The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation)
recognized on forward foreign currency contracts on the Statement of Operations during the current fiscal period, and the primary underlying risk exposure.
Upon execution of a futures
contract, the Fund is obligated to deposit cash or eligible securities, also known as “initial margin,” into an account at its clearing broker equal to a specified percentage of the contract amount. Cash held by the broker to cover initial
margin requirements on open futures contracts, if any, is recognized as “Cash collateral at brokers for investments in futures contracts” on the Statement of Assets and Liabilities. Investments in futures contracts obligate the Fund and
the clearing broker to settle monies on a daily basis representing changes in the prior days “mark-to-market” of the open contracts. If the Fund has unrealized appreciation the clearing broker would credit the Fund’s account with an
amount equal to appreciation and conversely if the Fund has unrealized depreciation the clearing broker would debit the Fund’s account with an amount equal to depreciation. These daily cash settlements are also known as “variation
margin.” Variation margin is recognized as a receivable and/or payable for “Variation margin on futures contracts” on the Statement of Assets and Liabilities.
During the period the futures contract is open, changes in the value of the contract are recognized as an unrealized gain or loss by “marking-to-market” on a
daily basis to reflect the changes in market value of the contract, which is recognized as a component of “Change in net unrealized appreciation (depreciation) of futures contracts” on the Statement of Operations. When the contract is
closed or expired, the Fund records a realized gain or loss equal to the difference between the value of the contract on the closing date and value of the contract when originally entered into, which is recognized as a component of “Net
realized gain (loss) from futures contracts” on the Statement of Operations.
Risks of investments in futures contracts include the possible adverse movement in
the price of the securities or indices underlying the contracts, the possibility that there may not be a liquid secondary market for the contracts and/or that a change in the value of the contract may not correlate with a change in the value of the
underlying securities or indices.
During the current fiscal period, the Fund used futures on U.S. and German interest rates as part of an overall portfolio
construction strategy to reduce interest rate sensitivity and manage yield curve exposure.
The average notional amount of futures contracts outstanding during the
current fiscal period was as follows:
The following table presents the fair value of all
futures contracts held by the Fund as of the end of the reporting period, the location of these instruments on the Statement of Assets and Liabilities and the primary underlying risk exposure.
The following table presents
the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized on futures contracts on the Statement of Operations during the current fiscal period, and the primary underlying risk exposure.
When the Fund writes an
option, an amount equal to the net premium received (the premium less commission) is recognized as a component of “Options written, at value” on the Statement of Assets and Liabilities and is subsequently adjusted to reflect the current
value of the written option until the option is exercised or expires or the Fund enters into a closing purchase transaction. The changes in the value of options written during the fiscal period are recognized as a component of “Change in net
unrealized appreciation (depreciation) of options written” on the Statement of Operations. When an option is exercised or expires or the Fund enters into a closing purchase transaction, the difference between the net premium received and any
amount paid at expiration or on executing a closing purchase transaction, including commission, is recognized as a component of “Net realized gain (loss) from options written” on the Statement of Operations. The Fund, as a writer of an
option, has no control over whether the underlying instrument may be sold (called) or purchased (put) and as a result bears the risk of an unfavorable change in the market value of the instrument underlying the written option. There is also the risk
the Fund may not be able to enter into a closing transaction because of an illiquid market.
During the current fiscal period, the Fund wrote call options to capture
upside and manage downside risk against sharp movement of securities held in the portfolio.
The average notional amount of outstanding options written during the
current fiscal period was as follows:
The following table presents the
amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized on options written on the Statement of Operations during the current fiscal period, and the primary underlying risk exposure.
Interest rate
swap contracts involve the Fund’s agreement with the counterparty to pay or receive a fixed rate payment in exchange for the counterparty receiving or paying a variable rate payment. Forward interest rate swap contracts involve the Fund’s
agreement with a counterparty to pay, in the future, a fixed or variable rate payment in exchange for the counterparty paying the Fund a variable or fixed rate payment, the accruals for which would begin at a specified date in the future (the
“effective date”).
The amount of the payment obligation for an interest rate swap is based on the notional amount and the termination date of the contract.
Interest rate swap contracts do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to the swap counterparty on such transactions is limited to the net amount of interest
payments that the Fund is to receive.
Interest rate swap contracts are valued daily. Upon entering into an interest rate swap contract
(and beginning on the effective date for a forward interest rate swap contract), the Fund accrues the fixed rate payment expected to be paid or received and the variable rate payment expected to be received or paid on the interest rate swap
contracts on a daily basis, and recognizes the daily change in the fair value of the Fund’s contractual rights and obligations under the contracts. For an OTC swap that is not cleared through a clearing house (“OTC Uncleared”), the
amount recorded on these transactions is recognized on the Statement of Assets and Liabilities as a component of “Unrealized appreciation or depreciation on interest rate swaps.”
Upon the execution of an OTC swap cleared through a clearing house (“OTC Cleared”), the Fund is obligated to deposit cash or eligible securities, also known as
“initial margin,” into an account at its clearing broker equal to a specified percentage of the contract amount. Cash deposited by the Fund to cover initial margin requirements on open swap contracts, if any, is recognized as a component
of “Cash collateral at brokers for investments in swaps” on the Statement of Assets and Liabilities. Investments in OTC Cleared swaps obligate the Fund and the clearing broker to settle monies on a daily basis representing changes in the
prior day’s “mark-to-market” of the swap contract. If the Fund has unrealized appreciation, the clearing broker will credit the Fund’s account with an amount equal to the appreciation. Conversely, if the Fund has unrealized
depreciation, the clearing broker will debit the Fund’s account with an amount equal to the depreciation. These daily cash settlements are also known as “variation margin.” Variation margin for OTC Cleared swaps is recognized as a
receivable and/or payable for “Variation margin on swap contracts” on the Statement of Assets and Liabilities. Upon the execution of an OTC Uncleared swap, neither the Fund nor the counterparty is required to deposit initial margin as the
trades are recorded bilaterally between both parties to the swap contract, and the terms of the variation margin are subject to a predetermined threshold negotiated by the Fund and the counterparty. Variation margin for OTC Uncleared swaps is
recognized as a component of “Unrealized appreciation or depreciation on interest rate swaps” as described in the preceding paragraph.
The net amount of
periodic payments settled in cash are recognized as a component of “Net realized gain (loss) from swaps” on the Statement of Operations, in addition to the net realized gain or loss recorded upon the termination of the swap contract. For
tax purposes, payments expected to be received or paid on the swap contracts are treated as ordinary income or expense, respectively. Changes in the value of the swap contracts during the fiscal period are recognized as a component of “Change
in net unrealized appreciation (depreciation) of swaps” on the Statement of Operations. In certain instances, payments are made or received upon entering into the swap contract to compensate for differences between the stated terms of the swap
agreements and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors). Payments received or made at the beginning of the measurement period, if any, are recognized as “Interest rate
swaps premiums received and/or paid” on the Statement of Assets and Liabilities.
During the current fiscal period, the Fund continued to use interest rate swap
contracts to partially hedge its future interest cost of leverage, which is through the use of bank borrowings.
The average notional amount of interest rate swap
contracts outstanding during the current fiscal period was as follows:
The following table presents the fair value of all swap contracts held by
the Fund as of the end of the reporting period, the location of these instruments on the Statement of Assets and Liabilities and the primary underlying risk exposure.
The following table
presents the swap contacts subject to netting agreements and the collateral delivered related to those swap contracts as of the end of the reporting period.
The following table presents the amount of net
realized gain (loss) and change in net unrealized appreciation (depreciation) recognized on swap contracts on the Statement of Operations during the current fiscal period, and the primary underlying risk exposure.
In the
normal course of business the Fund may invest in financial instruments and enter into financial transactions where risk of potential loss exists due to changes in the market (market risk) or failure of the other party to the transaction to perform
(counterparty credit risk). The potential loss could exceed the value of the financial assets recorded on the financial statements. Financial assets, which potentially expose the Fund to counterparty credit risk, consist principally of cash due from
counterparties on forward, option and swap transactions, when applicable. The extent of the Fund’s exposure to counterparty credit risk in respect to these financial assets approximates their carrying value as recorded on the Statement of
Assets and Liabilities.
The Fund helps manage counterparty credit risk by entering into agreements only with counterparties the Adviser believes have the financial
resources to honor their obligations and by having the Adviser monitor the financial stability of the counterparties. Additionally, counterparties may be required to pledge collateral daily (based on the daily valuation of the financial asset) on
behalf of the Fund with a value approximately equal to the amount of any unrealized gain above a pre-determined threshold. Reciprocally, when the Fund has an unrealized loss, the Fund has instructed the custodian to pledge assets of the Fund as
collateral with a value approximately equal to the amount of the unrealized loss above a pre-determined threshold. Collateral pledges are monitored and subsequently adjusted if and when the valuations fluctuate, either up or down, by at least the
pre-determined threshold amount.
The Fund intends to
distribute substantially all of its net investment company taxable income to shareholders and to otherwise comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. In any year when the
Fund realizes net capital gains, the Fund may choose to distribute all or a portion of its net capital gains to shareholders, or alternatively, to retain all or a portion of its net capital gains and pay federal corporate income taxes on such
retained gains.
For all open tax years and all major taxing jurisdictions, management of the Fund has concluded that there are no significant uncertain tax positions
that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore, management of
the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
The following information is presented on an income tax basis. Differences between amounts for financial statement and federal income tax purposes are primarily due to
recognition of premium amortization and timing differences in recognizing certain gains and losses on investment transactions. To the extent that differences arise that are permanent in nature, such amounts are reclassified within the capital
accounts as detailed below. Temporary differences do not require reclassification. Temporary and permanent differences do not impact the NAV of the Fund.
The table
below presents the cost and unrealized appreciation (depreciation) of the Fund’s investment portfolio, as determined on a federal income tax basis as of December 31, 2020.
For purposes of this disclosure, derivative tax cost is generally the sum of any upfront fees or
premiums exchanged and any amounts unrealized for income statement reporting but realized in income and/or capital gains for tax reporting. If a particular derivative category does not disclose any tax unrealized appreciation or depreciation, the
change in value of those derivatives have generally been fully realized for tax purposes.
Permanent differences, primarily
due to foreign currency transactions, distributions reallocations, investments in partnerships, investments in passive foreign investment companies, treatment of notional principal contracts, and bond premium amortization adjustments, resulted in
reclassifications among the Fund’s components of common share net assets as of December 31, 2020, the Fund’s tax year end.
The tax components of
undistributed net ordinary income and net long-term capital gains as of December 31, 2020, the Fund’s tax year end, were as follows:
The tax character of distributions paid during the Fund’s tax years ended December 31, 2020 and December 31, 2019 was designated for
purposes of the dividends paid deduction as follows:
|
|
|
|
|
|
|
2020
|
|
|
|
|
Distributions from net ordinary income1
|
|
|
$6,099,099
|
|
|
Distributions from net long-term capital gains
|
|
|
—
|
|
|
Return of capital
|
|
|
9,772,009
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
Distributions from net ordinary income¹
|
|
|
$8,740,744
|
|
|
Distributions from net long-term capital gains
|
|
|
3,953,326
|
|
|
Return of capital
|
|
|
4,476,700
|
|
|
|
|
1 Net ordinary income consists
of net taxable income derived from dividends, interest, and net short-term capital gains, if any.
|
|
As of December 31, 2020, the Fund’s tax year end, the Fund had unused capital losses carrying forward available for federal
income tax purposes to be applied against future capital gains, if any. The capital losses are not subject to expiration.
|
|
|
|
|
|
|
Not subject to expiration:
|
|
|
|
|
|
Short-Term
|
|
$
|
10,201,679
|
|
|
Long-Term
|
|
|
3,077,246
|
|
|
Total
|
|
$
|
13,278,925
|
|
7. Management Fees
The Fund’s management
fee compensates the Adviser for overall investment advisory and administrative services and general office facilities. The Sub-Advisers are compensated for their services to the Fund from the management fees paid to the Adviser.
The Fund’s management fee consists of two components – a fund-level fee, based only on the amount of assets within the Fund, and a complex-level fee, based on
the aggregate amount of all eligible fund assets managed by the Adviser. This pricing structure enables Fund shareholders to benefit from growth in the assets within the Fund as well as from growth in the amount of complex-wide assets managed by the
Adviser.
The annual fund-level fee, payable monthly, is calculated according to the following schedule:
|
|
|
|
|
|
|
Average Daily Managed Assets*
|
|
Fund-Level Fee Rate
|
|
|
For the first $500 million
|
|
|
0.7000
|
%
|
|
For the next $500 million
|
|
|
0.6750
|
|
|
For the next $500 million
|
|
|
0.6500
|
|
|
For the next $500 million
|
|
|
0.6250
|
|
|
For managed assets over $2 billion
|
|
|
0.6000
|
|
56
The annual complex-level fee, payable monthly, is
calculated by multiplying the current complex-wide fee rate, determined according to the following schedule by the Fund’s daily managed assets:
|
|
|
|
|
|
|
Complex-Level Eligible Asset Breakpoint Level*
|
|
Effective Complex-Level Fee
Rate at Breakpoint Level
|
|
|
$55 billion
|
|
|
0.2000
|
%
|
|
$56 billion
|
|
|
0.1996
|
|
|
$57 billion
|
|
|
0.1989
|
|
|
$60 billion
|
|
|
0.1961
|
|
|
$63 billion
|
|
|
0.1931
|
|
|
$66 billion
|
|
|
0.1900
|
|
|
$71 billion
|
|
|
0.1851
|
|
|
$76 billion
|
|
|
0.1806
|
|
|
$80 billion
|
|
|
0.1773
|
|
|
$91 billion
|
|
|
0.1691
|
|
|
$125 billion
|
|
|
0.1599
|
|
|
$200 billion
|
|
|
0.1505
|
|
|
$250 billion
|
|
|
0.1469
|
|
|
$300 billion
|
|
|
0.1445
|
|
|
*
|
For the complex-level fees, managed assets include closed-end fund assets managed by the Adviser that are attributable to
certain types of leverage. For these purposes, leverage includes the funds’ use of preferred stock and borrowings and certain investments in the residual interest certificates (also called inverse floating rate securities) in tender option bond
(TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed by the trust’s issuance of floating rate securities, subject to an agreement by the Adviser as to certain funds to limit the amount of such
assets for determining managed assets in certain circumstances. The complex-level fee is calculated based upon the aggregate daily managed assets of all Nuveen open-end and closed-end funds that constitute “eligible assets.” Eligible
assets do not include assets attributable to investments in other Nuveen funds or assets in excess of a determined amount (originally $2 billion) added to the Nuveen fund complex in connection with the Adviser’s assumption of the
management of the former First American Funds effective January 1, 2011, but do not included certain assets of certain Nuveen funds that were reorganized into funds advised by an affiliate of the Adviser during the 2019 calendar year. As of
December 31, 2020, the complex-level fee for the Fund was 0.1557%.
|
8. Borrowing Arrangements
Borrowing
The Fund has entered into a borrowing arrangement as a means of
leverage.
As of the end of the reporting period, the Fund has a $90,000,000 (maximum commitment amount) committed 364-day revolving line of credit
(“Borrowing”) with its custodian bank. As of the end of the reporting period, the outstanding balance on these Borrowings was $77,900,000.
Interest is
charged on the Borrowings drawn amount at a rate per annum equal to the higher of (a) one-month LIBOR rate plus 0.70% or (b) the Federal Funds Rate plus 0.70%. The Fund also accrued a 0.15% per annum commitment fee on the undrawn balance based on
the maximum commitment amount of the Borrowings to the extent the unused portion of the Borrowings is less than 50% of the maximum commitment amount, otherwise the per annum commitment fee is 0.25%.
During May 2020, the Fund renewed the Borrowings with its custodian bank through May 14, 2021. The Fund incurred a 0.10% upfront fee. All other terms remain unchanged.
During the current fiscal period, the average daily balance outstanding (which was for the entire reporting period) and average annual interest rate on these
Borrowings was $76,171,858 and 1.33%, respectively.
In order to maintain these Borrowings, the Fund must meet certain collateral, asset coverage and other
requirements. Borrowings outstanding are fully secured by assets in the Fund’s portfolio of investments.
Borrowings outstanding are recognized as
“Borrowings” on the Statement of Assets and Liabilities. Interest expense, commitment fees and the amendment fee are each recognized as a component of “Interest expense on borrowings” on the Statement of Operations.
Inter-Fund Borrowing and Lending
The SEC has granted an exemptive order
permitting registered open-end and closed-end Nuveen funds to participate in an inter-fund lending facility whereby the Nuveen funds may directly lend to and borrow money from each other for temporary purposes (e.g., to satisfy redemption requests
or when a sale of securities “fails,” resulting in an unanticipated cash shortfall) (the “Inter-Fund Program”). The closed-end Nuveen funds, including the Fund covered by this shareholder report, will participate only as lenders,
and not as borrowers, in the Inter-Fund Program because such closed-end funds rarely, if ever, need to borrow cash to meet redemptions. The Inter-Fund Program is subject to a number of conditions, including, among other things, the requirements that
(1) no fund may borrow or lend money through the Inter-Fund Program unless it receives a more favorable interest rate than is typically
57
Notes to Financial Statements (continued)
available from a bank or other financial institution for a comparable transaction; (2) no fund
may borrow on an unsecured basis through the Inter-Fund Program unless the fund’s outstanding borrowings from all sources immediately after the inter-fund borrowing total 10% or less of its total assets; provided that if the borrowing fund has
a secured borrowing outstanding from any other lender, including but not limited to another fund, the inter-fund loan must be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value; (3) if
a fund’s total outstanding borrowings immediately after an inter-fund borrowing would be greater than 10% of its total assets, the fund may borrow through the inter-fund loan on a secured basis only; (4) no fund may lend money if the loan
would cause its aggregate outstanding loans through the Inter-Fund Program to exceed 15% of its net assets at the time of the loan; (5) a fund’s inter-fund loans to any one fund shall not exceed 5% of the lending fund’s net assets;
(6) the duration of inter-fund loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days; and (7) each inter-fund loan may be called on one business day’s notice by a
lending fund and may be repaid on any day by a borrowing fund. In addition, a Nuveen fund may participate in the Inter-Fund Program only if and to the extent that such participation is consistent with the fund’s investment objective and
investment policies. The Board is responsible for overseeing the Inter-Fund Program.
The limitations detailed above and the other conditions of the SEC exemptive
order permitting the Inter-Fund Program are designed to minimize the risks associated with Inter-Fund Program for both the lending fund and the borrowing fund. However, no borrowing or lending activity is without risk. When a fund borrows money from
another fund, there is a risk that the loan could be called on one day’s notice or not renewed, in which case the fund may have to borrow from a bank at a higher rate or take other actions to payoff such loan if an inter-fund loan is not
available from another fund. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs.
During the current
reporting period, the Fund did not enter into any inter-fund loan activity.
9. Subsequent Events
Borrowing
During January 2021, the Fund increased the outstanding balance on
its borrowings to $82,900,000.
58
Shareholder Update
(Unaudited)
CURRENT INVESTMENT OBJECTIVES, INVESTMENT POLICIES AND PRINCIPAL RISKS OF THE FUND
NUVEEN DIVERSIFIED DIVIDEND AND INCOME FUND (JDD)
Investment Objectives
The Fund’s investment objectives are high current
income and total return.
In its efforts to achieve its investment objectives, the Fund utilizes equity and debt strategies focused on providing current income, total
return and reducing U.S. interest rate sensitivity. The Fund invests approximately equal proportions in 1) U.S. and foreign dividend-paying common stocks, 2) dividend paying common stocks issued by real estate companies and Real Estate
Investment Trusts (“REITs”), 3) emerging markets sovereign debt, and 4) adjustable rate senior loans.
Investment Policies
The Fund’s target weighting is approximately 50% equity and 50% debt. However, subject to the limitations noted below, the relative allocations of the Fund’s
Managed Assets for investment in equity securities and debt securities, and allocations to the different types of securities within each such asset class, will vary from time to time consistent with the Fund’s investment objectives.
Under normal conditions, the Fund expects to invest at least 40%, but no more than 70%, of its Managed Assets in equity security holdings and at least 30%, but no more
than 60%, of its Managed Assets in debt security holdings.
The Fund’s investment adviser has entered into sub-advisory
agreements with NWQ Investment Management Company, LLC (“NWQ”), Security Capital Research & Management Incorporated (“Security Capital”), Nuveen Asset Management LLC (“Nuveen Asset Management”) and Wellington
Management Company LLP (“Wellington”) (each a “Sub-Adviser” and collectively, the “Sub-Advisers”).
NWQ manages the global equity income strategy portion of the Fund consisting of a portfolio focused on income producing and dividend paying equity securities. Security
Capital manages the REIT strategy portion of the Fund consisting of a portfolio focused on dividend-paying common stock REITs. Nuveen Asset Management manages the adjustable rate senior loan strategy portion of the Fund consisting of a portfolio
focused on senior loans. Wellington manages the emerging market debt strategy portion of the Fund consisting of a portfolio focused on emerging market sovereign debt. Wellington also manages the Fund’s forward foreign currency strategy. The
Adviser is responsible for managing the Fund’s investments in swap contracts.
“Managed Assets” mean the total assets of the Fund, minus the sum of its
accrued liabilities (other than Fund liabilities incurred for the express purpose of creating leverage). Total assets for this purpose shall include assets attributable to the Fund’s use of leverage (whether or not those assets are reflected in
the Fund’s financial statements for purposes of generally accepted accounting principles), and derivatives will be valued at their market value.
The Fund has
the following principal investment policies that apply at the Fund level and various principal investment policies that apply specifically to each portion of the portfolio managed by each sub-adviser. The
following policies apply only at the time of any new investment.
Fund Level Policies
Under normal market conditions:
|
|
•
|
|
The Fund will invest at least 80% of its Managed Assets in income producing or dividend paying securities.
|
|
|
•
|
|
The Fund may invest up to 60% of its Managed Assets in non-U.S. issuers of any
currency.
|
|
|
•
|
|
The Fund intends to invest at least 15%, but no more than 40%, of its Managed Assets in common stocks of issuers (other than
REITs) that have historically paid periodic dividends or otherwise made distributions to common stockholders.
|
|
|
•
|
|
The Fund will invest at least 15%, but no more than 40%, of its Managed Assets in dividend-paying common stocks issued by
real estate companies, including REOC’s and REITs.
|
|
|
•
|
|
The Fund will invest at least 15%, but no more than 30%, of its Managed Assets in senior secured loans.
|
|
|
•
|
|
The Fund will invest at least 15%, but no more than 30%, of its Managed Assets in emerging market sovereign debt securities.
|
|
|
•
|
|
The Fund may invest up to 10% of its Managed Assets in securities that, at the time of investment, are rated below B by at
least one nationally recognized statistical rating organization (“NRSRO”) or are unrated but judged to be of comparable quality, except no more than 5% of the its Managed Assets may be invested in such securities rated below CCC by at
least one NRSRO or that are unrated but judged to be of comparable quality. This policy applies only at the Fund level and does not apply individually to any portion managed by any of the Sub-Advisers.
|
|
|
•
|
|
The Fund will not invest in inverse floating rate securities.
|
59
Shareholder Update (continued)
(Unaudited)
Global Equity Income Strategy
Under normal market conditions, NWQ will invest
its portion of Managed Assets in the global equity income strategy as follows:
|
|
•
|
|
At least 80% of the global equity income strategy is invested in equity security holdings that may include common stock,
preferred securities, convertible securities, and common and preferred securities issued by master limited partnerships (“MLPs”) and REITs of U.S. and non-U.S. issuers.
|
|
|
•
|
|
At least 65% of the global equity income strategy is invested in income-producing or dividend-paying securities.
|
|
|
•
|
|
No more than 20% of the global equity income strategy may be invested in emerging markets issuers.
|
|
|
•
|
|
No more than 20% of the global equity income strategy may be invested in convertible securities.
|
|
|
•
|
|
No more than 20% of the global equity income strategy may be invested in preferred securities.
|
|
|
•
|
|
No more than 20% of the global equity income strategy may be invested in debt.
|
REIT Strategy
Under normal market conditions, Security Capital will invest its
portion of Managed Assets in the REIT strategy as follows:
|
|
•
|
|
At least 80% of the REIT strategy is invested in common stocks issued by REITs.
|
|
|
•
|
|
No more than 20% of the REIT may be invested in any one of the following investment categories: preferred securities,
convertible securities and rights and warrants to acquire any of the foregoing, each issued by REITs.
|
Adjustable Rate Senior Loan Strategy
Under normal market conditions, Nuveen Asset Management will invest its portion of Managed Assets in the adjustable rate senior loan strategy as follows:
|
|
•
|
|
At least 80% of the adjustable rate senior loan strategy will be invested in senior secured loans, except that up to 5% may
be invested in senior unsecured loans.
|
|
|
•
|
|
No more than 20% of the adjustable rate senior loan strategy may be invested in other senior unsecured loans, domestic
corporate bonds, notes and debentures, convertible debt securities, and other similar types of corporate instruments, including high yield securities.
|
Emerging Market Debt Strategy
Under normal market conditions, Wellington will
invest its portion of Managed Assets in the emerging market debt strategy as follows:
|
|
•
|
|
At least 80% of the emerging market debt strategy will be invested in sovereign debt securities issued by issuers located,
or conducting their business, in emerging markets countries.
|
|
|
•
|
|
No more than 20% of the emerging market debt strategy may be invested may be invested in other non-U.S. sovereign debt securities and non-U.S. (including emerging market) corporate bonds, notes and debentures and other similar types of corporate instruments.
|
Approving Changes in Investment Policies
The Board of
Trustees of the Fund may change the principal policies above without a shareholder vote. However, with respect to the Fund’s policy of investing at least 80% of its Managed Assets in income producing or dividend paying securities, such policy
may not be changed without 60 days’ prior written notice to shareholders.
Portfolio Contents
The Fund generally invests in:
|
|
•
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(i)(a) dividend-paying common stocks and (b) dividend-paying common stocks issued by companies that derive at least 50%
of their revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate (or that have at least 50% of their assets invested in such real estate), commonly referred to as
“REOCs”, including REITs; and
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(ii)(a) debt securities and other instruments that are issued by, or that are related to, government, government-related and
supranational issuers located, or conducting their business, in emerging market countries and (b) senior secured loans.
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The Fund may invest in
common stocks, preferred securities, convertible securities and rights and warrants, including those issued by MLPs and REITs. A common type of real estate company, a REIT, is a company that pools investors’ funds for investment primarily in
income-producing real estate or in real
60
estate related loans (such as mortgages) or other
interests. Therefore, a REIT normally derives its income from rents or from interest payments, and may realize capital gains by selling properties that have appreciated in value. REITs generally pay relatively high dividends (as compared to other
types of companies) and the Fund intends to use these REIT dividends in an effort to meet its primary objective of high current income. An MLP is an entity, most commonly a limited partnership, that is taxed as a partnership, publicly traded
and listed on a national securities exchange.
The Fund may invest in common stocks, including common stocks issued by REITs and MLPs. Common stock generally
represents an equity ownership interest in an issuer, without preference over and with a lower priority than any other class of securities, including such issuer’s debt securities, preferred stock and other senior equity securities. Common
stocks usually carry voting rights and earn dividends. 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, as such the company may or may not pay dividends. Dividends on common stocks are declared at the discretion of the company’s board. In addition, common stock generally has the greatest appreciation and
depreciation potential because increases and decreases in earnings are usually reflected in a company’s stock price.
The Fund may invest in preferred
securities, including preferred securities issued by REITs and MLPs. Traditional preferred securities are generally equity securities of the issuer that have priority over the issuer’s common shares as to the payment of dividends (i.e.,
the issuer cannot pay dividends on its common shares until the dividends on the preferred shares are current) and as to the payout of proceeds of a bankruptcy or other liquidation, but are subordinate to an issuer’s senior debt and junior
debt as to both types of payments. Additionally, in a bankruptcy or other liquidation, traditional preferred securities are generally subordinate to an issuer’s trade creditors and other general obligations. Traditional preferred securities may
be perpetual or have a term, and typically have a fixed liquidation (or “par”) value. The term “preferred securities” also includes certain hybrid securities and other types of preferred securities that do not have the
traditional features described above.
The Fund may invest in convertible securities, which may include convertible debt, convertible preferred stock, synthetic
convertible securities and may also include secured and unsecured debt, based upon the judgment of the Fund’s Sub-Advisers. The convertible securities in which the Fund may invest also includes
convertible securities issued by REITs and MLPs. Convertible securities may pay interest or dividends that are based on a fixed or floating rate. A convertible security is a preferred stock, warrant or other security that may be converted into or
exchanged for a prescribed amount of common stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price or formula.
The Fund may also invest in rights and warrants in any of the foregoing. Rights and warrants are pure speculation in that they have no voting rights, pay no
dividends and have no rights with respect to the assets of the entity issuing them. They do not represent ownership of the securities, but only the right to buy them. The prices of rights (if traded independently) and warrants do not necessarily
move parallel to the prices of the underlying securities.
The Fund may also invest in debt securities of governmental issuers in all countries, including emerging
market countries. The Fund will classify an issuer of a security as being a U.S. or non-U.S. issuer based on the determination of an unaffiliated, recognized financial data provider. Such determinations are
based on a number of criteria, such as the issuer’s country of domicile, the primary exchange on which the security predominately trades, the location from which the majority of the issuer’s revenue comes, and the issuer’s reporting
currency. Furthermore, a country is considered to be an “emerging market” if it has a relatively low gross national product per capita compared to the world’s major economies and the potential for rapid economic growth. The Fund
considers a country an emerging market country based on the determination of an international organization, such as the IMF, or an unaffiliated, recognized financial data provider. These debt securities may include: fixed-income securities issued or
guaranteed by governments and governmental agencies or instrumentalities; fixed-income securities issued by government owned, controlled or sponsored entities; interests in entities organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness;
participations in loans between governments and financial institutions; or fixed income securities issued by supranational entities such as the World Bank or the European Economic Community. A supranational entity is a bank, commission or company
established or financially supported by the national governments of one or more countries to promote reconstruction or development.
The Fund may invest in sovereign
debt securities issued by issuers located, or conducting their business, in emerging markets countries, and a wide variety of bonds and other debt instruments of varying maturities issued by domestic and
non-U.S. corporations, including high yield debt securities.
The Fund may invest in international debt securities, including
those of emerging market issuers. These securities may be U.S. dollar denominated or non-U.S. dollar denominated and include: (a) debt obligations issued or guaranteed by foreign national, provincial,
state, municipal or other governments with taxing authority or by their agencies or instrumentalities; (b) debt obligations of supranational entities; (c) debt obligations (including U.S. dollar and
non-U.S. dollar denominated) and other fixed-income securities of foreign corporate issuers; and (d) non-U.S. dollar denominated debt obligations of U.S. corporate
issuers. The Fund may also invest in securities denominated in currencies of emerging market countries. Emerging market debt securities generally are rated in the lower rating categories of recognized credit rating agencies or are unrated and
considered to be of comparable quality to lower rated debt securities.
61
Shareholder Update (continued)
(Unaudited)
The Fund may invest in corporate debt securities, including corporate bonds. Corporate debt securities are fully taxable debt obligations issued by corporations. These
securities fund capital improvements, expansions, debt refinancing or acquisitions that require more capital than would ordinarily be available from a single lender. Investors in corporate debt securities lend money to the issuing corporation in
exchange for interest payments and repayment of the principal at a set maturity date. Rates on corporate debt securities are set according to prevailing interest rates at the time of the issue, the credit rating of the issuer, the length of the
maturity and other terms of the security, such as a call feature.
The Fund may invest in fixed and floating rate loans. Loans may include senior loans and secured
and unsecured junior loans, including subordinated loans, second lien or more junior loans and bridge loans. Loans are typically arranged through private negotiations between borrowers in the United States or in foreign or emerging markets which may
be corporate issuers or issuers of sovereign debt obligations and one or more financial institutions and other lenders.
Senior loans typically hold the most senior
position in the capital structure of a business entity, are typically secured with specific collateral and have a claim on the assets and/or stock of the issuer that is senior to that held by subordinated debt holders and stockholders of the
issuer.
Senior loans generally include: (i) senior loans made by banks or other financial institutions to U.S. and
non-U.S. corporations, partnerships and other business entities (each a “Borrower” and, collectively, “Borrowers”), (ii) assignments of such interests in senior loans, or
(iii) participation interests in senior loans. Generally, an assignment is the actual sale of the loan, in whole or in part. A participation, on the other hand, means that the original lender maintains ownership over the loan and the
participant has only a contract right against the original lender, not a credit relationship with the Borrower. Senior loans typically hold the most senior position in the capital structure of a Borrower, are typically secured with specific
collateral and have a claim on the assets and/or stock of the Borrower that is senior to that held by subordinated debt holders and stockholders of the Borrower. The capital structure of a Borrower may include senior loans, senior and junior
subordinated debt, preferred stock and common stock issued by the Borrower, typically in descending order of seniority with respect to claims on the Borrower’s assets. The proceeds of senior loans primarily are used by Borrowers to finance
leveraged buyouts, recapitalizations, mergers, acquisitions, stock repurchases, refinancings, internal growth and for other corporate purposes. A senior loan is typically originated, negotiated and structured by a U.S. or non-U.S. commercial bank, insurance company, finance company or other financial institution (“Agent”) for a lending syndicate of financial institutions which typically includes the Agent
(“Lenders”). The Agent typically administers and enforces the senior loan on behalf of the other Lenders in the syndicate. In addition, an institution, typically but not always the Agent, holds any collateral on behalf of the Lenders. The
Fund normally will rely primarily on the Agent to collect principal of and interest on a senior loan. Also, the Fund usually will rely on the Agent to monitor compliance by the Borrower with the restrictive covenants in a loan agreement.
Senior loans typically have rates of interest that are redetermined either daily, monthly, quarterly or semi-annually by reference to a base lending rate plus a premium
or credit spread. These base lending rates are primarily the London Inter-Bank Offered Rate (“LIBOR”), and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate or other base lending rates
used by commercial lenders. The base rate for senior loans after 2021 has not yet been determined with the discontinuation of LIBOR. As adjustable rate loans, the frequency of how often a senior loan resets its interest rate will impact how closely
such senior loans track current market interest rates.
The Fund’s investments will include investment grade and below investment grade securities. Below
investment grade securities (such securities are commonly referred to as “high yield” or “junk”) generally provide high income in an effort to compensate investors for their higher risk of default, which is the failure to make
required interest or principal payments.
The Fund may buy and sell securities on a when-issued or delayed delivery basis, making payment or taking delivery at a
later date, normally within 15 to 45 days of the trade date.
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that typically does not pay
interest for the entire life of the obligation or for an initial period after the issuance of the obligation.
The Fund may invest in illiquid securities (i.e.,
securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may be resold only pursuant to Rule 144A under
the Securities Act of 1933, as amended (the “1933 Act”), and repurchase agreements with maturities in excess of seven days.
The Fund may enter into certain
derivative instruments for hedging purposes, including to hedge the Fund’s exposure to foreign currency exchange rate risk in the event the Fund invests in non-U.S. denominated securities of non-U.S. issuers. Such instruments include options, including option on common stock, stock indexes, bonds and bond indexes, futures contracts, including stock index futures, bond index futures and related
instruments, structured notes, forward foreign currency contracts and similar instruments, credit derivative instruments and currency exchange transactions. The Fund may also write (sell) covered puts and call options for enhancing risk-adjusted
returns.
The Fund may also invest in securities of other open- or closed-end investment companies (including
exchange-traded funds (“ETFs”)) that invest primarily in securities of the types in which the Fund may invest directly, to the extent permitted by the Investment Company Act of 1940, as amended (the “1940 Act”), the rules and
regulations issued thereunder and applicable exemptive orders issued by the Securities and Exchange Commission (“SEC”).
62
The Fund may invest in mortgage-backed securities
(“MBS”) guaranteed by, or secured by collateral that is guaranteed by, the United States government, its agencies, instrumentalities or sponsored corporations. MBS are structured debt obligations collateralized by pools of commercial or
residential mortgages. Pools of mortgage loans and mortgage-related loans, such as mezzanine loans, are assembled into pools of assets that secure or back securities sold to investors by various governmental, government-related and private
organizations. MBS in which the Fund may invest include those with fixed, floating or variable interest rates, those with interest rates that change based on a specified index of interest rates and those with interest rates that change inversely to
changes in interest rates, as well as those that do not bear interest.
The Fund may also invest in asset-backed securities (“ABS”). ABS are securities that
are primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period. Asset-backed securitization is a financing technique
in which financial assets, in many cases themselves less liquid, are pooled and converted into instruments that may be offered and sold in the capital markets. While residential mortgages were the first financial assets to be securitized in the form
of MBS, non-mortgage related securitizations have grown to include many other types of financial assets, such as credit card receivables, auto loans and student loans.
Use of Leverage
The Fund uses leverage to pursue its investment objectives. The
Fund may use leverage to the extent permitted by the 1940 Act. The Fund may source leverage through a number of methods including borrowings, entering into reverse repurchase agreements (effectively a secured borrowing) and the issuance of preferred
shares of beneficial interest. In addition, the Fund may also use certain derivatives that have the economic effect of leverage by creating additional investment exposure. The amount and sources of leverage will vary depending on market
conditions.
Temporary Defensive Periods
During temporary defensive periods
the Fund may deviate from its investment objectives and policies, and in order to keep the Fund’s cash fully invested, the Fund may invest any percentage of its total assets in investment grade debt securities, including obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities. The Fund may not achieve its investment objectives during such periods.
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Shareholder Update (continued)
(Unaudited)
PRINCIPAL RISKS OF THE FUND
The factors that are most likely to have a
material effect on the Fund’s portfolio as a whole are called “principal risks.” The Fund is subject to the principal risks indicated below, whether through direct investment or derivative positions. The Fund may be subject to
additional risks other than those identified and described below because the types of investments made by the Fund can change over time.
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Risks of Nuveen Diversified
Dividend and Income Fund
(JDD)
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Portfolio Level Risks
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Basis Risk
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Below Investment Grade Risk
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Call Risk
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Common Stock Risk
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Convertible Securities Risk
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Credit Risk
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Credit Spread Risk
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Debt Securities Risk
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Deflation Risk
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Derivatives Risk
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Dividend-Paying Securities Risk
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Duration Risk
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Emerging Markets Risk
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Financial Futures and Options Transactions Risk
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Foreign Currency Risk
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Forward Currency Contracts Risk
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Hedging Risk
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Illiquid Investments Risk
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Income Risk
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Inflation Risk
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Interest Rate Risk
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Large-Cap Company
Risk
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Master Limited Partnerships (“MLPs”) Risk
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Mid-Cap Company
Risk
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Non-U.S. Securities
Risk
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Other Investment Companies Risk
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Preferred Securities Risk
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Real Estate Related Securities Risk
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Reinvestment Risk
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Rights and Warrants Risk
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Senior Loan Agent Risk
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Senior Loan Risk
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Sovereign Government and Supranational Debt Risk
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Swap Transactions Risk
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Unrated Securities Risk
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Valuation Risk
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64
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Risks of Nuveen Diversified
Dividend and Income Fund
(JDD)
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Fund Level and Other Risks
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Anti-Takeover Provisions
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Borrowing Risk
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Counterparty Risk
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Cybersecurity Risk
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Global Economic Risk
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Investment and Market Risk
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Legislation and Regulatory Risk
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Leverage Risk
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Market Discount from Net Asset Value
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Recent Market Conditions
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Reverse Repurchase Agreement Risk
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Tax Risk
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Portfolio Level Risks:
Basis Risk. As short-term rates change, interest income from floating rate loans may not increase in concert with increases in the costs of floating rate leverage or other
borrowings, introducing basis or imperfect hedging risk.
Below Investment Grade Risk. Securities of below investment grade quality are regarded as having speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal, and may be subject to higher price volatility
and default risk than investment grade securities of comparable terms and duration. Issuers of lower grade securities may be highly leveraged and may not have available to them more traditional methods of financing. The prices of these lower grade
securities are typically more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn. The secondary market for lower rated securities may not be as liquid as the secondary market for more
highly rated securities, a factor which may have an adverse effect on the Fund’s ability to dispose of a particular security. If a below investment grade security goes into default, or its issuer enters bankruptcy, it might be difficult to sell
that security in a timely manner at a reasonable price.
Call Risk. The Fund may
invest in securities that are subject to call risk. Such securities may be redeemed at the option of the issuer, or “called,” before their stated maturity or redemption date. In general, an issuer will call its instruments if they can be
refinanced by issuing new instruments that bear a lower interest rate. The Fund is subject to the possibility that during periods of falling interest rates, an issuer will call its high yielding securities. The Fund would then be forced to invest
the unanticipated proceeds at lower interest rates, resulting in a decline in the Fund’s income.
Common Stock
Risk. Common stocks have experienced significantly more volatility in returns and may significantly underperform relative to fixed-income securities during certain periods. An adverse event, such as an
unfavorable earnings report, may depress the value of a particular common stock held by the Fund. Also, prices of common stocks are sensitive to general movements in the stock market, and a drop in the stock market may depress the price of common
stocks to which the Fund has exposure. Common stock prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer, the general condition of the relevant stock market or the current and
expected future conditions of the broader economy, or when political or economic events affecting the issuer in particular or the stock market in general occur. In addition, common stock prices may be particularly sensitive to rising interest rates,
as the cost of capital rises and borrowing costs increase.
Convertible Securities Risk. Convertible securities have characteristics of both equity and debt securities and, as a result, are exposed to certain additional risks that are typically associated with debt, including but not limited to Interest Rate
Risk, Credit Risk, Below Investment Grade Risk and Unrated Securities Risk. The value of a convertible security is influenced by both the yield of non-convertible securities of comparable issuers and by the
value of the underlying common stock. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar credit quality. The market values of convertible
securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, the convertible security’s market value tends to reflect the market price of the common stock of the issuing company when
that stock price is greater than the convertible security’s “conversion price.” The conversion price is defined as the predetermined price at which the convertible security could be exchanged for the associated common stock. As the
market price of the underlying common stock declines, the price of the convertible security
65
Shareholder Update (continued)
(Unaudited)
tends to be influenced more by the yield of the convertible security. Thus, the convertible security may not decline in price to the same extent as the underlying common
stock. Convertible securities fall below debt obligations of the same issuer in order of preference or priority in the event of a liquidation and are typically unrated or rated lower than such debt obligations.
Credit Risk. Issuers of securities in which the Fund may invest may default on their
obligations to pay principal or interest when due. This non-payment would result in a reduction of income to the Fund, a reduction in the value of a security experiencing
non-payment and potentially a decrease in the net asset value (“NAV”) of the Fund. To the extent that the credit rating assigned to a security in the Fund’s portfolio is downgraded, the market
price and liquidity of such security may be adversely affected.
Credit Spread
Risk. Credit spread risk is the risk that credit spreads (i.e., the difference in yield between securities that is due to differences in their credit quality) may increase when the market believes that
securities generally have a greater risk of default. Increasing credit spreads may reduce the market values of the Fund’s securities. Credit spreads often increase more for lower rated and unrated securities than for investment grade
securities. In addition, when credit spreads increase, reductions in market value will generally be greater for longer-maturity securities.
Debt Securities Risk. Issuers of debt instruments in which the Fund may invest may default on their obligations to pay principal or interest when due. This non-payment would result in a reduction of income to the Fund, a reduction in the value of a debt instrument experiencing non-payment and, potentially, a decrease in the NAV
of the Fund. There can be no assurance that liquidation of collateral would satisfy the issuer’s obligation in the event of non-payment of scheduled interest or principal or that such collateral could be
readily liquidated. In the event of bankruptcy of an issuer, the Fund could experience delays or limitations with respect to its ability to realize the benefits of any collateral securing a security. To the extent that the credit rating assigned to
a security in the Fund’s portfolio is downgraded, the market price and liquidity of such security may be adversely affected.
Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time. 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.
Derivatives
Risk. The use of derivatives involves additional risks and transaction costs which could leave the Fund in a worse position than if it had not used these instruments. Derivative instruments can be used to
acquire or to transfer the risk and returns of a security or other asset without buying or selling the security or asset. These instruments may entail investment exposures that are greater than their cost would suggest. As a result, a small
investment in derivatives can result in losses that greatly exceed the original investment. Derivatives can be highly volatile, illiquid and difficult to value. An
over-the-counter derivative transaction between the Fund and a counterparty that is not cleared through a central counterparty also involves the risk that a loss may be
sustained as a result of the failure of the counterparty to the contract to make required payments. The payment obligation for a cleared derivative transaction is guaranteed by a central counterparty, which exposes the Fund to the creditworthiness
of the central counterparty.
It is possible that developments in the derivatives market, including changes in government regulation, could adversely impact
the Fund’s ability to invest in certain derivatives.
Dividend-Paying Securities
Risk. The Fund’s investment in dividend-paying stocks could cause the Fund to underperform similar funds that invest without consideration of a company’s track record of paying dividends. Stocks
of companies with a history of paying dividends may not participate in a broad market advance to the same degree as most other stocks, and a sharp rise in interest rates or economic downturn could cause a company to unexpectedly reduce or eliminate
its dividend. There is no guarantee that the issuers of the stocks held by the Fund will declare dividends in the future or that, if declared, they will remain at their current levels or increase over time. The Fund may also be harmed by changes to
the favorable federal income tax treatment generally afforded to dividends.
Duration Risk. Duration is the sensitivity, expressed in years, of the price of a fixed-income security to changes in the general level of interest rates (or yields). Securities with longer durations tend to be more sensitive to interest
rate (or yield) changes, which typically corresponds to increased volatility and risk, than securities with shorter durations. For example, if a security or portfolio has a duration of three years and interest rates increase by 1%, then the security
or portfolio would decline in value by approximately 3%. Duration differs from maturity in that it considers potential changes to interest rates, and a security’s coupon payments, yield, price and par value and call features, in addition to the
amount of time until the security matures. The duration of a security will be expected to change over time with changes in market factors and time to maturity.
Emerging Markets Risk. Risks of investing in securities of emerging markets issuers include:
smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. In
addition, foreign investors may be required to register the proceeds of sales; and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of
government monopolies. Certain emerging markets also may face other significant internal or external risks, including a heightened risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries
participate to a significant degree in their economies and securities markets, which may impair investment and economic growth, and which may in turn diminish the value of the securities in those markets. The considerations noted below in “Non-U.S. Securities Risk” are generally intensified for investments in emerging market countries.
66
Financial Futures
and Options Transactions Risk. The Fund may use certain transactions for hedging the portfolio’s exposure to credit risk and the risk of increases in interest rates, which could result in poorer
overall performance for the Fund. There may be an imperfect correlation between price movements of the futures and options and price movements of the portfolio securities being hedged.
If the Fund engages in futures transactions or in the writing of options on futures, it will be required to maintain initial margin and maintenance margin and may be
required to make daily variation margin payments in accordance with applicable rules of the exchanges and the Commodity Futures Trading Commission (“CFTC”). If the Fund purchases a financial futures contract or a call option or writes a
put option in order to hedge the anticipated purchase of securities, and if the Fund fails to complete the anticipated purchase transaction, the Fund may have a loss or a gain on the futures or options transaction that will not be offset by price
movements in the securities that were the subject of the anticipatory hedge. There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a derivatives or futures or a futures option position, and the Fund
would remain obligated to meet margin requirements until the position is closed.
Foreign Currency Risk. Because the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities held by the Fund and the unrealized
appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies, which means that the Fund’s NAV could decline as a result of changes
in the exchange rates between foreign currencies and the U.S. dollar. In addition, certain countries, particularly emerging market countries, may impose foreign currency exchange controls or other restrictions on the transferability, repatriation or
convertibility of currency.
Forward Currency Contracts Risk. Forward currency
contracts are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and “cash” trading is substantially unregulated; there is no limitation on daily
price movements and speculative position limits are not applicable. The principals who deal in the forward currency markets are not required to continue to make markets in the securities they trade and these markets can experience periods of
illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain securities or have quoted prices with an unusually wide spread between the price at
which they were prepared to buy and that at which they were prepared to sell. Market illiquidity or disruption could result in major losses to the Fund. In addition, trading forward currency contracts can have the effect of leverage by creating
additional investment exposure.
Hedging Risk. The Fund’s use of derivatives
or other transactions to reduce risk involves costs and will be subject to the investment adviser’s and/or the Sub-Advisers’ ability to predict correctly changes in the relationships of such hedge
instruments to the Fund’s portfolio holdings or other factors. No assurance can be given that the investment adviser’s and/or the Sub-Advisors’ judgment in this respect will be correct, and no
assurance can be given that the Fund will enter into hedging or other transactions at times or under circumstances in which it may be advisable to do so. Hedging activities may reduce the Fund’s opportunities for gain by offsetting the positive
effects of favorable price movements and may result in net losses.
Illiquid Investments Risk. Illiquid investments are investments that are not readily marketable and may include restricted securities, which are securities that may not be resold unless they have been registered under the 1933 Act or that can be
sold in a private transaction pursuant to an available exemption from such registration. Illiquid investments involve the risk that the investments will not be able to be sold at the time desired by the Fund or at prices approximating the value at
which the Fund is carrying the investments on its books from time to time.
Income Risk. The Fund’s income could decline due to falling market interest rates. This is because, in a falling interest rate environment, the Fund generally will have to invest the proceeds from maturing portfolio securities in
lower-yielding securities.
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. As inflation increases, the real value of the common shares and distributions can decline.
Interest Rate Risk. Interest rate risk is the risk that securities in the Fund’s
portfolio will decline in value because of changes in market interest rates. Generally, when market interest rates rise, the market value of such securities will fall, and vice versa. As interest rates decline, issuers of securities may
prepay principal earlier than scheduled, forcing the Fund to reinvest in lower-yielding securities and potentially reducing the Fund’s income. As interest rates increase, slower than expected principal payments may extend the average life of
securities, potentially locking in a below-market interest rate and reducing the Fund’s value. In typical market interest rate environments, the prices of longer-term securities generally fluctuate more than prices of shorter-term securities as
interest rates change.
Large-Cap Company Risk. While securities of large-cap companies may be less volatile than those of mid-and small-cap companies, they still involve risk. To the extent the Fund
invests in large-capitalization securities, the Fund may underperform funds that invest primarily in securities of smaller capitalization companies during periods when the securities of such companies are in favor. Large-capitalization companies may
be unable to respond as quickly as smaller capitalization companies to competitive challenges or to changes in business, product, financial or other market conditions.
Master Limited Partnerships (“MLPs”) Risk. An MLP is an investment that combines
the tax benefits of a limited partnership with the liquidity of publicly-traded securities. Entities commonly referred to as MLPs are generally organized under state law as limited partnerships or limited liability companies. An investment in MLP
units involves risks that differ from a similar investment in equity securities, such as common stock, of a corporation. Holders of MLP
67
Shareholder Update (continued)
(Unaudited)
units have the rights typically afforded to limited partners in a limited partnership. As compared to common stockholders of a corporation, holders of MLP units have
significantly more limited rights to exercise control over the partnership and to vote on matters affecting the partnership. In addition, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly,
there may be fewer protections afforded investors in an MLP than investors in a corporation. Investments held by MLPs may be relatively illiquid, limiting the MLPs’ ability to vary their portfolios promptly in response to changes in economic or
other conditions. MLPs may have limited financial resources and their securities may trade infrequently and in limited volumes and be subject to more abrupt or erratic price movements than securities of larger or more broadly-based companies. The
Fund’s investment in MLPs also subjects the Fund to the risks associated with the specific industry or industries in which the MLPs invest. Currently, most MLPs operate in the energy, natural resources or real estate sectors. Additionally,
since MLPs generally conduct business in multiple states, the Fund may be subject to income or franchise tax in each of the states in which the partnership does business. The additional cost of preparing and filing the tax returns and paying the
related taxes may adversely impact the Fund’s return on its investment in MLPs. The value of any investment by the Fund in MLP units will depend on the MLP’s ability to qualify as a partnership for U.S. federal income tax purposes. If an
MLP fails to meet the requirements for partnership status under the Code, or if the MLP is unable to do so because of changes in tax law or regulation, the MLP could be taxed as a corporation. In that case, the MLP would be obligated to pay U.S.
federal income tax at the entity level, and distributions received by the Fund would be taxed as dividend income. The Fund may also invest in debt securities issued by MLPs.
Mid-Cap Company Risk. While securities of mid-cap
companies may be slightly less volatile than those of small-cap companies, they still involve substantial risk. Mid-cap companies may have limited product lines, markets
or financial resources, and they may be dependent on a limited management group. Securities of mid-cap companies may be subject to more abrupt or erratic market movements than those of larger, more established
companies or broader market averages in general.
Non-U.S. Securities Risk.
Investments in securities of non-U.S. issuers involve special risks, including: less publicly available information about non-U.S. issuers or markets due to less
rigorous disclosure or accounting standards or regulatory practices; many non-U.S. markets are smaller, less liquid and more volatile; the economies of non-U.S.
countries may grow at slower rates than expected or may experience a downturn or recession; the impact of economic, political, social or diplomatic events; and withholding and other non-U.S. taxes may decrease
the Fund’s return. These risks are more pronounced to the extent that the Fund invests a significant amount of its assets in issuers located in one region.
Other Investment Companies Risk. The Fund may invest in the securities of other investment
companies, including ETFs. Investing in an investment company exposes the Fund to all of the risks of that investment company’s investments. The Fund, as a holder of the securities of other investment companies, will bear its pro rata
portion of the other investment companies’ expenses, including advisory fees. These expenses are in addition to the direct expenses of the Fund’s own operations. As a result, the cost of investing in investment company shares may exceed
the costs of investing directly in its underlying investments. In addition, securities of other investment companies may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities and therefore
magnify the Fund’s leverage risk.
With respect to ETF’s, an ETF that is based on a specific index may not be able to replicate and maintain exactly
the composition and relative weighting of securities in the index. The value of an ETF based on a specific index is subject to change as the values of its respective component assets fluctuate according to market volatility. ETFs typically rely on a
limited pool of authorized participants to create and redeem shares, and an active trading market for ETF shares may not develop or be maintained. The market value of shares of ETFs and closed-end funds may
differ from their NAV.
Preferred Securities Risk. Preferred securities are subordinated
to bonds and other debt instruments in a company’s capital structure, and therefore are subject to greater credit risk. In addition, preferred stockholders (such as the Fund, to the extent it invests in preferred stocks of other issuers)
generally 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 stockholders may elect a number of directors to the issuer’s
board. Generally, once all the arrearages have been paid, the preferred stockholders no longer have voting rights. In the case of certain taxable preferred stocks, holders generally have no voting rights, except (i) if the issuer fails to pay
dividends for a specified period of time or (ii) if a declaration of default occurs and is continuing. In such an event, rights of preferred stockholders generally would include the right to appoint and authorize a trustee to enforce the trust
or special purpose entity’s rights as a creditor under the agreement with its operating company. In certain varying circumstances, an issuer of preferred stock may redeem the securities prior to a specified date. For instance, for certain types
of preferred stock, a redemption may be triggered by a change in U.S. 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.
Real Estate Related Securities Risk. Real estate companies have been subject to substantial
fluctuations and declines on a local, regional and national basis in the past and may continue to be in the future. Real property values and incomes from real property may decline due to general and local economic conditions, overbuilding and
increased competition for tenants, increases in property taxes and operating expenses, changes in zoning laws, casualty or condemnation losses, regulatory limitations on rents, changes in neighborhoods and in demographics, increases in market
interest rates, or other factors. Factors such as these may adversely affect companies that own and operate real estate directly, companies that lend to them, and companies that service the real estate industry. Equity REITs may be affected by
changes in the values of and incomes from the properties they own, while mortgage REITs may be affected by the credit quality of the mortgage loans they hold. REITs are subject to other risks as well, including the fact that REITs are dependent on
68
specialized management skills, which may affect their
ability to generate cash flow for operating purposes and to make distributions to shareholders or unitholders. REITs may have limited diversification and are subject to the risks associated with obtaining financing for real property. A U.S. domestic
REIT can pass its income through to shareholders or unitholders without any U.S. federal income tax at the entity level if it complies with various requirements under the Code. There is the risk that a REIT held by the Fund will fail to qualify for
this tax-free pass-through treatment of its income, in which case the REIT would become subject to U.S. federal income tax. Similarly, REITs formed under the laws of
non-U.S. countries may fail to qualify for corporate tax benefits made available by the governments of such countries. The Fund, as a holder of a REIT, will bear its pro rata portion of the REIT’s
expenses.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund’s portfolio will decline if and when the Fund invests the proceeds from matured, traded or called securities at market interest rates that are below the portfolio’s current earnings rate. A decline in income could affect the common
shares’ market price, NAV and/or a shareholder’s overall returns.
Rights and Warrants Risk. Rights and warrants are subject to the same market risks as common stocks, but are more volatile in price. Rights and warrants do not carry the right to dividends or voting rights with respect to their underlying
securities, and they do not represent any rights in the assets of the issuer. An investment in rights or warrants may be considered speculative. In addition, the value of a right or warrant does not necessarily change with the value of the
underlying security and a right or warrant ceases to have value if it is not exercised prior to its expiration date. The purchase of warrants or rights involves the risk that the Fund could lose the purchase value of a right or warrant if the right
to subscribe for additional shares is not exercised prior to the rights’ or warrants’ expiration. Also, the purchase of rights and warrants involves the risk that the effective price paid for the right or warrant added to the subscription
price of the related security may exceed the value of the subscribed security’s market price such as when there is no movement in the price of the underlying security.
Senior Loan Agent Risk. A financial institution’s employment as an agent under a senior
loan might be terminated in the event that it fails to observe a requisite standard of care or becomes insolvent. A successor agent would generally be appointed to replace the terminated agent, and assets held by the agent under the loan agreement
would likely remain available to holders of such indebtedness. However, if assets held by the terminated agent for the benefit of the Fund were determined to be subject to the claims of the agent’s general creditors, the Fund might incur
certain costs and delays in realizing payment on a senior loan or loan participation and could suffer a loss of principal and/or interest. In situations involving other interposed financial institutions (e.g., an insurance company or government
agency) similar risks may arise.
Senior Loan Risk. Senior loans typically hold
the most senior position in the capital structure of a business entity, are typically secured with specific collateral and have a claim on the assets and/or stock of the issuer that is senior to that held by subordinated debt holders and
stockholders of the issuer. Senior loans are usually rated below investment grade, and share the same risks of other below investment grade debt instruments.
Although the Fund may invest in senior loans that are secured by specific collateral, there can be no assurance that the liquidation of such collateral would satisfy an
issuer’s obligation to the Fund in the event of issuer default or that such collateral could be readily liquidated under such circumstances. If the terms of a senior loan do not require the issuer to pledge additional collateral in the event of
a decline in the value of the already pledged collateral, the Fund will be exposed to the risk that the value of the collateral will not at all times equal or exceed the amount of the issuer’s obligations under the senior loan.
In the event of bankruptcy of an issuer, the Fund could also experience delays or limitations with respect to its ability to realize the benefits of any collateral
securing a senior loan. Some senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the senior loans to presently existing or future indebtedness of the issuer or take other
action detrimental to lenders, including the Fund. Such court action could under certain circumstances include invalidation of senior loans.
Sovereign Government and Supranational Debt Risk. Investments in sovereign debt, including supranational debt, involve special risks. Foreign governmental issuers of debt or the
governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due. In the event of default, there may be limited or no legal recourse in that, generally, remedies for defaults must
be pursued in the courts of the defaulting party. Political conditions, especially a sovereign entity’s willingness to meet the terms of its debt obligations, are of considerable significance. The ability of a foreign sovereign issuer,
especially an emerging market country, to make timely payments on its debt obligations will also be strongly influenced by the sovereign issuer’s balance of payments, including export performance, its access to international credit facilities
and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in
international prices of these commodities or imports. If a sovereign issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial
banks, and multinational organizations. The cost of servicing external debt will also generally be adversely affected by rising international interest rates, as many external debt obligations bear interest at rates which are adjusted based upon
international interest rates. Foreign investment in certain sovereign debt is restricted or controlled to varying degrees, including requiring governmental approval for the repatriation of income, capital or proceeds of sales by foreign investors.
There are no bankruptcy proceedings similar to those in the U.S. by which defaulted sovereign debt may be collected.
69
Shareholder Update (continued)
(Unaudited)
Swap Transactions Risk. The Fund may enter into derivative instruments such as credit
default swap contracts and interest rate swaps. Like most derivative instruments, the use of swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. In addition, the use of swaps requires an understanding by the adviser and/or the Sub-Advisers’ of not only the referenced asset, rate or index, but also of the swap itself. If the
investment adviser and/or the Sub-Advisers are incorrect in its forecasts of default risks, market spreads or other applicable factors or events, the investment performance of the Fund would diminish compared
with what it would have been if these techniques were not used.
Unrated Securities Risk. The Fund may purchase securities that are not rated by any rating organization. The investment adviser may, after assessing such securities’ credit quality, internally assign ratings to certain of those securities in
categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be difficult to value, which means the Fund might have difficulty selling them promptly at an acceptable price. To the extent
that the Fund invests in unrated securities, the Fund’s ability to achieve its investment objectives will be more dependent on the investment adviser’s credit analysis than would be the case when the Fund invests in rated securities.
Valuation Risk. The securities in which the Fund invests typically are valued by
a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such instruments, cash flows and transactions for comparable instruments. There
is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the Fund. Pricing services generally price securities assuming orderly transactions of an
institutional “round lot” size, but some trades may occur in smaller, “odd lot” sizes, often at lower prices than institutional round lot trades. Different pricing services may incorporate different assumptions and inputs into
their valuation methodologies, potentially resulting in different values for the same securities. As a result, if the Fund were to change pricing services, or if the Fund’s pricing service were to change its valuation methodology, there could
be a material impact, either positive or negative, on the Fund’s NAV.
Fund Level and Other Risks:
Anti-Takeover Provisions. The Fund’s organizational documents include provisions that
could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. These provisions could have the effect of depriving the common shareholders of
opportunities to sell their common shares at a premium over the then-current market price of the common shares.
Borrowing
Risk. In addition to borrowing for leverage, the Fund may borrow for temporary or emergency purposes, to pay dividends, repurchase its shares, or clear portfolio transactions. Borrowing may exaggerate
changes in the NAV of the Fund’s shares and may affect the Fund’s net income. When the Fund borrows money, it must pay interest and other fees, which will reduce the Fund’s returns if such costs exceed the returns on the portfolio
securities purchased or retained with such borrowings. Any such borrowings are intended to be temporary. However, under certain market circumstances, such borrowings might be outstanding for longer periods of time.
Counterparty Risk. Changes in the credit quality of the companies that serve as the
Fund’s counterparties with respect to derivatives or other transactions supported by another party’s credit will affect the value of those instruments. Certain entities that have served as counterparties in the markets for these
transactions have incurred or may incur in the future significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime mortgages and other lower-quality credit investments.
As a result, such hardships have reduced these entities’ capital and called into question their continued ability to perform their obligations under such transactions. By using such derivatives or other transactions, the Fund assumes the risk
that its counterparties could experience similar financial hardships. In the event of the insolvency of a counterparty, the Fund may sustain losses or be unable to liquidate a derivatives position.
Cybersecurity Risk. The Fund and its service providers are susceptible to operational and
information security risk resulting from cyber incidents. Cyber incidents refer to both intentional attacks and unintentional events including: processing errors, human errors, technical errors including computer glitches and system malfunctions,
inadequate or failed internal or external processes, market-wide technical-related disruptions, unauthorized access to digital systems (through “hacking” or malicious software coding), computer viruses, and cyber-attacks which shut down,
disable, slow or otherwise disrupt operations, business processes or website access or functionality (including denial of service attacks). Cyber incidents could adversely impact the Fund and cause the Fund to incur financial loss and expense, as
well as face exposure to regulatory penalties, reputational damage, and additional compliance costs associated with corrective measures. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.
Furthermore, the Fund cannot control the cybersecurity plans and systems put in place by its service providers or any other third parties whose operations may affect the Fund.
Global Economic Risk. National and regional economies and financial markets are becoming
increasingly interconnected, which increases the possibilities that conditions in one country, region or market might adversely impact issuers in a different country, region or market. Changes in legal, political, regulatory, tax and economic
conditions may cause fluctuations in markets and securities prices around the world, which could negatively impact the value of the Fund’s investments. Major economic or political disruptions, particularly in large economies like China’s,
may have global negative economic
70
and market repercussions. Additionally, events such
as war, terrorism, natural and environmental disasters and the spread of infectious illnesses or other public health emergencies may adversely affect the global economy and the markets and issuers in which the Fund invests. Recent examples of such
events include the outbreak of a novel coronavirus known as COVID-19 that was first detected in China in December 2019 and heightened concerns regarding North Korea’s nuclear weapons and long-range
ballistic missile programs. These events could reduce consumer demand or economic output, result in market closure, travel restrictions or quarantines, and generally have a significant impact on the economy. These events could also impair the
information technology and other operational systems upon which the Fund’s service providers, including the investment adviser and Sub-Advisers, rely, and could otherwise disrupt the ability of employees
of the Fund’s service providers to perform essential tasks on behalf of the Fund. Governmental and quasi-governmental authorities and regulators throughout the world have in the past responded to major 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 quick reversal of these policies, or the
ineffectiveness of these policies, could increase volatility in securities markets, which could adversely affect the Fund’s investments.
Investment and Market Risk. An investment in the Fund’s common shares is subject to investment risk, including the possible loss of the entire principal amount that you
invest. Common shares frequently trade at a discount to their NAV. An investment in common shares represents an indirect investment in the securities owned by the Fund. Common shares at any point in time may be worth less than your original
investment, even after taking into account the reinvestment of Fund dividends and distributions.
Legislation and Regulatory
Risk. At any time after the date of this report, legislation or additional regulations may be enacted that could negatively affect the assets of the Fund, securities held by the Fund or the issuers of such
securities. Fund shareholders may incur increased costs resulting from such legislation or additional regulation. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Fund or
will not impair the ability of the Fund to achieve its investment objectives.
The SEC recently adopted rules governing the use of derivatives by registered
investment companies, which could affect the nature and extent of derivatives used by the Fund. The full impact of such rules is uncertain at this time. It is possible that such rules, as interpreted, applied and enforced by the SEC, could limit the
implementation of the Fund’s use of derivatives, which could have an adverse impact on the Fund.
Leverage Risk. The use of leverage creates special risks for common shareholders, including potential interest rate risks and the likelihood of greater volatility of NAV and market price of, and distributions on, the common shares. The
use of leverage in a declining market will likely cause a greater decline in the Fund’s NAV, which may result at a greater decline of the common share price, than if the Fund were not to have used leverage.
The Fund will pay (and common shareholders will bear) any costs and expenses relating to the Fund’s use of leverage, which will result in a reduction in the
Fund’s NAV. The investment adviser may, based on its assessment of market conditions and composition of the Fund’s holdings, increase or decrease the amount of leverage. Such changes may impact the Fund’s distributions and the price
of the common shares in the secondary market.
The Fund may seek to refinance its leverage over time, in the ordinary course, as current forms of leverage mature or
it is otherwise desirable to refinance; however, the form that such leverage will take cannot be predicted at this time. If the Fund is unable to replace existing leverage on comparable terms, its costs of leverage will increase. Accordingly, there
is no assurance that the use of leverage may result in a higher yield or return to common shareholders.
The amount of fees paid to the investment adviser and the Sub-Advisers for investment advisory services will be higher if the Fund uses leverage because the fees will be calculated based on the Fund’s Managed Assets—this may create an incentive for the investment
adviser and the Sub-Advisers’ to leverage the Fund or increase the Fund’s leverage.
Market Discount from Net Asset Value. Shares of
closed-end investment companies like the Fund frequently trade at prices lower than their NAV. This characteristic is a risk separate and distinct from the risk that the Fund’s NAV could decrease as a
result of investment activities. Whether investors will realize gains or losses upon the sale of the common shares will depend not upon the Fund’s NAV but entirely upon whether the market price of the common shares at the time of sale is above
or below the investor’s purchase price for the common shares. Furthermore, management may have difficulty meeting the Fund’s investment objectives and managing its portfolio when the underlying securities are redeemed or sold during
periods of market turmoil and as investors’ perceptions regarding closed-end funds or their underlying investments change. Because the market price of the common shares will be determined by factors such
as relative supply of and demand for the common shares in the market, general market and economic circumstances, and other factors beyond the control of the Fund, the Fund cannot predict whether the common shares will trade at, below or above NAV.
The common shares are designed primarily for long-term investors, and you should not view the Fund as a vehicle for short-term trading purposes.
Recent Market Conditions. In response to the financial crisis and recent market events, policy and legislative changes by the United States government and the Federal Reserve to
assist in the ongoing support of financial markets, both domestically and in other countries, are changing many aspects of financial regulation. The impact of these changes on the markets, and the practical implications for market participants, may
not be fully known for some time. Withdrawal of government support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding, could adversely impact the value and liquidity of certain securities. The
severity or duration of adverse economic conditions may also be affected by policy changes made
71
Shareholder Update (continued)
(Unaudited)
by governments or quasi-governmental organizations, including changes in tax laws and the imposition of trade barriers. The impact of new financial regulation legislation
on the markets and the practical implications for market participants may not be fully known for some time. Changes to the Federal Reserve policy may affect the value, volatility and liquidity of dividend and interest paying securities. In addition,
the 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, the
threat of a federal government shutdown and threats not to increase the federal government’s debt limit, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a
significant degree.
Interest rates have been unusually low in recent years in the United States and abroad but there is consensus that interest rates will increase
during the life of the Fund, which could negatively impact the price of debt securities. Because there is little precedent for this situation, it is difficult to predict the impact of a significant rate increase on various markets.
The current political climate has intensified concerns about a potential trade war between China and the United States, as each country has recently imposed tariffs on
the other country’s products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or
large segments of China’s export industry, which could have a negative impact on the Fund’s performance.
The impact of these developments in the near- and
long-term is unknown and could have additional adverse effects on economies, financial markets and asset valuations around the world.
Reverse Repurchase Agreement Risk. A reverse repurchase agreement, in economic essence,
constitutes a securitized borrowing by the Fund from the security purchaser. The Fund may enter into reverse repurchase agreements for the purpose of creating a leveraged investment exposure and, as such, their usage involves essentially the same
risks associated with a leveraging strategy generally since the proceeds from these agreements may be invested in additional portfolio securities. Reverse repurchase agreements tend to be short-term in tenor, and there can be no assurances that the
purchaser (lender) will commit to extend or “roll” a given agreement upon its agreed-upon repurchase date or an alternative purchaser can be identified on similar terms. Reverse repurchase agreements also involve the risk that the
purchaser fails to return the securities as agreed upon, files for bankruptcy or becomes insolvent. The Fund may be restricted from taking normal portfolio actions during such time, could be subject to loss to the extent that the proceeds of the
agreement are less than the value of securities subject to the agreement and may experience adverse tax consequences.
Tax
Risk. The Fund has elected to be treated and intends to qualify each year as a Regulated Investment Company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a
RIC, the Fund is not expected to be subject to U.S. federal income tax to the extent that it distributes its investment company taxable income and net capital gains. To qualify for the special tax treatment available to a RIC, the Fund must comply
with certain investment, distribution, and diversification requirements. Under certain circumstances, the Fund may be forced to sell certain assets when it is not advantageous in order to meet these requirements, which may reduce the Fund’s
overall return. If the Fund fails to meet any of these requirements, subject to the opportunity to cure such failures under applicable provisions of the Code, the Fund’s income would be subject to a double level of U.S. federal income tax. The
Fund’s income, including its net capital gain, would first be subject to U.S. federal income tax at regular corporate rates, even if such income were distributed to shareholders and, second, all distributions by the Fund from earnings and
profits, including distributions of net capital gain (if any), would be taxable to shareholders as dividends.
72
EFFECTS OF LEVERAGE
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effects of leverage through the use of senior securities, as
that term is defined under Section 18 of the 1940 Act, as well as certain other forms of leverage, such as reverse repurchase agreements, on common share total return, assuming investment portfolio total returns (consisting of income and
changes in the value of investments held in the Fund’s portfolio) of -10%, -5%, 0%, 5% and 10%. The table below reflects the Fund’s (i) continued use of
leverage as of December 31, 2020 as a percentage of Managed Assets (including assets attributable to such leverage), (ii) the estimated annual effective interest expense rate payable by the Fund on such instruments (based on actual leverage
costs incurred during the fiscal year ended December 31, 2020) as set forth in the table, and (iii) the annual return that the Fund’s portfolio must experience (net of expenses) in order to cover such costs of leverage based on such
estimated annual effective interest expense rate. The information below does not reflect the Fund’s use of certain other forms of economic leverage achieved through the use of other instruments or transactions not considered to be senior
securities under the 1940 Act, such as certain derivative instruments.
The numbers are merely estimates, used for illustration. The costs of leverage may vary
frequently and may be significantly higher or lower than the estimated rate. The assumed investment portfolio returns in the table below are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or
expected to be experienced by the Fund. Your actual returns may be greater or less than those appearing below.
|
|
|
|
|
|
|
|
|
Nuveen Diversified
Dividend and
Income Fund
(JDD)
|
|
|
|
|
|
Estimated Leverage as a Percentage of Managed Assets (Including
Assets Attributable to Leverage)
|
|
|
28.02
|
%
|
|
Estimated Annual Effective Leverage Expense Rate Payable by Fund on
Leverage
|
|
|
1.56
|
%
|
|
Annual Return Fund Portfolio Must Experience (net of expenses) to
Cover Estimated Annual Effective Interest Expense Rate on Leverage
|
|
|
0.44
|
%
|
|
Common Share Total Return for (10.00)% Assumed Portfolio Total
Return
|
|
|
-14.50
|
%
|
|
Common Share Total Return for (5.00)% Assumed Portfolio Total
Return
|
|
|
-7.55
|
%
|
|
Common Share Total Return for 0.00% Assumed Portfolio Total
Return
|
|
|
-0.61
|
%
|
|
Common Share Total Return for 5.00% Assumed Portfolio Total
Return
|
|
|
6.34
|
%
|
|
Common Share Total Return for 10.00% Assumed Portfolio Total
Return
|
|
|
13.29
|
%
|
Common Share total return is composed of two elements — the distributions paid by the Fund to holders of common shares (the amount of
which is largely determined by the net investment income of the Fund after paying dividend payments on any preferred shares issued by the Fund and expenses on any forms of leverage outstanding) and gains or losses on the value of the securities and
other instruments the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the income
it receives on its investments is entirely offset by losses in the value of those investments. This table reflects hypothetical performance of the Fund’s portfolio and not the actual performance of the Fund’s common shares, the value of
which is determined by market forces and other factors. Should the Fund elect to add additional leverage to its portfolio, any benefits of such additional leverage cannot be fully achieved until the proceeds resulting from the use of such leverage
have been received by the Fund and invested in accordance with the Fund’s investment objectives and policies. As noted above, the Fund’s willingness to use additional leverage, and the extent to which leverage is used at any time, will
depend on many factors.
73
Shareholder Update (continued)
(Unaudited)
DIVIDEND REINVESTMENT PLAN
Nuveen
Closed-End Funds Automatic Reinvestment Plan
Your Nuveen Closed-End Fund allows
you to conveniently reinvest distributions in additional Fund shares. By choosing to reinvest, you’ll be able to invest money regularly and automatically, and watch your investment grow through the power of compounding. Just like distributions
in cash, there may be times when income or capital gains taxes may be payable on distributions that are reinvested. It is important to note that an automatic reinvestment plan does not ensure a profit, nor does it protect you against loss in a
declining market.
Easy and convenient
To make recordkeeping easy and
convenient, each quarter you’ll receive a statement showing your total distributions, the date of investment, the shares acquired and the price per share, and the total number of shares you own.
How shares are purchased
The shares you acquire by reinvesting will either be
purchased on the open market or newly issued by the Fund. If the shares are trading at or above NAV at the time of valuation, the Fund will issue new shares at the greater of the NAV or 95% of the then-current market price. If the shares are trading
at less than NAV, shares for your account will be purchased on the open market. If Computershare Trust Company, N.A. (the “Plan Agent”) begins purchasing Fund shares on the open market while shares are trading below NAV, but the
Fund’s shares subsequently trade at or above their NAV before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion of the distribution in newly-issued Fund shares
at a price equal to the greater of the shares’ NAV or 95% of the shares’ market value on the last business day immediately prior to the purchase date. Distributions received to purchase shares in the open market will normally be invested
shortly after the distribution payment date. No interest will be paid on distributions awaiting reinvestment. Because the market price of the shares may increase before purchases are completed, the average purchase price per share may exceed the
market price at the time of valuation, resulting in the acquisition of fewer shares than if the distribution had been paid in shares issued by the Fund. A pro rata portion of any applicable brokerage commissions on open market purchases will be paid
by Dividend Reinvestment Plan (the “Plan”) participants. These commissions usually will be lower than those charged on individual transactions.
Flexible
You may change your distribution option or withdraw from the Plan at
any time, should your needs or situation change. You can reinvest whether your shares are registered in your name, or in the name of a brokerage firm, bank, or other nominee. Ask your investment advisor if his or her firm will participate on your
behalf. Participants whose shares are registered in the name of one firm may not be able to transfer the shares to another firm and continue to participate in the Plan. The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge payable by the participants, there is no direct service charge to participants in the Plan at this time.
Call today to start reinvesting distributions
For more information on the
Nuveen Automatic Reinvestment Plan or to enroll in or withdraw from the Plan, speak with your financial professional or call us at (800) 257-8787.
74
CHANGES OCCURRING DURING THE PRIOR FISCAL YEAR
The following information in this annual report is a summary of certain changes during the most recent fiscal year. This information may not reflect all of
the changes that have occurred since you purchased shares of the Fund.
During the most recent fiscal year, there have been no changes to: (i) the
Fund’s investment objectives and principal investment policies that have not been approved by shareholders, (ii) the principal risks of the Fund, (iii) the portfolio managers of the Fund; (iv) the Fund’s charter or by-laws that would delay or prevent a change of control of the Fund that have not been approved by shareholders except as follows:
Changes to Portfolio Managers
Effective October 1,
2020, Jenny Rhee no longer served as portfolio manager of the Fund.
James W. Valone, CFA, currently a portfolio manager for the emerging market debt strategy sleeve
of the Fund, will retire effective December 31, 2021.
Amended and Restated By-Laws
On October 5, 2020, after a rigorous and deliberative review, and consistent with the interests of the Nuveen Diversified Dividend and Income Fund (the
“Fund”) long-term shareholders, the Board of Trustees of the Fund adopted Amended and Restated By-Laws.
Among other
changes, the Amended and Restated By-Laws require compliance with certain amended deadlines and procedural and informational requirements in connection with advance notice of shareholder proposals or
nominations, including certain information about the proponent and the proposal, or in the case of a nomination, the nominee. Any shareholder considering making a nomination or other proposal should carefully review and comply with those provisions
of the Amended and Restated By-Laws.
The Amended and Restated By-Laws also include
provisions (the “Control Share By-Law”) pursuant to which, in summary, a shareholder who obtains beneficial ownership of common shares of the Fund in a “Control Share Acquisition” may
exercise voting rights with respect to such shares only to the extent the authorization of such voting rights is approved by other shareholders of the Fund. The Control Share By-Law is primarily intended to
protect the interests of the Fund and its long-term shareholders by limiting the risk that the Fund will become subject to undue influence by opportunistic traders pursuing short-term agendas adverse to the best interests of the Fund and its
long-term shareholders. The Control Share By-Law does not eliminate voting rights for common shares acquired in Control Share Acquisitions, but rather entrusts the Fund’s other “non-interested” shareholders with determining whether to approve the authorization of the voting rights of the person acquiring such shares.
Subject to various conditions and exceptions, the Control Share By-Law defines a “Control Share Acquisition” to include
an acquisition of common shares that, but for the Control Share By-Law, would give the beneficial owner, upon the acquisition of such shares, the ability to exercise voting power in the election of Trustees of
the Fund in any of the following ranges:
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(i)
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one-tenth or more, but less than one-fifth
of all voting power;
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(ii)
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one-fifth or more, but less than one-third
of all voting power;
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(iii)
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one-third or more, but less than a majority of all voting power; or
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(iv)
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a majority or more of all voting power.
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The Control Share By-Law generally excludes certain acquisitions of common shares from the definition of a Control Share
Acquisition, including acquisitions of common shares that occurred prior to October 5, 2020, though such shares are included in assessing whether any subsequent share acquisition exceeds one of the enumerated thresholds.
Subject to certain conditions and procedural requirements set forth in the Control Share By-Law, including the delivery of a
“Control Share Acquisition Statement” to the Fund’s Secretary setting forth certain required information, a shareholder who obtains or proposes to obtain beneficial ownership of common shares in a Control Share Acquisition generally
may demand a special meeting of shareholders for the purpose of considering whether the voting rights of such acquiring person with respect to such shares shall be authorized.
This discussion is only a high-level summary of certain aspects of the Amended and Restated By-Laws, and is qualified in its
entirety by reference to the Amended and Restated By-Laws. Shareholders should refer to the Amended and Restated By-Laws for more information. A copy of the Amended and
Restated By-Laws can be found in the Current Report on Form 8-K filed by the Fund with the Securities and Exchange Commission on October 6, 2020, which is available
at www.sec.gov, and may also be obtained by writing to the Secretary of the Fund at 333 West Wacker Drive, Chicago, Illinois 60606.
75
Additional Fund Information
(Unaudited)
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Board of Trustees
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Jack B. Evans
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William C. Hunter
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Albin F. Moschner
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John K. Nelson
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Judith M. Stockdale
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Carole E. Stone
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Matthew Thornton III
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Terence J. Toth
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Margaret L. Wolff
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Robert Young
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Investment Adviser
Nuveen Fund Advisors, LLC
333 West
Wacker Drive
Chicago, IL 60606
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Custodian
State Street Bank
& Trust
Company
One Lincoln Street
Boston, MA 02111
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Legal Counsel
Chapman and Cutler LLP
Chicago, IL
60603
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Independent Registered
Public Accounting Firm
KPMG
LLP
200 East Randolph Street
Chicago, IL 60601
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Transfer Agent and
Shareholder Services
Computershare
Trust
Company, N.A.
150 Royall Street
Canton, MA 02021
(800) 257-8787
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Distribution Information
The Fund hereby designates its
percentage of dividends paid from net ordinary income as dividends qualifying for the dividends received deduction (“DRD”) for corporations, its percentage of qualified dividend income (“QDI”) for individuals under Section
1(h)(11) of the Internal Revenue Code, and its percentage of qualified business income (“QBI”) for individuals under Section 199A of the Internal Revenue Code as shown in the accompanying table. The actual qualified dividend and business
income distributions will be reported to shareholders on Form 1099-DIV which will be sent to shareholders shortly after calendar year end.
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JDD
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% DRD
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15.9%
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% QDI
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37.4%
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% QBI
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16.5%
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The Fund hereby designates its percentage of dividends paid from net ordinary income as dividends qualifying as
Interest-Related Dividends and/or short-term capital gain dividends as defined in the Internal Revenue Code Section 871(k) for the taxable year ended December 31, 2020:
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JDD
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% of Interest-Related Dividends
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19.5%
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The Fund had the following percentage, or maximum amount allowable, of ordinary dividends treated as Section 163(j)
interest dividends pursuant to Section 163(j) of the Internal Revenue Code for the taxable year ended December 31, 2020:
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JDD
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% of Section 163(j) Interest Dividends
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53.1%
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Portfolio of Investments Information
The Fund is required to file its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third
quarters of each fiscal year as an exhibit to its report on Form N-Port. You may obtain this information directly from the SEC’s website at http://www.sec.gov.
Nuveen Funds’ Proxy Voting Information
You may obtain
(i) information regarding how each fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, without charge, upon request, by calling Nuveen toll-free at (800) 257-8787 or on
Nuveen’s website at www.nuveen.com and (ii) a description of the policies and procedures that each fund used to determine how to vote proxies relating to portfolio securities without charge, upon request, by calling Nuveen toll free at
(800) 257-8787. You may also obtain this information directly from the SEC. Visit the SEC on-line at http://www.sec.gov.
