.
Foreign
Securities. Subject to the limitations described in this Annual Report, the Fund may invest in securities of non-U.S.
issuers, which involve certain risks not associated with domestic investments.
Among
other risks, foreign markets have different clearance and settlement procedures, and in certain markets there have been times
when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions.
Delays in settlements could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses
to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
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Additional Fund Information (Continued) (Unaudited)
Frontier
Markets Risk. Frontier countries generally have smaller economies or less developed capital markets than traditional emerging
markets, and, as a result, the risks of investing in emerging market countries are magnified in frontier countries. The economies
of frontier countries are less correlated to global economic cycles than those of their more developed counterparts and their
markets have low trading volumes and the potential for extreme price volatility and illiquidity. This volatility may be further
heightened by the actions of a few major investors. For example, a substantial increase or decrease in the cash flows of mutual
funds investing in these markets could significantly affect local stock prices and, therefore, the NAV of Fund's common stock.
These factors make investing in frontier countries significantly riskier than in other countries and any one of them could cause
the NAV of the Fund's shares to decline.
Governments
of many frontier countries in which the Fund may invest may exercise substantial influence over many aspects of the private sector.
In some cases, the governments of such frontier countries may own or control certain companies. Accordingly, government actions
could have a significant effect on economic conditions in a frontier country and on market conditions, prices and yields of securities
in the Fund's portfolio. Moreover, the economies of frontier countries may be heavily dependent upon international trade and,
accordingly, have been and may continue to be, adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These
economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade.
Options.
The Fund may purchase or write call or put options on securities or indices. In the case of call options, the exercise
prices are referred to as "in-the-money," "at-the-money," and "out-of-the-money," respectively.
The Fund may write (a) in-the-money call options when Gabelli Funds, LLC (the "Investment Adviser") expects that the
price of the underlying security will remain stable or decline during the option period, (b) at-the-money call options when the
Investment Adviser expects that the price of the underlying security will remain stable, decline, or advance moderately during
the option period, and (c) out-of-the-money call options when the Investment Adviser expects that the premiums received from writing
the call option will be greater than the appreciation in the price of the underlying security above the exercise price. By writing
a call option, the Fund limits its opportunity to profit from any increase in the market value of the underlying security above
the exercise price of the option. Out-of-the-money, at-the-money, and in-the-money put options (the reverse of call options as
to the relation of exercise price to market price) may be utilized in the same market environments that such call options are
used in equivalent transactions.
Options
on Securities Indices. The Fund may purchase and sell securities index options. One effect of such transactions may be
to hedge all or part of the Fund's securities holdings against a general decline in the securities market or a segment of the
securities market. Options on securities indices are similar to options on stocks except that, rather than the right to take or
make delivery of stock at a specified price, an option on a securities index gives the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than,
in the case of a call option, or less than, in the case of a put option, the exercise price of the option.
The
Fund's successful use of options on indices depends upon its ability to predict the direction of the market and is subject to
various additional risks. The correlation between movements in the index and the price of the securities being hedged against
is imperfect and the risk from imperfect correlation increases as the composition
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
of
the Fund diverges from the composition of the relevant index. Accordingly, a decrease in the value of the securities being hedged
against may not be wholly offset by a gain on the exercise or sale of a securities index put option held by the Fund.
Options
on Foreign Currencies. Instead of purchasing or selling currency futures (as described below), the Fund may attempt to
accomplish similar objectives by purchasing put or call options on currencies or by writing put options or call options on currencies
either on exchanges or in OTC markets. A put option gives the Fund the right to sell a currency at the exercise price until the
option expires. A call option gives the Fund the right to purchase a currency at the exercise price until the option expires.
Both types of options serve to insure against adverse currency price movements in the underlying portfolio assets designated in
a given currency. The Fund's use of options on currencies will be subject to the same limitations as its use of options on securities,
described above and in the Prospectus. Currency options may be subject to position limits which may limit the ability of the Fund
to fully hedge its positions by purchasing the options.
As
in the case of interest rate futures contracts and options thereon, described below, the Fund may hedge against the risk of a
decrease or increase in the U.S. dollar value of a foreign currency denominated debt security which the Fund owns or intends to
acquire by purchasing or selling options contracts, futures contracts or options thereon with respect to a foreign currency other
than the foreign currency in which such debt security is denominated, where the values of such different currencies (vis-à-vis
the U.S. dollar) historically have a high degree of positive correlation.
Futures
Contracts and Options on Futures. The Fund may purchase and sell financial futures contracts and options thereon which
are traded on a commodities exchange or board of trade for certain hedging and risk management purposes. A financial futures contract
is an agreement to purchase or sell an agreed amount of securities or currencies at a set price for delivery in the future. These
futures contracts and related options may be on debt securities, financial indices, securities indices, U.S. government securities
and foreign currencies.
A
"sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation
to deliver the securities underlying the contract at a specified price at a specified future time. A "purchase" of a
futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the securities
underlying the contract at a specified price at a specified future time. Certain futures contracts, including stock and bond index
futures, are settled on a net cash payment basis rather than by the sale and delivery of the securities underlying the futures
contracts.
No
consideration will be paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker an amount of cash or cash equivalents equal to approximately 1% to 10% of the contract amount
(this amount is subject to change by the exchange or board of trade on which the contract is traded and brokers or members of
such board of trade may charge a higher amount). This amount is known as the "initial margin" and is in the nature of
a performance bond or good faith deposit on the contract. Subsequent payments, known as "variation margin," to and from
the broker will be made daily as the price of the index or security underlying the futures contract fluctuates. At any time prior
to the expiration of the futures contract, the Fund may elect to close the position by taking an opposite position, which will
operate to terminate its existing position in the contract.
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
An
option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time prior to the expiration of the option. Upon exercise of an option, the delivery
of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account attributable to that contract, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call option, or is less than, in the case of a put option, the exercise
price of the option on the futures contract. The potential loss related to the purchase of an option on a futures contract is
limited to the premium paid for the option (plus transaction costs). Because the value of the option purchased is fixed at the
point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in the net assets of the Fund.
Futures
and options on futures entail certain risks, including but not limited to the following: no assurance that futures contracts or
options on futures can be offset at favorable prices, possible reduction of the yield of the Fund due to the use of hedging, possible
reduction in value of both the securities hedged and the hedging instrument, possible lack of liquidity due to daily limits on
price fluctuations, imperfect correlation between the contracts and the securities being hedged, losses from investing in futures
transactions that are potentially unlimited and the segregation requirements described below.
In
the event the Fund sells a put option or enters into long futures contracts, under current interpretations of the 1940 Act, an
amount of cash, U.S. government securities or other liquid assets equal to the market value of the contract must be deposited
and maintained in a segregated account with the Fund's custodian to collateralize the positions, in order for the Fund to avoid
being treated as having issued a senior security in the amount of its obligations. For short positions in futures contracts and
sales of call options, the Fund may establish a segregated account (not with a futures commission merchant or broker) with cash,
U.S. government securities or other liquid assets that, when added to amounts deposited with a futures commission merchant or
a broker as margin, equal the market value of the instruments or currency underlying the futures contracts or call options, respectively
(but are no less than the stock price of the call option or the market price at which the short positions were established).
Contingent
Convertible Securities. One type of convertible security in which the Fund may invest is contingent convertible securities,
sometimes referred to as "CoCos." CoCos are a form of hybrid debt security issued by banking institutions that are intended
to either automatically convert into equity or have their principal written down upon the occurrence of certain "trigger
events," which may include a decline in the issuer's capital below a specified threshold level, increase in the issuer's
risk weighted assets, the share price of the issuer falling to a particular level for a certain period of time and certain regulatory
events. CoCos' unique equity conversion or principal write-down features are tailored to the issuing banking institution and its
regulatory requirements.
CoCos
are a newer form of instrument and the regulatory environment for these instruments continues to evolve. Because the market for
such securities is evolving, it is uncertain how the larger market for CoCos would react to a trigger event, coupon cancellation,
write-down of par value or coupon suspension (as described below) applicable to a single issuer. Following conversion of a CoCo,
because the common stock of the issuer may not pay a dividend, investors in such securities could experience reduced yields or
no yields at all.
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
Loss
Absorption Risk. CoCos have fully discretionary coupons. This means coupons can potentially be cancelled at the banking institution's
discretion or at the request of the relevant regulatory authority in order to help the bank absorb losses. The liquidation value
of a CoCo may be adjusted downward to below the original par value or written off entirely under certain circumstances. The write-down
of the security's par value may occur automatically and would not entitle holders to institute bankruptcy proceedings against
the issuer. In addition, an automatic write-down could result in a reduced income rate if the dividend or interest payment associated
with the security is based on the security's par value. Coupon payments may also be subject to approval by the issuer's regulator
and may be suspended in the event there are insufficient distributable reserves. Due to uncertainty surrounding coupon payments,
CoCos may be volatile and their price may decline rapidly in the event that coupon payments are suspended.
Subordinated
Instruments. CoCos will, in the majority of circumstances, be issued in the form of subordinated debt instruments in order
to provide the appropriate regulatory capital treatment prior to a conversion. Accordingly, in the event of liquidation, dissolution
or winding-up of an issuer prior to a conversion having occurred, the rights and claims of the holders of the CoCos, such as the
Fund, against the issuer in respect of or arising under the terms of the CoCos shall generally rank junior to the claims of all
holders of unsubordinated obligations of the issuer. In addition, if the CoCos are converted into the issuer's underlying equity
securities following a conversion event (i.e., a "trigger"), each holder will be subordinated due to their conversion
from being the holder of a debt instrument to being the holder of an equity instrument. Such conversion may be automatic.
Unpredictable
Market Value Fluctuate. The value of CoCos is unpredictable and will be influenced by many factors including, without limitation:
(i) the creditworthiness of the issuer and/or fluctuations in such issuer's applicable capital ratios; (ii) supply and demand
for the CoCos; (iii) general market conditions and available liquidity; and (iv) economic, financial and political events that
affect the issuer, its particular market or the financial markets in general.
Interest
Rate Futures Contracts and Options Thereon. The Fund may purchase or sell interest rate futures contracts to take advantage
of or to protect the Fund against fluctuations in interest rates affecting the value of debt securities which the Fund holds or
intends to acquire. For example, if interest rates are expected to increase, the Fund might sell futures contracts on debt securities,
the values of which historically have a high degree of positive correlation to the values of the Fund's portfolio securities.
Such a sale would have an effect similar to selling an equivalent value of the Fund's portfolio securities. If interest rates
increase, the value of the Fund's portfolio securities will decline, but the value of the futures contracts to the Fund will increase
at approximately an equivalent rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would
have. The Fund could accomplish similar results by selling debt securities with longer maturities and investing in debt securities
with shorter maturities when interest rates are expected to increase. However, since the futures market may be more liquid than
the cash market, the use of futures contracts as a risk management technique allows the Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly,
the Fund may purchase interest rate futures contracts when it is expected that interest rates may decline. The purchase of futures
contracts for this purpose constitutes a hedge against increases in the price of debt securities (caused by declining interest
rates) which the Fund intends to acquire. Since fluctuations in the value of appropriately selected futures contracts should approximate
that of the debt securities that will be purchased, the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
buying
them. Subsequently, the Fund can make its intended purchase of the debt securities in the cash market and liquidate its futures
position.
The
purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying
debt securities. As with the purchase of futures contracts, when the Fund is not fully invested it may purchase a call option
on a futures contract to hedge against a market advance due to declining interest rates.
The
purchase of a put option on a futures contract is similar to the purchase of protective put options on portfolio securities. The
Fund will purchase a put option on a futures contract to hedge the Fund's portfolio against the risk of rising interest rates
and a consequent reduction in the value of portfolio securities.
The
writing of a call option on a futures contract constitutes a partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price,
the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing
prices of the securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount of the option premium, which provides a partial
hedge against any increase in the price of debt securities that the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received. Depending
on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from options on futures it has written may to some extent be reduced or increased by changes in the
value of its portfolio securities.
Currency
Futures and Options Thereon. Generally, foreign currency futures contracts and options thereon are similar to the interest
rate futures contracts and options thereon discussed previously. By entering into currency futures and options thereon, the Fund
will seek to establish the rate at which it will be entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars it will receive at delivery for a certain amount
of a foreign currency. In this way, whenever the Fund anticipates a decline in the value of a foreign currency against the U.S.
dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or all of the securities held in its portfolio
that are denominated in that currency. By purchasing currency futures, the Fund can establish the number of dollars it will be
required to pay for a specified amount of a foreign currency in a future month. Thus, if the Fund intends to buy securities in
the future and expects the U.S. dollar to decline against the relevant foreign currency during the period before the purchase
is effected, the Fund can attempt to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The
purchase of options on currency futures will allow the Fund, for the price of the premium and related transaction costs it must
pay for the option, to decide whether or not to buy (in the case of a call option) or to sell (in the case of a put option) a
futures contract at a specified price at any time during the period before the option expires. If the Investment Adviser, in purchasing
an option, has been correct in its judgment concerning
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
the
direction in which the price of a foreign currency would move against the U.S. dollar, the Fund may exercise the option and thereby
take a futures position to hedge against the risk it had correctly anticipated or close out the option position at a gain that
will offset, to some extent, currency exchange losses otherwise suffered by the Fund. If exchange rates move in a way the Fund
did not anticipate, however, the Fund will have incurred the expense of the option without obtaining the expected benefit; any
such movement in exchange rates may also thereby reduce rather than enhance the Fund's profits on its underlying securities transactions.
Securities
Index Futures Contracts and Options Thereon. Purchases or sales of securities index futures contracts are used for hedging
purposes to attempt to protect the Fund's current or intended investments from broad fluctuations in stock or bond prices. For
example, the Fund may sell securities index futures contracts in anticipation of or during a market decline to attempt to offset
the decrease in market value of the Fund's securities portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance, it may purchase securities index futures contracts
in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions in securities index futures contracts will be closed
out. The Fund may write put and call options on securities index futures contracts for hedging purposes.
Loans
of Portfolio Securities. Consistent with applicable regulatory requirements and the Fund's investment restrictions, the
Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable
at any time by the Fund (subject to notice provisions described below), and are at all times collateralized by cash or cash equivalents,
which are to be maintained at all times in an amount equal to at least 100% of the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which will be invested in short term highly liquid obligations.
The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which
its shares are qualified for sale. The Fund's loans of portfolio securities will be collateralized in accordance with applicable
regulatory requirements, which means that "cash equivalents" accepted as collateral will be limited to securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities or irrevocable letters of credit issued by a bank (other
than the Fund's bank lending agent, if any, or a borrower of the Fund's portfolio securities or any affiliate of such bank or
borrower) which qualifies as a custodian bank for an investment company under the 1940 Act, and no loan will cause the value of
all loaned securities to exceed 20% of the value of the Fund's total assets. The Fund's ability to lend portfolio securities may
be limited by rating agency guidelines (if any).
A
loan may generally be terminated by the borrower on one business day's notice, or by the Fund at any time thereby requiring the
borrower to redeliver the borrowed securities within the normal and customary settlement time for securities transactions. If
the borrower fails to deliver the loaned securities within the normal and customary settlement time for securities transactions,
the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost
over the value of the collateral pledged by the borrower. As with any extensions of credit, there are risks of delay in recovery
and in some cases even loss of rights in the collateral should the borrower of the securities violate the terms of the loan or
fail financially.
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
However,
these loans of portfolio securities will only be made to firms deemed by the Investment Adviser to be creditworthy and when the
income which can be earned from such loans justifies the attendant risks. The Board will oversee the creditworthiness of the contracting
parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any
gain or loss in the market price during the loan period would inure to the Fund.
The
risks associated with loans of portfolio securities are substantially similar to those associated with repurchase agreements.
Thus, if the counter party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law
regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's
ability to sell the collateral and the Fund would suffer a loss. Moreover, because the Fund will reinvest any cash collateral
it receives, as described above, the Fund is subject to the risk that the value of the investments it makes will decline and result
in losses to the Fund. These losses, in extreme circumstances such as the 2007-2009 financial crisis, could be substantial and
have a significant adverse impact on the Fund and its shareholders.
When
voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the
loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved
would have a material effect on the Fund's investment in such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities, and may also pay fees to one or more securities lending agents
and/or pay other fees or rebates to borrowers.
Additional
Risks of Foreign Options, Futures Contracts, Options on Futures Contracts and Forward Contracts. Options, futures
contracts and options thereon and forward contracts on securities and currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of,
foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political,
legal and economic factors, (ii) lesser availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in the foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in
the United States and (v) lesser trading volume.
Exchanges
on which options, futures and options on futures are traded may impose limits on the positions that the Fund may take in certain
circumstances.
Repurchase
Agreements. The Fund may enter into repurchase agreements as set forth in the Prospectus. A repurchase agreement is an
instrument under which the purchaser, i.e., the Fund, acquires a debt security and the seller agrees, at the time of the sale,
to repurchase the obligation at a mutually agreed upon time and price, thereby determining the yield during the purchaser's holding
period. This results in a fixed rate of return insulated from market fluctuations during such period. The underlying securities
are ordinarily U.S. Treasury or other government obligations or high quality money market instruments. The Fund will require that
the value of such underlying securities, together with any other collateral held by the Fund, always equals or exceeds the amount
of the repurchase obligations of the counter party. The Fund's risk is primarily that, if the seller defaults,
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
the
proceeds from the disposition of the underlying securities and other collateral for the seller's obligation are less than the
repurchase price. If the seller becomes insolvent, the Fund might be delayed in or prevented from selling the collateral. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, the
Fund will experience a loss.
If
the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United
States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there
may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
Additional
Risk Relating to Derivative Investments
Special
Risk Considerations Relating to Futures and Options Thereon. The Fund's ability to establish and close out positions in
futures contracts and options thereon will be subject to the development and maintenance of liquid markets. Although the Fund
generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at
any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Fund
maintains a position, it will not be possible to effect a closing transaction in that contract or to do so at a satisfactory price
and the Fund would have to either make or take delivery under the futures contract or, in the case of a written option, wait to
sell the underlying securities until the option expires or is exercised or, in the case of a purchased option, exercise the option.
In the case of a futures contract or an option thereon which the Fund has written and which the Fund is unable to close, the Fund
would be required to maintain margin deposits on the futures contract or option thereon and to make variation margin payments
until the contract is closed.
Successful
use of futures contracts and options thereon and forward contracts by the Fund is subject to the ability of the Investment Adviser
to predict correctly movements in the direction of interest and foreign currency rates. If the Investment Adviser's expectations
are not met, the Fund will be in a worse position than if a hedging strategy had not been pursued. For example, if the Fund has
hedged against the possibility of an increase in interest rates that would adversely affect the price of securities in its portfolio
and the price of such securities increases instead, the Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell securities to meet the requirements. These sales may be,
but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.
INVESTMENT
RESTRICTIONS
Fundamental
Restrictions and Policies
The
Fund operates under the following restrictions that constitute fundamental policies under the 1940 Act and that, except as otherwise
noted, cannot be changed without the affirmative vote of the holders of a majority of the outstanding voting securities of the
Fund voting together as a single class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
the
outstanding shares are represented or (ii) more than 50% of the outstanding shares). In addition, pursuant to the Fund's Series
E Preferred Articles Supplementary, the affirmative vote of the holders of a majority of the outstanding preferred shares of the
Fund voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the preferred shares,
as a single class, represented at a meeting at which more than 50% of the Fund's outstanding preferred shares are represented
or (ii) more than 50% of the outstanding preferred shares), is also required to change a fundamental policy. Except as otherwise
noted, all percentage limitations set forth below apply immediately after a purchase or initial investment and any subsequent
change in any applicable percentage resulting from market fluctuations does not require any action. The Fund may not:
| ● | purchase
the securities of any one issuer, other than the United States government or any of its
agencies or instrumentalities, if immediately after such purchase more than 5% of the
value of its total assets would be invested in such issuer or the Fund would own more
than 10% of the outstanding voting securities of such issuer, except that up to 25%
of the value of the Fund's total assets may be invested without regard to such 5% and
10% limitations; |
| ● | purchase
or otherwise acquire real estate or interests therein, although the Fund may purchase
securities of issuers which engage in real estate operations and securities secured
by real estate or interests therein; |
| ● | purchase
or otherwise acquire or sell commodities or commodity contracts except that the Fund
may purchase or sell financial futures contracts and related options thereon; |
| ● | purchase
oil, gas or other mineral leases, rights or royalty contracts, or exploration or development
programs, except that the Fund may invest in the securities of companies which operate,
invest in, or sponsor such programs; |
| ● | purchase
securities of other investment companies, except in connection with a merger, consolidation,
reorganization or acquisition of assets, except that the Fund reserves the right to invest
up to 5% of its total assets in not more than 3% of the securities of any one investment
company including small business investment companies or invest up to 10% of its total
assets in the securities of investment companies, nor make any such investments other
than through purchases in the open market where to the best information of the Fund
no commission or profit to a sponsor or dealer (other than the customary broker's commission)
results from such purchase; |
| ● | borrow
money, except to the extent permitted by applicable law; |
| ● | issue
senior securities except to the extent permitted by applicable law; |
| ● | make
loans of money or securities, except: (a) that the Fund may engage in repurchase agreements
as set forth in the Prospectus and (b) the Fund may lend its portfolio securities consistent
with applicable regulatory requirements and as set forth in the Prospectus; |
| ● | make
short sales of securities or maintain a short position, unless at all times when a short
position is open, it either owns an equal amount of such securities or owns securities
which, without payment of |
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
any
further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities
sold short;
| ● | engage
in the underwriting of securities, except insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933, as amended, in disposing of a portfolio security; |
| ● | invest
for the purpose of exercising control or management of any other issuer; or |
| ● | invest
more than 25% of the value of its total assets in any one industry. |
If
a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a
change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing
restrictions.
The
Fund may become subject to rating agency guidelines that are more limiting than its current investment restrictions in order to
obtain and maintain a desired rating on its preferred shares, if any.
The
Fund's investment objective is a fundamental policy. Except as expressly stated above, none of the Fund's other policies is fundamental,
and each may be modified by the Board without shareholder approval.
The
1940 Act permits the Fund to borrow money in amounts of up to one-third of the Fund's total assets from banks for any purpose,
and to borrow up to 5% of the Fund's total assets from banks or other lenders for temporary purposes. The Fund's total assets
include the amounts being borrowed. To limit the risks attendant to borrowing, the 1940 Act requires the Fund to maintain at all
times an "asset coverage" of at least 300% of the amount of its borrowings. Asset coverage means the ratio that the
value of the Fund's total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the aggregate
amount of all borrowings. Borrowing money to increase portfolio holdings is known as "leveraging." Certain trading practices
and investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject
to the 1940 Act restrictions. In accordance with SEC staff guidance and interpretations, when the Fund engages in certain such
transactions, other than reverse repurchase agreements, the Fund, instead of maintaining asset coverage of at least 300%, may
segregate or earmark liquid assets, or enter into an offsetting position, in an amount at least equal to the Fund's exposure to
the transaction (as calculated pursuant to requirements of the SEC). From the outset of the transaction, in accordance with Investment
Company Act Release 10666, "Securities Trading Practices of Registered Investment Companies" (April 18, 1979), for reverse
repurchase agreements, the Fund will segregate the full amount of the Fund's actual or potential cash payment obligations that
the Fund will owe at settlement. The investment restriction regarding borrowing money, described above, will be interpreted to
permit the Fund to (a) engage in trading practices and investments that may be considered to be borrowing or to involve leverage
to the extent permitted by the 1940 Act, (b) segregate or earmark liquid assets or enter into offsetting positions in accordance
with SEC staff guidance and interpretation, (c) engage in securities lending in accordance with the SEC staff guidance and interpretations
and (d) settle securities transactions within the ordinary settlement cycle for such transactions.
The
1940 Act permits the Fund to issue senior securities (which may be stock, such as preferred shares, and/or securities representing
debt, such as notes) only if immediately after such issuance the value of the Fund's total assets, less certain ordinary course
liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares (measured by
liquidation value) and debt outstanding, which is referred to as the "asset coverage" required by the 1940 Act. The
1940 Act also generally restricts the Fund
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Gabelli Convertible and Income Securities Fund Inc.
Additional Fund Information (Continued) (Unaudited)
from
declaring cash distributions on, or repurchasing, common or preferred shares unless outstanding debt securities have an asset
coverage of 300% (200% in the case of declaring distributions on preferred shares), or from declaring cash distributions on, or
repurchasing, common shares unless preferred shares have an asset coverage of 200% (in each case, after giving effect to such
distribution or repurchase).
The Gabelli Convertible
and Income Securities Fund Inc.
Additional Fund
Information (Continued) (Unaudited)
MANAGEMENT OF THE FUND