AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2019
1933 Act No. 333-74295
1940 Act No. 811-09253
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 630 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 631 [X]
WELLS FARGO FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
525 Market Street
San Francisco, California 94105
(Address of Principal Executive Offices)
(800) 222-8222
(Registrant's Telephone Number)
Alexander Kymn
Wells Fargo Funds Management, LLC
525 Market Street, 12th Floor
San Francisco, CA 94105
(Name and Address of Agent for Service)
With a copy to:
Marco E. Adelfio, Esq.
Goodwin Procter LLP
901 New York Avenue, N.W.
Washington, D.C. 20001
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It is proposed that this filing will become effective: (check appropriate box) |
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immediately upon filing pursuant to paragraph (b) |
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on May 1, 2019 pursuant to paragraph (b) |
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60 days after filing pursuant to paragraph (a)(1) |
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on [ ] pursuant to paragraph (a)(1) |
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75 days after filing pursuant to paragraph (a)(2) |
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on [ ] pursuant to paragraph (a)(2) of Rule 485 |
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If appropriate, check the following box: |
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this post-effective amendment designates a new effective date for a previously filed post-effective amendment |
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Explanatory Note: This Post-Effective Amendment No. 630 to the Registration Statement of Wells Fargo Funds Trust (the "Trust") is being filed primarily to add the audited financial statements and certain related financial information for the fiscal period ended December 31, 2018 for the Wells Fargo Managed Account CoreBuilder Shares - Series M, and to make certain other non-material changes to the Registration Statement.
WELLS FARGO FUNDS TRUST
PART A
WELLS FARGO MANAGED ACCOUNT - COREBUILDER SHARES
PROSPECTUS
Prospectus
.
Wells Fargo Managed Account
Fund
Wells Fargo Managed Account
CoreBuilder
® Shares - Series M
.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any
action. You may elect to receive shareholder reports and other communications from the Fund electronically at any time by contacting
your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor, by calling 1-800-222-8222 or by enrolling at
wellsfargo.com/advantagedelivery.
You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your
financial intermediary to request that you continue to receive paper copies of your shareholder reports; if you invest directly with the
Fund, you can call 1-800-222-8222. Your election to receive reports in paper will apply to all Wells Fargo Funds held in your account with
your financial intermediary or, if you are a direct investor, to all Wells Fargo Funds that you hold.
As with all mutual funds, the U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved these securities or passed upon
the accuracy or adequacy of this Prospectus. Anyone who tells you otherwise is committing a crime.
Fund shares are NOT deposits or other obligations of, or guaranteed by, Wells Fargo Bank, N.A., its affiliates or any other depository institution.
Fund shares are not insured or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation or any other government agency
and may lose value.
CoreBuilder Shares - Series M Summary
Investment Objective
The Fund seeks total return, consisting of current income and capital appreciation.
Fees and Expenses
The Fund is a component of various “wrap-fee” programs sponsored by investment advisers and broker-dealers.
Participants in the wrap-fee programs eligible to invest in the Fund pay an asset-based fee to the sponsors of these
programs. Please carefully read the brochure provided to you in connection with your participation in the wrap-fee
program for important information about the fees charged to you by the sponsor.
Shareholder Fees (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases (as a percentage of offering price)
None
Maximum deferred sales charge (load) (as a percentage of offering price)
None
Management Fees
0.00%
Distribution (12b-1) Fees
0.00%
Other Expenses
0.03%
Total Annual Fund Operating Expenses
0.03%
Fee Waivers
(0.03)%
Total Annual Fund Operating Expenses After Fee Waiver
1
0.00%
Example of Expenses
The example below is intended to help you compare the costs of investing in the Fund with the costs of investing in
other mutual funds. The example assumes a $10,000 initial investment, 5% annual total return, and that fees and
expenses remain the same as in the tables above. The example includes contractual commitments to waive fees and
reimburse expenses as indicated in the previous table. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
After:
1 Year
$0
3 Year
$0
5 Year
$0
10 Year
$0
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A
higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares
are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the
example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 28%
of the average value of its portfolio.
Wells Fargo Managed Account
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2
Principal Investment Strategies
Under normal circumstances, we invest:
We invest principally in municipal securities of states, territories and possessions of the United States that pay interest
exempt from federal income tax, but not necessarily federal AMT. Some of the securities may be below investment
grade or may be unrated and deemed by us to be of comparable quality. Additionally, we may invest in debt securities
of corporate issuers. These include traditional corporate bonds as well as bank loans. These securities may have fixed,
floating, or variable rates. We may use futures for duration and yield curve management. While we may purchase
securities of any maturity, under normal circumstances, we expect the Fund’s dollar-weighted average effective
maturity to be between 3 and 20 years.
We may invest up to 20% of the Fund’s total assets in inverse floaters to seek enhanced returns. Inverse floaters are
derivative debt instruments created by depositing a municipal security in a trust. Inverse floaters pay interest at rates
that generally vary inversely with specified short-term interest rates and involve leverage. We intend to limit leverage
created by the Fund’s investment in inverse floaters to an amount equal to 20% of the Fund’s total assets.
We start our investment process with a top-down, macroeconomic outlook to determine portfolio duration and yield
curve positioning as well as industry, sector and credit quality allocations. Macroeconomic factors considered may
include, among others, the pace of economic growth, employment conditions, inflation, and monetary and fiscal
policy. In combination with our top-down macroeconomic approach, we conduct intensive research on individual
issuers to uncover solid investment opportunities, especially looking for bonds whose quality may be improving. Our
security selection is based on several factors including, among others, improving financial trends, positive industry and
sector dynamics, improving economic conditions, specific demographic trends and value relative to other securities.
We may sell a security due to changes in credit characteristics or outlook, as well as changes in portfolio strategy or
cash flow needs. A security may also be sold based on relative value considerations and could be replaced with a
security that presents a better value or risk/reward profile.
Principal Investment Risks
An investment in the Fund may lose money, is not a deposit of Wells Fargo Bank, N.A. or its affiliates, is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency, and is primarily subject
to the risks (in alphabetical order) briefly summarized below.
Credit Risk.
The issuer or guarantor of a debt security may be unable or perceived to be unable to pay interest or
repay principal when they become due, which could cause the value of an investment to decline and a Fund to lose
money.
Derivatives Risk.
The use of derivatives, such as futures, options and swap agreements, can lead to losses, including
those magnified by leverage, particularly when derivatives are used to enhance return rather than mitigate risk.
Certain derivative instruments may be difficult to sell when the portfolio manager believes it would be appropriate to
do so, or the other party to a derivative contract may be unwilling or unable to fulfill its contractual obligations.
Futures Contracts Risk.
A Fund that uses futures contracts, which are a type of derivative, is subject to the risk of loss
caused by unanticipated market movements. In addition, there may at times be an imperfect correlation between the
movement in the prices of futures contracts and the value of their underlying instruments or indexes, and there may at
times not be a liquid secondary market for certain futures contracts.
High Yield Securities Risk
. High yield securities and unrated securities of similar credit quality (commonly known as
“junk bonds”) have a much greater risk of default or of not returning principal and their values tend to be more volatile
than higher-rated securities with similar maturities.
Interest Rate Risk.
When interest rates rise, the value of debt securities tends to fall. When interest rates decline,
interest that a Fund is able to earn on its investments in debt securities may also decline, but the value of those
securities may increase.
Inverse Floater Risk.
The holder of an inverse floater, which is a type of derivative, could lose more than its principal
investment. An inverse floater produces less income and may decline in value when market rates and the rate payable
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Wells Fargo Managed Account
on the floater rises. An inverse floater typically involves leverage, which may magnify a Fund’s losses, and exhibits
greater price and income volatility than an unleveraged bond with a similar maturity.
Management Risk.
Investment decisions, techniques, analyses or models implemented by a Fund’s manager or
sub-adviser in seeking to achieve the Fund’s investment objective may not produce expected returns, may cause the
Fund’s shares to lose value or may cause the Fund to underperform other funds with similar investment objectives.
Market Risk.
The values of, and/or the income generated by, securities held by a Fund may decline due to general
market conditions or other factors, including those directly involving the issuers of such securities. Securities markets
are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic
developments. Different sectors of the market and different security types may react differently to such developments.
Municipal Securities Risk.
Municipal securities may be fully or partially backed or enhanced by the taxing authority of
a local government, by the current or anticipated revenues from a specific project or specific assets, or by the credit of,
or liquidity enhancement provided by, a private issuer. Various types of municipal securities are often related in such a
way that political, economic or business developments affecting one obligation could affect other municipal securities
held by a Fund.
Performance
The following information provides some indication of the risks of investing in the Fund by showing changes in the
Fund’s performance from year to year. The Fund’s average annual total returns are compared to the performance of
one or more indices. Past performance before and after taxes is no guarantee of future results.
Calendar Year Total Returns as of 12/31 each year
.
Highest Quarter:
+10.04%
Lowest Quarter:
-4.42%
Year-to-date total
return as of
3/31/2019 is 3.30%
After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not
reflect the impact of state, local or foreign taxes. Actual after-tax returns depend on an investor’s tax situation and may
differ from those shown, and after-tax returns shown are not relevant to tax-exempt investors or investors who hold
their Fund shares through tax-deferred arrangements, such as 401(k) Plans or Individual Retirement Accounts.
Wells Fargo Managed Account
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4
Fund Management
Manager
Sub-Adviser
Portfolio Manager, Title/Managed Since
Wells Fargo Funds Management,
LLC
Wells Capital Management Incorporated
Wendy Casetta
, Portfolio Manager / 2019
Purchase and Sale of Fund Shares
Tax Information
Any distributions you receive from the Fund may be taxable as ordinary income or capital gains, except when your
investment is in an IRA, 401(k) or other tax-advantaged investment plan. However, subsequent withdrawals from such
a tax-advantaged investment plan may be subject to federal income tax. You should consult your tax adviser about
your specific tax situation.
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Wells Fargo Managed Account
CoreBuilder Shares - Series M
Investment Objective
The Fund seeks total return, consisting of current income and capital appreciation.
The Fund’s Board of Trustees can change this investment objective without a shareholder vote.
Principal Investment Strategies
Under normal circumstances, we invest:
We invest principally in municipal securities of states, territories and possessions of the United States that pay interest
exempt from federal income tax, but not necessarily federal AMT. Some of the securities may be below investment
grade or may be unrated and deemed by us to be of comparable quality. Additionally, we may invest in debt securities
of corporate issuers. These include traditional corporate bonds as well as bank loans. These securities may have fixed,
floating, or variable rates. We may use futures for duration and yield curve management. While we may purchase
securities of any maturity, under normal circumstances, we expect the Fund’s dollar-weighted average effective
maturity to be between 3 and 20 years.
We may invest up to 20% of the Fund’s total assets in inverse floaters to seek enhanced returns. Inverse floaters are
derivative debt instruments created by depositing a municipal security in a trust. Inverse floaters pay interest at rates
that generally vary inversely with specified short-term interest rates and involve leverage. We intend to limit leverage
created by the Fund’s investment in inverse floaters to an amount equal to 20% of the Fund’s total assets.
We start our investment process with a top-down, macroeconomic outlook to determine portfolio duration and yield
curve positioning as well as industry, sector and credit quality allocations. Macroeconomic factors considered may
include, among others, the pace of economic growth, employment conditions, inflation, and monetary and fiscal
policy. In combination with our top-down macroeconomic approach, we conduct intensive research on individual
issuers to uncover solid investment opportunities, especially looking for bonds whose quality may be improving. Our
security selection is based on several factors including, among others, improving financial trends, positive industry and
sector dynamics, improving economic conditions, specific demographic trends and value relative to other securities.
We may sell a security due to changes in credit characteristics or outlook, as well as changes in portfolio strategy or
cash flow needs. A security may also be sold based on relative value considerations and could be replaced with a
security that presents a better value or risk/reward profile.
We may actively trade portfolio securities, which may lead to higher transaction costs that may affect the Fund’s
performance. In addition, active trading of portfolio securities may lead to higher taxes if your shares are held in a
taxable account.
The Fund may hold some of its assets in cash or in money market instruments, including U.S. Government obligations,
shares of other mutual funds and repurchase agreements, or make other short-term investments for purposes of
maintaining liquidity or for short-term defensive purposes when we believe it is in the best interests of the
shareholders to do so. During such periods, the Fund may not achieve its objective.
Wells Fargo Managed Account
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6
Principal Investment Risks
The Fund is primarily subject to the risks mentioned below (in alphabetical order).
Credit Risk
Derivatives Risk
Futures Contracts Risk
High Yield Securities Risk
Interest Rate Risk
Inverse Floater Risk
Management Risk
Market Risk
Municipal Securities Risk
These and other risks could cause you to lose money in your investment in the Fund and could adversely affect the
Fund’s net asset value, yield and total return. These risks are described in the “Description of Principal Investment Risks”
section.
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Wells Fargo Managed Account
Description of Principal Investment Risks
Understanding the risks involved in mutual fund investing will help you make an informed decision that takes into
account your risk tolerance and preferences. The risks that are most likely to have a material effect on a particular
Fund as a whole are called “principal risks.” The principal risks for the Fund have been previously identified and are
described below. Additional information about the principal risks is included in the Statement of Additional
Information.
Credit Risk.
The issuer or guarantor of a debt security may be unable or perceived to be unable to pay interest or
repay principal when they become due. In these instances, the value of an investment could decline and the Fund
could lose money. Credit risk increases as an issuer’s credit quality declines.
Derivatives Risk.
The use of derivatives, such as futures, options and swap agreements, presents risks different from,
and possibly greater than, the risks associated with investing directly in traditional securities. The use of derivatives can
lead to losses because of adverse movements in the price or value of the derivatives’ underlying assets, indexes or
rates and the derivatives themselves, which may be magnified by certain features of the derivatives. These risks are
heightened when derivatives are used to enhance a Fund’s return or as a substitute for a position or security, rather
than solely to hedge (or mitigate) the risk of a position or security held by the Fund. The success of a derivative
strategy will be affected by the portfolio manager’s ability to assess and predict market or economic developments
and their impact on the derivatives’ underlying assets, indexes or reference rates, as well as the derivatives themselves.
Certain derivative instruments may become illiquid and, as a result, may be difficult to sell when the portfolio manager
believes it would be appropriate to do so. Certain derivatives create leverage, which can magnify the impact of a
decline in the value of their underlying assets, indexes or reference rates, and increase the volatility of the Fund’s net
asset value. Certain derivatives (e.g., over-the-counter swaps) are also subject to the risk that the counterparty to the
derivative contract will be unwilling or unable to fulfill its contractual obligations, which may cause a Fund to lose
money, suffer delays or incur costs arising from holding or selling an underlying asset. Changes in laws or regulations
may make the use of derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect
the use, value or performance of derivatives.
Futures Contracts Risk.
A Fund that uses futures contracts, which are a type of derivative, is subject to the risk of loss
caused by unanticipated market movements. In addition, there may at times be an imperfect correlation between the
movement in the prices of futures contracts and the value of their underlying instruments or indexes, and there may at
times not be a liquid secondary market for certain futures contracts.
High Yield Securities Risk.
High yield securities and unrated securities of similar credit quality (commonly known as
“junk bonds”) have a much greater risk of default (or in the case of bonds currently in default, of not returning
principal) and their values tend to be more volatile than higher-rated securities with similar maturities. Additionally,
these securities tend to be less liquid and more difficult to value than higher-rated securities.
Interest Rate Risk.
When interest rates rise, the value of debt securities tends to fall. The longer the terms of the debt
securities held by a Fund, the more the Fund is subject to this risk. If interest rates decline, interest that the Fund is able
to earn on its investments in debt securities may also decline, which could cause the Fund to reduce the dividends it
pays to shareholders, but the value of those securities may increase. Some debt securities give the issuers the option
to call, redeem or prepay the securities before their maturity dates. If an issuer calls, redeems or prepays a debt security
during a time of declining interest rates, the Fund might have to reinvest the proceeds in a security offering a lower
yield, and therefore might not benefit from any increase in value as a result of declining interest rates. Changes in
market conditions and government policies may lead to periods of heightened volatility in the debt securities market,
reduced liquidity for certain Fund investments and an increase in Fund redemptions. Interest rate changes and their
impact on the Fund and its share price can be sudden and unpredictable.
Inverse Floater Risk.
The holder of an inverse floater, which is a type of derivative, could lose more than its principal
investment. An inverse floater produces less income (and may produce no income) and may decline in value when
market rates and the rate payable on the floater rises, and produces more income and may increase in value when
market rates and the rate payable on the floater falls. An inverse floater typically involves leverage, which may magnify
a Fund’s losses, and exhibits greater price and income volatility than an unleveraged bond with a similar maturity. The
tender of a floater, the failure of a remarketing agent to sell a floater or certain other events may require the
dissolution of the trust or the liquidation of the underlying municipal security. In that event, the Fund, as a holder of an
inverse floater, and thus a residual interest in the underlying municipal security, may lose some or all of its investment.
Wells Fargo Managed Account
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8
Management Risk.
Investment decisions, techniques, analyses or models implemented by a Fund’s manager or
sub-adviser in seeking to achieve the Fund’s investment objective may not produce the returns expected, may cause
the Fund’s shares to lose value or may cause the Fund to underperform other funds with similar investment objectives.
Market Risk.
The values of, and/or the income generated by, securities held by a Fund may decline due to general
market conditions or other factors, including those directly involving the issuers of such securities. Securities markets
are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic
developments. Different sectors of the market and different security types may react differently to such developments.
Municipal Securities Risk.
Municipal securities may be fully or partially backed or enhanced by the taxing authority of
a local government, by the current or anticipated revenues from a specific project or specific assets, or by the credit of,
or liquidity enhancement provided by, a private issuer. Municipal securities may be difficult to obtain because of
limited supply, which may increase the cost to a Fund of purchasing such securities and effectively reduce the Fund’s
yield. Typically, less information is available about a municipal issuer than is available about other types of issuers.
Various types of municipal securities are often related in such a way that political, economic or business developments
affecting one obligation could affect other municipal securities held by the Fund. The value and liquidity of municipal
securities backed by the revenue from a particular project or other source may decline if the project or other source
fails to generate expected revenue. Although the Fund may strive to invest in municipal securities and other securities
that pay interest that is exempt from certain taxes (such as federal taxes, federal alternative minimum tax and/or state
taxes as applicable), some income earned by Fund investments may be subject to such taxes. Certain issuers of
municipal securities may have the ability to call or redeem a security prior to its maturity date, which could impair
Fund performance.
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Wells Fargo Managed Account
Portfolio Holdings Information
A description of the Fund’s policies and procedures with respect to disclosure of its portfolio holdings is available in
the Fund’s Statement of Additional Information.
A Fund’s NAV is the value of a single share. The NAV is calculated as of the close of regular trading on the New York
Stock Exchange (“NYSE”) (generally 4:00 p.m. Eastern time) on each day that the NYSE is open, although a Fund may
deviate from this calculation time under unusual or unexpected circumstances. To calculate the NAV of a Fund’s shares,
the Fund’s assets are valued and totaled, liabilities are subtracted, and the balance, called net assets, is divided by the
number of shares outstanding. The price at which a purchase or redemption request is processed is based on the next
NAV calculated after the request is received in good order. Generally, NAV is not calculated, and purchase and
redemption requests are not processed, on days that the NYSE is closed for trading; however, under unusual or
unexpected circumstances, a Fund may elect to remain open even on days that the NYSE is closed or closes early. To
the extent that a Fund’s assets are traded in various markets on days when the Fund is closed, the value of the Fund’s
assets may be affected on days when you are unable to buy or sell Fund shares. Conversely, trading in some of a Fund’s
assets may not occur on days when the Fund is open.
With respect to any portion of a Fund’s assets that may be invested in other mutual funds, the value of the Fund’s
shares is based on the NAV of the shares of the other mutual funds in which the Fund invests. The valuation methods
used by mutual funds in pricing their shares, including the circumstances under which they will use fair value pricing
and the effects of using fair value pricing, are included in the prospectuses of such funds. To the extent a Fund invests
a portion of its assets in non-registered investment vehicles, the Fund’s interests in the non-registered vehicles are fair
valued at NAV.
With respect to a Fund’s assets invested directly in securities, the Fund’s investments are generally valued at current
market prices. Equity securities, options and futures are generally valued at the official closing price or, if none, the last
reported sales price on the primary exchange or market on which they are listed (closing price). Equity securities that
are not traded primarily on an exchange are generally valued at the quoted bid price obtained from a broker-dealer.
Debt securities are valued at the evaluated bid price provided by an independent pricing service or, if a reliable price is
not available, the quoted bid price from an independent broker-dealer.
We are required to depart from these general valuation methods and use fair value pricing methods to determine the
values of certain investments if we believe that the closing price or the quoted bid price of a security, including a
security that trades primarily on a foreign exchange, does not accurately reflect its current market value as of the time
a Fund calculates its NAV. The closing price or the quoted bid price of a security may not reflect its current market value
if, among other things, a significant event occurs after the closing price or quoted bid price are made available, but
before the time as of which a Fund calculates its NAV, that materially affects the value of the security. We use various
criteria, including a systemic evaluation of U.S. market moves after the close of foreign markets, in deciding whether a
foreign security’s market price is still reliable and, if not, what fair market value to assign to the security. In addition, we
use fair value pricing to determine the value of investments in securities and other assets, including illiquid securities,
for which current market quotations or evaluated prices from a pricing service or broker-dealer are not readily
available.
The fair value of a Fund’s securities and other assets is determined in good faith pursuant to policies and procedures
adopted by the Fund’s Board of Trustees. In light of the judgment involved in making fair value decisions, there can be
no assurance that a fair value assigned to a particular security is accurate or that it reflects the price that the
Fund could obtain for such security if it were to sell the security at the time as of which fair value pricing is determined.
Such fair value pricing may result in NAVs that are higher or lower than NAVs based on the closing price or quoted bid
price. See the Statement of Additional Information for additional details regarding the determination of NAVs.
Wells Fargo Managed Account
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The Manager
Wells Fargo Funds Management, LLC (“Funds Management”), headquartered at 525 Market Street, San Francisco, CA
94105, provides advisory and Fund-level administrative services to the Fund pursuant to an investment management
agreement (the “Management Agreement”). Funds Management is a wholly owned subsidiary of Wells Fargo &
Company, a publicly traded diversified financial services company that provides banking, insurance, investment,
mortgage and consumer financial services. Funds Management is a registered investment adviser that provides
advisory services for registered mutual funds, closed-end funds and other funds and accounts. Funds Management is a
part of Wells Fargo Asset Management, the trade name used by the asset management businesses of Wells Fargo &
Company.
Funds Management is responsible for implementing the investment objectives and strategies of the Fund. Funds
Management’s investment professionals review and analyze the Fund’s performance, including relative to peer funds,
and monitor the Fund’s compliance with its investment objectives and strategies. Funds Management is responsible
for reporting to the Board on investment performance and other matters affecting the Fund. When appropriate, Funds
Management recommends to the Board enhancements to Fund features, including changes to Fund investment
objectives, strategies and policies. Funds Management also communicates with shareholders and intermediaries
about Fund performance and features.
Funds Management is also responsible for providing Fund-level administrative services to the Fund, which include,
among others, providing such services in connection with the Fund’s operations; developing and implementing
procedures for monitoring compliance with regulatory requirements and compliance with the Fund’s investment
objectives, policies and restrictions; and providing any other Fund-level administrative services reasonably necessary
for the operation of the Fund, other than those services that are provided by the Fund’s transfer and dividend
disbursing agent, custodian, and fund accountant.
To assist Funds Management in implementing the investment objectives and strategies of the Fund, Funds
Management may contract with one or more sub-advisers to provide day-to-day portfolio management services to
the Fund. Funds Management employs a team of investment professionals who identify and recommend the initial
hiring of any sub-adviser and oversee and monitor the activities of any sub-adviser on an ongoing basis. Funds
Management retains overall responsibility for the investment activities of the Fund.
A discussion regarding the basis for the Board’s approval of the Management Agreement and any applicable
sub-advisory agreements for the Fund is available in the Fund’s semi-annual report for the period ended June 30.
For the Fund’s most recent fiscal year end, the management fee paid to Funds Management pursuant to the
Management Agreement, net of any applicable waivers and reimbursements, was as follows:
Fund
Management
Wells Fargo Managed Account CoreBuilder® Shares - Series M
All assets
0.00%
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Wells Fargo Managed Account
The Sub-Adviser and Portfolio Managers
The following sub-adviser and portfolio managers provide day-to-day portfolio management services to the Fund.
These services include making purchases and sales of securities and other investment assets for the Fund, selecting
broker-dealers, negotiating brokerage commission rates and maintaining portfolio transaction records. The
sub-adviser is compensated for its services by Funds Management from the fees Funds Management receives from
sponsors of the wrap-fee programs. The Statement of Additional Information provides additional information about
the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio
managers’ ownership of securities in the Fund.
Wells Capital Management Incorporated
(“Wells Capital Management”) is a registered investment adviser located at
525 Market Street, San Francisco, CA 94105. Wells Capital Management, an affiliate of Funds Management and indirect
wholly owned subsidiary of Wells Fargo & Company, is a multi-boutique asset management firm committed to
delivering superior investment services to institutional clients, including mutual funds. Wells Capital Management is a
part of Wells Fargo Asset Management, the trade name used by the asset management businesses of Wells Fargo &
Company.
Wendy Casetta
Ms. Casetta joined Wells Capital Management or one of its predecessor firms in 1998,
where she currently serves as a Senior Portfolio Manager with the Tax-Exempt Fixed
Income team.
Lyle J. Fitterer, CFA, CPA
Mr. Fitterer joined Wells Capital Management or one of its predecessor firms in 1989, where
he currently serves as a Senior Portfolio Manager, Managing Director and Head of the
Tax-Exempt Fixed-Income team and Co-Head of WFAM Global Fixed Income.
Terry J. Goode
Mr. Goode joined Wells Capital Management in 2002, where he currently serves as a Senior
Portfolio Manager and was formerly Leader of the Tax-Exempt Research team.
Robert J. Miller
Mr. Miller joined Wells Capital Management in 2008, where he currently serves as a Senior
Portfolio Manager with the Tax-Exempt Fixed-Income team.
Adrian Van Poppel
Mr. Van Poppel joined Wells Capital Management in 1997, where he currently serves as a
Senior Portfolio Manager with the Tax-Exempt Fixed-Income team.
The Fund and Funds Management have obtained an exemptive order from the SEC that permits Funds Management,
subject to Board approval, to select certain sub-advisers and enter into or amend sub-advisory agreements with them,
without obtaining shareholder approval. The SEC order extends to sub-advisers that are not otherwise affiliated with
Funds Management or the Fund , as well as sub-advisers that are wholly-owned subsidiaries of Funds Management or
of a company that wholly owns Funds Management (“Multi-Manager Sub-Advisers”).
Pursuant to the order, Funds Management, with Board approval, may hire or replace Multi-Manager Sub-Advisers for
each Fund that is eligible to rely on the order. Funds Management, subject to Board oversight, has the responsibility to
oversee Multi-Manager Sub-Advisers and to recommend their hiring, termination and replacement. If a new
sub-adviser is hired for a Fund pursuant to the order, the Fund is required to notify shareholders within 90 days.
The Fund is not required to disclose the individual fees that Funds Management pays to a Multi-Manager Sub-Adviser.
Wells Fargo Managed Account
|
12
Share Class Eligibility
Developed exclusively as an investment option within the separately managed accounts advised or subadvised by
Wells Fargo Funds Management, LLC, the Wells Fargo Managed Account CoreBuilder® Shares - Series M is a special
purpose fund invested primarily in municipal securities and is intended to be used in combination with selected
individual securities to effectively model institutional-level investment strategies. The Fund is intended to help enable
certain separately managed account investors to achieve greater diversification than smaller managed accounts might
otherwise achieve.
Shares of the Fund may be purchased only by or on behalf of separately managed account clients that have entered
into an agreement with Funds Management either directly or through a separately managed account sponsor
(typically a registered investment adviser or broker-dealer) to have Funds Management serve as investment adviser or
sub-adviser to the account. We intend to redeem shares held by or on behalf of a shareholder who ceases to be an
eligible investor as described above, and each shareholder, by purchasing shares, agrees to any such redemption.
The table below summarizes the key features of the share class offered through this Prospectus.
CoreBuilder
Front-End Sales Charge
None
Contingent Deferred Sales Charge (CDSC)
None
Ongoing Distribution (12b-1) Fees
None
Compensation to Financial Professionals and Intermediaries
No compensation is paid to intermediaries from Fund assets on sales of CoreBuilder
®
shares or for related services.
CoreBuilder
®
shares do not carry sales commissions or pay Rule 12b-1 fees, or make payments to intermediaries to
assist in, or in connection with, the sale of Fund shares. Neither the manager, the distributor nor their affiliates make
any type of administrative or service payments to intermediaries in connection with investments in CoreBuilder
®
Shares - Series M.
Buying and Selling Fund Shares
Shares of the Fund may be purchased or redeemed only at the direction of Funds Management, in its capacity as
investment adviser or sub-adviser to the applicable separately managed account, to the broker-dealer who executes
trades for the account. Purchase and redemption requests are based on instructions received by Funds Management
from a separately managed account sponsor. Such requests are processed at the NAV next calculated after the
broker-dealer who executes trades for the account receives the instructions on behalf of the account.
The Fund does not impose any minimum investment requirements. However, the separately managed accounts
through which the Fund is offered typically impose minimum investment requirements.
Frequent Purchases and Redemptions of Fund Shares
Because the Fund is designed to be a component of a separately managed account that also invests in individual
securities and other investments, the Fund’s shares may be purchased and redeemed on a frequent basis for
rebalancing purposes, to invest new monies, or to accommodate reductions in account size. Furthermore, because all
purchase and redemption orders are initiated by Funds Management, separately managed account clients are not in a
13
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Wells Fargo Managed Account
position to effect purchase or redemption orders and are, therefore, unable to directly trade in shares of the Fund.
Accordingly, the Fund has not adopted any policies and procedures that would limit frequent purchases and
redemptions of the Fund’s shares.
The Fund is not designed to serve as a vehicle for frequent trading. Funds Management reserves the right to satisfy
purchase and redemption orders exclusively through the purchase and sale of individual securities in an account if it
determines that such account is attempting to use the Fund as a vehicle for market timing.
The Fund declares distributions of any net investment income daily, and pays such distributions monthly. The Fund
generally make distributions of any realized net capital gains annually.
Wells Fargo Managed Account
|
14
Taxes
The following discussion regarding federal income taxes is based on laws that were in effect as of the date of this
Prospectus and summarizes only some of the important federal income tax considerations affecting the Fund and you
as a shareholder. It does not apply to foreign or tax-exempt shareholders or those holding Fund shares through a
tax-advantaged account, such as a 401(k) Plan or IRA. This discussion is not intended as a substitute for careful tax
planning. You should consult your tax adviser about your specific tax situation. Please see the Statement of Additional
Information for additional federal income tax information.
The Fund elected to be treated, and intends to qualify each year, as a regulated investment company (“RIC”). A RIC is
not subject to tax at the corporate level on income and gains from investments that are distributed in a timely manner
to shareholders. However, the Fund’s failure to qualify as a RIC would result in corporate level taxation, and
consequently, a reduction in income available for distribution to you as a shareholder.
We will pass on to a Fund’s shareholders substantially all of the Fund’s net investment income and realized net capital
gains, if any. Distributions from a Fund’s ordinary income and net short-term capital gains, if any, generally will be
taxable to you as ordinary income. Distributions from a Fund’s net long-term capital gains, if any, generally will be
taxable to you as long-term capital gains. If you are an individual and meet certain holding period requirements with
respect to your Fund shares, you may be eligible for reduced tax rates on qualified dividend income, if any, distributed
by the Fund.
Corporate shareholders may be able to deduct a portion of their distributions when determining their taxable income.
Individual taxpayers are subject to a maximum tax rate of 37% on ordinary income and a maximum tax rate on
long-term capital gains and qualified dividends of 20%. For U.S. individuals with income exceeding $200,000 ($250,000
if married and filing jointly), a 3.8% Medicare contribution tax will apply on “net investment income,” including interest,
dividends, and capital gains. Corporations are subject to tax on all income and gains at a maximum tax rate of 21%.
However, a RIC is not subject to tax at the corporate level on income and gains from investments that are distributed in
a timely manner to shareholders.
Distributions from a Fund normally will be taxable to you when paid, whether you take distributions in cash or
automatically reinvest them in additional Fund shares. Following the end of each year, we will notify you of the federal
income tax status of your distributions for the year.
If you buy shares of a Fund shortly before it makes a taxable distribution, your distribution will, in effect, be a taxable
return of part of your investment. Similarly, if you buy shares of a Fund when it holds appreciated securities, you will
receive a taxable return of part of your investment if and when the Fund sells the appreciated securities and distributes
the gain. The Fund has built up, or has the potential to build up, high levels of unrealized appreciation.
Your redemptions (including redemptions in-kind) and exchanges of Fund shares ordinarily will result in a taxable
capital gain or loss, depending on the amount you receive for your shares (or are deemed to receive in the case of
exchanges) and the amount you paid (or are deemed to have paid) for them. Such capital gain or loss generally will be
long-term capital gain or loss if you have held your redeemed or exchanged Fund shares for more than one year at the
time of redemption or exchange. In certain circumstances, losses realized on the redemption or exchange of Fund
shares may be disallowed.
When you receive a distribution from a Fund or redeem shares, you may be subject to backup withholding.
15
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Wells Fargo Managed Account
The following table is intended to help you understand a Fund’s financial performance for the past five years (or since
inception, if shorter). Certain information reflects financial results for a single Fund share. Total returns represent the
rate you would have earned (or lost) on an investment in the Fund (assuming reinvestment of all distributions). The
information in the following table has been derived from the Fund’s financial statements, which have been audited by
KPMG LLP, the Funds’ independent registered public accounting firm, whose report, along with the Fund’s financial
statements, is also included in the Fund’s annual report, a copy of which is available upon request.
CoreBuilder Shares - Series M
For a share outstanding throughout each period
Year ended December 31
2018
2017
2016
2015
2014
Net asset value, beginning of period
$
$
$
$
$
Net investment income
Net realized and unrealized gains (losses) on investments
Total from investment operations
Distributions to shareholders from
Net investment income
Net realized gains
Total distributions to shareholders
Net asset value, end of period
$
$
$
$
$
Total return
Ratios to average net assets (annualized)
Gross expenses
Net expenses
Net investment income
Supplemental data
Portfolio turnover rate
Net assets, end of period (000s omitted)
$
$
$
$
$
1.
The manager has contractually committed to irrevocably absorb and pay or reimburse all ordinary operating expenses of the Fund, except
portfolio transactions or other investment-related costs (e.g., commissions), fees payable for services provided by the Fund’s securities lending
agent (if any), interest, taxes, leverage expenses, and other expenses not incurred in the ordinary course of the Fund’s business. This commitment
has an indefinite term.
Wells Fargo Managed Account
|
16
Notes
17
|
Wells Fargo Managed Account
Notes
Wells Fargo Managed Account
|
18
.
.
FOR MORE INFORMATION
More information on a Fund is available free upon request,
including the following documents:
Statement of Additional Information (SAI)
Annual/Semi-Annual Reports
To obtain copies of the above documents or for more
information about Wells Fargo CoreBuilder Shares contact us:
By telephone:
You may also contact the financial intermediary, broker-dealer
or bank, through whom you purchased Fund shares.
From the SEC:
To obtain information for a fee, write or email:
The Fund is distributed by Wells Fargo Funds Distributor, LLC, a
member of FINRA/SIPC, and an affiliate of Wells Fargo &
Company. Securities Investor Protection Corporation (“SIPC”)
information and brochure are available at SIPC.org or by
calling SIPC at (202) 371-8300.
.
© 2019 Wells Fargo Funds Management, LLC. All rights reserved
059CBM/P1516
May 1, 2019
Beginning on January 1, 2021, as permitted by new regulations adopted by the Securities and Exchange Commission, paper copies of the
Wells Fargo Funds’ annual and semi-annual shareholder reports issued after this date will no longer be sent by mail, unless you
specifically request paper copies of the reports. Instead, the reports will be made available on the Funds’ website, and you will be notified
by mail each time a report is posted and provided with a website address to access the report.
1.
Generally, no ordinary operating fees or expenses are charged to the Fund. Wells Fargo Funds Management, LLC has contractually committed to
irrevocably absorb and pay or reimburse all ordinary operating expenses of the Fund, except portfolio transactions or other investment-related costs
(e.g., commissions), fees payable for services provided by the Fund’s securities lending agent, interest, taxes, leverage expenses and other expenses
not incurred in the ordinary course of the Fund’s business. This commitment has an indefinite term.
■
at least 60% of the Fund’s net assets in municipal securities that pay interest exempt from federal income tax, but
not necessarily the federal alternative minimum tax (“AMT”);
■
up to 40% of the Fund’s net assets in municipal securities that pay interest subject to federal AMT;
■
up to 40% of the Fund’s total assets in below investment-grade municipal securities;
■
up to 20% of the Fund’s total assets in inverse floaters; and
■
up to 10% of the Fund’s net assets in corporate debt securities.
Series M
3rd Quarter 2009
4th Quarter 2016
Lyle J. Fitterer, CFA, CPA
, Portfolio Manager
/ 2008
Terry J. Goode
, Portfolio Manager / 2019
Robert J. Miller
, Portfolio Manager / 2008
Adrian Van Poppel
, Portfolio Manager /
2018
■
at least 60% of the Fund’s net assets in municipal securities that pay interest exempt from federal income tax, but
not necessarily the federal alternative minimum tax (“AMT”);
■
up to 40% of the Fund’s net assets in municipal securities that pay interest subject to federal AMT;
■
up to 40% of the Fund’s total assets in below investment-grade municipal securities;
■
up to 20% of the Fund’s total assets in inverse floaters; and
■
up to 10% of the Fund’s net assets in corporate debt securities.
Fee
The information in this Prospectus is not intended for distribution to, or use by, any person or entity in any non-U.S.
jurisdiction or country where such distribution or use would be contrary to any law or regulation, or which would
subject Fund shares to any registration requirement within such jurisdiction or country.
Supplements the disclosures made by this Prospectus. The SAI,
which has been filed with the SEC, is incorporated by
reference into this Prospectus and therefore is legally part of
this Prospectus.
Provide financial and other important information, including a
discussion of the market conditions and investment strategies
that significantly affected Fund performance over the
reporting period. The Report of Independent Registered Public
Accounting Firm and each fund’s audited financial statements
included in the Fund’s most recent annual report are
incorporated by reference into this Prospectus.
888-877-9275
Visit the SEC’s Public Reference Room in Washington,
DC (phone 1-202-551-8090 for operational
information for the SEC’s Public Reference Room) or
the SEC’s Web site at sec.gov.
SEC’s Public Reference Section
100 “F” Street, NE
Washington, DC 20549-0102
publicinfo@sec.gov
.
ICA Reg. No. 811-09253
WELLS FARGO FUNDS TRUST
PART B
WELLS FARGO MANAGED ACCOUNT - COREBUILDER SHARES
STATEMENT OF ADDITIONAL INFORMATION
Statement of Additional Information
.
CoreBuilder® Shares
Fund
Wells Fargo Managed Account
CoreBuilder
® Shares - Series M
.
This SAI is not a prospectus and should be read in conjunction with the Fund’s Prospectus (the “Prospectus”) dated May 1, 2019. The audited financial statements for the
Fund, which include the portfolio of investments and report of the independent registered public accounting firm for the fiscal year ended December 31, 2018, are hereby
incorporated by reference to the Fund’s Annual Report. A copy of the Prospectus, Annual Report and Semi-Annual Report or further information about Wells Fargo
CoreBuilder
®
Shares may be obtained by calling 1-888-877-9275. You may also contact the financial intermediary, broker-dealer or bank through whom you purchased
Fund shares.
CBGS/FASAI15 (5-19)
The Trust was organized as a Delaware statutory trust on March 10, 1999. On March 25, 1999, the Board of Trustees of
Norwest Advantage Funds (“Norwest”), the Board of Directors of Stagecoach Funds, Inc. (“Stagecoach”) and the Board
of Trustees of the Trust (the “Board”), approved an Agreement and Plan of Reorganization providing for, among other
things, the transfer of the assets and stated liabilities of various predecessor Norwest and Stagecoach portfolios to
certain Funds of the Trust (the “Reorganization”). Prior to November 5, 1999, the effective date of the Reorganization,
the Trust had only nominal assets.
On December 16, 2002, the Boards of Trustees of The Montgomery Funds and The Montgomery Funds II (collectively,
“Montgomery”) approved an Agreement and Plan of Reorganization providing for, among other things, the transfer of
the assets and stated liabilities of various predecessor Montgomery portfolios into various Funds of the Trust. The
effective date of the reorganization was June 9, 2003.
On February 3, 2004, the Board, and on February 18, 2004, the Board of Trustees of The Advisors’ Inner Circle Fund (“AIC
Trust”), approved an Agreement and Plan of Reorganization providing for, among other things, the transfer of the
assets and stated liabilities of various predecessor AIC Trust portfolios into various Funds of the Trust. The effective date
of the reorganization was July 26, 2004.
In August and September 2004, the Boards of Directors of the Strong family of funds (“Strong”) and the Board
approved an Agreement and Plan of Reorganization providing for, among other things, the transfer of the assets and
stated liabilities of various predecessor Strong mutual funds into various Funds of the Trust. The effective date of the
reorganization was April 8, 2005.
On December 30, 2009, the Board of Trustees of Evergreen Funds (“Evergreen”), and on January 11, 2010, the Board,
approved an Agreement and Plan of Reorganization providing for, among other things, the transfer of the assets and
stated liabilities of various predecessor Evergreen portfolios and Wells Fargo Advantage Funds portfolios to certain
Funds of the Trust. The effective date of the reorganization was July 12, 2010 for certain Evergreen Funds, and July 19,
2010 for the remainder of the Evergreen Funds.
The
CoreBuilder
®
Shares - Series M
commenced operations on April 15, 2008.
Fundamental Investment Policies
The Fund has adopted the following fundamental investment policies; that is, they may not be changed without
approval by the holders of a majority (as defined under the 1940 Act) of the outstanding voting securities of the Fund.
The Fund may not
:
(1) purchase the securities of issuers conducting their principal business activity in the same industry if, immediately
after the purchase and as a result thereof, the value of a Fund’s investments in that industry would equal or exceed
25% of the current value of the Fund’s total assets, provided that for CoreBuilder
®
Shares - Series M this restriction does
not limit the Fund’s investments in securities of other investment companies, and does not limit the Fund’s
investments in municipal securities;
(2) purchase securities of any issuer if, as a result, with respect to 75% of a Fund’s total assets, more than 5% of the
value of its total assets would be invested in the securities of any one issuer or the Fund’s ownership would be more
than 10% of the outstanding voting securities of such issuer, provided that this restriction does not limit a Fund’s
investments in securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or
investments in securities of other investment companies;
(3) borrow money, except to the extent permitted under the 1940 Act, including the rules, regulations and any
exemptive orders obtained thereunder;
Wells Fargo - CoreBuilder® Shares
|
2
(4) issue senior securities, except to the extent permitted under the 1940 Act, including the rules, regulations and any
exemptive orders obtained thereunder;
(5) make loans to other parties if, as a result, the aggregate value of such loans would exceed one-third of a Fund’s total
assets. For the purposes of this limitation, entering into repurchase agreements, lending securities and acquiring any
debt securities are not deemed to be the making of loans;
(6) underwrite securities of other issuers, except to the extent that the purchase of permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with a
Fund’s investment program may be deemed to be an underwriting;
(7) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall
not prevent a Fund from investing in securities or other instruments backed by real estate or securities of companies
engaged in the real estate business);
(8) purchase or sell commodities, provided that (i) currency will not be deemed to be a commodity for purposes of this
restriction, (ii) this restriction does not limit the purchase or sale of futures contracts, forward contracts or options, and
(iii) this restriction does not limit the purchase or sale of securities or other instruments backed by commodities or the
purchase or sale of commodities acquired as a result of ownership of securities or other instruments.
Non-Fundamental Investment Policies
The Fund has adopted the following non-fundamental policies; that is, they may be changed by the Trustees at any
time without approval of the Fund’s shareholders.
(1) The Fund may invest in shares of other investment companies to the extent permitted under the 1940 Act,
including the rules, regulations and any exemptive orders obtained thereunder, provided however, that no Fund that
has knowledge that its shares are purchased by another investment company investor pursuant to Section 12(d)(1)(G)
of the 1940 Act will acquire any securities of registered open-end management investment companies or registered
unit investment trusts in reliance on Section 12 (d)(1)(F) or 12(d)(1)(G) of the 1940 Act.
3
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Wells Fargo - CoreBuilder® Shares
Notwithstanding the foregoing policies, any other investment companies in which the Fund may invest have adopted
their own investment policies, which may be more or less restrictive than those listed above, thereby allowing a Fund
to participate in certain investment strategies indirectly that are prohibited under the fundamental and
non-fundamental investment policies listed above.
With respect to repurchase agreements, the Fund invests only in repurchase agreements that are fully collateralized by
securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. For purposes of the Fund’s
fundamental investment policy with respect to concentration, the Fund does not consider such repurchase
agreements to constitute an industry or group of industries because the Fund chooses to look through such securities
to the underlying collateral, which is itself excepted from the Fund’s concentration policy.
Additional Approved Principal Investment Strategies
In addition to the principal investment strategies set forth in the Prospectus, the Fund may also use futures, options or
swap agreements, as well as other derivatives, to manage risk or to enhance return. Please refer to the Fund’s
Prospectus for information regarding the Fund’s anticipated use of derivatives, if any, as a principal investment
strategy. Please note that even if a Fund’s Prospectus does not currently include information regarding derivatives, or
only includes information regarding certain derivative instruments, the Fund may use any of the derivatives described
below, at any time, and to any extent consistent with the Fund’s other principal investment strategies.
DERIVATIVE SECURITIES
Derivatives are financial instruments that derive their value, at least in part, from the value of another security or asset,
the level of an index (e.g., the S&P 500 Index) or a rate (e.g., the Euro Interbank Offered Rate (“Euribor”)), or the relative
change in two or more reference assets, indices or rates. The most comment types of derivatives are forward contracts,
futures, options and swap agreements. Some forms of derivative instruments, such as exchange-traded futures and
options on securities, commodities, or indices, are traded on regulated exchanges, like the Chicago Board of Trade and
the Chicago Mercantile Exchange. These types of derivative instruments are standardized contracts that can easily be
bought and sold, and whose market values are determined and published daily. Non-standardized derivative
instruments, on the other hand, tend to be more specialized or complex, and may be harder to value. Other common
types of derivative instruments include forward foreign currency contracts, linked securities and structured products,
participation notes and agreements, collateralized mortgage obligations, inverse floaters, stripped securities, warrants,
and swaptions.
A Fund may take advantage of opportunities to invest in a type of derivative that is not presently contemplated for use
by the Fund, or that is not currently available, but that may be developed in the future, to the extent such
opportunities are both consistent with the Fund’s investment objective and legally permissible. The trading markets
for less traditional and/or newer types of derivative instruments are less developed than the markets for traditional
types of derivative instruments and provide less certainty with respect to how such instruments will perform in various
economic scenarios.
A Fund may use derivative instruments for a variety of reasons, including: i) to employ leverage to enhance returns; ii)
to increase or decrease exposure to particular securities or markets; iii) to protect against possible unfavorable
changes in the market value of securities held in, or to be purchased for, its portfolio (i.e., to hedge); iv) to protect its
unrealized gains reflected in the value of its portfolio; v) to facilitate the sale of portfolio securities for investment
purposes; vi) to reduce transaction costs; vii) to manage the effective maturity or duration of its portfolio; and/or viii) to
maintain cash reserves while remaining fully invested.
The risks associated with the use of derivative instruments are different from, and potentially much greater than, the
risks associated with investing directly in the underlying instruments on which the derivatives are based. The value of
some derivative instruments in which a Fund may invest may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to successfully utilize derivative instruments
may depend, in part, upon the ability of the sub-adviser to forecast interest rates and other economic factors correctly.
If the sub-adviser incorrectly forecasts such factors and has taken positions in derivatives contrary to prevailing market
trends, the Fund could be exposed to additional, unforeseen risks, including the risk of loss.
Because certain derivatives have a leverage component, adverse changes in the value or level of the underlying asset,
reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. The
Wells Fargo - CoreBuilder® Shares
|
4
risk of loss is heightened when a Fund uses derivative instruments to enhance its returns or as a substitute for a
position or security, rather than solely to hedge or offset the risk of a position or security held by a Fund. Certain
derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
Additional risks of derivative instruments include, but are not limited to: i) the risk of disruption of a Fund’s ability to
trade in derivative instruments because of regulatory compliance problems or regulatory changes; ii) credit risk of
counterparties to derivative contracts; and iii) market risk (i.e., exposure to adverse price changes). The possibility of
default by the issuer or the issuer’s credit provider may be greater for derivative instruments than for other types of
instruments. The sub-adviser utilizes a variety of internal risk management procedures to ensure that derivatives are
closely monitored, and that their use is consistent with a particular Fund’s investment objective, policies, restrictions
and quality standards, and does not expose such Fund to undue risk.
A hedging strategy may fail if the correlation between the value of the derivative instruments and the other
investments in a Fund’s portfolio is not consistent with the sub-adviser’s expectations. If the sub-adviser’s expectations
are not met, it is possible that the hedging strategy will not only fail to protect the value of a Fund’s portfolio, but the
Fund may also lose money on the derivative instrument itself.
In the case of credit derivatives, which are a form of derivative that includes credit default swaps and total return
swaps, payments of principal and interest are tied to the performance of one or more reference obligations or assets.
The same general risks inherent in derivative transactions are present. However, credit derivative transactions also
carry with them greater risks of imperfect correlation between the performance and price of the underlying reference
security or asset, and the general performance of the designated interest rate or index which is the basis for the
periodic payment.
The Funds might not employ any of the strategies described herein, and no assurance can be given that any strategy
used will succeed. Also, with some derivative strategies, there is the risk that a Fund may not be able to find a suitable
counterparty for a derivative transaction. In addition, some over-the-counter (“OTC”) derivative instruments may be
illiquid. Derivative instruments traded in the OTC market are also subject to the risk that the other party will not meet
its obligations. The use of derivative instruments may also increase the amount and accelerate the timing of taxes
payable by shareholders.
A Fund’s use of derivative instruments also is subject to broadly applicable investment policies. For example, a Fund
may not invest more than a specified percentage of its assets in “illiquid securities,” including those derivative
instruments that are not transferable or that do not have active secondary markets.
Because certain derivatives may involve leverage, and a Fund could lose more than it invested, federal securities laws,
regulations and guidance may require a Fund to segregate or “earmark” assets in order to reduce the risks associated
with such derivatives, or to otherwise hold instruments that offset the Fund’s current obligations from derivatives. This
process is known as “cover.” A Fund will not enter into any derivative transactions unless it earmarks cash or liquid
5
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Wells Fargo - CoreBuilder® Shares
assets with a value at least sufficient to cover its current obligations under a derivative transaction or otherwise covers
the transaction in accordance with applicable SEC guidance. If a large portion of a Fund’s assets is earmarked or
otherwise used for cover, it could affect portfolio management or the Fund’s ability to meet redemption requests or
other current obligations.
In the case of swaps, futures contracts, options, forward contracts and other derivative instruments that do not cash
settle a Fund must earmark liquid assets equal to the full notional amount of the instrument while the positions are
open, to the extent there is not a permissible offsetting position or a contractual “netting” agreement with respect to
swaps (other than credit default swaps where the Fund is the protection seller). Conversely, with respect to swaps,
futures contracts, options, forward contracts and other derivative instruments that are required to cash settle, a Fund
may earmark liquid assets in an amount equal to the Fund’s daily marked-to-market net obligations (i.e., the Fund’s
daily net liability) under the instrument, if any, rather than its full notional amount. Forwards and futures contracts that
do not cash settle may be treated as cash settled for asset segregation purposes when a Fund has entered into
contractual arrangements with a third party futures commission merchant (“FCM”) or other counterparty to offset the
Fund’s exposure under the contract, and, failing that, to assign their delivery obligations under the contract to the
counterparty. The Funds reserve the right to modify their asset segregation policies in the future in their discretion,
consistent with the Investment Company Act of 1940 and SEC or SEC-staff guidance. By earmarking assets equal to
only its net obligations under certain instruments, a Fund will have the ability to employ leverage to a greater extent
than if the Fund were required to earmark assets equal to the full notional amount of the instrument.
When a Fund buys or sells a derivative that is cleared through a central clearing party, an initial margin deposit with a
FCM is required. If the value of a Fund’s derivatives that are cleared through a central clearing party decline, the Fund
will be required to make additional “variation margin” payments to the FCM. If the value of a Fund’s derivatives that are
cleared through a central clearing party increases, the FCM will be required to make additional “variation margin”
payments to the Fund. This process is known as “marking-to-market” and is calculated on a daily basis.
Central clearing arrangements with respect to derivative instruments may be less favorable to the Funds than bilateral
arrangements, because the Funds may be required to provide greater amounts of margin for cleared transactions than
for bilateral transactions. Also, in contrast to bilateral derivatives transactions, following a period of notice to a Fund, a
central clearing party generally can require termination of existing cleared transactions at any time or increase margin
requirements.
While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses by offsetting favorable price movements in related investments or
otherwise. This is due, in part, to: i) the possible inability of a Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable; ii) the possible need to sell a portfolio security at a disadvantageous time because the
Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative
instruments; and/or iii) the possible inability of a Fund to close out or liquidate its derivatives positions. Accordingly,
there is the risk that such strategies may fail to serve their intended purposes, and may reduce returns or increase
volatility. These strategies also entail transactional expenses.
It is possible that current and/or future legislation and regulation with respect to derivative instruments may limit or
prevent a Fund from using such instruments as a part of its investment strategy, and could ultimately prevent a Fund
from being able to achieve its investment objective. For example, Title VII of the Dodd-Frank Act made broad changes
to the OTC derivatives market and granted significant authority to the SEC and the CFTC to regulate OTC derivatives
and market participants. Other provisions of the Dodd-Frank Act include: i) position limits that may impact a Fund’s
ability to invest in futures, options and swaps in a manner that efficiently meets its investment objective; ii) capital and
margin requirements; and iii) the mandatory use of clearinghouse mechanisms for many OTC derivative transactions.
In addition, the SEC, CFTC and exchanges are authorized to take extraordinary actions in the event of a market
emergency, including, for example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading.
The regulation of futures, options and swaps transactions in the United States is subject to modification by
government and judicial action. Changes to U.S. tax laws may affect the use of derivatives by the Funds. It is impossible
to fully predict the effects of past, present or future legislation and regulation in this area, but the effects could be
substantial and adverse.
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Moreover, the SEC has proposed, and indicated that it is likely to re-propose, rule changes that could significantly limit
or impact the ability of registered investment companies to invest in derivatives and other instruments, limit their
ability to employ certain strategies that use derivatives, or adversely affect their efficiency in implementing particular
investment strategies.
Futures Contracts.
A futures contract is an agreement to buy or sell a security or other asset at a set price on a future
date. An option on a future gives the holder of the option the right, which may or may not be exercised, to buy or sell a
position in a futures contract from or to the writer of the option, at a specified price on or before a specified expiration
date. Futures contracts and options on futures are standardized and exchange-traded, where the exchange serves as
the ultimate counterparty for all contracts. Consequently, the primary credit risk on such contracts is the
creditworthiness of the exchange. In addition, futures contracts and options on futures are subject to market risk (i.e.,
exposure to adverse price changes).
An interest rate, commodity, foreign currency or index futures contract provides for the future sale or purchase of a
specified quantity of a financial instrument, commodity, foreign currency or the cash value of an index at a specified
price and time. A futures contract on an index is an agreement pursuant to which a party agrees to pay or receive an
amount of cash equal to the difference between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of these securities is made. A public market
exists in futures contracts covering a number of indexes as well as financial instruments and foreign currencies. To the
extent that a Fund may invest in foreign currency-denominated securities, it also may invest in foreign currency futures
contracts and options thereon. Certain of the Funds also may invest in commodity futures contracts and options
thereon. A commodity futures contract is an agreement to buy or sell a commodity, such as an energy, agricultural or
metal commodity at a later date at a price and quantity agreed-upon when the contract is bought or sold.
Futures contracts often call for making or taking delivery of an underlying asset; however, futures are
exchange-traded, so that a party can close out its position on the exchange for cash, without ever having to make or
take delivery of an asset. Closing out a futures position is affected by purchasing or selling an offsetting contract for
the same aggregate amount with the same delivery date; however, there can be no assurance that a liquid market will
exist at a time a Fund seeks to close out an exchange-traded position, including options positions.
A Fund may purchase and write call and put options on futures contracts. The holder of an option on a futures contract
has the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures
contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the
holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the
case of a put option, the opposite is true. A call option is “in the money” if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is “in the money” if the exercise price exceeds the value
of the futures contract that is the subject of the option. The potential loss related to the purchase of futures options is
limited to the premium paid for the option (plus transaction costs). Because the value of the option is fixed at the time
of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value
of the option may change daily, and that change would be reflected in the net asset value (“NAV”) of a Fund.
To the extent securities are segregated or “earmarked” to cover a Fund’s obligations under futures contracts and
related options, such use will not eliminate the risk of leverage, which may exaggerate the effect of any increase or
decrease in the market value of a Fund’s portfolio, and may require liquidation of portfolio positions when it is not
advantageous to do so.
There are several risks associated with the use of futures contracts and options on futures as hedging instruments. A
purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract.
There can be no guarantee that there will be a correlation between price movements in a hedging vehicle and the
securities being hedged. In addition, there are significant differences between securities and futures markets that
could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for
futures and options on futures contracts for securities, including technical influences in futures and options trading,
and differences between the financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A
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decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities have historically been highly correlated to their respective underlying
U.S. Government securities. However, to the extent a Fund enters into such futures contracts, the value of the futures
will not fluctuate in direct proportion to the value of the Fund’s holdings of U.S. Government securities. Thus, the
anticipated spread between the price of a futures contract and its respective underlying security may be affected by
differences in the nature of their respective markets. The spread may also be affected by differences in initial and
variation margin requirements, the liquidity of such markets and the participation of speculators in such markets.
There are several additional risks associated with transactions in commodity futures contracts, including but not
limited to:
The requirements for qualification as a regulated investment company may limit the extent to which a Fund may enter
into futures and options on futures positions. Unless otherwise noted in the section entitled “Non-Fundamental
Investment Policies,” each of the Funds has claimed an exclusion from the definition of “Commodity Pool Operator”
(“CPO”) found in Rule 4.5 of the Commodity Exchange Act (“CEA”). Accordingly, the manager of each such Fund, as well
as each sub-adviser, is not subject to registration or regulation as a CPO with respect to the Funds under the CEA.
Interest Rate Futures Contracts and Options on Interest Rate Futures Contracts.
A Fund may invest in interest rate
futures contracts and options on interest rate futures contracts for various investment reasons, including to serve as a
substitute for a comparable market position in the underlying securities. A Fund may also sell options on interest rate
futures contracts as part of closing purchase transactions to terminate its options positions. No assurance can be given
that such closing transactions can be effected or as to the degree of correlation between price movements in the
options on interest rate futures and price movements in a Fund’s portfolio securities which are the subject of the
transaction.
Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in cash, generally within five business days
after the trade. In the futures market, a contract is made to purchase or sell a bond in the future for a set price on a
certain date. Historically, the prices for bonds established in the futures markets have tended to move generally in the
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aggregate in concert with the cash market prices and have maintained fairly predictable relationships. Accordingly, a
Fund may use interest rate futures contracts as a defense, or hedge, against anticipated interest rate changes. A Fund
presently could accomplish a similar result to that which it hopes to achieve through the use of interest rate futures
contracts by selling bonds with long maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling bonds with short maturities and investing in bonds with long maturities
when interest rates are expected to decline. However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest
being earned by a Fund, through using futures contracts.
Inverse Floaters.
Inverse floaters (also known as “residual interest bonds”) are inverse floating rate debt securities. The
interest rate on an inverse floater varies inversely with a floating rate (which may be reset periodically by a “Dutch”
auction, a remarketing agent or by reference to a short-term tax-exempt interest rate index). A change in the interest
rate on the referenced security or index will inversely affect the rate of interest paid on an inverse floater. That is,
income on inverse floating rate debt securities will decrease when interest rates increase, and will increase when
interest rates decrease.
Markets for inverse floaters may be less developed and more volatile, and may experience less or varying degrees of
liquidity relative to markets for more traditional securities, especially during periods of instability in credit markets. The
value of an inverse floater is generally more volatile than that of a traditional fixed-rate bond having similar credit
quality, redemption provisions and maturity. Inverse floaters may have interest rate adjustment formulas that
generally reduce or, in the extreme cases, eliminate the interest paid to a Fund when short-term interest rates rise, and
increase the interest paid to a Fund when short-term interest rates fall. The value of an inverse floater also tends to fall
faster than the value of a fixed-rate bond when interest rates rise, and conversely, the value of an inverse floater tends
to rise more rapidly when interest rates fall. Inverse floaters tend to underperform fixed-rate bonds in a rising
long-term interest rate environment, but tend to outperform fixed-rate bonds when long-term interest rates decline.
Inverse floaters have the effect of providing a degree of investment leverage because they may increase or decrease in
value in response to changes (e.g., changes in market interest rates) at a rate that is a multiple of the rate at which
fixed-rate securities increase or decrease in response to the same changes. As a result, the market values of such
securities are generally more volatile than the market values of fixed-rate securities (especially during periods when
interest rates are fluctuating). A Fund could lose money and its net asset value could decline if movements in interest
rates are incorrectly anticipated. To seek to limit the volatility of these securities, a Fund may purchase inverse floating
obligations that have shorter-term maturities or that contain limitations on the extent to which the interest rate may
vary. Certain investments in such obligations may be illiquid. Furthermore, where such a security includes a contingent
liability, in the event of an adverse movement in the underlying index or interest rate, a Fund may be required to pay
substantial additional margin to maintain the position.
A Fund may either participate in structuring an inverse floater or purchase an inverse floater in the secondary market.
When structuring an inverse floater, a Fund will transfer fixed-rate securities held in the Fund’s portfolio to a trust. The
trust then typically issues the inverse floaters and the floating rate notes that are collateralized by the cash flows of the
fixed-rate securities. In return for the transfer of the securities to the trust, the Fund receives the inverse floaters and
cash associated with the sale of the notes from the trust.
Inverse floaters are sometimes created by depositing municipal securities in a tender option bond trust (“TOB Trust”).
In a tender option bond (“TOB”) transaction, a TOB Trust issues a floating rate certificate (“TOB Floater”) and a residual
interest certificate (“TOB Residual”) and utilizes the proceeds of such issuance to purchase a fixed-rate municipal bond
(“Fixed-Rate Bond”) that either is owned or identified by a Fund. The TOB Floater is generally issued to third party
investors (typically a money market fund) and the TOB Residual is generally issued to the Fund that sold or identified
the Fixed-Rate Bond. The TOB Trust divides the income stream provided by the Fixed-Rate Bond to create two
securities, the TOB Floater, which is a short-term security, and the TOB Residual, which is a longer-term security. The
interest rates payable on the TOB Residual issued to a Fund bear an inverse relationship to the interest rate on the TOB
Floater. The interest rate on the TOB Floater is reset by a remarketing process typically every 7 to 35 days. After income
is paid on the TOB Floater at current rates, the residual income from the Fixed-Rate Bond goes to the TOB Residual.
Therefore, rising short-term rates result in lower income for the TOB Residual, and vice versa. In the case of a TOB Trust
that utilizes the cash received (less transaction expenses) from the issuance of the TOB Floater and TOB Residual to
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purchase the Fixed Rate Bond from a Fund, the Fund may then invest the cash received in additional securities,
generating leverage for the Fund.
The TOB Residual may be more volatile and less liquid than other municipal bonds of comparable maturity. In most
circumstances, the TOB Residual holder bears substantially all of the underlying Fixed-Rate Bond’s downside
investment risk and also benefits from any appreciation in the value of the underlying Fixed-Rate Bond. Investments in
a TOB Residual typically will involve greater risk than investments in Fixed-Rate Bonds.
The TOB Residual held by a Fund provides the Fund with the right to: i) cause the holders of the TOB Floater to tender
their notes at par; and ii) cause the sale of the Fixed-Rate Bond held by the TOB Trust, thereby collapsing the TOB Trust.
TOB Trusts are generally supported by a liquidity facility provided by a third-party bank or other financial institution
(the “Liquidity Provider”) that provides for the purchase of TOB Floaters that cannot be remarketed. The holders of the
TOB Floaters have the right to tender their certificates in exchange for payment of par plus accrued interest on a
periodic basis (typically weekly) or on the occurrence of certain mandatory tender events. The tendered TOB Floaters
are remarketed by a remarketing agent, which is typically an affiliated entity of the Liquidity Provider. If the TOB
Floaters cannot be remarketed, the TOB Floaters are purchased by the TOB Trust either from the proceeds of a loan
from the Liquidity Provider or from a liquidation of the Fixed-Rate Bond.
The TOB Trust may also be collapsed without the consent of a Fund, as the TOB Residual holder, upon the occurrence of
certain “tender option termination events” (or “TOTEs”), as defined in the TOB Trust agreements. Such termination
events typically include the bankruptcy or default of the municipal bond, a substantial downgrade in credit quality of
the municipal bond, or a judgment or ruling that interest on the Fixed-Rate Bond is subject to federal income taxation.
Upon the occurrence of a termination event, the TOB Trust would generally be liquidated in full with the proceeds
typically applied first to any accrued fees owed to the trustee, remarketing agent and liquidity provider, and then to
the holders of the TOB Floater up to par plus accrued interest owed on the TOB Floater and a portion of gain share, if
any, with the balance paid out to the TOB Residual holder. In the case of a mandatory termination event (“MTE”), after
the payment of fees, the TOB Floater holders would be paid before the TOB Residual holders (i.e., the Fund). In contrast,
in the case of a TOTE, after payment of fees, the TOB Floater holders and the TOB Residual holders would be paid pro
rata in proportion to the respective face values of their certificates.
Options.
A Fund may purchase and sell both put and call options on various instruments, including, but not limited to,
fixed-income or other securities or indices in standardized contracts traded on foreign or domestic securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an OTC market, and agreements,
sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer. A Fund may
also write covered straddles consisting of a combination of calls and puts written on the same underlying securities or
indices.
An option on a security (or index) is a contract that gives the holder of the option, in return for a premium, the right to
buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option
(or the cash value of the index) at a specified exercise price often at any time during the term of the option for
American options or only at expiration for European options. The writer of an option on a security has the obligation
upon exercise of the option to deliver the underlying security upon payment of the exercise price (in the case of a call)
or to pay the exercise price upon delivery of the underlying security (in the case of a put). Certain put options written
by a Fund may be structured to have an exercise price that is less than the market value of the underlying securities
that would be received by the Fund. Upon exercise, the writer of an option on an index is obligated to pay the
difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the
index option. An index is designed to reflect features of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.
If an option written by a Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at
the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss
equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out
by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise
price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected
when a Fund desires.
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A Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put
or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series. A Fund will realize a capital gain from a closing purchase transaction if the cost of
the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a
capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the
option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration date.
The value of an option purchased or written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between
the last bid and ask prices.
There are several risks associated with transactions in options on securities and on indexes. For example, there are
significant differences between the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
The writer of an American option typically has no control over the time when it may be required to fulfill its obligation
as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must deliver the underlying security at the
exercise price. To the extent a Fund writes a put option, the Fund has assumed the obligation during the option period
to purchase the underlying investment from the put buyer at the option’s exercise price if the put buyer exercises its
option, regardless of whether the value of the underlying investment falls below the exercise price. This means that a
Fund that writes a put option may be required to take delivery of the underlying investment and make payment for
such investment at the exercise price. This may result in losses to the Fund and may result in the Fund holding the
underlying investment for some period of time when it is disadvantageous to do so.
If a put or call option purchased by a Fund is not sold when it has remaining value, and if the market price of the
underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or
equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put
or call option on a particular security is purchased to hedge against price movements in a related security, the price of
the put or call option may move more or less than the price of the related security.
If trading were suspended in an option purchased by a Fund, the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by a Fund is covered by an option on the same index purchased by the
Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in
the value of the Fund’s securities during the period the option was outstanding.
To the extent that a Fund writes a call option on a security it holds in its portfolio and intends to use such security as
the sole means of “covering” its obligation under the call option, the Fund has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying security above the exercise price during the
option period, but, as long as its obligation under such call option continues, has retained the risk of loss should the
price of the underlying security decline.
Foreign Currency Options.
Funds that may invest in foreign currency-denominated securities may buy or sell put and
call options on foreign currencies. These Funds may buy or sell put and call options on foreign currencies either on
exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a
foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser
of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded
on U.S. or other exchanges may be subject to position limits which may limit the ability of a Fund to reduce foreign
currency risk using such options. OTC options differ from exchange-traded options in that they are bilateral contracts
with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity
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as exchange-traded options. Under definitions adopted by the CFTC and SEC, many foreign currency options are
considered swaps for certain purposes, including determination of whether such instruments need to be
exchange-traded and centrally cleared.
Stock Index Options.
A Fund may purchase and write (i.e., sell) put and call options on stock indices to gain exposure to
comparable market positions in the underlying securities or to manage risk (i.e., hedge) on direct investments in the
underlying securities. A stock index fluctuates with changes of the market values of the stocks included in the index.
For example, some stock index options are based on a broad market index, such as the S&P 500 Index or a narrower
market index, such as the S&P 100 Index. Indices may also be based on an industry or market segment. A Fund may, for
the purpose of hedging its portfolio, subject to applicable securities regulations, purchase and write put and call
options on stock indices listed on foreign and domestic stock exchanges. The effectiveness of purchasing or writing
stock index options will depend upon the extent to which price movements of the securities in a Fund’s portfolio
correlate with price movements of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock, whether a Fund will realize a gain or loss
from purchasing or writing stock index options depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the
price of particular stock.
There is a key difference between stock options and stock index options in connection with their exercise. In the case
of stock options, the underlying security, common stock, is delivered. However, upon the exercise of a stock index
option, settlement does not occur by delivery of the securities comprising the index. The option holder who exercises
the stock index option receives an amount of cash if the closing level of the stock index upon which the option is
based is greater than (in the case of a call) or less than (in the case of a put) the exercise price of the option. This
amount of cash is equal to the difference between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple.
Participation Notes.
Participation notes (“P-notes”) are participation interest notes that are issued by banks and
broker-dealers and are designed to offer a return linked to a particular equity, debt, currency or market. An investment
in a P-note involves additional risks beyond the risks normally associated with a direct investment in the underlying
security, and the P-note’s performance may differ from the underlying security’s performance. While the holder of a
P-note is entitled to receive from the bank or issuing broker-dealer any dividends paid on the underlying security, the
holder is not entitled to the same rights (e.g., voting rights) as an owner of the underlying stock. P-notes are
considered general unsecured contractual obligations of the banks or broker-dealers that issue them. As such, a Fund
must rely on the creditworthiness of the issuer of a P-note for their investment returns on such P-note, and would have
no rights against the issuer of the underlying security. There is also no assurance that there will be a secondary trading
market for a P-note or that the trading price of a P-note will equal the value of the underlying security. Additionally,
issuers of P-notes and the calculation agent may have broad authority to control the foreign exchange rates related to
the P-notes and discretion to adjust the P-note’s terms in response to certain events.
Stock Index Futures Contracts and Options on Stock Index Futures Contracts.
Stock index futures and options on stock
index futures provide exposure to comparable market positions in the underlying securities or to manage risk (i.e.,
hedge) on direct investments in the underlying securities. A stock index future obligates the seller to deliver (and the
purchaser to take), effectively, an amount of cash equal to a specific dollar amount times the difference between the
value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement
is made. No physical delivery of the underlying stocks in the index is made. With respect to stock indices that are
permitted investments, each Fund intends to purchase and sell futures contracts on the stock index for which it can
obtain the best price with consideration also given to liquidity.
Options on stock index futures give the purchaser the right, in return for the premium paid, to assume a position in a
stock index futures contract (a long position if the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer’s futures margin account, which represents the amount by which the market price
of the stock index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the stock index future. If an option is exercised on the last trading day prior to the
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expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise
price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
Swap Agreements.
Swap agreements are derivative instruments that can be individually negotiated and structured to
include exposure to a variety of different types of investments or market factors. Depending on their structure, swap
agreements may increase or decrease a Fund’s exposure to long- or short-term interest rates, foreign currency values,
mortgage securities, corporate borrowing rates, or other factors such as security prices or inflation rates. A Fund may
enter into a variety of swap agreements, including interest rate, index, commodity, equity, credit default and currency
exchange rate, among others, each of which may include special features, such as caps, collars and floors.
Swap agreements are usually entered into without an upfront payment because the value of each party’s position is
the same. The market values of the underlying commitments will change over time, resulting in one of the
commitments being worth more than the other and the net market value creating a risk exposure for one party or the
other.
A Fund may enter into swap agreements for any legal purpose consistent with its investment objectives and policies,
such as attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread
through purchases and/or sales of instruments in other markets, to protect against currency fluctuations, as a duration
management technique, to protect against any increase in the price of securities a Fund anticipates purchasing at a
later date, or to gain exposure to certain markets in a more cost efficient manner.
OTC swap agreements are bilateral contracts entered into primarily by institutional investors for periods ranging from
a few weeks to more than one year. In a standard OTC swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross
returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional
amount,” i.e., the return on or change in value of a particular dollar amount invested at a particular interest rate, in a
particular foreign (non-U.S.) currency, or in a “basket” of securities or commodities representing a particular index. A
“quanto” or “differential” swap combines both an interest rate and a currency transaction. Certain swap agreements,
such as interest rate swaps, are traded on exchanges and cleared through central clearing counterparties. Other forms
of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall
below a specified rate, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice
versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. A
total return swap agreement is a contract in which one party agrees to make periodic payments to another party
based on the change in market value of underlying assets, which may include a single stock, a basket of stocks, or a
stock index during the specified period, in return for periodic payments based on a fixed or variable interest rate or the
total return from other underlying assets. Consistent with a Fund’s investment objectives and general investment
policies, certain of the Funds may invest in commodity swap agreements. For example, an investment in a commodity
swap agreement may involve the exchange of floating-rate interest payments for the total return on a commodity
index. In a total return commodity swap, a Fund will receive the price appreciation of a commodity index, a portion of
the index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period,
a Fund may pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is more
than one period, with interim swap payments, a Fund may pay an adjustable or floating fee. With a “floating” rate, the
fee may be pegged to a base rate, such as Euribor, and is adjusted each period. Therefore, if interest rates increase over
the term of the swap contract, a Fund may be required to pay a higher fee at each swap reset date.
A Fund may also enter into combinations of swap agreements in order to achieve certain economic results. For
example, a Fund may enter into two swap transactions, one of which offsets the other for a period of time. After the
offsetting swap transaction expires, the Fund would be left with the economic exposure provided by the remaining
swap transaction. The intent of such an arrangement would be to lock in certain terms of the remaining swap
transaction that a Fund may wish to gain exposure to in the future without having that exposure during the period the
offsetting swap is in place.
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Most types of swap agreements entered into by the Funds will calculate the obligations of the parties to the
agreement on a “net basis.” Consequently, a Fund’s current obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the agreement based on the relative values of
the positions held by each party to the agreement (the “net amount”). A Fund’s current obligations under a swap
agreement will be accrued daily (offset against any amounts owed to the Fund), and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the segregation or “earmarking” of cash or other liquid assets
to limit the extent of any potential leveraging of the Fund’s portfolio. Obligations under swap agreements so covered
will not be construed to be “senior securities” for purposes of a Fund’s investment restriction concerning senior
securities.
Swap agreements are sophisticated instruments that typically involve a small investment of cash relative to the
magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on a Fund’s
performance. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a
Fund’s investments and its share price and yield. Additionally, the extent to which a Fund’s use of swap agreements will
be successful in furthering its investment objective will depend on the sub-adviser’s ability to correctly predict
whether certain types of investments are likely to produce greater returns than other investments.
Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of
the default or bankruptcy of a swap agreement counterparty. When a counterparty’s obligations are not fully secured
by collateral, then a Fund is essentially an unsecured creditor of the counterparty. If the counterparty defaults, the
Fund will have contractual remedies, but there is no assurance that a counterparty will be able to meet its obligations
pursuant to such contracts or that, in the event of default, the Fund will succeed in enforcing contractual remedies.
Counterparty risk still exists even if a counterparty’s obligations are secured by collateral because a Fund’s interest in
collateral may not be perfected or additional collateral may not be promptly posted as required. Counterparty risk also
may be more pronounced if a counterparty’s obligations exceed the amount of collateral held by a Fund (if any), the
Fund is unable to exercise its interest in collateral upon default by the counterparty, or the termination value of the
instrument varies significantly from the marked-to-market value of the instrument. The sub-adviser will closely
monitor the credit of a swap agreement counterparty in order to attempt to minimize this risk. Certain restrictions
imposed on the Funds by the Internal Revenue Code may limit the Funds’ ability to use swap agreements. The swaps
market is subject to increasing regulations, in both U.S. and non-U.S. markets. It is possible that developments in the
swaps market, including additional government regulation, could adversely affect a Fund’s ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
The use of swaps is a highly specialized activity that requires investment techniques, risk analyses and tax planning
different from those associated with traditional investments. The use of a swap requires an understanding, not only of
the reference asset, interest rate, or index, but also of the terms of the swap agreement, without the benefit of
observing the performance of the swap under all possible market conditions. Because OTC swap agreements are
bilateral contracts that may be subject to contractual restrictions on transferability and termination, and because they
may have remaining terms of greater than seven days, OTC swap agreements may be considered illiquid and subject
to a Fund’s limitation on investments in illiquid securities. To the extent that a swap is not liquid, it may not be possible
to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses.
Moreover, like most other investments, swap agreements are subject to the risk that the market value of the
instrument will change in a way detrimental to a Fund’s interest. A Fund bears the risk that the sub-adviser will not
accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in
establishing swap positions for the Fund. If the sub-adviser attempts to use a swap as a hedge on, or as a substitute for,
a portfolio investment, the Fund will be exposed to the risk that the swap will have or will develop an imperfect
correlation with the portfolio investment. This could cause substantial losses for the Fund. While hedging strategies
involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in
losses by offsetting favorable price movements in other Fund investments. In addition, because swap transactions
generally do not involve the delivery of securities or other underlying assets or principal, the risk of loss with respect to
swap agreements and swaptions (described below) generally is limited to the net amount of payments that a Fund is
contractually obligated to make. There is also a risk of a default by the other party to a swap agreement or swaption, in
which case a Fund may not receive the net amount of payments that such Fund contractually is entitled to receive.
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Many swaps are complex, and their valuation often requires modeling and judgment, which increases the risk of
mispricing or incorrect valuation. The pricing models used may not produce valuations that are consistent with the
values a Fund realizes when it closes or sells an over-the-counter derivative. Valuation risk is more pronounced when a
Fund enters into an over-the-counter swap with specialized terms, because the market value of a swap, in some cases,
is partially determined by reference to similar derivatives with more standardized terms. Incorrect valuations may
result in increased cash payment requirements to counterparties, undercollateralization and/or errors in calculation of
a Fund’s net asset value.
A Fund also may enter into options to enter into a swap agreement (“swaptions”). These transactions give a party the
right (but not the obligation), in return for payment of a premium, to enter into a new swap agreement or to shorten,
extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. A
Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option
agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it
purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid
should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the
option the Fund will become obligated according to the terms of the underlying agreement.
Commodity-Linked Swap Agreements.
Commodity-linked swaps are two-party contracts in which the parties agree to
exchange the return or interest rate on one instrument for the return of a particular commodity, commodity index or
commodities futures or options contract. The payment streams are calculated by reference to an agreed upon notional
amount. A one-period swap contract operates in a manner similar to a forward or futures contract because there is an
agreement to swap a commodity for cash at only one forward date. A Fund may engage in swap transactions that have
more than one period and more than one exchange of commodities.
In a total return commodity swap, a Fund will receive the price appreciation of a commodity index, a portion of the
index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, the
Fund will pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is more
than one period, with interim swap payments, the Fund will pay an adjustable or floating fee. With a “floating” rate, the
fee is pegged to a base rate such as Euribor, and is adjusted each period. Therefore, if interest rates increase over the
term of the swap contract, a Fund may be required to pay a higher fee at each swap reset date.
A Fund’s ability to invest in commodity-linked swaps may be adversely affected by changes in legislation, regulations
or other legally binding authority. Under the Internal Revenue Code of 1986, as amended (the “Code”), a Fund must
derive at least 90% of its gross income from qualifying sources to qualify as a regulated investment company. The
Internal Revenue Service has also issued a revenue ruling which holds that income derived from commodity-linked
swaps is not qualifying income with respect to the 90% threshold. As a result, a Fund’s ability to directly invest in
commodity-linked swaps as part of its investment strategy is limited to a maximum of 10% of its gross income. Failure
to comply with the restrictions in the Code and any future legislation or guidance may cause a Fund to fail to qualify as
a regulated investment company, which may adversely impact a shareholder’s return. Alternatively, a Fund may forego
such investments, which could adversely affect the Fund’s ability to achieve its investment goal.
Credit Default Swap Agreements.
A Fund may enter into OTC and cleared credit default swap agreements, which may
reference one or more debt securities or obligations that are or are not currently held by a Fund. The protection
“buyer” in an OTC credit default swap agreement is generally obligated to pay the protection “seller” an upfront or a
periodic stream of payments over the term of the contract until a credit event, such as a default, on a reference
obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional
value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in
the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may
be either the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, the Fund may recover
nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may
elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity whose value may have significantly decreased. As a seller, a Fund generally receives an upfront
payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller,
a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be
subject to investment exposure on the notional amount of the swap.
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The spread of a credit default swap is the annual amount the protection buyer must pay the protection seller over the
length of the contract, expressed as a percentage of the notional amount. Market perceived credit risk increases as
spreads widen; market perceived credit risk decreases as spreads narrow. Wider credit spreads and decreasing market
values, when compared to the notional amount of the swap, represent a deterioration of the credit soundness of the
issuer of the reference obligation and a greater likelihood or risk of default or other credit event occurring as defined
under the terms of the agreement. For credit default swap agreements on asset-backed securities and credit indices,
the quoted market prices and resulting values, as well as the annual payment rate, serve as an indication of the current
status of the payment/performance risk. A Fund’s obligations under a credit default swap agreement will be accrued
daily (offset against any amounts owing to the Fund).
Credit default swap agreements sold by a Fund may involve greater risks than if a Fund had invested in the reference
obligation directly because, in addition to general market risks, credit default swaps are subject to illiquidity risk and
counterparty credit risk (with respect to OTC credit default swaps). A Fund will enter into uncleared credit default swap
agreements generally with counterparties that meet certain standards of creditworthiness. A buyer generally also will
lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a
credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or
periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss
of value to the seller. In addition, there may be disputes between the buyer and seller of a credit default swap
agreement or within the swaps market as a whole as to whether a credit event has occurred or what the payment
should be. Such disputes could result in litigation or other delays, and the outcome could be adverse for the buyer or
seller.
Interest Rate Swap Agreements.
Interest rate swap agreements may be used to obtain or preserve a desired return or
spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. They
are financial instruments that involve the exchange of one type of interest rate cash flow for another type of interest
rate cash flow on specified dates in the future. In a standard interest rate swap transaction, two parties agree to
exchange their respective commitments to pay fixed or floating interest rates on a predetermined specified (notional)
amount. The swap agreement’s notional amount is the predetermined basis for calculating the obligations that the
swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are
exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case
may be, only the net amount of the two payments. Interest rate swaps can be based on various measures of interest
rates, including Euribor, swap rates, Treasury rates and foreign interest rates.
Swap agreements will tend to shift a Fund’s investment exposure from one type of investment to another. For
example, if a Fund agreed to pay fixed rates in exchange for floating rates while holding fixed-rate bonds, the swap
would tend to decrease a Fund’s exposure to long-term interest rates. Another example is if a Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap agreement would tend to decrease a Fund’s
exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates.
Total Return Swap Agreements.
Total return swap agreements are contracts in which one party agrees to make periodic
payments to another party based on the change in market value of the assets underlying the contract, which may
include a specified security, basket of securities or securities indices during the specified period, in return for periodic
payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap
agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such
security or investing directly in such market. Total return swap agreements may effectively add leverage to a Fund’s
portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional
amount of the swap.
Contracts for Differences.
Contracts for differences are swap arrangements in which the parties agree that their return
(or loss) will be based on the relative performance of two different groups or baskets of securities. Often, one or both
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baskets will be an established securities index. A Fund’s return will be based on changes in value of theoretical long
futures positions in the securities comprising one basket (with an aggregate face value equal to the notional amount
of the contract for differences) and theoretical short futures positions in the securities comprising the other basket. A
Fund also may use actual long and short futures positions and achieve similar market exposure by netting the
payment obligations of the two contracts. A Fund typically enters into contracts for differences (and analogous futures
positions) when the sub-adviser believes that the basket of securities constituting the long position will outperform
the basket constituting the short position. If the short basket outperforms the long basket, a Fund will realize a loss,
even in circumstances when the securities in both the long and short baskets appreciate in value.
Cross-Currency Swap Agreements.
Cross currency swap agreements are similar to interest rate swaps, except that they
involve multiple currencies. A Fund may enter into a cross currency swap agreement when it has exposure to one
currency and desires exposure to a different currency. Typically, the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest
rate swap agreement, however, the principal amounts are exchanged at the beginning of the contract and returned at
the end of the contract. In addition to paying and receiving amounts at the beginning and termination of the
agreements, both sides will have to pay in full periodically based upon the currency they have borrowed. Changes in
foreign exchange currency rates and changes in interest rates may negatively affect currency swaps.
Volatility, Variance and Correlation Swap Agreements.
A Fund also may enter into forward volatility agreements, also
known as volatility swaps. In a volatility swap, the counterparties agree to make payments in connection with changes
in the volatility (i.e., the magnitude of change over a specified period of time) of an underlying reference instrument,
such as a currency, rate, index, security or other financial instrument. Volatility swaps permit the parties to attempt to
hedge volatility risk and/or take positions on the projected future volatility of an underlying reference instrument. For
example, a Fund may enter into a volatility swap in order to take the position that the reference instrument’s volatility
will increase over a particular period of time. If the reference instrument’s volatility does increase over the specified
time, the Fund will receive a payment from its counterparty based upon the amount by which the reference
instrument’s realized volatility level exceeds a volatility level agreed upon by the parties. If the reference instrument’s
volatility does not increase over the specified time, the Fund will make a payment to the counterparty based upon the
amount by which the reference instrument’s realized volatility level falls below the volatility level agreed upon by the
parties. Payments on a volatility swap will be greater if they are based upon the mathematical square of volatility (i.e.,
the measured volatility multiplied by itself, which is referred to as “variance”). This type of a volatility swap is frequently
referred to as a variance swap. Certain of the Funds may engage in variance swaps. Correlation swaps are contracts
that provide exposure to increases or decreases in the correlation between the prices of different assets or different
market rates. Certain of the Funds may engage in variance swaps and correlation swaps.
Permitted Investment Activities and Certain Associated Risks
Set forth below are descriptions of permitted investment activities for the Fund and certain of their associated risks.
The activities are organized into various categories. To the extent that an activity overlaps two or more categories, the
activity is referenced only once in this section. The Fund may or may not participate in all of the investment activities
described below. In addition, with respect to the Fund, to the extent that an investment activity is described in the
Fund’s Prospectus as being part of its principal investment strategy, the information provided below regarding such
investment activity is intended to supplement, but not supersede, the information contained in the Prospectus, and
the Fund may engage in such investment activity in accordance with the limitations set forth in the Prospectus. To the
extent an investment activity is described in this SAI that is not referenced in the Prospectus, the Fund under normal
circumstances will not engage in such investment activity with more than 15% of its assets unless otherwise specified
below. Unless otherwise noted or required by applicable law, the percentage limitations included in this SAI apply at
the time of purchase of a security.
For purposes of monitoring the investment policies and restrictions of the Fund (with the exception of the loans of
portfolio securities policy described below), the amount of any securities lending collateral held by the Fund will be
excluded in calculating total assets.
DEBT SECURITIES
Debt securities include bonds, corporate debt securities and similar instruments, issued by various U.S. and non-U.S.
public- or private-sector entities. The issuer of a debt security has a contractual obligation to pay interest at a stated
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rate on specific dates and to repay principal (the debt security’s face value) periodically or on a specified maturity date.
An issuer may have the right to redeem or “call” a debt security before maturity, in which case the investor may have to
reinvest the proceeds at lower market rates. The value of fixed-rate debt securities will tend to fall when interest rates
rise, and rise when interest rates fall. The values of “floating-rate” or “variable-rate” debt securities, on the other hand,
fluctuate much less in response to market interest-rate movements than the value of fixed-rate debt securities. Debt
securities may be senior or subordinated obligations. Senior obligations, including certain bonds and corporate debt
securities, generally have the first claim on a corporation’s earnings and assets and, in the event of liquidation, are paid
before subordinated debt. Debt securities may be unsecured (backed only by the issuer’s general creditworthiness) or
secured (also backed by specified collateral).
Debt securities are interest-bearing investments that promise a stable stream of income; however, the prices of such
securities are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price
fluctuations. Longer-term securities are affected to a greater extent by changes in interest rates than shorter-term
securities. The values of debt securities also may be affected by changes in the credit rating or financial condition of
the issuing entities. Certain securities that may be purchased by a Fund, such as those rated “Baa” or lower by Moody’s
Investors Service, Inc. (“Moody’s”) and “BBB” or lower by Standard & Poor’s Rating Group (“S&P”) and Fitch Investors
Service, Inc. (“Fitch”) tend to be subject to greater issuer credit risk, to greater market fluctuations and pricing
uncertainty, and to less liquidity than lower-yielding, higher-rated debt securities. A Fund could lose money if the
issuer is unable or unwilling to meet its financial obligations. If a security held by a Fund is downgraded, such Fund
may continue to hold the security until such time as the Fund’s sub-adviser determines it to be advantageous for the
Fund to sell the security. Investing in debt securities is subject to certain risks including, among others, credit and
interest rate risk, as more fully described in this section.
A Fund may purchase instruments that are not rated if, as determined by the Fund’s sub-adviser, such obligations are
of investment quality comparable to other rated investments that are permitted to be purchased by such Fund. After
purchase by a Fund, a security may cease to be rated, or its rating may be reduced below the minimum required for
purchase by such Fund. Neither event will require a sale of such security by the Fund. To the extent the ratings given by
Moody’s, Fitch or S&P may change as a result of changes in such organizations’ rating systems, a Fund will attempt to
use comparable ratings as standards for investments in accordance with the investment policies contained in its
Prospectus and in this SAI.
Certain of the debt obligations a Fund may purchase (including certificates of participation, commercial paper and
other short-term obligations) may be backed by a letter of credit from a bank or insurance company. A letter of credit
guarantees that payment to a lender will be received on time and for the correct amount, and is typically
unconditional and irrevocable. In the event that the indebted party is unable to make payment on the debt obligation,
the bank or insurance company will be required to cover the full or remaining amount of the debt obligation.
Corporate debt securities are long and short term fixed-income securities typically issued by businesses to finance
their operations. The issuer of a corporate debt security has a contractual obligation to pay interest at a stated rate on
specific dates and to repay principal periodically or on a specified maturity date. The rate of interest on a corporate
debt security may be fixed, floating, or variable, and could vary directly or inversely with respect to a reference rate. An
issuer may have the right to redeem or “call” a corporate debt security before maturity, in which case the investor may
have to reinvest the proceeds at lower market rates. The value of fixed-rate corporate debt securities will tend to fall
when interest rates rise and rise when interest rates fall. Senior obligations generally have the first claim on a
corporation’s earnings and assets and, in the event of liquidation, are paid before subordinated debt. Corporate debt
securities may be unsecured (backed only by the issuer’s general creditworthiness) or secured (also backed by
specified collateral). Because of the wide range of types and maturities of corporate debt securities, as well as the
range of creditworthiness of issuers, corporate debt securities can have widely varying risk/return profiles.
Asset-Backed Securities.
Asset-backed securities are securities that are secured or “backed” by pools of various types of
assets on which cash payments are due at fixed intervals over set periods of time. Asset-backed securities are created
in a process called securitization. In a securitization transaction, an originator of loans or an owner of accounts
receivable of a certain type of asset class sells such underlying assets to a special purpose entity, so that there is no
recourse to such originator or owner. Payments of principal and interest on asset-backed securities typically are tied to
payments made on the pool of underlying assets in the related securitization. Such payments on the underlying assets
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are effectively “passed through” to the asset-backed security holders on a monthly or other regular, periodic basis. The
level of seniority of a particular asset-backed security will determine the priority in which the holder of such
asset-backed security is paid, relative to other security holders and parties in such securitization. Examples of
underlying assets include consumer loans or receivables, home equity loans, credit card loans, student loans,
automobile loans or leases, and timeshares, although other types of receivables or assets also may be used as
underlying assets.
While asset-backed securities typically have a fixed, stated maturity date, low prevailing interest rates may lead to an
increase in the prepayments made on the underlying assets. This may cause the outstanding balances due on the
underlying assets to be paid down more rapidly. As a result, a decrease in the originally anticipated interest from such
underlying securities may occur, causing the asset-backed securities to pay-down in whole or in part prior to their
original stated maturity date. Prepayment proceeds would then have to be reinvested at the lower prevailing interest
rates. Conversely, prepayments on the underlying assets may be less than anticipated, especially during periods of
high or rising interest rates, causing an extension in the duration of the asset-backed securities. The impact of any
prepayments made on the underlying assets may be difficult to predict and may result in greater volatility.
Delinquencies or losses that exceed the anticipated amounts for a given securitization could adversely impact the
payments made on the related asset-backed securities. This is a reason why, as part of a securitization, asset-backed
securities are often accompanied by some form of credit enhancement, such as a guaranty, insurance policy, or
subordination. Credit protection in the form of derivative contracts may also be purchased. In certain securitization
transactions, insurance, credit protection, or both may be purchased with respect to only the most senior classes of
asset-backed securities, on the underlying collateral pool, or both. The extent and type of credit enhancement varies
across securitization transactions.
Asset-backed securities carry additional risks including, but not limited to, the possibility that: i) the creditworthiness
of the credit support provider may deteriorate; and ii) such securities may become less liquid or harder to value as a
result of market conditions or other circumstances.
Bank Obligations.
Bank obligations include certificates of deposit, time deposits, bankers’ acceptances, and other
short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking
institutions. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds
deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Bankers’ acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation
both of the bank and of the customer to pay the face amount of the instrument upon maturity. Other short-term
obligations may include uninsured, direct obligations of the banking institution bearing fixed, floating or variable
interest rates.
The activities of U.S. banks and most foreign banks are subject to comprehensive regulations. New legislation or
regulations, or changes in interpretation and enforcement of existing laws or regulations, may affect the manner of
operations and profitability of domestic banks. With respect to such obligations issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, a Fund
may be subject to additional investment risks that are different in some respects from those incurred by a Fund that
invests only in debt obligations of domestic issuers. Such risks include political, regulatory or economic developments,
the possible imposition of foreign withholding and other taxes (at potentially confiscatory levels) on amounts realized
on such obligations, the possible establishment of exchange controls or the adoption of other foreign governmental
restrictions that might adversely affect the payment of principal and interest on these obligations and the possible
seizure or nationalization of foreign deposits. In addition, foreign branches of domestic banks and foreign banks may
be subject to less stringent reserve requirements and to different regulatory, accounting, auditing, reporting and
recordkeeping standards than those applicable to domestic branches of U.S. banks.
Banks may be particularly susceptible to certain economic factors, such as interest rate changes or adverse
developments in the market for real estate. Fiscal and monetary policy and general economic cycles can affect the
availability and cost of funds, loan demand and asset quality and thereby impact the earnings and financial conditions
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of banks. Further, the traditional banking industry is experiencing increased competition from alternative types of
financial institutions.
Collateralized Debt Obligations (“CDOs”).
CDOs pool together assets that generate cash flow, and repackages these
pools into discrete tranches that can be sold to investors. CDOs include collateralized loan obligations (“CLOs”),
collateralized bond obligations (“CBOs”), and other similarly structured securities. CLOs and CBOs are distinguished by
their underlying securities. CLOs are securities comprised of bundles of corporate loans; CBOs are securities backed by
a collection of bonds or other CDOs.
The tranches in a CDO vary substantially in their risk profiles and level of yield. Tranches bear losses in the reverse order
of their seniority with respect to one another. The most junior tranche is generally the tranche that bears the highest
level of risk, but also generally bears the highest coupon rates. The senior tranches are generally safer because they
have first priority on payback from the collateral in the event of default. As a result, the senior tranches of a CDO
generally have a higher credit rating and offer lower coupon rates than the junior tranches. Despite the protection,
even the most senior tranches can experience substantial losses due to the rate of actual defaults on the underlying
collateral. The type of collateral used as underlying securities in a particular CDO therefore may substantially impact
the risk associated with purchasing the securities.
CDOs can also be divided into two main categories: cash and synthetic. Cash CDOs are secured by cash assets, such as
loans and corporate bonds. Synthetic CDOs are secured by credit default swaps or other noncash assets that provide
exposure to a portfolio of fixed-income assets.
Cash CDOs can be further subdivided into two types: cash flow and market value. Cash flow and market value CDOs
differ from each other in the manner by which cash flow is generated to pay the security holders, the manner in which
the structure is credit-enhanced, and how the pool of underlying collateral is managed. Cash flow CDOs are
collateralized by a pool of high-yield bonds or loans, which pay principal and interest on a regular basis. Credit
enhancement is achieved by having subordinated tranches of securities. The most senior/highest-rated tranche will be
the last to be affected by any interruption of cash flow from the underlying assets. In a cash flow CDO, the collateral
manager endeavors to maintain a minimum level of diversification and weighted average rating among the
underlying assets in an effort to mitigate severity of loss. Market value CDOs receive payments based on the
mark-to-market returns on the underlying collateral. Credit enhancement for market value CDOs is achieved by
specific overcollateralization levels in the form of advance rates assigned to each underlying collateral asset. Because
principal and interest payments on the securities come from collateral cash flows and sales of collateral, which the
collateral manager monitors, returns on market value CDOs are substantially related to the collateral manager’s
performance.
CDOs carry the risk of uncertainty of timing of cash flows. Such a risk depends on the type of collateral, the degree of
diversification, and the specific tranche in which a Fund invests. Typically, CDOs are issued through private offerings
and are not registered under the securities laws. However, an active dealer market may exist for such securities,
thereby allowing such securities to trade consistent with an exemption from registration under Rule 144A under the
Securities Act of 1933, as amended. Further risks include the possibility that distributions from the collateral will not be
adequate to make interest payments, and that the quality of the collateral may decline in value or default.
Commercial Paper.
Commercial paper is a short-term, promissory note issued by a bank, corporation or other borrower
to finance short-term credit needs. Commercial paper is typically unsecured but it may be supported by letters of
credit, surety bonds or other forms of collateral. Commercial paper is usually sold on a discount basis and typically has
a maturity from 1 to 270 days. Like bonds, and other fixed-income securities, commercial paper prices are susceptible
to fluctuations in interest rates. As interest rates rise, commercial paper prices typically will decline and vice versa. The
short-term nature of a commercial paper investment, however, makes it less susceptible to such volatility than many
other securities. Variable amount master demand notes are a type of commercial paper. They are demand obligations
that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements
between the issuer and a commercial bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Dollar Roll Transactions.
Dollar roll transactions are transactions wherein a Fund sells fixed-income securities and
simultaneously makes a commitment to purchase similar, but not identical, securities at a later date from the same
party and at a predetermined price. Mortgage-backed security dollar rolls and U.S. Treasury dollar rolls are types of
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dollar rolls. Like a forward commitment, during the roll period, no payment is made by a Fund for the securities
purchased, and no interest or principal payments on the securities purchased accrue to the Fund, but the Fund
assumes the risk of ownership. A Fund is compensated for entering into dollar roll transactions by the difference
between the current sales price and the forward price for the future purchase, as well as by the interest earned on the
cash proceeds of the initial sale. Dollar roll transactions may result in higher transaction costs for a Fund.
High-Yield Securities.
High-yield securities (also known as “junk bonds”) are debt securities that are rated below
investment-grade, or are unrated and deemed by the Fund’s sub-adviser to be below investment-grade, or are in
default at the time of purchase. These securities are considered to be high-risk investments and have a much greater
risk of default (or in the case of bonds currently in default, of not returning principal). High-yield securities also tend to
be more volatile than higher-rated securities of similar maturity. The value of these debt securities can be affected by
overall economic conditions, interest rates, and the creditworthiness of the individual issuers. These securities tend to
be less liquid and more difficult to value than higher-rated securities. If market quotations are not readily available for
the Funds’ lower-rated or nonrated securities, these securities will be valued by a method that the Funds’ Boards
believe reflects their fair value.
The market values of certain high yield and comparable unrated securities tend to be more sensitive to individual
corporate developments and changes in economic conditions than investment-grade securities. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market. In addition, issuers of high yield and comparable unrated
securities often are highly leveraged and may not have more traditional methods of financing available to them. Their
ability to service their debt obligations, especially during an economic downturn or during sustained periods of high
interest rates, may be impaired.
High yield and comparable unrated securities are typically unsecured and frequently are subordinated to senior
indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. The existence of limited trading markets for high yield
and comparable unrated securities may diminish a Fund’s ability to: i) obtain accurate market quotations for purposes
of valuing such securities and calculating its net asset value; and ii) sell the securities either to meet redemption
requests or to respond to changes in the economy or in financial markets.
Loan Participations.
A loan participation gives a Fund an undivided proportionate interest in a partnership or trust that
owns a loan or instrument originated by a bank or other financial institution. Typically, loan participations are offered
by banks or other financial institutions or lending syndicates and are acquired by multiple investors. Principal and
interest payments are passed through to the holder of the loan participation. Loan participations may carry a demand
feature permitting the holder to tender the participations back to the bank or other institution. Loan participations,
however, typically do not provide the holder with any right to enforce compliance by the borrower, nor any rights of
set-off against the borrower, and the holder may not directly benefit from any collateral supporting the loan in which
it purchased a loan participation. As a result, the holder may assume the credit risk of both the borrower and the
lender that is selling the loan participation.
Loan participations in which a Fund may invest are subject generally to the same risks as debt securities in which the
Fund may invest. Loan participations in which a Fund invests may be made to finance highly leveraged corporate
acquisitions. The highly leveraged capital structure of the borrowers in such transactions may make such loan
participations especially vulnerable to adverse changes in economic or market conditions. Loan participations
generally are subject to restrictions on transfer, and only limited opportunities may exist to sell such loan
participations in secondary markets. As a result, a Fund may be unable to sell loan participations at a time when it may
otherwise be desirable to do so, or may be able to sell them only at a price below their fair market value. Market bids
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may be unavailable for loan participations from time to time; a Fund may find it difficult to establish a fair value for
loan participations held by it. Many loan participations in which a Fund invests may be unrated, and the Fund’s
sub-adviser will be required to rely exclusively on its analysis of the borrower in determining whether to acquire, or to
continue to hold, a loan participation. In addition, under legal theories of lender liability, a Fund potentially might be
held liable as a co-lender.
Money Market Instruments.
Money market instruments provide short-term funds to businesses, financial institutions
and governments. They are debt instruments issued with maturities of thirteen months or less, and that are
determined to present minimal credit risk. Because of their short-term maturities and by whom these debt
instruments are issued, money market instruments are extremely liquid and provide relatively few risks. Common
money market instruments include Treasury bills, certificates of deposit, commercial paper, banker’s acceptances, and
repurchase agreements among others.
Mortgage-Backed Securities.
Mortgage-backed securities, also called mortgage pass-through securities, are issued in
securitizations (see “Asset-Backed Securities” section) and represent interests in “pools” of underlying mortgage loans
that serve as collateral for such securities. These mortgage loans may have either fixed or adjustable interest rates. A
guarantee or other form of credit support may be attached to a mortgage-backed security to protect against default
on obligations. Similar to asset-backed securities, the monthly payments made by the individual borrowers on the
underlying mortgage loans are effectively “passed through” to the holders of the mortgage-backed securities (net of
administrative and other fees paid to various parties) as monthly principal and interest payments. Some
mortgage-backed securities make payments of both principal and interest at a range of specified intervals, while
others make semiannual interest payments at a predetermined rate and repay principal only at maturity. An economic
downturn—particularly one that contributes to an increase in delinquencies and defaults on residential mortgages,
falling home prices, and unemployment—may adversely affect the market for and value of mortgage-backed
securities.
The stated maturities of mortgage-backed securities may be shortened by unscheduled prepayments of principal on
the underlying mortgage loans, and the expected maturities may be extended in rising interest-rate environments.
Therefore, it is not possible to predict accurately the maturity of a particular mortgage-backed security. Variations in
the maturities of mortgage-backed securities resulting from prepayments will affect the yield of each such security
and the portfolio as a whole. Rates of prepayment of principal on the underlying mortgage loans in mortgage-backed
securitizations that are faster than expected may expose the holder to a lower rate of return upon reinvestment of
proceeds at lower prevailing interest rates. Also, if a mortgage-backed security has been purchased at a premium and
is backed by underlying mortgage loans that are subject to prepayment, the value of the premium would effectively
be lost or reduced if prepayments are made on such underlying collateral. Conversely, to the extent a
mortgage-backed security is purchased at a discount, both a scheduled payment of principal and an unscheduled
payment of principal would increase current and total returns, as well as accelerate the recognition of income.
Mortgage-backed securities are subject to credit risk, which includes the risk that the holder may not receive all or part
of its interest or principal because the issuer, or any credit enhancer and/or the underlying mortgage borrowers have
defaulted on their obligations. Credit risk is increased for mortgage-backed securities that are subordinated to another
security (i.e., if the holder of a mortgage-backed security is entitled to receive payments only after payment
obligations to holders of the other security are satisfied). The more deeply subordinated the security, the greater the
credit risk associated with the security will be.
In addition, the Funds may purchase some mortgage-backed securities through private placements that are restricted
as to further sale. Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to
guarantees by the private issuer, typically entail greater credit risk than mortgage-backed securities guaranteed by a
government association or government-sponsored enterprise. The performance of mortgage-backed securities issued
by private issuers depends, in part, on the financial health of any guarantees and the performance of the mortgage
pool backing such securities. An unexpectedly high rate of defaults on mortgages held by a mortgage pool may limit
substantially the pool’s ability to make payments of principal or interest to the holder of such mortgage-backed
securities, particularly if such securities are subordinated, thereby reducing the value of such securities and, in some
cases, rendering them worthless. The risk of such defaults is generally higher in the case of mortgage pools that
include “subprime” mortgages.
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Like other fixed-income securities, when interest rates rise, the value of mortgage-backed securities generally will
decline and may decline more than other fixed-income securities as the expected maturity extends. Conversely, when
interest rates decline, the value of mortgage-backed securities having underlying collateral with prepayment features
may not increase as much as other fixed-income securities as the expected maturity shortens. Payment of principal
and interest on some mortgage-backed securities issued or guaranteed by a government agency (but not the market
value of the securities themselves) is guaranteed by a U.S. Government sponsored entity, such as Government National
Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan
Mortgage Corporation (“FHLMC”). Unlike FHLMC and FNMA, which act as both issuers and guarantors of
mortgage-backed securities, GNMA only provides guarantees of mortgage-backed securities. Only GNMA guarantees
are backed by the full faith and credit of the U.S. Government. Mortgage-backed securities issued or guaranteed by
FHLMC or FNMA are not backed by the full faith and credit of the U.S. Government. FHLMC and FNMA are authorized
to borrow money from the U.S. Treasury or the capital markets, but there can be no assurance that they will be able to
raise funds as needed or that their existing capital will be sufficient to satisfy their guarantee obligations.
Mortgage-backed securities created by private issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported by
various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. Mortgage-backed
securities that are not insured or guaranteed generally offer a higher rate of return in the form of interest payments,
but also expose the holders to greater credit risk.
Adjustable-Rate Mortgage Securities (“ARMS”).
ARMS represent an ownership interest in a pool of mortgage loans that
generally carry adjustable interest rates, and in some cases principal repayment rates, that are reset periodically. ARMS
are issued, guaranteed or otherwise sponsored by governmental agencies such as GNMA, by government-sponsored
entities such as FNMA or FHLMC, or by private issuers. Mortgage loans underlying ARMS typically provide for a fixed
initial mortgage interest rate for a specified period of time and, thereafter, the interest rate may be subject to periodic
adjustments based on changes in an applicable index rate. Adjustable interest rates can cause payment increases that
some borrowers may find difficult to make.
Collateralized Mortgage Obligations (“CMOs”).
CMOs are debt obligations that may be collateralized by whole mortgage
loans, but are more typically collateralized by portfolios of mortgage-backed securities guaranteed by GNMA, FHLMC,
or FNMA, and divided into classes. CMOs are structured into multiple classes, often referred to as “tranches,” with each
class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest,
including pre-payments. Payments of principal on the underlying securities, including prepayments, are first “passed
through” to investors holding the class of securities with the shortest maturity; investors holding classes of securities
with longer maturities receive payments on their securities only after the more senior classes have been retired. A
longer duration or greater sensitivity to interest rate fluctuations generally increases the risk level of a CMO. CMOs may
be less liquid and may exhibit greater price volatility than other types of mortgage-backed securities. Examples of
CMOs include commercial mortgage-backed securities and adjustable-rate mortgage securities.
Commercial Mortgage-Backed Securities (“CMBS”).
CMBS are securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property, such as loans for hotels, restaurants, shopping centers, office buildings,
and apartment buildings. Interest and principal payments from the underlying loans are passed through to CMBS
holders according to a schedule of payments. Because the underlying commercial mortgage loans tend to be
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structured with prepayment penalties, CMBS generally carry less prepayment risk than securities backed by residential
mortgage loans.
Investing in CMBS expose a Fund to the risks of investing in the commercial real estate securing the underlying
mortgage loans. These risks include the effects of local and other economic conditions on real estate markets, the
ability of tenants to make loan payments and the ability of a commercial property to attract and retain tenants. The
value of CMBS may change because of: i) actual or perceived changes in the creditworthiness of the borrowers or their
tenants; ii) deterioration in the general state of commercial real estate or in the types of properties backing the CMBS;
or iii) overall economic conditions. Credit quality of the CMBS depends primarily on the quality of the loans themselves
and on the structure of the particular deal. While CMBS are sold both in public transactions registered with the SEC and
in private placement transactions, CMBS may be less liquid and exhibit greater price volatility than other types of
mortgage-backed or asset-backed securities.
Stripped Mortgage-Backed Securities.
Stripped mortgage-backed securities (“SMBS”) typically are structured with two or
more classes that receive different proportions of the interest and principal distributions from a pool of
mortgage-backed assets. SMBS are commonly structured so that one class receives only the principal, while another
class only receives interest. Principal-only SMBS generally are structured to make a lump-sum payment at maturity and
not to make periodic payments of principal or interest. Hence, the duration of these securities tends to be longer and
they are therefore more sensitive to interest-rate fluctuations than securities that offer periodic payments over time.
SMBS that are structured to receive interest only tend to increase in value as prevailing interest rates increase.
Municipal Bonds.
Municipal bonds are debt obligations of a governmental entity issued to obtain funds for various
public purposes that obligate the municipality to pay the holder a specified sum of money at specified intervals and to
repay the principal amount of the loan at maturity. The two principal classifications of municipal bonds are “general
obligation” and “revenue” bonds. General obligation bonds are typically, but not always, supported by the
municipality’s general taxing authority, while revenue bonds are supported by the revenues from one or more
particular project, facility, class of facilities, or activity. The revenue bond classification encompasses industrial revenue
bonds (“IRBs”) (formerly known as industrial development bonds). IRBs are organized by a government entity but the
proceeds are directed to a private, for-profit business. IRBs are backed by the credit and security of the private,
for-profit business. IRBs are typically used to support a specific project, such as to build or acquire factories or other
heavy equipment and tools. With an IRB, the sponsoring government entity holds title to the underlying collateral until
the bonds are paid in full. In certain circumstances, this may provide a federal tax exempt status to the bonds, and
many times a property tax exemption on the collateral. With an IRB, the sponsoring government entity is not
responsible for bond repayment and the bonds do not affect the government’s credit rating. Under the Internal
Revenue Code, certain revenue bonds are considered “private activity bonds” and interest paid on such bonds is
treated as an item of tax preference for purposes of calculating federal alternative minimum tax liability.
Certain of the municipal obligations held by the Funds may be insured as to the timely payment of principal and
interest. The insurance policies usually are obtained by the issuer of the municipal obligation at the time of its original
issuance. In the event that the issuer defaults on interest or principal payment, the insurer will be notified and will be
required to make payment to the bondholders. Although the insurance feature is designed to reduce certain financial
risks, the premiums for insurance and the higher market price sometimes paid for insured obligations may reduce the
Funds’ current yield. To the extent that securities held by the Funds are insured as to principal and interest payments
by insurers whose claims-paying ability rating is downgraded by a nationally recognized statistical ratings organization
(e.g., Moody’s, S&P, or Fitch ), the value of such securities may be affected. There is, however, no guarantee that the
insurer will meet its obligations. Moreover, the insurance does not guarantee the market value of the insured
obligation or the net asset value of the Funds’ shares. In addition, such insurance does not protect against market
fluctuations caused by changes in interest rates and other factors. The Funds also may purchase municipal obligations
that are additionally secured by bank credit agreements or escrow accounts. The credit quality of companies which
provide such credit enhancements will affect the value of those securities.
The risks associated with municipal bonds vary. Local and national market forces—such as declines in real estate prices
and general business activity—may result in decreasing tax bases, fluctuations in interest rates, and increasing
construction costs, all of which could reduce the ability of certain issuers of municipal bonds to repay their obligations.
Certain issuers of municipal bonds have also been unable to obtain additional financing through, or must pay higher
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interest rates on, new issues, which may reduce revenues available for issuers of municipal bonds to pay existing
obligations.
Because of the large number of different issuers of municipal bonds, the variance in size of bonds issued, and the
range of maturities within the issues, most municipal bonds do not trade on a daily basis, and many trade only rarely.
Because of this, the spread between the bid and offer may be wider, and the time needed to purchase or sell a
particular bond may be longer than for other securities.
Municipal securities are typically issued together with an opinion of bond counsel to the issuer that the interest paid
on those securities will be excludable from gross income for federal income tax purposes. Such opinion may have
been issued as of a date prior to the date that a Fund acquired the municipal security. Subsequent to a Fund’s
acquisition of such a municipal security, however, the security may be determined to pay, or to have paid, taxable
income. As a result, the treatment of dividends previously paid or to be paid by a Fund as “exempt-interest dividends”
could be adversely affected, subjecting the Fund’s shareholders to increased federal income tax liabilities. Under highly
unusual circumstances, the Internal Revenue Service may determine that a municipal bond issued as tax-exempt
should in fact be taxable. If any Fund held such a bond, it might have to distribute taxable income, or reclassify as
taxable, ordinary income that was previously distributed as exempt-interest dividends.
Changes or proposed changes in state or federal tax laws could impact the value of municipal debt securities that a
Fund may purchase. Also, the failure or possible failure of such debt issuances to qualify for tax-exempt treatment may
cause the prices of such municipal securities to decline, possibly adversely affecting the value of a Fund’s portfolio.
Such a failure could also result in additional taxable income to a Fund and/or shareholders.
Municipal Leases.
Municipal leases are obligations in privately arranged loans to state or local government borrowers
and may take the form of a lease, installment purchase or conditional sales contract (which typically provide for the
title to the leased asset to pass to the governmental issuer). They are issued by state and local governments and
authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may
purchase participation interests in such obligations. Interest income from such obligations is generally exempt from
local and state taxes in the state of issuance. “Participations” in such leases are undivided interests in a portion of the
total obligation. Participations entitle their holders to receive a pro rata share of all payments under the lease.
Municipal leases and participations therein frequently involve special risks.
Municipal leases may be subject to greater risks than general obligation or revenue bonds. In most cases, municipal
leases are not backed by the taxing authority of the issuers and may have limited marketability. Certain municipal
lease obligations contain “non-appropriation” clauses, which provide that the municipality has no obligation to make
lease or installment purchase payments in future years unless money is appropriated for such purpose in the relevant
years. Investments in municipal leases are thus subject to the risk that the legislative body will not make the necessary
appropriation and the issuer will not otherwise be willing or able to meet its obligation. Municipal leases may also be
subject to “abatement risk.” The leases underlying certain municipal lease obligations may state that lease payments
are subject to partial or full abatement. That abatement might occur, for example, if material damage to or destruction
of the leased property interferes with the lessee’s use of the property. However, in some cases that risk might be
reduced by insurance covering the leased property, or by the use of credit enhancements such as letters of credit to
back lease payments, or perhaps by the lessee’s maintenance of reserve monies for lease payments. While the
obligation might be secured by the lease, it might be difficult to dispose of that property in case of a default.
Municipal Market Data Rate Locks.
A municipal market data rate lock (“MMD Rate Lock”) permits an issuer that
anticipates issuing municipal bonds in the future to, in effect, lock in a specified interest rate. A MMD Rate Lock also
permits an investor (e.g., a Fund) to lock in a specified rate for a portion of its portfolio in order to: i) preserve returns
on a particular investment or a portion of its portfolio; ii) manage duration; and/or iii) protect against increases in the
prices of securities to be purchased at a later date. By using an MMD Rate Lock, a Fund can create a synthetic long or
short position, allowing the Fund to select what the sub-adviser believes is an attractive part of the yield curve. A Fund
will ordinarily use these transactions as a hedge or for duration or risk management, but may enter into them to
enhance income or gains, or to increase yield, for example, during periods of steep interest rate yield curves (i.e., wide
differences between short term and long term interest rates).
A MMD Rate Lock is a contract between the investor and the MMD Rate Lock provider pursuant to which the parties
agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data
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AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if
a Fund buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified
level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified
level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA
General Obligation Scale is above the specified level on the expiration date, the Fund will make a payment to the
counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract. In
connection with investments in MMD Rate Locks, there is a risk that municipal yields will move in the opposite
direction than anticipated by a Fund, which would cause the Fund to make payments to its counterparty in the
transaction that could adversely affect the Fund’s performance.
Stand-by Commitments.
A Fund may purchase municipal securities together with the right to resell the underlying
municipal securities to the seller or a third party (typically an institution such as a bank or broker-dealer that is
believed to continually satisfy credit quality requirements) at an agreed-upon price or yield within specified periods
prior to their maturity dates. Such a right to resell is commonly known as a stand-by commitment, and the aggregate
price that a Fund pays for securities with a stand-by commitment may be higher than the price that otherwise would
be paid. The primary purpose of this practice is to permit a Fund to be as fully invested as practicable in municipal
securities while preserving the necessary flexibility and liquidity to meet unanticipated redemptions. In this regard, a
Fund acquires stand-by commitments solely to facilitate portfolio liquidity and does not exercise its rights thereunder
for trading purposes.
When a Fund pays directly or indirectly for a stand-by commitment, its cost is reflected as unrealized depreciation for
the period during which the commitment is held. Stand-by commitments do not affect the average weighted maturity
of a Fund’s portfolio of securities.
The principal risk of stand-by commitments is that the writer of a commitment may default on its obligation to
repurchase the securities when a Fund exercises its stand-by commitment. Stand-by commitments are not separately
marketable and there may be differences between the maturity of the underlying security and the maturity of the
commitment.
Taxable Municipal Obligations.
Certain municipal obligations may be subject to federal income tax for a variety of
reasons. Taxable municipal obligations are typically issued by municipalities or their agencies for purposes which do
not qualify for federal tax exemption, but do qualify for state and local tax exemptions. For example, a taxable
municipal obligation would not qualify for the federal income exemption where (a) the governmental entity did not
receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) the
governmental entity exceeds certain regulatory limitations on the cost of issuance for tax-exempt financing, or (c) the
governmental entity finances public or private activities that do not qualify for the federal income tax exemption.
These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional
and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality’s
underfunded pension plan. Generally, payments on taxable municipal obligations depend on the revenues generated
by the projects, excise taxes or state appropriations, or whether the debt obligations can be backed by the
government’s taxing power. Due to federal taxation, taxable municipal obligations typically offer yields more
comparable to other taxable sectors such as corporate bonds or agency bonds than to other municipal obligations.
U.S. Territories, Commonwealths and Possessions Obligations.
A Fund may invest in municipal securities issued by certain
territories, commonwealths and possessions of the United States, including but not limited to, Puerto Rico, Guam, and
the U.S. Virgin Islands, that pay interest that is exempt from federal income tax and state personal income tax. The
value of these securities may be highly sensitive to events affecting the fiscal stability of the issuers. These issuers may
face significant financial difficulties for various reasons, including as the result of events that cannot be reasonably
anticipated or controlled, such as social conflict or unrest, labor disruption and natural disasters. In particular,
economic, legislative, regulatory or political developments affecting the ability of the issuers to pay interest or repay
principal may significantly affect the value of a Fund’s investments. These developments can include or arise from, for
example, insolvency of an issuer, uncertainties related to the tax status of the securities, tax base erosion, state or
federal constitutional limits on tax increases or other actions, budget deficits and other financial difficulties, or changes
in the credit ratings assigned to the issuers. The value of a Fund’s shares will be negatively impacted to the extent it
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invests in such securities. Further, there may be a limited market for certain of these municipal securities, and the Fund
could face illiquidity risks.
Municipal securities issued by Puerto Rico and its agencies and instrumentalities have been subject to multiple credit
downgrades as a result of Puerto Rico’s ongoing fiscal challenges and uncertainty about its ability to make full
repayment on these obligations. The majority of Puerto Rico’s debt is issued by the major public agencies that are
responsible for many of the island’s public functions, such as water, wastewater, highways, electricity, education and
public construction. Certain risks specific to Puerto Rico concern state taxes, e-commerce spending, and underfunded
pension liabilities. Any debt restructuring could reduce the principal amount due, the interest rate, the maturity and
other terms of Puerto Rico municipal securities, which could adversely affect the value of such securities.
Municipal Notes.
Municipal notes generally are used to provide short-term operating or capital needs and typically
have maturities of one year or less. Notes sold as interim financing in anticipation of collection of taxes, a bond sale or
receipt of other revenues are usually general obligations of the issuer. The values of outstanding municipal securities
will vary as a result of changing market evaluations of the ability of their issuers to meet the interest and principal
payments (i.e., credit risk). Such values also will change in response to changes in the interest rates payable on new
issues of municipal securities (i.e., market risk). The category includes, but is not limited to, tax anticipation notes, bond
anticipation notes, revenue anticipation notes, revenue anticipation warrants, and tax and revenue anticipation notes.
U.S. Government Obligations.
U.S. Government obligations include direct obligations of the U.S. Treasury, including
Treasury bills, notes and bonds, the principal and interest payments of which are backed by the full faith and credit of
the U.S. This category also includes other securities issued by U.S. Government agencies or U.S. Government sponsored
entities, such as GNMA, FNMA and FHLMC. U.S. Government Obligations issued by U.S. Government agencies or
government-sponsored entities may not be backed by the full faith and credit of the U.S. Government.
GNMA, a wholly owned U.S. Government corporation, is authorized to guarantee, with the full faith and credit of the
U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA
and backed by pools of mortgages insured by the Federal Housing Administration or the Department of Veterans
Affairs. Securities issued by FNMA and FHLMC are not backed by the full faith and credit of the U.S. Government.
Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but
are not backed by the full faith and credit of the U.S. Government. FHLMC guarantees the timely payment of interest
and ultimate collection or scheduled payment of principal, but its guarantees are not backed by the full faith and
credit of the U.S. Government.
While U.S. Treasury obligations are backed by the “full faith and credit” of the U.S. Government, such securities are
nonetheless subject to risk. U.S. Government obligations are subject to low but varying degrees of credit risk, and are
still subject to interest rate and market risk. From time to time, uncertainty regarding congressional action to increase
the statutory debt ceiling could: i) increase the risk that the U.S. Government may default on payments on certain U.S.
Government securities; ii) cause the credit rating of the U.S. Government to be downgraded or increase volatility in
both stock and bond markets; iii) result in higher interest rates; iv) reduce prices of U.S. Treasury securities; and/or v)
increase the costs of certain kinds of debt. U.S. Government obligations may be adversely affected by a default by, or
decline in the credit quality of, the U.S. Government. In the past, U.S. sovereign credit has experienced downgrades,
and there can be no guarantee that it will not be downgraded in the future. Further, if a U.S. Government-sponsored
entity is negatively impacted by legislative or regulatory action, is unable to meet its obligations, or its
creditworthiness declines, the performance of a Fund that holds securities of the entity will be adversely impacted.
Zero-Coupon, Step-Up Coupon, and Pay-in-Kind Securities.
Zero-coupon, step-up coupon, and pay-in-kind securities
are types of debt securities that do not make regular cash interest payments. Asset-backed securities, convertible
securities, corporate debt securities, foreign securities, high-yield securities, mortgage-backed securities, municipal
securities, participation interests, stripped securities, U.S. Government and related obligations and other types of debt
instruments may be structured as zero-coupon, step-up coupon, and pay-in-kind securities.
Instead of making periodic interest payments, zero-coupon securities are sold at discounts from face value. The
interest earned by the investor from holding this security to maturity is the difference between the maturity value and
the purchase price. Step-up coupon bonds are debt securities that do not pay interest for a specified period of time
and then, after the initial period, pay interest at a series of different rates. Pay-in-kind securities normally give the issuer
an option to pay cash at a coupon payment date or to give the holder of the security a similar security with the same
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coupon rate and a face value equal to the amount of the coupon payment that would have been made. To the extent
these securities do not pay current cash income, the market prices of these securities would generally be more volatile
and likely to respond to a greater degree to changes in interest rates than the market prices of securities that pay cash
interest periodically having similar maturities and credit qualities.
EQUITY SECURITIES
Equity securities represent an ownership interest, or the right to acquire an ownership interest, in an issuer. Different
types of equity securities provide different voting and dividend rights and priority in the event of the bankruptcy and/
or insolvency of the issuer. Equity securities include common stocks and certain preferred stocks, certain types of
convertible securities and warrants (see “Other Securities Section below”). Equity securities other than common stock
are subject to many of the same risks as common stock, although possibly to different degrees. The risks of equity
securities are generally magnified in the case of equity investments in distressed companies.
Equity securities fluctuate in value and the prices of equity securities tend to move by industry, market or sector. When
market conditions favorably affect, or are expected to favorably affect, an industry, the share prices of the equity
securities of companies in that industry tend to rise. Conversely, negative news or a poor outlook for a particular
industry can cause the share prices of such securities of companies in that industry to decline. Investing in equity
securities poses risks specific to an issuer, as well as to the particular type of company issuing the equity securities. For
example, investing in the equity securities of small- or mid-capitalization companies can involve greater risk than is
customarily associated with investing in stocks of larger, more-established companies. Small- or mid-capitalization
companies often have limited product lines, limited operating histories, limited markets or financial resources, may be
dependent on one or a few key persons for management, and can be more susceptible to financial losses. Also, their
securities may be thinly traded (and therefore may have to be sold at a discount from current prices or sold in small
lots over an extended period of time) and may be subject to wider price swings, thus creating a greater risk of loss than
securities of larger capitalization companies.
Common Stock.
Common stock represents a unit of equity ownership of a corporation. Owners typically are entitled to
vote on the election of directors and other important corporate governance matters, and to receive dividend
payments, if any, on their holdings. However, ownership of common stock does not entitle owners to participate in the
day-to-day operations of the corporation. Common stocks of domestic and foreign public corporations can be listed,
and their shares traded, on domestic stock exchanges, such as the NYSE or the NASDAQ Stock Market. Domestic and
foreign corporations also may have their shares traded on foreign exchanges, such as the London Stock Exchange or
Tokyo Stock Exchange. Common stock may be privately placed or publicly offered.
The price of common stock is generally affected by corporate earnings, anticipated dividend payments, types of
products or services offered, projected growth rates, experience of management, liquidity, and general market
conditions. In the event that a corporation declares bankruptcy or is liquidated, the claims of secured and unsecured
creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
The value of common stock may fall due to changes in general economic conditions that impact the market as a
whole, as well as factors that directly relate to a specific company or its industry. Such general economic conditions
include changes in interest rates, periods of market turbulence or instability, or general and prolonged periods of
economic decline and cyclical change. It is possible that a drop in the stock market may depress the price of most or all
of the common stocks in a Fund’s portfolio. Common stock is also subject to the risk that investor sentiment toward
particular industries will become negative. The value of a company’s common stock may fall because of various factors,
including an increase in production costs that negatively impact other companies in the same region, industry or
sector of the market. The value of common stock also may decline significantly over a short period of time due to
factors specific to a company, including decisions made by management or lower demand for the company’s products
or services.
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ownership interest in that company. Distributions on preferred stock generally are taxable as dividend income, rather
than interest payments, for federal income tax purposes.
Preferred stock generally has no maturity date, so its market value is dependent on the issuer’s business prospects for
an indefinite period of time. Preferred stock may pay fixed or adjustable rates of return. Preferred stock is subject to
issuer-specific and market risks generally applicable to equity securities. A company generally pays dividends on its
preferred stock only after making required payments to holders of its bonds and other debt. For this reason, the value
of preferred stock will usually react more strongly than bonds and other debt to actual or perceived changes in the
company’s financial condition or prospects. Preferred stock of smaller companies may be more vulnerable to adverse
developments than preferred stock of larger companies. In addition, preferred stock is subordinated to all debt
obligations in the event of insolvency, and an issuer’s failure to make a dividend payment is generally not an event of
default entitling the preferred shareholders to take action.
Auction preferred stock (“APS”) is a type of adjustable-rate preferred stock with a dividend determined periodically in a
Dutch auction process by institutional bidders. An APS is distinguished from standard preferred stock because its
dividends change more frequently. Shares typically are bought and sold at face values generally ranging from
$100,000 to $500,000 per share. Holders of APS may not be able to sell their shares if an auction fails, such as when
there are more shares of APS for sale at an auction than there are purchase bids.
Trust-preferred securities, also known as trust-issued securities, are securities that have characteristics of both debt
and equity instruments and are typically treated by the Funds as debt investments. Generally, trust-preferred securities
are cumulative preferred stocks issued by a trust that is created by a financial institution, such as a bank holding
company. The financial institution typically creates the trust with the objective of increasing its capital by issuing
subordinated debt to the trust in return for cash proceeds that are reflected on the financial institution’s balance sheet.
The primary asset owned by a trust is the subordinated debt issued to the trust by the financial institution. The
financial institution makes periodic interest payments on the debt as discussed further below. The financial institution
will own the trust’s common securities, which typically represents a small percentage of the trust’s capital structure.
The remainder of the trust’s capital structure typically consists of trust-preferred securities which are sold to investors.
The trust uses the proceeds from selling the trust-preferred securities to purchase the subordinated debt issued by the
financial institution.
The trust uses the interest received from the financial institution on its subordinated debt to make dividend payments
to the holders of the trust-preferred securities. The dividends are generally paid on a quarterly basis and are often
higher than other dividends potentially available on the financial institution’s common stocks. The interests of the
holders of the trust-preferred securities are senior to those of the financial institution’s common stockholders in the
event that the financial institution is liquidated, although their interests are typically subordinated to those of other
holders of other debt issued by the institution.
In certain instances, the structure involves more than one financial institution and thus, more than one trust. In such a
pooled offering, an additional separate trust may be created. This trust will issue securities to investors and use the
proceeds to purchase the trust-preferred securities issued by trust-preferred trust subsidiaries of the participating
financial institutions. In such a structure, the trust-preferred securities held by the investors are backed by other
trust-preferred securities issued by the trust subsidiaries.
If a financial institution is financially unsound and defaults on interest payments to the trust, the trust will not be able
to make dividend payments to holders of the trust-preferred securities (e.g, a Fund), as the trust typically has no
business operations other than holding the subordinated debt issued by the financial institution(s) and issuing the
trust-preferred securities and common stock backed by the subordinated debt.
Real Estate/REIT Securities.
Common, preferred and convertible securities of issuers in real estate-related industries,
real estate-linked derivatives and real estate investment trusts (“REITs”) provide exposure to the real estate sector. Each
of these types of investments is subject to risks similar to those associated with direct ownership of real estate,
including loss to casualty or condemnation, increases in property taxes and operating expenses, zoning law
amendments, changes in interest rates, overbuilding and increased competition, variations in market value, and
possible environmental liabilities.
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REITs are pooled investment vehicles that own, and typically operate, income-producing real estate. If a REIT meets
certain requirements, including distributing to shareholders substantially all of its taxable income (other than net
capital gains), then it is not generally taxed on the income distributed to shareholders. REITs are subject to
management fees and other expenses, and so the Funds that invest in REITs will bear their proportionate share of the
costs of the REITs’ operations, which are not shown as acquired fund fees and expenses in a Fund’s fee table.
There are three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily
in direct fee ownership or leasehold ownership of real property; they derive most of their income from rents. Mortgage
REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term loans, and
the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage
interests in real estate.
Along with the risks common to different types of real estate-related securities, REITs, no matter the type, involve
additional risk factors. These include poor performance by the REIT’s manager, changes to the tax laws, and failure by
the REIT to qualify for tax-free distribution of income or exemption under the 1940 Act. Furthermore, REITs are not
typically diversified and are heavily dependent on cash flows from property owners and/or tenants.
A Fund or some of the REITs in which a Fund may invest may be permitted to hold senior or residual interests in real
estate mortgage investment conduits (“REMICs”) or debt or equity interests in taxable mortgage pools. A Fund may
also hold interests in “Re-REMICs”, which are interests in securitizations formed by the contribution of asset backed or
other similar securities into a trust which then issues securities in various tranches. The Funds may participate in the
creation of a Re-REMIC by contributing assets to the issuing trust and receiving junior and/or senior securities in
return. An interest in a Re-REMIC security may be riskier than the securities originally held by and contributed to the
issuing trust, and the holders of the Re-REMIC securities will bear the costs associated with the securitization.
FOREIGN SECURITIES
Unless otherwise stated in a Fund’s prospectus, the decision on whether stocks and other securities or investments are
deemed to be “foreign” is based primarily on the issuer’s place of organization/incorporation, but the Fund may also
consider the issuer’s domicile, principal place of business, primary stock exchange listing, sources of revenue or other
factors. Foreign equity securities include common stocks and certain preferred stocks, certain types of convertible
securities and warrants (see “Equity Securities” above and “Other Securities Section” below). Foreign debt securities
may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon
securities and may be privately placed or publicly offered (see “Debt Securities” above).
Foreign securities may include securities of issuers in emerging and frontier market countries, which carry heightened
risks relative to investments in more developed foreign markets. Unless otherwise stated in a Fund’s prospectus,
countries are generally characterized by a Fund’s sub-adviser as “emerging market countries” by reference to a broad
market index, by reference to the World Bank’s per capita income brackets or based on the sub-adviser’s qualitative
judgments about a country’s level of economic and institutional development, and include markets commonly
referred to as “frontier markets.” An emerging market is generally in the earlier stages of its industrialization cycle with
a low per capita gross domestic product (“GDP”) and a low market capitalization to GDP ratio relative to those in the
United States and the European Union. Frontier market countries generally have smaller economies and even less
developed capital markets than typical emerging market countries and, as a result, the risks of investing in emerging
market countries are magnified in frontier market countries.
Investments in or exposure to foreign securities involve certain risks not associated with investments in or exposure to
securities of U.S. companies. For example, foreign markets can be extremely volatile. Foreign securities may also be less
liquid than securities of U.S. companies so that a Fund may, at times, be unable to sell foreign securities at desirable
times and/or prices. Brokerage commissions, custodial costs, currency conversion costs and other fees are also
generally higher for foreign securities. A Fund may have limited or no legal recourse in the event of default with
respect to certain foreign debt securities, including those issued by foreign governments.
The performance of a Fund may also be negatively affected by fluctuations in a foreign currency’s strength or
weakness relative to the U.S. dollar, particularly to the extent the Fund invests a significant percentage of its assets in
foreign securities or other assets denominated in non-U.S. currencies. Currency rates in foreign countries may fluctuate
significantly over short or long periods of time for a number of reasons, including changes in interest rates, imposition
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of currency exchange controls and economic or political developments in the U.S. or abroad. A Fund may also incur
currency conversion costs when converting foreign currencies into U.S. dollars and vice versa.
It may be difficult to obtain reliable information about the securities and business operations of certain foreign issuers.
It may also be difficult to evaluate such information, as well as foreign economic trends, due to foreign regulation and
accounting standards. Governments or trade groups may compel local agents to hold securities in designated
depositories that are not subject to independent evaluation. Additionally, investments in certain countries may subject
a Fund to tax rules, the application of which may be uncertain. Countries may amend or revise their existing tax laws,
regulations and/or procedures in the future, possibly with retroactive effect. Changes in or uncertainties regarding the
laws, regulations or procedures of a country could reduce the after-tax profits of a Fund, directly or indirectly, including
by reducing the after-tax profits of companies located in such countries in which the Fund invests, or result in
unexpected tax liabilities for the Fund.
Global economies and financial markets have become increasingly interconnected, which increases the possibility that
conditions in one country or region might adversely impact issuers in a different country or region. Any attempt by a
Fund to hedge against or otherwise protect its portfolio, or to profit from such circumstances, may fail and,
accordingly, an investment in a Fund could lose money over short or long periods. For example, the economies of
many countries or regions in which a Fund may invest are highly dependent on trading with certain key trading
partners. Reductions in spending on products and services by these key trading partners, the institution of tariffs or
other trade barriers, or a slowdown in the economies of key trading partners may adversely affect the performance of
securities in which a Fund may invest. The severity or duration of adverse economic conditions may also be affected by
policy changes made by governments or quasi-governmental organizations. The imposition of sanctions by the United
States or another government on a country could cause disruptions to the country’s financial system and economy,
which could negatively impact the value of securities. The risks posed by sanctions may be heightened to the extent a
Fund invests significantly in the affected country or region or in issuers from the affected country that depend on
global markets.
In addition, foreign securities may be impacted by economic, political, social, diplomatic or other conditions or events
(including, for example, military confrontations, war and terrorism), as well as the seizure, expropriation or
nationalization of a company or its assets or the assets of a particular investor or category of investors. A foreign
government may also restrict an issuer from paying principal and interest on its debt obligations to investors outside
the country. It may also be difficult to use foreign laws and courts to force a foreign issuer to make principal and
interest payments on its debt obligations.
Although it is not uncommon for governments to enter into trade agreements that would, among other things, reduce
barriers among countries, increase competition among companies and reduce government subsidies, there are no
assurances that such agreements will achieve their intended economic objectives. There is also a possibility that such
trade arrangements: i) will not be implemented; ii) will be implemented, but not completed; iii) or will be completed,
but then partially or completely unwound. It is also possible that a significant participant could choose to abandon a
trade agreement, which could diminish its credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating countries, including appreciation or depreciation of
currencies, a significant increase in exchange rate volatility, a resurgence in economic protectionism and an
undermining of confidence in markets. Such developments could have an adverse impact on a Fund’s investments in
the debt of countries participating in such trade agreements.
Some foreign countries prohibit or impose substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities, like the Funds. For example, certain countries may require governmental
approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of securities of a company which may have
less advantageous terms (including price) than securities of the company available for purchase by nationals. Even in
instances where there is no individual investment quota that applies, trading may be subject to aggregate and daily
investment quota limitations that apply to foreign entities in the aggregate. Such limitations may restrict a Fund from
investing on a timely basis, which could affect the Fund’s ability to effectively pursue its investment strategy.
Investment quotas are also subject to change. In instances where governmental approval is required, there can be no
assurance that a Fund will be able to obtain such approvals in a timely manner. In addition, changes to restrictions on
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foreign ownership of securities subsequent to a Fund’s purchase of such securities may have an adverse effect on the
value of such shares.
Regulations that govern the manner in which foreign investors may invest in companies in certain countries can
subject a Fund to trading, clearance and settlement procedures that could pose risks to the Fund. For example, a Fund
may be required in certain countries to invest initially through a local broker or other entity, and then have the shares
purchased re-registered in the name of the Fund. Re-registration may, in some instances, not be able to occur on a
timely basis, resulting in a delay during which the Fund may be denied certain of its rights as an investor, including
rights as to dividends or to be made aware of certain corporate actions. In certain other countries, shares may be held
only through a nominee structure whereby a local company holds purchased shares as nominee on behalf of foreign
investors. The precise nature and rights of a Fund as the beneficial owner of shares held through such a nominee
structure may not be well defined under local law, and as a result, should such local company become insolvent, there
is a risk that such shares may not be regarded as held for the beneficial ownership of the Fund, but rather as part of the
general assets of the local company available for general distribution to its creditors.
A Fund’s foreign debt securities are generally held outside of the United States in the primary market for the securities
in the custody of certain eligible foreign banks and trust companies (“foreign sub-custodians”), as permitted under the
1940 Act. Settlement practices for foreign securities may differ from those in the United States. Some countries have
limited governmental oversight and regulation of industry practices, stock exchanges, depositories, registrars, brokers
and listed companies, which increases the risk of corruption and fraud and the possibility of losses to a Fund. In
particular, under certain circumstances, foreign securities may settle on a delayed delivery basis, meaning that a Fund
may be required to make payment for securities before the Fund has actually received delivery of the securities or
deliver securities prior to the receipt of payment. Typically, in these cases, the Fund will receive evidence of ownership
in accordance with the generally accepted settlement practices in the local market entitling the Fund to delivery or
payment at a future date, but there is a risk that the security will not be delivered to the Fund or that payment will not
be received, although the Fund and its foreign sub-custodians take reasonable precautions to mitigate this risk. Losses
can also result from lost, stolen or counterfeit securities; defaults by brokers and banks; failures or defects of the
settlement system; or poor and improper recordkeeping by registrars and issuers.
There is a practice in certain foreign markets under which an issuer’s securities are blocked from trading at the
custodian or sub-custodian level for a specified number of days before and, in certain instances, after a shareholder
meeting where such shares are voted. This is referred to as “share blocking.” The blocking period can last up to several
weeks. Share blocking may prevent a Fund from buying or selling securities during this period, because during the
time shares are blocked, trades in such securities will not settle. It may be difficult or impossible to lift blocking
restrictions, with the particular requirements varying widely by country. To avoid these restrictions, a sub-adviser, on
behalf of a Fund, may abstain from voting proxies in markets that require share blocking.
Depositary Receipts.
American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”) represent interests in securities of foreign companies that have been deposited with a
U.S. financial institution, such as a bank or trust company, and that trade on an exchange or over-the-counter (“OTC”).
A Fund may invest in depositary receipts through “sponsored” or “unsponsored” facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary (the issuing bank or trust company),
whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited
security.
Holders of unsponsored depositary receipts generally bear all the costs of such facilities, and the depositary of an
unsponsored facility frequently is under no obligation to distribute interest holder communications received from the
issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the
deposited securities. The issuers of unsponsored depositary receipts are not obligated to disclose material information
in the United States; as such, there may be limited information available regarding such issuers and/or limited
correlation between available information and the market value of depositary receipts.
ADRs represent interests in foreign issuers that trade on U.S. exchanges or OTC. ADRs represent the right to receive
securities of the foreign issuer deposited with the issuing bank or trust company. Generally, ADRs are denominated in
U.S. dollars and are designed for use in the U.S. securities markets. The depositaries that issue ADRs are usually U.S.
financial institutions, such as a bank or trust company, but the underlying securities are issued by a foreign issuer.
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GDRs may be issued in U.S. dollars or other currencies and are generally designed for use in securities markets outside
the United States. GDRs represent the right to receive foreign securities and may be traded on the exchanges of the
depositary’s country. The issuing depositary, which may be a foreign or a U.S. entity, converts dividends and the share
price into the shareholder’s home currency. EDRs are generally issued by a European bank and traded on local
exchanges.
Although an issuing bank or trust company may impose charges for the collection of dividends on foreign securities
that underlie ADRs, GDRs and EDRs, and for the conversion of ADRs, GDRs and EDRs into their respective underlying
securities, there are generally no fees imposed on the purchase or sale of ADRs, GDRs and EDRs, other than transaction
fees ordinarily involved with trading stocks. ADRs, GDRs and EDRs may be less liquid or may trade at a lower price than
the underlying securities of the issuer. Additionally, receipt of corporate information about the underlying issuer may
be untimely.
Foreign Currency Contracts.
To the extent that a Fund may i) invest in securities denominated in foreign currencies, ii)
temporarily hold funds in bank deposits or other money market investments denominated in foreign currencies, or iii)
engage in foreign currency contract transactions, the Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies and the U.S. dollar. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign
exchange markets. The international balance of payments and other economic and financial conditions, market
interest rates, government intervention, speculation and other factors affect these forces. A Fund may engage in
foreign currency transactions in order to hedge its portfolio and to attempt to protect it against uncertainty in the
level of future foreign exchange rates in the purchase and sale of securities. A Fund may also engage in foreign
currency transactions to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations
from one country to another.
Forward foreign currency contracts are also contracts for the future delivery of a specified currency at a specified time
and at a specified price. These contracts may be bought or sold to protect a Fund against a possible loss resulting from
an adverse change in the relationship between foreign currencies and the U.S. dollar or to increase exposure to a
particular foreign currency. These transactions differ from futures contracts in that they are usually conducted on a
principal basis instead of through an exchange, and therefore there are no brokerage fees, margin deposits are
negotiated between the parties, and the contracts are settled through different procedures. The sub-advisers will
consider on an ongoing basis the creditworthiness of the institutions with which each Fund will enter into such
forward foreign currency contracts.
The use of foreign currency contracts involves the risk of imperfect correlation between movements in contract prices
and movements in the price of the currencies to which the contracts relate. The successful use of foreign currency
transaction strategies also depends on the ability of the sub-adviser to correctly forecast interest rate movements,
currency rate movements and general stock market price movements. There can be no assurance that the
sub-adviser’s forecasts will be accurate. Accordingly, a Fund may be required to buy or sell additional currency on the
spot market (and bear the expense of such transaction) if the sub-adviser’s predictions regarding the movement of
foreign currency or securities markets prove inaccurate. Also, foreign currency transactions, like currency exchange
rates, can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments. Such events may prevent or restrict a Fund’s ability to
enter into foreign currency transactions, force the Fund to exit a foreign currency transaction at a disadvantageous
time or price or result in penalties for the Fund, any of which may result in a loss to the Fund. When such contracts are
used for hedging purposes, they are intended to reduce the risk of loss due to a decline in the value of the hedged
currency, but at the same time, they tend to limit any potential gain which might result should the value of such
currency increase.
Foreign currency contracts may be either futures contracts or forward contracts. Similar to other futures contracts, a
foreign currency futures contract is an agreement for the future delivery of a specified currency at a specified time and
at a specified price that will be secured by margin deposits, is regulated by the CFTC and is traded on designated
exchanges. A Fund will incur brokerage fees when it purchases and sells foreign currency futures contracts.
Foreign currency futures contracts carry the same risks as other futures contracts, but also entail risks associated with
international investing. Similar to other futures contracts, a foreign currency futures contract is an agreement for the
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future delivery of a specified currency at a specified time and at a specified price that will be secured by margin
deposits, is regulated by the CFTC and is traded on designated exchanges. A Fund will incur brokerage fees when it
purchases and sells futures contracts.
To the extent a Fund may invest in securities denominated in foreign currencies, and may temporarily hold funds in
bank deposits or other money market investments denominated in foreign currencies, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the exchange rates between such currencies
and the U.S. dollar. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. The international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors affect these forces.
If a decline in the exchange rate for a particular currency is anticipated, a Fund may enter into a foreign currency
futures position as a hedge. If it is anticipated that an exchange rate for a particular currency will rise, a Fund may enter
into a foreign currency futures position to hedge against an increase in the price of securities denominated in that
currency. These foreign currency futures contracts will only be used as a hedge against anticipated currency rate
changes. Although such contracts are intended to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might result should the value of such currency
increase.
The use of foreign currency futures contracts involves the risk of imperfect correlation between movements in futures
prices and movements in the price of currencies which are the subject of the hedge. The successful use of foreign
currency futures contracts also depends on the ability of the sub-adviser to correctly forecast interest rate movements,
currency rate movements and general stock market price movements. There can be no assurance that the
sub-adviser’s judgment will be accurate. The use of foreign currency futures contracts also exposes a Fund to the
general risks of investing in futures contracts, including: the risk of an illiquid market for the foreign currency futures
contracts and the risk of adverse regulatory actions. Any of these events may cause a Fund to be unable to hedge its
currency risks, and may cause a Fund to lose money on its investments in foreign currency futures contracts.
Recent Events in European Countries.
A number of countries in Europe have experienced severe economic and financial
difficulties. Many non-governmental issuers, and even certain governments, have defaulted on, or been forced to
restructure, their debts; many other issuers have faced difficulties obtaining credit or refinancing existing obligations;
financial institutions have in many cases required government or central bank support, have needed to raise capital,
and/or have been impaired in their ability to extend credit; and financial markets in Europe and elsewhere have
experienced extreme volatility and declines in asset values and liquidity. These difficulties may continue, worsen or
spread within and beyond Europe. Responses to the financial problems by European governments, central banks and
others, including austerity measures and reforms, may not work, may result in social unrest and may limit future
growth and economic recovery or have other unintended consequences. Further defaults or restructurings by
governments and others of their debt could have additional adverse effects on economies, financial markets and asset
valuations around the world.
On June 23, 2016, the United Kingdom (“UK”) voted via referendum to leave the European Union, a measure
commonly referred to as “Brexit.” On March 29, 2017, the UK formally notified the European Council of its intention to
withdraw from the EU within two years after providing such notice, leading to an official date for Brexit of March 29,
2019. However, on March 29, 2019, the Parliament of the UK voted down a formal plan whereby the UK would
withdraw from the EU without any agreements in place regarding future dealings between the governments of both
parties, as well as their respective businesses. The EU has since granted the UK an extension to allow it to remain a
member of the EU through October 31, 2019, subject to certain conditions (including the UK’s participation in
European parliamentary elections in May 2019), to provide the UK additional time to further negotiate such
agreements with the EU. If such conditions are not met, the UK will be forced to leave the EU on June 1, 2019, with no
agreements in place. Negotiations are ongoing and subject to further developments.
Brexit has resulted in volatility in European and global markets and could have significant negative impacts on
financial markets in the UK and throughout Europe. The longer term economic, legal, political and social framework to
be put in place between the UK and the EU is unclear at this stage and is likely to lead to ongoing political and
economic uncertainty and periods of exacerbated volatility in both the UK and in wider European markets for some
time. This uncertainty may have an adverse effect on the global economy and on the value of a Fund’s investments.
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This may be due to, among other things: fluctuations in asset values and exchange rates; increased illiquidity of
investments located, traded or listed within the UK, the EU or elsewhere; changes in the willingness or ability of
counterparties to enter into transactions at the price and terms on which a Fund is prepared to transact; and/or
changes in legal and regulatory regimes to which certain of a Fund’s assets are or become subject. Potential decline in
the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the
UK’s sovereign credit rating, may also have an impact on the performance of a Fund’s assets or investments
economically tied to the UK or the EU.
The effects of Brexit will depend, in part, on agreements the UK negotiates to retain access to EU markets, either during
a transitional period or more permanently, including, but not limited to, current trade and finance agreements. Brexit
could lead to legal and tax uncertainty and potentially divergent national laws and regulations, as the UK determines
which EU laws to replace or replicate. The extent of the impact of the withdrawal negotiations in the UK and in global
markets, as well as any associated adverse consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of a Fund’s investments. Whether or not a Fund invests in securities of issuers located in
Europe or with significant exposure to European issuers or countries, these events could result in losses to the Fund, as
there may be negative effects on the value and liquidity of the Fund’s investments and/or the Fund’s ability to enter
into certain transactions.
In addition, the Funds’ investments, payment obligations and financing terms may be based on floating rates, such as
London Inter-bank Offered Rate (“LIBOR”), Euro Interbank Offered Rate (“EURIBOR”) and other similar types of
reference rates (each, a “Reference Rate”). On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority
(“FCA”), which regulates LIBOR, announced that the FCA will no longer persuade nor compel banks to submit rates for
the calculation of LIBOR and certain other Reference Rates after 2021. Such announcement indicates that the
continuation of LIBOR and other Reference Rates on the current basis cannot and will not be guaranteed after 2021.
This announcement and any additional regulatory or market changes may have an adverse impact on a Fund’s
investments, performance or financial condition. Until then, the Funds may continue to invest in instruments that
reference such rates or otherwise use such Reference Rates due to favorable liquidity or pricing.
In advance of 2021, regulators and market participants will work together to identify or develop successor Reference
Rates and how the calculation of associated spreads (if any) should be adjusted. Additionally, prior to 2021, it is
expected that industry trade associations and participants will focus on the transition mechanisms by which the
Reference Rates and spreads (if any) in existing contracts or instruments may be amended, whether through
market-wide protocols, fallback contractual provisions, bespoke negotiations or amendments or otherwise.
Nonetheless, the termination of certain Reference Rates presents risks to the Funds. At this time, it is not possible to
exhaustively identify or predict the effect of any such changes, any establishment of alternative Reference Rates or any
other reforms to Reference Rates that may be enacted in the UK or elsewhere. The elimination of a Reference Rate, or
any other changes or reforms to the determination or supervision of Reference Rates, could have an adverse impact on
the market for, or value of any, securities or payments linked to those Reference Rates and other financial obligations
held by a Fund, or on its overall financial condition or results of operations. In addition, any substitute Reference Rate,
and any pricing adjustments imposed by a regulator or by counterparties or otherwise, may adversely affect a Fund’s
performance and/or net asset value.
Foreign Debt Securities.
Foreign debt securities may be structured as fixed-, variable- or floating-rate obligations, or as
zero-coupon, pay-in-kind and step-coupon securities. They include fixed-income securities of foreign issuers and
securities or contracts payable or denominated in non-U.S. currencies. Investments in, or exposure to, foreign debt
securities involve certain risks not associated with securities of U.S. issuers. Unless otherwise stated in a Fund’s
prospectus, the decision on whether a security is deemed to be “foreign” is based primarily on the issuer’s place of
organization/incorporation, but the Fund may also consider the issuer’s domicile, principal place of business, primary
stock exchange listing, sources of revenue or other factors.
Foreign debt securities may include securities of issuers in emerging and frontier market countries, which carry
heightened risks relative to investments in more developed foreign markets. Unless otherwise stated in a Fund’s
prospectus, countries are generally characterized by a Fund’s sub-adviser as “emerging market countries” by reference
to a broad market index, by reference to the World Bank’s per capita income brackets or based on the sub-adviser’s
qualitative judgments about a country’s level of economic and institutional development, and include markets
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commonly referred to as “frontier markets.” An emerging market is generally in the earlier stages of its industrialization
cycle with a low per capita gross domestic product (“GDP”) and a low market capitalization to GDP ratio relative to
those in the United States and the European Union. Frontier market countries generally have smaller economies and
even less developed capital markets than typical emerging market countries and, as a result, the risks of investing in
emerging market countries are magnified in frontier market countries.
Investments in or exposure to foreign debt securities involve certain risks not associated with investments in or
exposure to securities of U.S. companies. For example, foreign markets can be extremely volatile. Foreign debt
securities may also be less liquid than securities of U.S. issuers so that a Fund may, at times, be unable to sell foreign
debt securities at desirable times and/or prices. Transaction fees, custodial costs, currency conversion costs and other
fees are also generally higher for foreign debt securities. A Fund may have limited or no legal recourse in the event of
default with respect to certain foreign debt securities, including those issued by foreign governments. Foreign debt
securities carry many of the same risks as other types of foreign securities. For more information, refer to “Foreign
Securities.”
The cost of servicing foreign debt will also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted based upon international interest
rates. Furthermore, there is a risk of restructuring of certain foreign debt obligations that could reduce and reschedule
interest and principal payments.
The performance of a Fund may also be negatively affected by fluctuations in a foreign currency’s strength or
weakness relative to the U.S. dollar, particularly to the extent the Fund invests a significant percentage of its assets in
foreign debt securities denominated in non-U.S. currencies. Currency rates in foreign countries may fluctuate
significantly over short or long periods of time for a number of reasons, including changes in interest rates, imposition
of currency exchange controls and economic or political developments in the U.S. or abroad. A Fund may also incur
currency conversion costs when converting foreign currencies into U.S. dollars and vice versa.
It may be difficult to obtain reliable information about the securities and business operations of certain foreign issuers.
It may also be difficult to evaluate such information, as well as foreign economic trends, due to foreign regulation and
accounting standards. Governments or trade groups may compel local agents to hold securities in designated
depositories that are not subject to independent evaluation. Additionally, investments in certain countries may subject
a Fund to tax rules, the application of which may be uncertain. Countries may amend or revise their existing tax laws,
regulations and/or procedures in the future, possibly with retroactive effect. Changes in or uncertainties regarding the
laws, regulations or procedures of a country could reduce the after-tax profits of a Fund, directly or indirectly, including
by reducing the after-tax profits of companies located in such countries in which the Fund invests, or result in
unexpected tax liabilities for the Fund.
Global economies and financial markets have become increasingly interconnected, which increases the possibility that
conditions in one country or region might adversely impact issuers in a different country or region. Any attempt by a
Fund to hedge against or otherwise protect its portfolio, or to profit from such circumstances, may fail and,
accordingly, an investment in a Fund could lose money over short or long periods. For example, the economies of
many countries or regions in which a Fund may invest are highly dependent on trading with certain key trading
partners. Reductions in spending on products and services by these key trading partners, the institution of tariffs or
other trade barriers, or a slowdown in the economies of key trading partners may adversely affect the performance of
securities in which a Fund may invest. The severity or duration of adverse economic conditions may also be affected by
policy changes made by governments or quasi-governmental organizations. The imposition of sanctions by the United
States or another government on a country could cause disruptions to the country’s financial system and economy,
which could negatively impact the value of securities. The risks posed by sanctions may be heightened to the extent a
Fund invests significantly in the affected country or region or in issuers from the affected country that depend on
global markets.
In addition, foreign debt securities may be impacted by economic, political, social, diplomatic or other conditions or
events (including, for example, military confrontations, war and terrorism), as well as the seizure, expropriation or
nationalization of a company or its assets or the assets of a particular investor or category of investors. A foreign
government may also restrict an issuer from paying principal and interest on its debt obligations to investors outside
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the country. It may also be difficult to use foreign laws and courts to force a foreign issuer to make principal and
interest payments on its debt obligations.
Further, investments in certain countries may subject a Fund to tax rules, the application of which may be uncertain.
Countries may amend or revise their existing tax laws, regulations and/or procedures in the future, possibly with
retroactive effect. Changes in, or uncertainties regarding the laws, regulations or procedures of a country could reduce
the after-tax profits of a Fund, directly or indirectly, including by reducing the after-tax profits of companies located in
such countries in which the Fund invests, or result in unexpected tax liabilities for the Fund.
Although it is not uncommon for governments to enter into trade agreements that would, among other things, reduce
barriers among countries, increase competition among companies and reduce government subsidies, there are no
assurances that such agreements will achieve their intended economic objectives. There is also a possibility that such
trade arrangements: i) will not be implemented; ii) will be implemented, but not completed; iii) or will be completed,
but then partially or completely unwound. It is also possible that a significant participant could choose to abandon a
trade agreement, which could diminish its credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating countries, including appreciation or depreciation of
currencies, a significant increase in exchange rate volatility, a resurgence in economic protectionism and an
undermining of confidence in markets. Such developments could have an adverse impact on a Fund’s investments in
the debt of countries participating in such trade agreements.
A Fund’s foreign debt securities are generally held outside of the United States in the primary market for the securities
in the custody of certain eligible foreign banks and trust companies (“foreign sub-custodians”), as permitted under the
1940 Act. Settlement practices for foreign securities may differ from those in the United States. Some countries have
limited governmental oversight and regulation of industry practices, stock exchanges, depositories, registrars, brokers
and listed companies, which increases the risk of corruption and fraud and the possibility of losses to a Fund. In
particular, under certain circumstances, foreign securities may settle on a delayed delivery basis, meaning that a Fund
may be required to make payment for securities before the Fund has actually received delivery of the securities or
deliver securities prior to the receipt of payment. Typically, in these cases, the Fund will receive evidence of ownership
in accordance with the generally accepted settlement practices in the local market entitling the Fund to delivery or
payment at a future date, but there is a risk that the security will not be delivered to the Fund or that payment will not
be received, although the Fund and its foreign sub-custodians take reasonable precautions to mitigate this risk. Losses
can also result from lost, stolen or counterfeit securities; defaults by brokers and banks; failures or defects of the
settlement system; or poor and improper recordkeeping by registrars and issuers.
Supranational Entity Securities.
Debt security investments may include the debt securities of “supranational” entities,
which are international groups or unions in which the power and influence of member states transcend national
boundaries or interests in order to share in decision making and vote on issues concerning the collective body. They
include international organizations designated or supported by governments to promote economic reconstruction or
development and international banking institutions and related government agencies, such as the International Bank
for Reconstruction and Development (part of the World Bank), the European Union, the Asian Development Bank and
the Inter-American Development Bank. The governmental members of these supranational entities are “stockholders”
that typically make capital contributions and may be committed to make additional capital contributions if the entity
is unable to repay its borrowings. There can be no assurance that the constituent foreign governments will continue to
be able or willing to honor their capitalization commitments for such entities.
Supranational Entity Securities are subject to risks in addition to those relating to foreign government and sovereign
debt securities and debt securities generally. Issuers of such debt securities may be unwilling to pay interest and repay
principal, or otherwise meet obligations, when due and may require that the conditions for payment be renegotiated.
The foreign governmental or other organizations supporting such supranational issuers may be immune from lawsuits
in the event of the issuer’s failure or inability to pay the obligations when due. Issuers may be dependent on expected
disbursements from foreign governmental or other organizations.
OTHER PERMITTED INVESTMENT ACTIVITIES
Borrowing.
Generally, under the 1940 Act, a Fund may borrow money only from banks in an amount not exceeding 1/3
of its total assets (including the amount borrowed) less liabilities (other than borrowings). A Fund may borrow money
for temporary or emergency purposes, including for short-term redemptions and liquidity needs. Borrowing involves
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special risk considerations. Interest costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds (or on the assets that were retained rather than sold to
meet the needs for which funds were borrowed). Under adverse market conditions, a Fund might have to sell portfolio
securities to meet interest or principal payments at a time when investment considerations would not favor such sales.
Reverse repurchase agreements, dollar roll transactions and other similar investments that involve a form of leverage
have characteristics similar to borrowings, but are not considered borrowings if a Fund covers such leverage by
maintaining a segregated account or otherwise. To help meet short-term redemptions and liquidity needs, the Funds
are parties to a revolving credit agreement whereby a Fund is permitted to use bank borrowings for temporary or
emergency purposes.
Convertible Securities.
A convertible security is a bond, debenture, note, preferred stock, or other security that may be
converted or exchanged (by the holder or by the issuer) within a specified period of time into a certain amount of
common stock of the same or a different issuer. As such, convertible securities combine the investment characteristics
of debt and equity securities. A convertible security provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a market price advance in its underlying
common stock.
Investing in convertible securities is subject to certain risks in addition to those generally associated with debt
securities. Certain convertible securities, particularly securities that are convertible into securities of an issuer other
than the issuer of the convertible security, may be or become illiquid and, therefore, may be more difficult to resell in a
timely fashion or for a fair price, which could result in investment losses.
The creditworthiness of the issuer of a convertible security is important because the holder of a convertible security
will typically have recourse only to the issuer. In addition, a convertible security may be subject to conversion or
redemption by the issuer, but only after a specified date and under circumstances established at the time the security
is issued. This feature may require a holder to convert the security into the underlying common stock, even if the value
of the underlying common stock has declined substantially. In addition, companies that issue convertible securities
frequently are small- or mid-capitalization companies and, accordingly, carry the risks associated with investments in
such companies.
While the Funds use the same criteria to evaluate the credit quality of a convertible debt security that they would use
for a more conventional debt security, a convertible preferred stock is treated like a preferred stock for a Fund’s credit
evaluation, as well as financial reporting and investment limitation purposes.
Contingent Convertible Bonds.
Contingent convertible bonds are a type of convertible security typically issued by
non-U.S. banks. Unlike more traditional convertible securities, which typically may convert into equity after the issuer’s
common stock has reached a certain strike price, the trigger event for a contingent convertible bond is typically a
decline in the issuing bank’s capital threshold below a specified level. Contingent convertible bonds typically are
subordinated to other debt instruments of the issuer and generally rank junior to the claims of all holders of
unsubordinated obligations of the issuer. Coupon payments on contingent convertible securities may be discretionary
and may be cancelled by the issuer. Contingent convertible bonds are a new form of instrument, and the market and
regulatory environment for contingent convertible bonds is evolving. Therefore, it is uncertain how the overall market
for contingent convertible bonds would react to a triggering event or coupon suspension applicable to one issuer. A
Fund may lose money on its investment in a contingent convertible bond when holders of the issuer’s equity securities
do not.
Exchange-Traded Notes.
Exchange-traded notes (“ ETNs”) are generally notes representing debt of an issuer, usually a
financial institution. ETNs combine aspects of both bonds and ETFs. An ETN’s returns are based on the performance of
one or more underlying assets, reference rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on
an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETN’s maturity,
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at which time the issuer will pay a return linked to the performance of the specific asset, index or rate (“reference
instrument”) to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest
payments, and principal is not protected.
The value of an ETN may be influenced by, among other things, time to maturity, levels of supply and demand for the
ETN, volatility and lack of liquidity in underlying markets, changes in the applicable interest rates, the performance of
the reference instrument, changes in the issuer’s credit rating and economic, legal, political or geographic events that
affect the reference instrument. An ETN that is tied to a reference instrument may not replicate the performance of the
reference instrument. ETNs also incur certain expenses not incurred by their applicable reference instrument. Some
ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair
price. Levered ETNs are subject to the same risk as other instruments that use leverage in any form. While leverage
allows for greater potential returns, the potential for loss is also greater. Finally, additional losses may be incurred if the
investment loses value because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on an ETN is dependent on the issuer’s ability or willingness to meet its obligations, the value of the
ETN may change due to a change in the issuer’s credit rating, despite there being no change in the underlying
reference instrument. The market value of ETN shares may differ from the value of the reference instrument. This
difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time
is not always identical to the supply and demand in the market for the assets underlying the reference instrument that
the ETN seeks to track.
There may be restrictions on a Fund’s right to redeem its investment in an ETN, which is generally designed to be held
until maturity. A Fund’s decision to sell its ETN holdings may be limited by the unavailability or limited nature of a
secondary market. A Fund could lose some or all of the amount invested in an ETN.
Illiquid Securities.
Pursuant to Rule 22e-4 under the 1940 Act, a Fund (other than a money market Fund) may not
acquire any “illiquid investment” if, immediately after the acquisition, the Fund would have invested more than 15% of
its net assets in illiquid investments that are assets. An “illiquid investment” is any investment that such a Fund
reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without
the sale or disposition significantly changing the market value of the investment. Illiquid investments include
repurchase agreements with a notice or demand period of more than seven days, certain over-the-counter derivative
instruments, and securities and other financial instruments that are not readily marketable, unless, based upon a
review of the relevant market, trading and investment-specific considerations, those investments are determined not
to be illiquid. The Funds (other than the money market Funds) have implemented a liquidity risk management
program and related procedures to identify illiquid investments pursuant to Rule 22e-4, and the Board has approved
the designation of the Funds Management to administer the liquidity risk management program and related
procedures. The money market Funds may invest up to 5% of its net assets in illiquid investments. The 15% and 5%
limits are applied as of the date a Fund purchases an illiquid investment. It is possible that a Fund’s holding of illiquid
investment could exceed the 15% limit (5% for the money market Funds), for example as a result of market
developments or redemptions.
Each Fund may purchase certain restricted securities that can be resold to institutional investors and which may be
determined not to be illiquid investments pursuant to the Trust’s liquidity risk management program. In many cases,
those securities are traded in the institutional market under Rule 144A under the 1933 Act and are called Rule 144A
securities.
Investments in illiquid investments involve more risks than investments in similar securities that are readily
marketable. Illiquid investments may trade at a discount from comparable, more liquid investments. Investment of a
Fund’s assets in illiquid investments may restrict the ability of the Fund to dispose of its investments in a timely fashion
and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where a Fund’s operations require cash, such as when a Fund has net redemptions, and could
result in the Fund borrowing to meet short-term cash requirements or incurring losses on the sale of illiquid
investments.
Illiquid investments are often restricted securities sold in private placement transactions between issuers and their
purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, the
privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to
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contractual restrictions on resale. To the extent privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales could be less than those originally paid by the Fund or less than the fair
value of the securities. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that may be applicable if their securities were publicly traded. If any
privately placed securities held by a Fund are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Private placement
investments may involve investments in smaller, less seasoned issuers, which may involve greater risks than
investments in more established companies. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making investments in private placement
securities, a Fund may obtain access to material non-public information, which may restrict the Fund’s ability to
conduct transactions in those securities.
Investment Companies.
These securities include shares of other affiliated or unaffiliated open-end investment
companies (i.e., mutual funds), closed-end funds, exchange-traded funds (“ETFs”), UCITS funds (pooled investment
vehicles established in accordance with the Undertaking for Collective Investment in Transferable Securities adopted
by European Union member states) and business development companies. A Fund may invest in securities of other
investment companies up to the limits prescribed in Section 12(d) under the 1940 Act, the rules and regulations
thereunder and any exemptive relief currently or in the future available to a Fund.
Other investment companies in which a Fund invests can be expected to pay fees and other operating expenses, such
as investment advisory and administration fees, that would be in addition to those paid by the Fund. Other investment
companies may include ETFs, which are publicly-traded unit investment trusts, open-end funds or depositary receipts
that seek to track the performance of specific indices or companies in related industries (e.g., passive ETFs), and index
funds. A passive ETF or index fund is an investment company that seeks to track the performance of an index (before
fees and expenses) by holding in its portfolio either the securities that comprise the index or a representative sample
of the securities in the index. Passive ETFs or index funds in which the Funds invest will incur expenses not incurred by
their applicable indices. Certain securities comprising the indices tracked by passive ETFs or index funds may, from
time to time, temporarily be unavailable, which may further impede a passive ETF’s or index fund’s ability to track their
respective indices. An actively-managed ETF is an investment company that seeks to outperform the performance of
an index.
ETFs generally are subject to the same risks as the underlying securities the ETFs are designed to track and to the risks
of the specific sector or industry tracked by the ETF. ETFs also are subject to the risk that their prices may not totally
correlate to the prices of the underlying securities the ETFs are designed to track and the risk of possible trading halts
due to market conditions or for other reasons. Although ETFs that track broad market indexes are typically large and
their shares are fairly liquid, ETFs that track more specific indexes tend to be newer and smaller, and all ETFs have
limited redemption features. The SEC has granted orders for exemptive relief to certain ETFs that permit investments in
those ETFs by certain other registered investment companies in excess of these limits.
In addition, a Fund may invest in the securities of closed-end investment companies. Because shares of closed-end
investment companies trade on a stock exchange or in the OTC market, they may trade at a premium or discount to
their net asset values, which may be substantial, and their potential lack of liquidity could result in greater volatility. In
addition, closed-end investment companies may employ leverage, which also subjects the closed-end investment
company to increased risks such as increased volatility. Moreover, closed-end investment companies incur their own
fees and expenses.
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Under the 1940 Act and rules and regulations thereunder, a Fund may purchase shares of other affiliated Funds,
including the money market Funds, subject to certain conditions. Investing in affiliated Funds may present certain
actual or potential conflicts of interest. In 2018, the SEC proposed voted to propose a new rule and related
amendments designed to streamline and enhance the regulatory framework for fund of funds arrangements, which
are created when a mutual fund or other type of fund invests in shares of another fund. If adopted, this new rule may
affect the ability and conditions under which a Fund may purchase shares of other affiliated Funds, including the
money market Funds.
Loans of Portfolio Securities.
Portfolio securities of a Fund may be loaned pursuant to guidelines approved by the
Board to brokers, dealers and financial institutions, provided: i) the loan is secured continuously by collateral consisting
of cash, securities of the U.S. Government, its agencies or instrumentalities, or an irrevocable letter of credit issued by a
bank organized under the laws of the United States, organized under the laws of a state, or a foreign bank that has
filed an agreement with the Federal Reserve Board to comply with the same rules and regulations applicable to U.S.
banks in securities credit transactions, initially in an amount at least equal to 100% of the value of the loaned securities
(which includes any accrued interest or dividends), with the borrower being obligated, under certain circumstances, to
post additional collateral on a daily marked-to-market basis, all as described in further detail in the following
paragraph; although the loans may not be fully supported at all times if, for example, the instruments in which cash
collateral is invested decline in value or the borrower fails to provide additional collateral when required in a timely
manner or at all; ii) the Fund may at any time terminate the loan and request the return of the loaned securities upon
sufficient prior notification; iii) the Fund will receive any interest or distributions paid on the loaned securities; and iv)
the aggregate market value of loaned securities will not at any time exceed the limits established under the 1940 Act.
The interests in the Cash Collateral Fund are not insured by the FDIC, and are not deposits, obligations of, or endorsed
or guaranteed in any way by, Wells Fargo Bank or any banking entity. Any losses in the Cash Collateral Fund will be
borne solely by the Cash Collateral Fund and not by Wells Fargo Bank or its affiliates.
Loans of securities involve a risk that the borrower may fail to return the securities when due or when recalled by a
Fund or may fail to provide additional collateral when required. In either case, a Fund could experience delays in
recovering securities or could lose all or part of the value of the loaned securities. Although voting rights, or rights to
consent, attendant to securities on loan pass to the borrower, loans may be recalled at any time and generally will be
recalled if a material event affecting the investment is expected to be presented to a shareholder vote, so that the
securities may be voted by a Fund.
Each lending Fund pays a portion of the income (net of rebate fees) or fees earned by it from securities lending to a
securities lending agent. Goldman Sachs Bank USA, an unaffiliated third party doing business as Goldman Sachs
Agency Lending, currently acts as securities lending agent for the Funds, subject to the overall supervision of the
Funds’ manager.
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Private Placement and Other Restricted Securities.
Private placement securities are securities sold in offerings that are
exempt from registration under the 1933 Act. They are generally eligible for sale only to certain eligible investors.
Private placements often may offer attractive opportunities for investment not otherwise available on the open
market. However, private placement and other “restricted” securities typically cannot be resold without registration
under the 1933 Act or the availability of an exemption from registration (such as Rules 144A (a “Rule 144A Security”)),
and may not be readily marketable because they are subject to legal or contractual delays in or restrictions on resale.
Asset-backed securities, common stock, convertible securities, corporate debt securities, foreign securities, high-yield
securities, money market instruments, mortgage-backed securities, municipal securities, participation interests,
preferred stock and other types of equity and debt instruments may be privately placed or restricted securities.
Private placement and other restricted securities typically may be resold only to qualified institutional buyers, or in a
privately negotiated transaction, or to a limited number of qualified purchasers, or in limited quantities after they have
been held for a specified period of time and other conditions are met for an exemption from registration. Private
placement and other restricted securities may be considered illiquid securities, as they typically are subject to
restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few
potential qualified purchasers for such securities, especially under adverse market or economic conditions, or in the
event of adverse changes in the financial condition of the issuer, a Fund could find it more difficult to sell such
securities when it may be advisable to do so or it may be able to sell such securities only at prices lower than if such
securities were more widely held and traded. At times, it also may be more difficult to determine the fair value of such
securities for purposes of computing a Fund’s net asset value due to the absence of an active trading market. Delay or
difficulty in selling such securities may result in a loss to a Fund. Restricted securities that are “illiquid” are subject to
each Fund’s policy of not investing or holding more than 15% of its net assets in illiquid securities. The term “illiquid” in
this context refers to securities that cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities.
The manager typically will evaluate the liquidity characteristics of each Rule 144A Security proposed for purchase by a
Fund on a case-by-case basis and will consider the following factors, among others, in its evaluation: i) the frequency
of trades and quotes for the Rule 144A Security; ii) the number of dealers willing to purchase or sell the Rule 144A
Security and the number of other potential purchasers; iii) dealer undertakings to make a market in the Rule 144A
Security; and iv) the nature of the Rule 144A Security and the nature of the marketplace trades (e.g., the time needed
to dispose of the Rule 144A Security, the method of soliciting offers and the mechanics of transfer).
The manager will apply a similar process to evaluating the liquidity characteristics of other restricted securities. A
restricted security that is deemed to be liquid when purchased may not continue to be liquid for as long as it is held by
a Fund.
Repurchase Agreements.
A repurchase agreement is an agreement wherein a Fund purchases a security for a relatively
short period of time (usually less than or up to seven days) and, at the time of purchase, the seller agrees to repurchase
that security from the Fund at a mutually agreed upon time and price (representing the Fund’s cost plus interest). The
repurchase agreement specifies the yield during the purchaser’s holding period. Entering into repurchase agreements
allows a Fund to earn a return on cash in the Fund’s portfolio that would otherwise remain un-invested.
A Fund may enter into reverse repurchase agreements under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon future date and price. Use of a reverse repurchase agreement may be preferable
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to a regular sale and later repurchase of securities, because it avoids certain market risks and transaction costs. At the
time a Fund enters into a reverse repurchase agreement, it will segregate cash or other liquid assets having a value
equal to or greater than the repurchase price (including accrued interest), and will subsequently monitor the account
to ensure that the value of such segregated assets continues to be equal to or greater than the repurchase price.
In the event that the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Fund’s use of proceeds from the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce a Fund’s obligation to repurchase the securities. Reverse repurchase
agreements may be viewed as a form of borrowing.
Short Sales.
A short sale is a transaction in which a Fund sells a security it may not own in anticipation of a decline in
market value of that security. When a Fund makes a short sale, the proceeds it receives are retained by the broker until
the Fund replaces the borrowed security. In order to deliver the security to the buyer, a Fund must arrange through a
broker to borrow the security and, in so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be. Short sales “against the box” means that a Fund
owns the securities, which are placed in a segregated account until the transaction is closed out, or has the right to
obtain securities equivalent in kind and amount to the securities sold short. A Fund’s ability to enter into short sales
transactions is limited by the requirements of the 1940 Act.
If a Fund makes a short sale “against the box,” it would not immediately deliver the securities sold and would not
receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the
securities sold, at which time it receives the proceeds of the sale. A sub-adviser’s decision to make a short sale “against
the box” may be a technique to hedge against market risks when the sub-adviser believes that the price of a security
may decline, causing a decline in the value of a security owned by the Fund or a security convertible into or
exchangeable for such security. In such case, any future losses in the Fund’s long position would be reduced by a gain
in the short position. Short sale transactions may have adverse tax consequences to a Fund and its shareholders.
In the view of the SEC, a short sale involves the creation of a “senior security,” as such term is defined in the 1940 Act,
unless the sale is “against the box,” and the securities sold are placed in a segregated account, or unless a Fund’s
obligation to deliver the securities sold short is “covered” by segregating cash or other liquid assets in an amount equal
to the difference between the current market value of the securities sold short and any cash or liquid securities
required to be deposited as collateral with a broker in connection with the transaction. Collateral deposited with a
broker will be marked-to-market daily, and any amounts deposited with a broker or in a segregated account will not
have the effect of limiting a Fund’s potential losses on a short sale.
To avoid limitations under the 1940 Act on borrowing by investment companies, all short sales not “against the box”
will be “covered” by segregating cash, U.S. Government securities or other liquid debt or equity securities in an amount
equal to the market value of its delivery obligation. A Fund will not make short sales of futures or options not “against
the box” or maintain a short position if doing so could create liabilities or require collateral deposits and segregation of
assets totaling more than a specified percentage of the value of the Fund’s total assets.
Warrants.
Warrants are instruments, typically issued with preferred stock or bonds, that give the holder the right to
purchase a given number of shares of common stock at a specified price, usually during a specified period of time. The
price usually represents a premium over the applicable market value of the common stock at the time of the warrant’s
issuance. Warrants have no voting rights with respect to the common stock, receive no dividends and have no rights
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with respect to the assets of the issuer. Warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for the resale of the warrants, potential price fluctuations as a result
of speculation or other factors and failure of the price of the common stock to rise. A warrant becomes worthless if it is
not exercised within the specified time period.
When-Issued and Delayed-Delivery Transactions and Forward Commitments.
Certain securities may be purchased or
sold on a when-issued or delayed-delivery basis, and contracts to purchase or sell securities for a fixed price at a future
date beyond customary settlement time may also be made. Delivery and payment on such transactions normally take
place within 120 days after the date of the commitment to purchase. Securities purchased or sold on a when-issued,
delayed-delivery or forward commitment basis involve a risk of loss if the value of the security to be purchased
declines, or the value of the security to be sold increases, before the settlement date.
Each Fund has a segregated account where it may maintain cash, U.S. Government obligations or other high-quality
debt instruments in an amount at least equal in value to its commitments to purchase when-issued securities. If the
value of these assets declines, a Fund will place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is at least equal to the amount of such commitments.
Liquidation Risk.
There can be no assurance that a Fund will grow to or maintain a viable size and, pursuant to the
Declaration of Trust, the Board is authorized to close and/or liquidate a Fund at any time. In the event of the liquidation
of a Fund, the expenses, timing and tax consequences of such liquidation may not be favorable to some or all of the
Fund’s shareholders. In addition, pursuant to section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act and certain rules promulgated thereunder (collectively known as the “Volcker Rule”), if the manager
and/or its affiliates own 25% or more of the outstanding shares of a Fund more than three years after the Fund’s
inception date (or such longer period as may be permitted by the Federal Reserve Board and/or other federal
regulatory agencies overseeing the Volcker Rule), the Fund will be subject to restrictions on trading that will adversely
impact the Fund’s ability to execute its investment strategy. Should this occur, a Fund may be liquidated, or the
manager and/or its affiliates may be required to reduce their ownership interests in the Fund, either of which may
result in gains or losses, increased transaction and other costs and adverse tax consequences. In addition, other large
shareholders controlling a significant portion of a Fund’s shares, such as other funds, institutional investors, financial
intermediaries, individuals and other accounts, may elect to redeem a portion or all of their shares at any time, and the
Fund may no longer be able to maintain a viable size after meeting the redemption request. In these circumstances, a
Fund’s board may determine to liquidate the Fund. Other factors and events that may lead to the liquidation of a Fund
include changes in laws or regulations governing the Fund or affecting the type of assets in which the Fund invests, or
economic developments or trends having a significant adverse impact on the business or operations of the Fund.
Operational and Cybersecurity Risks.
Fund operations, including business, financial, accounting, data processing
systems or other operating systems and facilities may be disrupted, disabled or damaged as a result of a number of
factors, including events that are wholly or partially beyond our control. For example, there could be electrical or
telecommunications outages; degradation or loss of internet or web services; natural disasters, such as earthquakes,
tornados and hurricanes; disease pandemics; or events arising from local or larger scale political or social events, as
well as terrorist acts.
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harming of or unauthorized access to digital systems (for example, through “hacking” or infection by computer viruses
or other malicious software code), denial-of-service attacks on websites, and the inadvertent or intentional release of
confidential or proprietary information. Cyber incidents may, among other things, harm Fund operations, result in
financial losses to a Fund and its shareholders, cause the release of confidential or highly restricted information, and
result in regulatory penalties, reputational damage, and/or increased compliance, reimbursement or other
compensation costs. Fund operations that may be disrupted or halted due to a cyber incident include trading, the
processing of shareholder transactions, and the calculation of a Fund’s net asset value.
Issues affecting operating systems and facilities through cyber incidents, any of the scenarios described above, or
other factors, may harm the Funds by affecting a Fund’s manager, sub-adviser(s), or other service providers, or issuers
of securities in which a Fund invests. Although the Funds have business continuity plans and other safeguards in place,
including what the Funds believe to be robust information security procedures and controls, there is no guarantee that
these measures will prevent cyber incidents or prevent or ameliorate the effects of significant and widespread
disruption to our physical infrastructure or operating systems. Furthermore, the Funds cannot directly control the
security or other measures taken by unaffiliated service providers or the issuers of securities in which the Funds invest.
Such risks at issuers of securities in which the Funds invest could result in material adverse consequences for such
issuers, and may cause a Fund’s investment in such securities to lose value.
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The following information supplements, and should be read in conjunction with, the section in each Prospectus
entitled “Management of the Funds.”
General
The following table provides basic information about the Trustees and Officers of the Trust. Each of the Trustees and
Officers listed below acts in identical capacities for the Wells Fargo family of funds which consists of, as of December
31, 2018, 152 series comprising the Trust, Wells Fargo Variable Trust, Wells Fargo Master Trust and four closed-end funds
(collectively the “Fund Complex” or the “Trusts”). The business address of each Trustee and Officer is 525 Market Street,
12th Floor, San Francisco, CA 94105. Each Trustee and Officer serves an indefinite term, with the Trustees subject to
retirement from service as required pursuant to the Trust’s retirement policy at the end of the calendar year in which a
Trustee turns 75.
Information for Trustees, all of whom are not “interested” persons of the Trust, as that term is defined under the 1940
Act (“Independent Trustees”), appears below. In addition to the Officers listed below, the Funds have appointed an
Anti-Money Laundering Compliance Officer.
Name and Year of Birth
Position Held
with Registrant/
Length of
Service
1
Principal Occupation(s) During Past 5 Years or
Longer
Current Other Public Company or
Investment Company Directorships
INDEPENDENT TRUSTEES
William R. Ebsworth
Trustee, since
2015
Retired. From 1984 to 2013, equities analyst,
portfolio manager, research director and chief
investment officer at Fidelity Management
and Research Company in Boston, Tokyo, and
Hong Kong, and retired in 2013 as Chief
Investment Officer of Fidelity Strategic
Advisers, Inc. where he led a team of
investment professionals managing client
assets. Prior thereto, Board member of Hong
Kong Securities Clearing Co., Hong Kong
Options Clearing Corp., the Thailand
International Fund, Ltd., Fidelity Investments
Life Insurance Company, and Empire Fidelity
Investments Life Insurance Company. Audit
Committee Chair and Investment Committee
Chair of the Vincent Memorial Hospital
Endowment (non-profit organization). Mr.
Ebsworth is a CFA® charterholder.
N/A
Jane A. Freeman
Trustee, since
2015; Chair
Liaison, since
2018
Retired. From 2012 to 2014 and 1999 to 2008,
Chief Financial Officer of Scientific Learning
Corporation. From 2008 to 2012, Ms. Freeman
provided consulting services related to
strategic business projects. Prior to 1999,
Portfolio Manager at Rockefeller & Co. and
Scudder, Stevens & Clark. Board member of
the Harding Loevner Funds from 1996 to 2014,
serving as both Lead Independent Director
and chair of the Audit Committee. Board
member of the Russell Exchange Traded Funds
Trust from 2011 to 2012 and the chair of the
Audit Committee. Ms. Freeman is a Board
Member of The Ruth Bancroft Garden
(non-profit organization). She is also an
inactive Chartered Financial Analyst.
N/A
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Name and Year of Birth
Position Held
with Registrant/
Length of
Service
1
Principal Occupation(s) During Past 5 Years or
Longer
Current Other Public Company or
Investment Company Directorships
Isaiah Harris, Jr.
2
Trustee, since
2009; Audit
Committee
Chairman, since
2019
Retired. Chairman of the Board of CIGNA
Corporation since 2009, and Director since
2005. From 2003 to 2011, Director of Deluxe
Corporation. Prior thereto, President and CEO
of BellSouth Advertising and Publishing Corp.
from 2005 to 2007, President and CEO of
BellSouth Enterprises from 2004 to 2005 and
President of BellSouth Consumer Services
from 2000 to 2003. Emeritus member of the
Iowa State University Foundation Board of
Governors. Emeritus Member of the Advisory
Board of Iowa State University School of
Business. Advisory Board Member, Palm
Harbor Academy (private school). Advisory
Board Member, Child Evangelism Fellowship
(non-profit). Mr. Harris is a certified public
accountant (inactive status).
CIGNA Corporation
Judith M. Johnson
Trustee, since
2008;
Retired. Prior thereto, Chief Executive Officer
and Chief Investment Officer of Minneapolis
Employees Retirement Fund from 1996 to
2008. Ms. Johnson is an attorney, certified
public accountant and a certified managerial
accountant.
N/A
David F. Larcker
Trustee, since
2009
James Irvin Miller Professor of Accounting at
the Graduate School of Business, Stanford
University, Director of the Corporate
Governance Research Initiative and Senior
Faculty of The Rock Center for Corporate
Governance since 2006. From 2005 to 2008,
Professor of Accounting at the Graduate
School of Business, Stanford University. Prior
thereto, Ernst & Young Professor of
Accounting at The Wharton School, University
of Pennsylvania from 1985 to 2005.
N/A
Olivia S. Mitchell
Trustee, since
2006;
Nominating and
Governance
Committee
Chairman, since
2018
International Foundation of Employee Benefit
Plans Professor, Wharton School of the
University of Pennsylvania since 1993. Director
of Wharton’s Pension Research Council and
Boettner Center on Pensions & Retirement
Research, and Research Associate at the
National Bureau of Economic Research.
Previously, Cornell University Professor from
1978 to 1993.
N/A
Timothy J. Penny
Trustee, since
1996; Chairman,
since 2018
President and Chief Executive Officer of
Southern Minnesota Initiative Foundation, a
non-profit organization, since 2007. Member
of the Board of Trustees of NorthStar
Education Finance, Inc., a non-profit
organization, since 2007.
N/A
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Name and Year of Birth
Position Held
with Registrant/
Length of
Service
1
Principal Occupation(s) During Past 5 Years or
Longer
Current Other Public Company or
Investment Company Directorships
James G. Polisson
Trustee, since
2018
Retired. Chief Marketing Officer, Source (ETF)
UK Services, Ltd, from 2015 to 2017. From
2012 to 2015, Principal of The Polisson Group,
LLC, a management consulting, corporate
advisory and principal investing company.
Chief Executive Officer and Managing Director
at Russell Investments, Global Exchange
Traded Funds from 2010 to 2012. Managing
Director of Barclays Global Investors from
1998 to 2010 and Global Chief Marketing
Officer for iShares and Barclays Global
Investors from 2000 to 2010. Trustee of the
San Francisco Mechanics’ Institute, a
non-profit organization, from 2013 to 2015.
Board member of the Russell Exchange Traded
Fund Trust from 2011 to 2012. Director of
Barclays Global Investors Holdings
Deutschland GmbH from 2006 to 2009. Mr.
Polisson is an attorney and has a retired status
with the Massachusetts and District of
Columbia Bar Associations.
N/A
Pamela Wheelock
Trustee, since
2018
Board member of the Destination Medical
Center Economic Development Agency,
Rochester, Minnesota since 2019. Chief
Operating Officer, Twin Cities Habitat for
Humanity from 2017 to 2019. Vice President of
University Services, University of Minnesota
from 2012 to 2016. Prior thereto, on the Board
of Directors, Governance Committee and
Finance Committee for the Minnesota
Philanthropy Partners (Saint Paul Foundation)
from 2012 to 2018, Interim Chief Executive
Officer of Blue Cross Blue Shield of Minnesota
from 2011 to 2012, Chairman of the Board
from 2009 to 2012 and Board Director from
2003 to 2015. Vice President, Leadership and
Community Engagement, Bush Foundation,
Saint Paul, Minnesota (a private foundation)
from 2009 to 2011. Executive Vice President
and Chief Financial Officer, Minnesota Sports
and Entertainment from 2004 to 2009 and
Senior Vice President from 2002 to 2004.
Executive Vice President of the Minnesota Wild
Foundation from 2004 to 2008. Commissioner
of Finance, State of Minnesota, from 1999 to
2002. Currently Board Chair of the Minnesota
Wild Foundation since 2010.
N/A
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Name and Year of Birth
Position Held
with Registrant/
Length of
Service
1
Principal Occupation(s) During Past 5 Years or Longer
Jeremy DePalma
Treasurer, since
2012; Assistant
Treasurer, since
2009
Senior Vice President of Wells Fargo Funds Management, LLC since 2009. Senior Vice
President of Evergreen Investment Management Company, LLC from 2008 to 2010
and head of the Fund Reporting and Control Team within Fund Administration from
2005 to 2010.
Nancy Wiser
Treasurer, since
2012
Executive Vice President of Wells Fargo Funds Management since 2011. Chief
Operating Officer and Chief Compliance Officer at LightBox Capital Management
LLC, from 2008 to 2011.
Alexander Kymn
Secretary and
Chief Legal
Officer, since
2018
Senior Company Counsel of Wells Fargo Bank, N.A since 2018 (previously Senior
Counsel from 2007 to 2018). Vice President of Wells Fargo Funds Management, LLC
from 2008 to 2014.
Michael H. Whitaker
Chief
Compliance
Officer, since
2016
Senior Vice President and Chief Compliance Officer since 2016. Senior Vice
President and Chief Compliance Officer for Fidelity Investments from 2007 to 2016.
David Berardi
Assistant
Treasurer, since
2009
Vice President of Wells Fargo Funds Management, LLC since 2009. Vice President of
Evergreen Investment Management Company, LLC from 2008 to 2010. Manager of
Fund Reporting and Control for Evergreen Investment Management Company, LLC
from 2004 to 2010.
The Trust’s Declaration of Trust, as amended and restated from time to time (the “Declaration of Trust”), does not set
forth any specific qualifications to serve as a Trustee other than that no person shall stand for initial election or
appointment as a Trustee if such person has already reached the age of 72. The Charter and the Statement of
Governance Principles of the Nominating and Governance Committee also do not set forth any specific qualifications,
but do set forth certain factors that the Nominating and Governance Committee may take into account in considering
Trustee candidates and a process for evaluating potential conflicts of interest, which identifies certain disqualifying
conflicts. All of the current Trustees are Independent Trustees. Among the attributes or skills common to all Trustees
are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively
with the other Trustees, Wells Fargo Funds Management, LLC (“Funds Management” or the “Manager”), sub-advisers,
other service providers, counsel and the independent registered public accounting firm, and to exercise effective and
independent business judgment in the performance of their duties as Trustees. Each Trustee’s ability to perform his or
her duties effectively has been attained through the Trustee’s business, consulting, public service, professional and/or
academic positions and through experience from service as a board member of the Trust and the other Trusts in the
Fund Complex (and/or in other capacities, including for any predecessor funds), other registered investment
companies, public companies, and/or non-profit entities or other organizations. Each Trustee’s ability to perform his or
her duties effectively also has been enhanced by his or her educational background, professional training, and/or
other life experiences. The specific experience, qualifications, attributes and/or skills that led to the conclusion that a
Trustee should serve as a Trustee of the Trusts in the Fund Complex are as set forth below.
William R. Ebsworth.
Mr. Ebsworth has served as a Trustee of the Trusts in the Fund Complex since January 1, 2015. He
also served as a Trustee of Asset Allocation Trust from 2015 to 2018. From 1984 to 2013, he was employed as an
equities analyst, portfolio manager and research director at Fidelity Management and Research Company in Boston,
Tokyo, and Hong Kong, and retired in 2013 as Chief Investment Officer of Fidelity Strategic Advisers, Inc., where he led
a team of investment professionals managing client assets. Prior thereto, he was a Board member of Hong Kong
Securities Clearing Co., Hong Kong Options Clearing Corp., the Thailand International Fund, Ltd., Fidelity Investments
Life Insurance Company, and Empire Fidelity Investments Life Insurance Company. Mr. Ebsworth is a CFA
®
charterholder.
Jane A. Freeman.
Ms. Freeman has served as a Trustee of the Trusts in the Fund Complex since January 1, 2015. She also
served as a Trustee of Asset Allocation Trust from 2015 to 2018. From 2012 to 2014 and 1999 to 2008, Ms. Freeman
served as the Chief Financial Officer of Scientific Learning Corporation. From 2008 to 2012, Ms. Freeman provided
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consulting services related to strategic business projects. Prior to joining Scientific Learning, Ms. Freeman was
employed as a portfolio manager at Rockefeller & Co. and Scudder, Stevens & Clark. She served as a board member of
the Harding Loevner Funds from 1996 to 2014, serving as both Lead Independent Director and chair of the Audit
Committee. She also served as a board member of the Russell Exchange Traded Funds Trust from 2011 to 2012, and as
chair of the Audit Committee. Ms. Freeman serves as a Board Member of the Ruth Bancroft Garden (non-profit
organization) and the Glimmerglass Festival. Ms. Freeman is a Chartered Financial Analyst (inactive).
Isaiah Harris, Jr
. Mr. Harris has served as a Trustee of the Trusts in the Fund Complex since 2009 and as Chair of the
Audit Committee since 2019 and was an Advisory Board Member from 2008 to 2009. He also served as a Trustee of
Asset Allocation Trust from 2010 to 2018. He has been the Chairman of the Board of CIGNA Corporation since 2009,
and has been a director of CIGNA Corporation since 2005. He served as a director of Deluxe Corporation from 2003 to
2011. As a director of these and other public companies, he has served on board committees, including Governance,
Audit and Compensation Committees. Mr. Harris served in senior executive positions, including as president, chief
executive officer, vice president of finance and/or chief financial officer, of operating companies for approximately 20
years.
James G. Polisson.
Mr. Polisson has served as a Trustee of the Trusts in the Fund Complex since 2018 and was an
Advisory Board member in 2017. Mr. Polisson has extensive experience in the financial services industry, including over
15 years in the ETF industry. From 2015 to July 31, 2017, Mr. Polisson was the Chief Marketing Officer of Source (ETF)
UK Services, Ltd., one of the largest providers of exchange-traded products in Europe. From 2012 to 2015, Mr. Polisson
was Principal of The Polisson Group, LLC, a management consulting, corporate advisory and principal investing firm.
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Prior to 2012, Mr. Polisson was Chief Executive Officer and Managing Director of Russell Investments’ global ETF
business from 2010 to 2012. He was also a member of the Board of Trustees of Russell Exchange Traded Funds Trust,
where he served as Chairman, President and Chief Executive Officer, from 2011 to 2012. Mr. Polisson also served as
Chief Marketing Officer for Barclays Global Investors from 2000 to 2010, where he led global marketing for the iShares
ETF business.
Pamela Wheelock.
Ms. Wheelock has served as a Trustee of the Trusts in the Fund Complex since 2018 and was an
Advisory Board member in 2017. Ms. Wheelock is the Chief Operating Officer of Twin Cities Habitat for Humanity. Ms.
Wheelock has more than 25 years of leadership experience in the private, public and nonprofit sectors. Prior to joining
Habitat for Humanity in 2017, Ms. Wheelock was on the Board of Directors, Governance Committee and Finance
Committee for the Minnesota Philanthropy Partners (Saint Paul Foundation) and the Vice President of University
Services at the University of Minnesota from 2012 to 2017, where she served as chief operations officer of the
University. She also served as Interim President and Chief Executive Officer of Blue Cross Blue Shield of Minnesota from
2011 to 2012, Vice President of the Bush Foundation from 2009 to 2011, and Executive Vice President and Chief
Financial Officer of Minnesota Sports and Entertainment from 2004 to 2009. Ms. Wheelock served as the Executive
Budget Officer and Finance Commissioner for the State of Minnesota from 1999 to 2002.
Board of Trustees - Leadership Structure and Oversight Responsibilities
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service providers have their own, independent interest in risk management, and their policies and methods of carrying
out risk management functions will depend, in part, on their individual priorities, resources and controls.
Committees.
As noted above, the Board has established a standing Nominating and Governance Committee, a standing Audit
Committee, a standing Valuation Committee and a standing Dividend Committee to assist the Board in the oversight
and direction of the business and affairs of the Trust. The Nominating and Governance Committee and Audit
Committee operate pursuant to charters approved by the Board. The Valuation Committee’s responsibilities are set
forth in Valuation Procedures approved by the Board, and the Dividend Committee’s responsibilities were set forth by
the Board when it established the Committee. Each Independent Trustee is a member of the Trust’s Nominating and
Governance Committee, Audit Committee and Valuation Committee. The Dividend Committee is comprised of three
Independent Trustees.
(1)
Nominating and Governance Committee.
Except with respect to any trustee nomination made by an eligible
shareholder or shareholder group as permitted by applicable law and applicable provisions of the Declaration of Trust
and any By-Laws of a Trust, the Committee shall make all nominations for membership on the Board of Trustees of
each Trust. The Committee shall evaluate each candidate’s qualifications for Board membership and his or her
independence from the Funds’ manager, sub-adviser(s) and principal underwriter(s) and, as it deems appropriate,
other principal service providers. Olivia Mitchell serves as the chairman of the Nominating and Governance
Committee.
The Nominating and Governance Committee has adopted procedures by which a shareholder may properly submit a
nominee recommendation for the Committee’s consideration, which are set forth in Appendix A to the Trusts’
Nominating and Governance Committee Charter. The shareholder must submit any such recommendation (a
“Shareholder Recommendation”) in writing to the Trust, to the attention of the Trust’s Secretary, at the address of the
principal executive offices of the Trust. The Shareholder Recommendation must include: (i) a statement in writing
setting forth (A) the name, age, date of birth, business address, residence address, and nationality of the person
recommended by the shareholder (the “candidate”), (B) the series (and, if applicable, class) and number of all shares of
the Trust owned of record or beneficially by the candidate, as reported to such shareholder by the candidate; (C) any
other information regarding the candidate called for with respect to director nominees by paragraphs (a), (d), (e), and
(f ) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), adopted by the SEC (or the corresponding provisions of any
regulation or rule subsequently adopted by the SEC or any successor agency applicable to the Trust); (D) any other
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information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a
proxy statement or other filing required to be made in connection with solicitation of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; and (E) whether
the recommending shareholder believes that the candidate is or will be an “interested person” of the Trust (as defined
in the 1940 Act) and information regarding the candidate that will be sufficient for the Trust to make such
determination; (ii) the written and signed consent of the candidate to be named as a nominee and to serve as a
Trustee if elected; (iii) the recommending shareholder’s name as it appears on the Trust’s books; (iv) the series (and, if
applicable, class) and number of all shares of the Trust owned beneficially and of record by the recommending
shareholder; and (v) a description of all arrangements or understandings between the recommending shareholder and
the candidate and any other person or persons (including their names) pursuant to which the recommendation is
being made by the recommending shareholder. In addition, the Nominating and Governance Committee may require
the candidate to interview in person or furnish such other information as it may reasonably require or deem necessary
to determine the eligibility of such candidate to serve as a Trustee of the Trust. The Nominating and Governance
Committee has full discretion to reject candidates recommended by shareholders, and there is no assurance that any
such person properly recommended and considered by the Committee will be nominated for election to the Board. In
the event of any conflict or inconsistency with respect to the requirements applicable to a Shareholder
Recommendation as between those established in the procedures and those in the By-Laws of a Closed-End Fund, the
requirements of the By-Laws of such Closed-End Fund shall control.
The Nominating and Governance Committee may from time-to-time propose nominations of one or more individuals
to serve as members of an “advisory board,” as such term is defined in Section 2(a)(1) of the 1940 Act.
(2)
Audit Committee.
The Audit Committee oversees the Funds’ accounting and financial reporting policies, including
their internal controls over financial reporting; oversees the quality and objectivity of the Funds’ financial statements
and the independent audit thereof; and interacts with the Funds’ independent registered public accounting firm on
behalf of the full Board and with appropriate officers of the Trust. Isaiah Harris, Jr. serves as the chairman of the Audit
Committee.
(3)
Valuation Committee.
The Board has delegated to the Valuation Committee the authority to take any action
regarding the valuation of portfolio securities that the Valuation Committee deems necessary or appropriate,
including determining the fair value of securities between regularly scheduled Board meetings in instances where that
determination has not otherwise been delegated to the valuation team (“Management Valuation Team”) of Funds
Management. The Board considers for ratification at each quarterly meeting any valuation actions taken during the
previous quarter by the Valuation Committee or by the Management Valuation Team other than pursuant to
Board-approved methodologies. Any one member of the Valuation Committee may constitute a quorum for a meeting
of the committee.
(4)
Dividend Committee.
The Board has delegated to the Dividend Committee the responsibility to review and approve
certain dividend amount determinations made by a separate committee composed of representatives from Funds
Management and certain sub-advisers (“Management Open-End Dividend Committee”). The Board has delegated to
the Management Open-End Dividend Committee the authority to determine periodic dividend amounts subject to
certain Board-approved parameters to be paid by each of the Core Plus Bond Fund, Diversified Income Builder Fund,
Emerging Markets Equity Income Fund, International Bond Fund, Real Return Fund and Strategic Income Fund. Under
certain circumstances, the Dividend Committee must review and consider for approval, as it deems appropriate,
recommendations of the Management Open-End Dividend Committee.
The committees met the following number of times during the most recently completed fiscal year:
Committee Name
Committee Meetings During Last Fiscal Year
Nominating and Governance
Committee
3
Audit Committee
7
Valuation Committee
0
Dividend Committee
0
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Compensation.
The Trustees do not receive any retirement benefits or deferred compensation from the Trust or any
other member of the Fund Complex. The Trust’s Officers are not compensated by the Trust for their services. Listed
below is the compensation that was paid to each current Trustee by a Fund and the Fund Complex for the most
recently completed fiscal year:
Trustee Compensation
Trustee
Compensation From the Fund
Total Compensation from the
Fund Complex
1
William R. Ebsworth
$301,000
$1,980
Jane A. Freeman
$321,000
$2,112
Isaiah Harris, Jr.
$288,500
$1,898
Judith M. Johnson
$331,000
$2,178
David F. Larcker
$301,000
$1,980
Olivia S. Mitchell
$321,000
$2,112
Timothy J. Penny
$376,000
$2,474
James G. Polisson
$301,000
$1,980
Pamela Wheelock
$301,000
$1,980
Beneficial Equity Ownership Information.
The following table contains specific information about the dollar range of
equity securities beneficially owned by each Trustee as of December 31, 2018 in each Fund and the aggregate dollar
range of equity securities in other Funds in the Fund Complex overseen by the Trustees, stated as one of the following
ranges: A = $0; B = $1 - $10,000; C = 10,001 - $50,000; D = $50,001 - $100,000; and E = Over $100,000.
Fund
Ebsworth
Freeman
Harris
Johnson
Larcker
Mitchell
Penny
Polisson
Wheelock
CoreBuilder
®
Shares - Series M
A
A
A
A
A
A
A
A
A
Aggregate Dollar Range of Equity Securities in
All Funds Overseen by Trustee in Fund
Complex
1
E
E
E
E
E
E
E
E
E
Ownership of Securities of Certain Entities.
As of the calendar year ended December 31, 2018, none of the Independent
Trustees and/or their immediate family members owned securities of the manager, any sub-advisers, or the distributor,
or any entity directly or indirectly controlling, controlled by, or under common control with the manager, any
sub-advisers, or the distributor.
MANAGER AND OTHER SERVICE PROVIDERS
Manager and Class-Level Administrator
Funds Management, an indirect wholly owned subsidiary of Wells Fargo & Company and an affiliate of Wells Fargo
Bank, is the manager and class-level administrator for the Fund. Funds Management provides advisory and Fund-level
administrative services to the Fund under an investment management agreement (the “Management Agreement”)
and provides class-level administrative services to the Fund under a class-level administration agreement (the
“Class-Level Administration Agreement”). Under the Management Agreement, Funds Management is responsible for,
among other services, (i) implementing the investment objectives and strategies of the Fund, (ii) supervising the
applicable Sub-Adviser(s), (iii) providing Fund-level administrative services in connection with the Fund’s operations,
(iv) developing and implementing procedures for monitoring compliance with regulatory requirements and
compliance with the Fund’s investment objectives, policies and restrictions, and (v) providing any other Fund-level
administrative services reasonably necessary for the operation of the Fund other than those services that are provided
by the Fund’s transfer and dividend disbursing agent, custodian, and fund accountant. Funds Management also
furnishes office space and certain facilities required for conducting the Fund’s business together with ordinary clerical
and bookkeeping services.
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Under the Class-Level Administration Agreement, Funds Management is responsible for, among other services, (i)
coordinating, supervising and paying the applicable transfer agent and various sub-transfer agents and omnibus
account servicers and record-keepers, (ii) coordinating the preparation and filing of registration statements, notices,
shareholder reports and other information materials, including prospectuses, proxies and other shareholder
communications for a class, (iii) receiving and tabulating class-specific shareholder votes, (iv) reviewing bills submitted
to a Fund and, upon determining that a bill is appropriate, allocating amounts to the appropriate classes thereof and
instructing the Fund’s custodian to pay such bills, and (v) assembling and disseminating information concerning class
performance, expenses, distributions and administration. Funds Management has agreed to pay all of the Fund’s fees
and expenses for services provided by the Fund’s transfer agent and various sub-transfer agents and omnibus account
servicers and record-keepers out of the fees it receives pursuant to the Class-Level Administration Agreement.
Management Fees Paid
. The Fund’s investment management agreement with Funds Management does not require
the Fund to pay any management fees. Although the Fund does not compensate Funds Management directly for its
services under the investment management agreement, Funds Management receives fees from the sponsors of
wrap-fee programs in which the Fund is offered as an investment option.
For providing class-level administrative services to the Funds pursuant to the Class-Level Administration Agreement,
including paying the Funds’ fees and expenses for services provided by the Funds’ transfer agent and various
sub-transfer agents and omnibus account servicers and record-keepers, Funds Management is entitled to receive an
annual fee at the rates indicated below, as a percentage of the total net assets of each Class:
Class-Level
Administrator
Fee
Share Class
% of Total
Net Assets
Single Class
0.00%
General.
The Fund’s Management Agreement will continue in effect for more than two years from the effective date
provided the continuance is approved annually (i) by the holders of a majority of the respective Fund’s outstanding
voting securities or by the Board and (ii) by a majority of the Trustees who are not parties to the Management
Agreement or “interested persons” (as defined under the 1940 Act) of any such party. The Fund’s Management
Agreement may be terminated on 60 days written notice by either party and will terminate automatically if assigned.
The Fund’s Class-Level Administration Agreement will continue in effect provided the continuance is approved
annually by the Board, including a majority of the Trustees who are not “interested persons” (as defined under the 1940
Act) of any party to the Class-Level Administration Agreement. The Class-Level Administration Agreement may be
terminated on 60 days’ written notice by either party.
Conflicts of Interest
. Wells Fargo & Company is a diversified financial services company providing banking, insurance,
investment, mortgage and consumer financial services. The involvement of various subsidiaries of Wells Fargo &
Company, including Funds Management, in the management and operation of the Fund and in providing other
services or managing other accounts gives rise to certain actual and potential conflicts of interest.
For example, certain investments may be appropriate for a Fund and also for other clients advised by Funds
Management and its affiliates, and there may be market or regulatory limits on the amount of such investments, which
may cause competition for limited positions. Also, various clients and proprietary accounts of Funds Management and
its affiliates may at times take positions that are adverse to a Fund. Funds Management applies various policies to
address these situations, but a Fund may nonetheless incur losses or underperformance during periods when Wells
Fargo & Company, its affiliates and their clients achieve gains or outperformance.
Wells Fargo & Company may have interests in or provide services to portfolio companies or Fund shareholders or
intermediaries that may not be fully aligned with the interests of all investors. Funds Management and its affiliates
serve in multiple roles, including as manager and, for most Wells Fargo Funds, sub-adviser, as well as class-level
administrator and principal underwriter.
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These are all considerations of which an investor should be aware and which may cause conflicts that could
disadvantage a Fund. Funds Management has instituted business and compliance policies, procedures and disclosures
that are designed to identify, monitor and mitigate such conflicts of interest.
Fund Expenses
. As described in the Prospectus, generally no ordinary operating fees or expenses are charged to the
Fund. Funds Management has contractually committed to absorb and pay all ordinary operating expenses of the Fund,
except portfolio transactions or other investment-related costs (e.g. commissions), fees payable for services provided
by the Fund’s securities lending agent, interest, taxes, leverage expenses and other expenses not incurred in the
ordinary course of the Fund’s business. This commitment has an indefinite term.
Funds Management has engaged Wells Capital Management Incorporated (“Wells Capital Management”), to serve as
sub-adviser to the Fund (the “Sub-Adviser”). Subject to the direction of the Board and the overall supervision and
control of Funds Management and the Trust, the Sub-Adviser provides day-to-day portfolio management services to
the Fund.The Sub-Adviser furnishes to Funds Management periodic reports on the investment activity and
performance of the Fund. The Sub-Adviser also furnishes additional reports and information as Funds Management
and the Board and Officers may reasonably request. Funds Management may, from time to time and in its sole
discretion, allocate and reallocate services provided by and fees paid to Wells Capital Management.
For providing sub-advisory services to the Fund, the Sub-Adviser is compensated for its services by Funds
Management from the fees Funds Management receives from sponsors of the wrap-fee programs.
The following information supplements, and should be read in conjunction with, the section in each Prospectus
entitled “Portfolio Managers.” The information in this section is provided as of December 31, 2018, the most recent
fiscal year end for the Funds managed by the portfolio managers listed below (each, a “Portfolio Manager” and
together, the “Portfolio Managers”). The Portfolio Managers manage the investment activities of the Funds on a
day-to-day basis as follows:
Fund
Sub-Adviser
Portfolio Manager
CoreBuilder
®
Shares - Series M
Wells Capital Management
Wendy Casetta
Management of Other Accounts.
The following table(s) provide information relating to other accounts managed by the
Portfolio Manager(s). The table(s) do not include the Fund or any personal brokerage accounts of the Portfolio
Manager(s) and their families.
Portfolio Manager
Wendy Casetta
1
Registered Investment Companies
Number of Accounts
6
Total Assets Managed
$10.91 B
Number of Accounts Subject to Performance Fee
0
Assets of Accounts Subject to Performance Fee
$0
Other Pooled Investment Vehicles
Number of Accounts
0
Total Assets Managed
$0
Number of Accounts Subject to Performance Fee
0
Assets of Accounts Subject to Performance Fee
$0
Other Accounts
Number of Accounts
1
Total Assets Managed
$1.87 B
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Material Conflicts of Interest
.
The Portfolio Managers face inherent conflicts of interest in their day-to-day
management of the Funds and other accounts because the Funds may have different investment objectives, strategies
and risk profiles than the other accounts managed by the Portfolio Managers. For instance, to the extent that the
Portfolio Managers manage accounts with different investment strategies than the Funds, they may from time to time
be inclined to purchase securities, including initial public offerings, for one account but not for a Fund. Additionally,
some of the accounts managed by the Portfolio Managers may have different fee structures, including performance
fees, which are or have the potential to be higher or lower, in some cases significantly higher or lower, than the fees
paid by the Funds. The differences in fee structures may provide an incentive to the Portfolio Managers to allocate
more favorable trades to the higher-paying accounts.
To minimize the effects of these inherent conflicts of interest, the Sub-Advisers have adopted and implemented
policies and procedures, including brokerage and trade allocation policies and procedures, that they believe address
the potential conflicts associated with managing portfolios for multiple clients and are designed to ensure that all
clients are treated fairly and equitably. Accordingly, security block purchases are allocated to all accounts with similar
objectives in a fair and equitable manner. Furthermore, the Sub-Advisers have adopted a Code of Ethics under Rule
17j-1 under the 1940 Act and Rule 204A-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) to address
potential conflicts associated with managing the Funds and any personal accounts the Portfolio Managers may
maintain.
Wells Capital Management.
Wells Capital Management’s Portfolio Managers often provide investment management
for separate accounts advised in the same or similar investment style as that provided to mutual funds. While
management of multiple accounts could potentially lead to conflicts of interest over various issues such as trade
allocation, fee disparities and research acquisition, Wells Capital Management has implemented policies and
procedures for the express purpose of ensuring that clients are treated fairly and that potential conflicts of interest are
minimized.
Compensation
.
The Portfolio Managers were compensated by their employing Sub-Adviser using the following
compensation structure:
Wells Capital Management.
The compensation structure for Wells Capital Management’s Portfolio Managers includes
a competitive fixed base salary plus variable incentives, payable annually and over a longer term period. Wells Capital
Management participates in third party investment management compensation surveys for market-based
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compensation information to help support individual pay decisions. In addition to surveys, Wells Capital Management
also considers prior professional experience, tenure, seniority and a Portfolio Manager’s team size, scope and assets
under management when determining his/her fixed base salary. In addition, Portfolio Managers, who meet the
eligibility requirements, may participate in Wells Fargo’s 401(k) plan that features a limited matching contribution.
Eligibility for and participation in this plan is on the same basis for all employees.
Beneficial Ownership in the Funds.
The following table shows for each Portfolio Manager the dollar value of Fund equity
securities beneficially owned by the Portfolio Manager, stated as one of the following ranges:
$0;
Portfolio Manager Fund Holdings
Portfolio Manager
Fund
Dollar Range of Holdings in Fund
Wendy Casetta
1
CoreBuilder® Shares - Series M
$0
Lyle J. Fitterer, CFA, CPA
CoreBuilder
®
Shares - Series M
$0
Terry J. Goode
1
CoreBuilder® Shares - Series M
$0
Robert J. Miller
CoreBuilder
®
Shares - Series M
$0
Adrian Van Poppel
CoreBuilder
®
Shares - Series M
$0
Wells Fargo Funds Distributor, LLC (the “Distributor”), an affiliate of Funds Management located at 525 Market Street,
San Francisco, California 94105, serves as the distributor to the Fund.
Underwriting Commissions
The Distributor serves as the principal underwriter distributing securities of the Fund on a continuous basis.
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State Street Bank and Trust Company (“State Street”), located at State Street Financial Center, One Lincoln Street
Boston, Massachusetts 02111, acts as Custodian and fund accountant for the Funds. As Custodian, State Street, among
other things, maintains a custody account or accounts in the name of each Fund, handles the receipt and delivery of
securities, selects and monitors foreign sub-custodians as the Fund’s global custody manager, determines income and
collects interest on each Fund’s investments and maintains certain books and records. As fund accountant, State Street
is responsible for calculating each Fund’s daily net asset value per share and for maintaining its portfolio and general
accounting records. For its services, State Street is entitled to receive certain transaction fees, asset-based fees and
out-of-pocket costs.
Goldman Sachs Bank USA, d/b/a Goldman Sachs Agency Lending (the “Securities Lending Agent”) serves as the
securities lending agent to the Funds responsible for the implementation and administration of the Funds’ securities
lending program including facilitating the lending of the Funds’ available securities to approved borrowers and
negotiating the terms and conditions of each loan with a borrower. The Securities Lending Agent ensures that all
substitute interest, dividends, and other distributions paid with respect to loaned securities is credited to each Fund’s
relevant account on the date such amounts are delivered by the borrower to the Securities Lending Agent.
The Securities Lending Agent ensures that all collateral received in connection with securities loans is invested in the
Cash Collateral Fund, as described above in the section entitled “Permitted Investment Activities and Certain
Associated Risks – Loans of Portfolio Securities”. The Securities Lending Agent monitors the marked value of the
collateral delivered in connection with a securities loan so that such collateral equals to at least 102% of the market
value of any domestic securities loaned or 105% of the market value of any foreign securities loaned. The loaned
securities are marked to market on a daily basis, and additional collateral is required to be paid to maintain coverage.
At the termination of the loan, the Securities Lending Agent returns the collateral to the borrower upon the return of
the loaned securities.
The Securities Lending Agent maintains records of all loans and makes available to the Funds a monthly statement
describing the loans made and the income derived from the loans during the period. The Securities Lending Agent
performs compliance monitoring and testing of the securities lending program and provides quarterly report to the
Funds’ Board of Trustees.
For the fiscal year ended December 31, the Funds listed in the table below earned income and paid fees and
compensation to the Securities Lending Agent as follows:
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Transfer and Distribution Disbursing Agent
DST Asset Manager Solutions, Inc. (“DST”), located at Two Thousand Crown Colony Drive, Quincy, Massachusetts
02169, acts as transfer and distribution disbursing agent for the Funds. For providing such services, DST is entitled to
receive fees from the Administrator.
Independent Registered Public Accounting Firm
KPMG LLP (“KPMG”) has been selected as the independent registered public accounting firm for the Funds. KPMG
provides audit services, tax return preparation and assistance and consultation in connection with review of certain
SEC filings. KPMG’s address is Two Financial Center, 60 South Street, Boston, MA 02111.
Under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”), accounting firms such as KPMG are not independent if
they or any of their covered persons have certain financial relationships with their audit clients or certain affiliates of
those clients. The Funds are required under various securities laws to have their financial statements audited by an
independent accounting firm.
The Loan Rule specifically provides that an accounting firm would not be independent if it or certain affiliates and
covered persons receives a loan from a lender that is a record or beneficial owner of more than ten percent of an audit
client’s equity securities. For purposes of the Loan Rule, audit clients include all of the series of the Fund Complex,
including the Funds. KPMG has informed the Trust’s Audit Committee that it and certain of its covered persons have
relationships with one or more lenders who hold, as record owner, more than ten percent of the shares of certain series
of the Fund Complex, which implicates the Loan Rule.
On June 20, 2016, the SEC staff issued a “no-action” letter to another mutual fund complex (see Fidelity Management &
Research Company, et al., No-Action Letter) (the “No-Action Letter”) related to the Loan Rule. In the No-Action Letter,
the SEC staff provided assurances that it would not recommend enforcement action against a fund that relied on audit
services performed by an accounting firm that was not in compliance with the Loan Rule in certain specified
circumstances. The circumstances described in the No-Action Letter are substantially similar to the circumstances that
may implicate KPMG’s independence under the Loan Rule with respect to the Funds. While the SEC had indicated that
the assurances granted in the No-Action Letter would expire eighteen months from its issuance, on September 22,
2017, the SEC staff extended its assurances indefinitely and indicated that the No-Action Letter would be withdrawn
upon the effectiveness of any amendments to the Loan Rule designed to address the concerns expressed in the
No-Action Letter.
KPMG has communicated to the Trust’s Audit Committee that, after evaluating the facts and circumstances and the
Loan Rule and No-Action Letter, it believes that the relationships reported to the Trust’s Audit Committee do not bear
on its ability to be objective and impartial in the performance of its audits of the Funds and that a reasonable investor,
with knowledge of all relevant facts and circumstances, would reach the same conclusion. Based on this evaluation,
KPMG has confirmed that it continues to be an independent accountant with respect to the Funds within the meaning
of PCAOB Rule 3520 and all relevant professional and regulatory standards. In May 2018, the SEC proposed
amendments to revise its auditor independence rules related to loans or debtor-creditor relationships. The rules, as
proposed, are not expected to alter this conclusion.
If, in the future, the independence of KPMG is called into question under the Loan Rule by circumstances that are not
addressed in the No-Action Letter, the Funds may need to take action in order for the Funds’ filings with the SEC
containing financial statements to be deemed compliant with applicable securities laws. Such actions could result in
additional costs, impair the ability of the Funds to issue new shares or have other material adverse consequences for
the Funds.
The Fund Complex, Funds Management, the Distributor and the Sub-Advisers each has adopted a code of ethics which
contains policies on personal securities transactions by “access persons” as defined in each of the codes. These policies
comply with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, as applicable. Each code of ethics,
among other things, permits access persons to invest in certain securities, subject to various restrictions and
requirements. To facilitate enforcement, the codes of ethics generally require that an access person submit reports to a
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designated compliance person regarding personal securities transactions. The codes of ethics for the Fund Complex,
Funds Management, the Distributor and the Sub-Advisers are on public file with, and are available from, the SEC.
Proxy Voting Policies and Procedures
The Trusts have adopted policies and procedures for the Funds (“Fund Proxy Voting Procedures”) that are used to
determine how to vote proxies relating to portfolio securities held by the Funds of the Trusts. The Fund Proxy Voting
Procedures are designed to ensure that proxies are voted in the best interests of Fund shareholders, without regard to
any relationship that any affiliated person of a Fund (or an affiliated person of such affiliated person) may have with the
issuer of the security and with the goal of maximizing value to shareholders consistent with governing laws and the
investment policies of each Fund. While securities are not purchased to exercise control or to seek to effect corporate
change through share ownership activism, the Funds support sound corporate governance practices within
companies in which they invest.
The Board of the Trusts has delegated the responsibility for voting proxies relating to the Funds’ portfolio securities to
Funds Management. Funds Management has adopted the Wells Fargo Asset Management (“WFAM”) Proxy Voting
Policies and Procedures (the “WFAM Policies and Procedures”) and WFAM has established a Proxy Voting Committee
(“WFAM Proxy Committee”) that is responsible for overseeing the proxy voting process and ensuring that the voting
process is implemented in conformance with the WFAM Policies and Procedures. The following outlines certain key
aspects of the WFAM Policies and Procedures relating to the administration of the proxy voting process and how
proxies are voted.
Proxy Administrator.
The proxy voting process is administered by Wells Capital Management’s Operations Department
(“Proxy Administrator”), who reports to WFAM’s Chief Operations Officer. The Proxy Administrator is responsible for
administering and overseeing the proxy voting process to ensure the implementation of the WFAM Policies and
Procedures, including regular operational reviews, typically conducted on a weekly basis. The Proxy Administrator
monitors third party voting of proxies to ensure it is being done in a timely and responsible manner, including review
of scheduled vendor reports. The Proxy Administrator in conjunction with the WFAM Proxy Committee reviews the
continuing appropriateness of the WFAM Policies and Procedures, and recommends revisions as necessary.
Third Party Proxy Voting Vendor.
WFAM has retained a third-party proxy voting service, Institutional Shareholder
Services Inc. (“ISS”), to assist in the implementation of certain proxy voting-related functions including: 1.) Providing
research on proxy matters 2.) Providing technology to facilitate the sharing of research and discussions related to
proxy votes 3.) Voting proxies in accordance with WFAM’s guidelines 4.) Handling administrative and reporting items
5.) Maintaining records of proxy statements received in connection with proxy votes and provide copies/analyses
upon request. Except in instances where clients have retained voting authority, WFAM retains the responsibility for
proxy voting decisions.
Proxy Committee and Sub-Committees.
The WFAM Proxy Committee shall be responsible for overseeing the proxy
voting process to ensure its implementation in conformance with the WFAM Policies and Procedures. The WFAM Proxy
Committee shall coordinate with WFAM Risk and Compliance to monitor ISS, the proxy voting agent currently retained
by WFAM, to determine that ISS is accurately applying the WFAM Policies and Procedures and operates as an
independent proxy voting agent. WFAM’s ISS vendor oversight process includes an assessment of ISS’ Policy and
Procedures (“P&P”), including conflict controls and monitoring, receipt and review of routine performance-related
reporting by ISS to WFAM and periodic onsite due diligence meetings. Due diligence meetings typically include:
meetings with key staff, P&P related presentations and discussions, technology-related demonstrations and
assessments, and some sample testing, if appropriate. The WFAM Proxy Committee shall review the continuing
appropriateness of the WFAM Policies and Procedures. The WFAM Proxy Committee may delegate certain powers and
responsibilities to sub- committees consisting of a “Proxy Voting Sub-Committee” and a “Proxy Governance
Sub-Committee.”
Proxy Voting Sub-Committee.
Among other delegated matters, the Proxy Voting Sub-Committee, in accordance with
the WFAM Policies and Procedures, reviews and votes on routine proxy proposals that it considers under the WFAM
Policies and Procedures in a timely manner. If necessary, the Proxy Voting Sub- Committee escalates issues to the Proxy
Governance Sub-Committee that are determined to be material by the Proxy Voting Sub-Committee or otherwise in
accordance with the WFAM Policies and Procedures. The Proxy Voting Sub-Committee coordinates with WFAM Risk and
Compliance to review the performance and independence of ISS in exercising its proxy voting responsibilities.
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Proxy Governance Sub-Committee.
The Proxy Governance Sub-Committee reviews and, in accordance with the WFAM
Policies and Procedures, votes on issues that have been escalated from the Proxy Voting Sub- Committee. Members of
the Proxy Governance Sub-Committee also oversee the implementation of WFAM Proxy Committee recommendations
for the respective functional areas in WFAM that they represent.
Voting Procedures.
Unless otherwise required by applicable law, proxies will be voted in accordance with the following
steps and in the following order of consideration:
First, any voting items related to WFAM “Top-of-House” voting principles (as described below under the heading
“WFAM Proxy Voting Principles/Guidelines”) will generally be voted in accordance with a custom voting policy with ISS
(“Custom Policy”) designed to implement the WFAM’s Top-of-House voting principles.
Commitment to the Principles of Responsible Investment.
As a signatory to the Principles for Responsible Investment,
WFAM has integrated certain environmental, social, and governance factors into its investment processes, which
includes the proxy process. As described under Voting Procedures above, WFAM considers ISS’s Sustainability Voting
Guidelines as a point of reference in certain cases deemed to be material to a company’s long-term shareholder value.
Voting Discretion.
In all cases, the WFAM Proxy Committee (and any sub-committee thereof) will exercise its voting
discretion in accordance with the voting philosophy of the WFAM Policies and Procedures. In cases where a proxy item
is forwarded by ISS to the WFAM Proxy Committee or a sub-committee thereof, the WFAM Proxy Committee or its
sub-committee may be assisted in its voting decision through receipt of: (i) independent research and voting
recommendations provided by ISS or other independent sources; (ii) input from the investment sub-adviser
responsible for purchasing the security; and (iii) information provided by company management and shareholder
groups.
Portfolio Manager and Sub-Adviser Input.
The WFAM Proxy Committee may consult with portfolio management teams
and Fund sub-advisers on specific proxy voting issues, as it deems appropriate. In addition, portfolio management
teams or Fund sub-advisers may proactively make recommendations to the WFAM Proxy Committee regarding any
proxy voting issue. In this regard, the process takes into consideration expressed views of portfolio management
teams and Fund sub-advisers given their deep knowledge of investee companies. For any proxy vote, portfolio
management teams and Fund sub-advisers may make a case to vote against the ISS or WFAM Proxy Committee’s
recommendation (which is described under Voting Procedures above). Any portfolio management team’s or Fund
sub-adviser’s opinion will be documented in a brief write-up for consideration by the WFAM Proxy Committee who will
determine, or escalate to the Proxy Voting Sub-Committee, the final voting decision.
Consistent Voting.
Proxies will be voted consistently on the same matter when securities of an issuer are held by WFAM
multiple client accounts without “split voting” across different accounts.
WFAM Top-of-House Proxy Voting Principles/Guidelines.
The following reflects WFAM’s Top-of- House Voting Principles.
WFAM has put in place a custom voting policy with ISS to implement these voting principles.
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In all cases where the Proxy Committee makes the decision regarding how a particular proxy should be voted, the
Proxy Committee exercises its voting discretion in accordance with the voting philosophy of the Funds and in the best
interests of Fund shareholders. In deciding how to vote, the Proxy Committee may rely on independent research, input
and recommendations from third parties including independent proxy services, other independent sources,
sub-advisers, company managements and shareholder groups as part of its decision-making process.
Policies and Procedures for Disclosure of Fund Portfolio Holdings
I. Scope of Policies and Procedures. The following policies and procedures (the “Procedures”) govern the disclosure of
portfolio holdings and any ongoing arrangements to make available information about portfolio holdings for the
separate series of Wells Fargo Funds Trust (“Funds Trust”), Wells Fargo Master Trust (“Master Trust”), Wells Fargo Variable
Trust (“Variable Trust”) (each of Funds Trust, Master Trust and Variable Trust are referred to collectively herein as the
“Funds” or individually as the “Fund”) now existing or hereafter created.
II. Disclosure Philosophy. The Funds have adopted these Procedures to ensure that the disclosure of a Fund’s portfolio
holdings is accomplished in a manner that is consistent with a Fund’s fiduciary duty to its shareholders. For purposes
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of these Procedures, the term “portfolio holdings” means the stock, bond and derivative positions held by a Fund and
includes the cash investments held by the Fund.
Under no circumstances shall Wells Fargo Funds Management, LLC (“Funds Management”), Wells Fargo Asset
Management (“WFAM”) or the Funds receive any compensation in return for the disclosure of information about a
Fund’s portfolio holdings or for any ongoing arrangements to make available information about a Fund’s portfolio
holdings.
III. Disclosure of Fund Portfolio Holdings. The complete portfolio holdings and top ten holdings information referenced
below (except for the Funds of Master Trust (“Master Portfolios”) and Funds of Variable Trust) will be available on the
Funds’ website until updated for the next applicable period. Funds Management may withhold any portion of a Fund’s
portfolio holdings from online disclosure when deemed to be in the best interest of the Fund. Once holdings
information has been posted on the website, it may be further disseminated without restriction.
A. Complete Holdings. The complete portfolio holdings for each Fund (except for Money Market Funds and Alternative
Funds and Master Portfolios) shall be made publicly available monthly on the Funds’ website (wellsfargofunds.com), on
a one-month delayed basis. Money Market Fund portfolio holdings shall be made publicly available on the Fund’s
website, on a 1-day delayed basis. In addition to the foregoing, each Money Market Fund shall post on its website such
portfolio holdings and other information required by Rule 2a-7 under the Investment Company Act of 1940, as
amended. The categories of information included on the website may differ slightly from what is included in the
Funds’ financial statements.
B. Top Ten Holdings. Top ten holdings information (excluding derivative positions) for each Fund (except for Money
Market Funds, Alternative Funds and Master Portfolios) shall be made publicly available on the Funds’ website on a
monthly, seven-day or more delayed basis.
C. Fund of Funds Structures.
D. Alternative Funds.
E. Master Portfolios.
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Furthermore, each Fund shall file such forms and portfolio holdings information in filings made with the SEC in the
manner specified on such forms and with such frequency as required by such forms and applicable SEC rules and
regulations.
IV. List of Approved Recipients. The following list describes the limited circumstances in which a Fund’s portfolio
holdings may be disclosed to select third parties in advance of the monthly release on the Funds’ website. In each
instance, a determination will be made by Funds Management that such advance disclosure is supported by a
legitimate business purpose and that the recipients, where feasible, are subject to an independent duty or contractual
obligation not to disclose or trade on the nonpublic information.
A.
Wells Fargo Affiliates
. Team members of Wells Fargo & Co. (“Wells Fargo”) and its affiliates who perform risk
management functions and provide other services to the Fund(s), as well as the third-party service providers utilized
by them to perform such functions and provide such services, shall have full daily access to the portfolio holdings of
the Fund(s).
B.
Sub-Advisers
. Sub-advisers shall have full daily access to fund holdings for the Fund(s) for which they have direct
management responsibility. Sub-advisers may also release to and discuss portfolio holdings with various
broker/dealers for purposes of analyzing the impact of existing and future market changes on the prices, availability/
demand and liquidity of such securities, as well as for the purpose of assisting portfolio managers in the trading of
such securities.
A new Fund sub-adviser may periodically receive full portfolio holdings information for such Fund from the date of
Board approval through the date upon which they take over day-to- day investment management activities. Such
disclosure will be subject to confidential treatment.
C.
Money Market Portfolio Management Team
. The money market portfolio management team at Wells Capital
Management Incorporated (“Wells Capital Management”) shall have full daily access to daily transaction information
across the Wells Fargo Funds for purposes of anticipating money market sweep activity which in turn helps to enhance
liquidity management within the money market funds.
D.
Funds Management/Wells Fargo Funds Distributor, LLC (“Funds Distributor”)
.
E.
External Servicing Agents
. Portfolio holdings may be disclosed to servicing agents in connection with the day-to-day
operations and management of the funds. These recipients include, but are not limited to: a fund’s auditors; a fund’s
custodians; a fund’s accountants; proxy voting service providers; class action processing service providers; pricing
service vendors; prime brokers; securities lending agents; counsel to a fund or its independent Trustees; regulatory
authorities; third parties that assist in the review, processing and/or analysis of Fund portfolio transactions, portfolio
accounting and reconciliation, portfolio performance, trade order management, portfolio data analytics, electronic
order matching and other analytical or operational systems and services in connection with supporting a fund’s
operations; a fund’s insurers; financial printers; and providers of electronic systems providing access to materials for
meetings of a fund’s board of Trustees.
F.
Rating Agencies
. Nationally Recognized Statistical Ratings Organizations may receive full Fund holdings for rating
purposes.
G.
Reorganizations
. Entities hired as trading advisors that assist with the analysis and trading associated with
transitioning portfolios may receive full portfolio holdings of both the target fund and the acquiring fund. In addition,
the portfolio managers of the target fund and acquiring fund may receive full portfolio holdings of the acquiring fund
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and target fund, respectively, in order to assist with aligning the portfolios prior to the closing date of the
reorganization.
H.
Investment Company Institute
. The Investment Company Institute may receive information about full money
market Fund holdings concurrently at the time each money market Fund files with the SEC a report containing such
information.
I.
In-Kind Redemptions
. In connection with satisfying in-kind redemption requests from Funds, the redeeming
shareholders and their advisers and service providers may receive full Fund holdings as reasonably necessary to
operationally process such redemptions.
V.
Additions to List of Approved Recipients
. Any additions to the list of approved recipients requires approval by the
President, Chief Legal Officer and Chief Compliance Officer of the Funds based on a review of: (i) the type of fund
involved; (ii) the purpose for receiving the holdings information; (iii) the intended use of the information; (iv) the
frequency of the information to be provided; (v) the length of the lag, if any, between the date of the information and
the date on which the information will be disclosed; (vi) the proposed recipient’s relationship to the Funds; (vii) the
ability of Funds Management to monitor that such information will be used by the proposed recipient in accordance
with the stated purpose for the disclosure; (viii) whether a confidentiality agreement will be in place with such
proposed recipient; and (ix) whether any potential conflicts exist regarding such disclosure between the interests of
Fund shareholders, on the one hand, and those of the Fund’s investment manager/adviser, principal underwriter, or
any affiliated person of the Fund.
VI.
Commentaries
. Funds Management and WFAM may disclose any views, opinions, judgments, advice or
commentary, or any analytical, statistical, performance or other information in connection with or relating to a Fund or
its portfolio holdings (including historical holdings information), or any changes to the portfolio holdings of a Fund.
The portfolio commentary and statistical information may be provided to members of the press, shareholders in the
Funds, persons considering investment in the Funds or representatives of such shareholders or potential shareholders.
The content and nature of the information provided to each of these persons may differ.
Certain of the information described above will be included in periodic fund commentaries (e.g., quarterly, monthly,
etc.) and will contain information that includes, among other things, top contributors/detractors from fund
performance and significant portfolio changes during the relevant period (e.g., calendar quarter, month, etc.). This
information will be posted contemporaneously with their distribution on the Funds’ website.
No person shall receive any of the information described above if, in the sole judgment of Funds Management and
WFAM, the information could be used in a manner that would be harmful to the Funds.
VII.
Other Investment Products
. Funds Management, WFAM and/or their affiliates manage other investment products,
including investment companies, offshore funds, and separate accounts. Many of these other investment products
have strategies that are the same or substantially similar to those of the Funds and thus may have the same or
substantially similar portfolio holdings. The portfolio holdings of these other investment products are made available
to clients, investors, and in some cases, third-party sponsors, at different times than portfolio holdings of the Funds are
publicly disclosed. It is possible that any recipient of portfolio holdings for these other investment products could
trade ahead or against a Fund based on the information received.
VIII.
Board Approval
. The Board shall review these Procedures, including the list of approved recipients, as often as they
deem appropriate, but not less often than annually, and will consider for approval any changes that they deem
appropriate.
IX.
Education Component
. In order to promote strict compliance with these Procedures, Funds Management has
informed its employees, and other parties possessing Fund portfolio holdings information (such as sub-advisers, the
fund accounting agent and the custodian), of the limited circumstances in which the Funds’ portfolio holdings may be
disclosed in advance of the monthly disclosure on the Funds’ website and the ramifications, including possible
dismissal, if disclosure is made in contravention of these Procedures.
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The Trust has no obligation to deal with any broker-dealer or group of broker-dealers in the execution of transactions
in portfolio securities. Subject to the supervision of the Board and the supervision of the Manager, the Sub-Advisers
are responsible for the Funds’ portfolio decisions and the placing of portfolio transactions. In placing orders, it is the
policy of the Sub-Advisers to obtain the best overall results taking into account various factors, including, but not
limited to, the size and type of transaction involved; the broker-dealer’s risk in positioning the securities involved; the
nature and character of the market for the security; the confidentiality, speed and certainty of effective execution
required for the transaction, the general execution and operational capabilities of the broker-dealer; the reputation,
reliability, experience and financial condition of the firm, the value and quality of the services rendered by the firm in
this and other transactions; and the reasonableness of the spread or commission. While the Sub-Advisers generally
seek reasonably competitive spreads or commissions, the Funds will not necessarily be paying the lowest spread or
commission available.
Purchases and sales of equity securities on a securities exchange are effected through broker-dealers who charge a
negotiated commission for their services. Orders may be directed to any broker-dealer including, to the extent and in
the manner permitted by applicable law, affiliated broker-dealers. However, the Funds and Funds Management have
adopted a policy pursuant to Rule 12b-1(h) under the 1940 Act that prohibits the Funds from directing portfolio
brokerage to brokers who sell Fund shares as compensation for such selling efforts. In the over-the-counter market,
securities are generally traded on a “net” basis with broker-dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit to the broker-dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter’s concession or discount.
In placing orders for portfolio securities of the Fund, the Fund’s Sub-Adviser is required to give primary consideration
to obtaining the most favorable price and efficient execution. This means that the Sub-Adviser will seek to execute
each transaction at a price and commission, if any, that provide the most favorable total cost or proceeds reasonably
attainable in the circumstances. Commission rates are established pursuant to negotiations with the broker-dealer
based, in part, on the quality and quantity of execution services provided by the broker-dealer and in the light of
generally prevailing rates. Furthermore, the Manager oversees the trade execution procedures of the Sub-Adviser to
ensure that such procedures are in place, that they are adhered to, and that adjustments are made to the procedures
to address ongoing changes in the marketplace.
The Sub-Adviser may, in circumstances in which two or more broker-dealers are in a position to offer comparable
results for a portfolio transaction, give preference to a broker-dealer that has provided statistical or other research
services to the Sub-Adviser. In selecting a broker-dealer under these circumstances, the Sub-Adviser will consider, in
addition to the factors listed above, the quality of the research provided by the broker-dealer.
The Sub-Adviser may pay higher commissions than those obtainable from other broker-dealers in exchange for such
research services. The research services generally include: (1) furnishing advice as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the advisability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions
incidental thereto. By allocating transactions in this manner, a Sub-Adviser is able to supplement its research and
analysis with the views and information of securities firms. Information so received will be in addition to, and not in
lieu of, the services required to be performed by the Sub-Adviser under the advisory contracts, and the expenses of
the Sub-Adviser will not necessarily be reduced as a result of the receipt of this supplemental research information.
Furthermore, research services furnished by broker-dealers through which a sub-adviser places securities transactions
for a Fund may be used by the Sub-Adviser in servicing its other accounts, and not all of these services may be used by
the Sub-Adviser in connection with advising the Funds.
Portfolio Turnover
. The portfolio turnover rate is not a limiting factor when a Sub-Adviser deems portfolio changes
appropriate. Changes may be made in the portfolios consistent with the investment objectives and policies of the
Fund’s whenever such changes are believed to be in the best interests of the Funds and their shareholders. The
portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities by the average
monthly value of a Fund’s portfolio securities. For purposes of this calculation, portfolio securities exclude all securities
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having a maturity when purchased of one year or less. Portfolio turnover generally involves some expenses to the
Funds, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and
the reinvestment in other securities. Portfolio turnover may also result in adverse tax consequences to a Fund’s
shareholders.
The table below shows each Fund’s portfolio turnover rates for the two most recent fiscal years:
Fund
December 31, 2018
December 31, 2017
CoreBuilder
®
Shares - Series M
28%
19%
Brokerage Commissions
. The Fund paid no brokerage commissions during the last three fiscal years.
Securities of Regular Broker-Dealers.
The Fund is required to identify any securities of its “regular brokers or dealers” (as
defined under the 1940 Act) or of its parents that the Fund may hold at the close of its most recent fiscal year. As of
December 31, 2018, the Fund did not hold securities of its regular broker-dealers or of its parents.
DETERMINATION OF NET ASSET VALUE
The NAV per share for each Fund is determined as of the close of regular trading (currently 4:00 p.m. (Eastern time)) on
each day the New York Stock Exchange (“NYSE”) is open for business. Expenses and fees, including advisory fees, are
accrued daily and are taken into account for the purpose of determining the NAV of each Fund’s shares.
Each Fund’s investments are generally valued at current market prices. Securities are generally valued based on the last
sales price during the regular trading session if the security trades on an exchange (“closing price”). Securities that are
not traded primarily on an exchange generally are valued using latest quoted bid prices obtained by an independent
pricing service. Securities listed on the Nasdaq Stock Market, Inc., however, are valued at the Nasdaq Official Closing
Price (“NOCP”), and if no NOCP is available, then at the last reported sales price. A Fund is required to depart from
these general valuation methods and use fair value pricing methods to determine the value of certain investments if it
is determined that the closing price or the latest quoted bid price of a security, including securities that trade primarily
on a foreign exchange, does not accurately reflect its current value when the Fund calculates its NAV. In addition, we
also use fair value pricing to determine the value of investments in securities and other assets, including illiquid
securities, for which current market quotations are not readily available. The closing price or the latest quoted bid price
of a security may not reflect its current value if, among other things, a significant event occurs after the closing price or
latest quoted bid price but before a Fund calculates its NAV that materially affects the value of the security. We use
various criteria, including a systematic evaluation of U.S. market moves after the close of foreign markets, in deciding
whether a foreign security’s market price is still reliable and, if not, what fair market value to assign to the security. With
respect to any portion of a Fund’s assets that are invested in other mutual funds, the Fund’s NAV is calculated based
upon the net asset values of the other mutual funds in which the Fund invests, and the prospectuses for those
companies explain the circumstances under which those companies will use fair value pricing and the effects of using
fair value pricing. In light of the judgment involved in fair value decisions, there can be no assurance that a fair value
assigned to a particular security is accurate. Such fair value pricing may result in NAVs that are higher or lower than
NAVs based on the closing price or latest quoted bid price.
Money market instruments and debt instruments maturing in 60 days or less generally are valued at amortized cost.
Futures contracts will be marked to market daily at their respective settlement prices determined by the relevant
exchange. Prices may be furnished by a reputable independent pricing service. Prices provided by an independent
pricing service may be determined without exclusive reliance on quoted prices and may take into account appropriate
factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data.
The following information supplements and should be read in conjunction with the section in each Prospectus
entitled “Taxes.” Each Prospectus generally describes the U.S. federal income tax treatment of distributions by the
Funds. This section of the SAI provides additional information concerning U.S. federal income taxes. It is based on the
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Internal Revenue Code of 1986, as amended (the “Code”), applicable Treasury Regulations, judicial authority, and
administrative rulings and practice, all as of the date of this SAI and all of which are subject to change, including
changes with retroactive effect. Except as specifically set forth below, the following discussion does not address any
state, local or foreign tax matters.
On December 22, 2017, new tax legislation was enacted which includes significant changes in tax rates, restrictions on
miscellaneous itemized deductions, changes to the dividends received deduction, restrictions on the deduction of
interest and the international operations of domestic businesses. Certain changes have sunset provisions, which are
important to note. Because the tax legislation is recently enacted and Treasury Regulations related to such legislation
have not been drafted, there is still uncertainty in how the legislation will affect the Fund’s investments and
shareholders and whether such legislation could have an adverse effect on a Fund’s investments or the taxation of the
shareholders of a Fund. Shareholders are urged and advised to consult their own tax advisor with respect to the
impact of this legislation.
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If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable year, such Fund may be
eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid
with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis
failures of the diversification requirements where the Fund corrects the failure within a specified period. If the
applicable relief provisions are not available or cannot be met, such Fund will be taxed in the same manner as an
ordinary corporation, described below.
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profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by the
Fund to the IRS. In addition, if a Fund initially qualifies as a RIC but subsequently fails to qualify as a RIC for a period
greater than two taxable years, the Fund generally would be required to recognize and pay tax on any net unrealized
gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if the
Fund had been liquidated) or, alternatively, be subject to tax on such unrealized gain recognized for a period of five
years, in order to re-qualify as a RIC in a subsequent year.
Fund
Post-January 1, 2011 Capital Loss Carryforwards
Long-term
Short-Term
CoreBuilder Shares - Series M
$5,651,024
$323,531
If a Fund engages in a reorganization, either as an acquiring fund or acquired fund, its capital loss carry-forwards (if
any), its unrealized losses (if any), and any such losses of other funds participating in the reorganization may be subject
to severe limitations that could make such losses, in particular losses realized in taxable years beginning before
January 1, 2011, substantially unusable. The Funds have engaged in reorganizations in the past and/or may engage in
reorganizations in the future.
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continue to qualify as a RIC. Each master portfolio will be treated as a non-publicly traded partnership (or, in the event
that a Fund is the sole investor in the corresponding master portfolio, as disregarded from the Fund) for U.S. federal
income tax purposes rather than as a RIC or a corporation under the Code. Under the rules applicable to a non-publicly
traded partnership (or disregarded entity), a proportionate share of any interest, dividends, gains and losses of a
master portfolio will be deemed to have been realized (i.e., “passed-through”) by its investors, including the
corresponding Fund, regardless of whether any amounts are actually distributed by the master portfolio. Each investor
in a master portfolio will be taxed on such share, as determined in accordance with the governing instruments of the
particular master portfolio, the Code and U.S. Treasury regulations, in determining such investor’s U.S. federal income
tax liability. Therefore, to the extent a master portfolio were to accrue but not distribute any income or gains, the
corresponding Fund would be deemed to have realized its proportionate share of such income or gains without
receipt of any corresponding distribution. However, each of the master portfolios will seek to minimize recognition by
its investors (such as a corresponding Fund) of income and gains without a corresponding distribution. Furthermore,
each master portfolio intends to manage its assets, income and distributions in such a way that an investor in a master
portfolio will be able to continue to qualify as a RIC by investing its assets through the master portfolio.
If a Fund invests in distressed debt obligations or obligations of issuers that later become distressed, including debt
obligations of issuers not currently paying interest or who are in default, special tax issues may exist for the Fund. U.S.
federal income tax rules are not entirely clear about issues such as when a Fund may cease to accrue interest, OID, or
market discount, when and to what extent deductions may be taken for bad debts or worthless securities, and how
payments received on obligations in default should be allocated between principal and income. Under recently
enacted legislation, for tax years beginning after December 31, 2018, the Fund may be required to include in income
certain fees that are treated as OID and required to be included in income for financial statement purposes when
received (rather than when accrued into income under current law). It is unclear whether this provision applies to
market discount as well. These and other related issues will be addressed by a Fund when, as, and if it invests in such
securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not
become subject to U.S. federal income or excise tax.
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the securities delivered in determining the amount of gain or loss on the sale. If securities are purchased by a Fund
pursuant to the exercise of a put option granted by it, the Fund generally will subtract the premium received from its
cost basis in the securities purchased.
If a Fund enters into a “constructive sale” of any appreciated financial position in stock, a partnership interest, or certain
debt instruments, the Fund will be treated as if it had sold and immediately repurchased the property and must
recognize gain (but not loss) with respect to that position. A constructive sale of an appreciated financial position
occurs when a Fund enters into certain offsetting transactions with respect to the same or substantially identical
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property, including: (i) a short sale; (ii) an offsetting notional principal contract; (iii) a futures or forward contract; or (iv)
other transactions identified in future U.S. Treasury regulations. The character of the gain from constructive sales will
depend upon a Fund’s holding period in the appreciated financial position. Losses realized from a sale of a position
that was previously the subject of a constructive sale will be recognized when the position is subsequently disposed
of. The character of such losses will depend upon a Fund’s holding period in the position and the application of various
loss deferral provisions in the Code. Constructive sale treatment does not apply to certain closed transactions,
including if such a transaction is closed on or before the 30th day after the close of the Fund’s taxable year and the
Fund holds the appreciated financial position unhedged throughout the 60-day period beginning with the day such
transaction was closed.
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equal to that portion of its excess inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the highest federal corporate income tax rate. To the extent permitted under the 1940 Act,
a Fund may elect to specially allocate any such tax to the applicable disqualified organization, and thus reduce such
shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in the Fund.
The Funds have not yet determined whether such an election will be made.
“Passive foreign investment companies” (“PFICs”) are generally defined as foreign corporations with respect to which at
least 75% of their gross income for their taxable year is income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gains) or at least 50% of their assets on average produce such passive income. If a
Fund acquires any equity interest in a PFIC, the Fund could be subject to U.S. federal income tax and interest charges
on “excess distributions” received from the PFIC or on gain from the sale of such equity interest in the PFIC, even if all
income or gain actually received by the Fund is timely distributed to its shareholders. Excess distributions will be
characterized as ordinary income even though, absent the application of PFIC rules, some excess distributions may
have been classified as capital gain.
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Fluctuations in foreign currency exchange rates may result in foreign exchange gain or loss on transactions in foreign
currencies, foreign currency-denominated debt obligations, and certain foreign currency options, futures contracts
and forward contracts. Such gains or losses are generally characterized as ordinary income or loss for tax purposes. The
Fund must make certain distributions in order to qualify as a Regulated Investment Company (“RIC”), and the timing of
and character of transactions such as foreign currency-related gains and losses may result in the fund paying a
distribution treated as a return of capital. Such distribution is nontaxable to the extent of the recipient’s basis in its
shares.
Sales and Exchanges of Fund Shares.
If a shareholder sells, pursuant to a cash or in-kind redemption, or exchanges the
shareholder’s Fund shares, subject to the discussion below, the shareholder generally will recognize a taxable capital
gain or loss on the difference between the amount received for the shares (or deemed received in the case of an
exchange) and the shareholder’s tax basis in the shares. This gain or loss will be long-term capital gain or loss if the
shareholder has held such Fund shares for more than one year at the time of the sale or exchange, and short-term
otherwise.
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corporations, the Fund will be eligible to file an annual election with the IRS pursuant to which the Fund may
pass-through to its shareholders on a pro rata basis certain foreign income and similar taxes paid by the Fund, and
such taxes may be claimed, subject to certain limitations, either as a tax credit or deduction by the shareholders.
However, even if a Fund qualifies for the election for any year, it may not make the election for such year. If a Fund does
not so elect, then shareholders will not be entitled to claim a credit or deduction with respect to foreign taxes paid or
withheld. If a Fund does elect to “pass through” its foreign taxes paid in a taxable year, the Fund will furnish a written
statement to its shareholders reporting such shareholders proportionate share of the Funds’ foreign taxes paid.
If a Fund makes the election, the Fund will not be permitted to claim a credit or deduction for foreign taxes paid in that
year, and the Fund’s dividends-paid deduction will be increased by the amount of foreign taxes paid that year. Fund
shareholders that have satisfied the holding period requirements and certain other requirements shall include their
proportionate share of the foreign taxes paid by the Fund in their gross income and treat that amount as paid by them
for the purpose of the foreign tax credit or deduction. If the shareholder claims a credit for foreign taxes paid, the
credit will be limited to the extent it exceeds the shareholder’s federal income tax attributable to foreign source
taxable income. If the credit is attributable, wholly or in part, to qualified dividend income (as defined below), special
rules will be used to limit the credit in a manner that reflects any resulting dividend rate differential.
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planners. Income and bond Funds typically do not distribute significant amounts of “qualified dividend income”
eligible for reductions in individual U.S. federal income tax rates applicable to certain dividend income.
Backup Withholding.
A Fund is generally required to withhold and remit to the U.S. Treasury, subject to certain
exemptions (such as for certain corporate or foreign shareholders), an amount equal to 24% of all distributions and
redemption proceeds (including proceeds from exchanges and redemptions in-kind) paid or credited to a Fund
shareholder if (i) the shareholder fails to furnish the Fund with a correct “taxpayer identification number” (“TIN”), (ii) the
shareholder fails to certify under penalties of perjury that the TIN provided is correct, (iii) the shareholder fails to make
certain other certifications, or (iv) the IRS notifies the Fund that the shareholder’s TIN is incorrect or that the
shareholder is otherwise subject to backup withholding. Backup withholding is not an additional tax imposed on the
shareholder. The shareholder may apply amounts withheld as a credit against the shareholder’s U.S. federal income tax
liability and may obtain a refund of any excess amounts withheld, provided that the required information is furnished
to the IRS. If a shareholder fails to furnish a valid TIN upon request, the shareholder can also be subject to IRS penalties.
A shareholder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9. State
backup withholding may also be required to be withheld by the Funds under certain circumstances.
Foreign Shareholders.
For purposes of this discussion, “foreign shareholders” include: (i) nonresident alien individuals,
(ii) foreign trusts (i.e., a trust other than a trust with respect to which a U.S. court is able to exercise primary supervision
over administration of that trust and one or more U.S. persons have authority to control substantial decisions of that
trust), (iii) foreign estates (i.e., the income of which is not subject to U.S. tax regardless of source), and (iv) foreign
corporations.
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capital gains dividends, provided that the Funds obtain a properly completed and signed certificate of foreign status,
unless (i) such gains or distributions are effectively connected with the conduct of a trade or business carried on by the
foreign shareholder within the United States (or, if an income tax treaty applies, are attributable to a permanent
establishment in the United States of the foreign shareholder); (ii) in the case of an individual foreign shareholder, the
shareholder is present in the United States for a period or periods aggregating 183 days or more during the year of the
sale and certain other conditions are met; or (iii) the shares of the Funds constitute U.S. real property interests
(“USRPIs”), as described below.
Tax-Deferred Plans.
Shares of the Funds may be available for a variety of tax-deferred retirement and other
tax-advantaged plans and accounts. However, shares of a Tax-Free Fund may not be suitable for tax-deferred,
retirement and other tax-advantaged plans and accounts, since such plans and accounts are generally tax-exempt and,
therefore, would not benefit from the tax-exempt status of certain distributions from the Tax-Free Fund (discussed
below). Such distributions may ultimately be taxable to the beneficiaries when distributed to them.
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Any investment in residual interests of a collateralized mortgage obligation that has elected to be treated as a REMIC
can create complex U.S. federal income tax consequences, especially if a Fund has state or local governments or other
tax-exempt organizations as shareholders.
Persons who may be “substantial users” (or “related persons” of substantial users) of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares in a Tax-Free Fund. Furthermore,
shareholders will not be permitted to deduct any of their share of a Tax-Free Fund’s expenses in computing their U.S.
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federal AMT. As of the date of this filing, individuals are subject to the U.S. federal AMT at a maximum rate of 28%.
Corporations are not subject to the U.S. federal AMT for taxable years beginning after December 31, 2017.
Shareholders with questions or concerns about the U.S. federal AMT should consult own their own tax advisers.
Cost Basis Reporting
Each Fund or its delegate is required to report cost basis information for shareholders who are individuals and S
Corporations to the Internal Revenue Service for redemptions of Fund shares acquired on or after January 1, 2012. This
information will also be reported to a shareholder on Form 1099-B and the IRS each year. If a shareholder is a
corporation and has not instructed a Fund that it is a C corporation by written instruction, the Fund will treat the
shareholder as an S corporation and file a Form 1099-B.
Fund shareholders should consult their tax advisors to obtain more information about how the new cost basis rules
apply to them and determine which cost basis method allowed by the Internal Revenue Service is best for their tax
situation. Methods allowed by the IRS include, but are not limited to:
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In the absence of a shareholder method election, the Fund will apply its default method, Average Cost. If the Average
Cost method is applied either by default or at the shareholder’s election, the shareholder’s ability to change such
election once a sale occurs will be limited under the IRS rules. After an election has been made, but before a
disposition of shares occurs, a shareholder may make a retroactive change to an alternate method. The cost basis
method a shareholder elects may not be changed with respect to a redemption of shares after the settlement date of
the redemption. At any time, a shareholder may designate a new election for future purchases.
Redemptions of shares acquired prior to January 1, 2012 will continue to be reported using the Average Cost method,
if available, and will not be reported to the IRS.
CONTROL PERSONS AND PRINCIPAL FUND HOLDERS
The Fund is one series of the Trust in the Wells Fargo family of funds. The Trust was organized as a Delaware statutory
trust on March 10, 1999.
Most of the Trust’s series are authorized to issue multiple classes of shares, one class generally subject to a front-end
sales charge and, in some cases, classes subject to a CDSC, that are offered to retail investors. Certain of the Trust’s
series also are authorized to issue other classes of shares, which are sold primarily to institutional investors. Each share
in a series represents an equal, proportionate interest in the series with all other shares. Shareholders bear their pro
rata portion of a series’ operating expenses, except for certain class-specific expenses (e.g., any state securities
registration fees, shareholder servicing fees or distribution fees that may be paid under Rule 12b-1) that are allocated
to a particular class. Please contact Wells Fargo Funds Distributor at 1-888-877-9275 if you would like additional
information about other series or classes of shares offered.
With respect to matters affecting one class but not another, shareholders vote as a class; for example, the approval of a
Plan. Subject to the foregoing, all shares of a Fund have equal voting rights and will be voted in the aggregate, and not
by series, except where voting by a series is required by law or where the matter involved only affects one series. For
example, a change in a Fund’s fundamental investment policy affects only one series and would be voted upon only by
shareholders of the Fund involved. Additionally, approval of an advisory agreement, since it affects only one Fund, is a
matter to be determined separately by each series. Approval by the shareholders of one series is effective as to that
series whether or not sufficient votes are received from the shareholders of the other series to approve the proposal as
to those series.
As used in the Prospectus(es) and in this SAI, the term “majority,” when referring to approvals to be obtained from
shareholders of a class of shares of a Fund means the vote of the lesser of (i) 67% of the shares of the class represented
at a meeting if the holders of more than 50% of the outstanding shares of the class are present in person or by proxy,
or (ii) more than 50% of the outstanding shares of the class of the Fund. The term “majority,” when referring to
approvals to be obtained from shareholders of the Fund, means the vote of the lesser of (i) 67% of the shares of the
Fund represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund. The term “majority,” when referring to
the approvals to be obtained from shareholders of the Trust as a whole, means the vote of the lesser of (i) 67% of the
Trust’s shares represented at a meeting if the holders of more than 50% of the Trust’s outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Trust’s outstanding shares.
83
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Wells Fargo - CoreBuilder® Shares
Shareholders are not entitled to any preemptive rights. All shares are issued in uncertificated form only, and, when
issued will be fully paid and non-assessable by the Trust. The Trust may dispense with an annual meeting of
shareholders in any year in which it is not required to elect Trustees under the 1940 Act.
Each share of a class of a Fund represents an equal proportional interest in the Fund with each other share of the same
class and is entitled to such dividends and distributions out of the income earned on the assets belonging to the Fund
as are declared in the discretion of the Trustees. In the event of the liquidation or dissolution of the Trust, shareholders
of a Fund are entitled to receive the assets attributable to that Fund that are available for distribution, and a
distribution of any general assets not attributable to a particular Fund that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may determine.
Set forth below as of April 1, 2019, the following owned of record and/or beneficially 5% or more of the outstanding
shares of a class or 25% or more of the outstanding shares of a Fund as applicable. Additionally, as of April 1, 2019 the
Trustees and Officers of the Trust, as a group, beneficially owned less than 1% of the outstanding shares of the Trust.
For purposes of the 1940 Act, any person who owns directly or through one or more controlled companies more than
25% of the voting securities of a company is presumed to “control” such company. Accordingly, to the extent that a
person identified in the foregoing table is identified as the beneficial owner of more than 25% of a Fund, or is
identified as the record owner of more than 25% of a Fund and has voting and/or investment powers, it may be
presumed to control such Fund. A controlling person’s vote could have a more significant effect on matters presented
to shareholders for approval than the vote of other Fund shareholders.
Wells Fargo - CoreBuilder® Shares
|
84
NOTES
85
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Wells Fargo - CoreBuilder® Shares
NOTES
Wells Fargo - CoreBuilder® Shares
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86
NOTES
87
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Wells Fargo - CoreBuilder® Shares
May 1, 2019
Wells Fargo Funds Trust (the “Trust”) is an open-end, management investment company. This Statement of Additional Information (“SAI”) contains additional information
about a series of the Trust in the Wells Fargo family of funds - the above referenced Fund (the “Fund”). The Fund is considered diversified under the Investment Company
Act of 1940, as amended (the “1940 Act”). The Fund offers a single class of shares.
On December 15, 2015, the Wells Fargo Advantage Funds changed its name to the Wells Fargo Funds.
(2) The Fund may not acquire any illiquid investment if, immediately after the acquisition, the Fund would have
invested more than 15% of its net assets in illiquid investments that are assets.
(3) The Fund may invest in futures or options contracts consistent with its investment policies and the 1940 Act,
including the rules, regulations and interpretations of the Securities and Exchange Commission (the “SEC”) thereunder
or any exemptive orders obtained thereunder, and consistent with investment in futures or options contracts that
would allow the Fund to claim an exclusion from being a “commodity pool operator” as defined by the Commodity
Exchange Act.
(4) The Fund may lend securities from its portfolio to approved brokers, dealers and financial institutions, to the extent
permitted under the 1940 Act, including the rules, regulations and exemptions thereunder, which currently limit such
activities to one-third of the value of a Fund’s total assets (including the value of the collateral received). Any such
loans of portfolio securities will be fully collateralized based on values that are marked-to-market daily.
(5) The Fund may not make investments for the purpose of exercising control or management, provided that this
restriction does not limit a Fund’s investments in securities of other investment companies or investments in entities
created under the laws of foreign countries to facilitate investment in securities of that country.
(6) The Fund may not purchase securities on margin (except for short-term credits necessary for the clearance of
transactions).
(7) The Fund may not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short (short sales “against the box”), and provided that transactions in futures contracts
and options are not deemed to constitute selling securities short.
Further Explanation of Investment Policies
Certain derivative transactions may be modified or terminated only by mutual consent of a Fund and its counterparty
and certain derivative transactions may be terminated by the counterparty or the Fund, as the case may be, upon the
occurrence of certain Fund-related or counterparty-related events, which may result in losses or gains to the Fund
based on the market value of the derivative transactions entered into between the Fund and the counterparty. In
addition, such early terminations may result in taxable events and accelerate gain or loss recognition for tax purposes.
It may not be possible for a Fund to modify, terminate, or offset the Fund’s obligations or the Fund’s exposure to the
risks associated with a derivative transaction prior to its termination or maturity date, which may create a possibility of
increased volatility and/or decreased liquidity to the Fund. Upon the expiration or termination of a particular contract,
a Fund may wish to retain a Fund’s position in the derivative instrument by entering into a similar contract, but may be
unable to do so if the counterparty to the original contract is unwilling to enter into the new contract and no other
appropriate counterparty can be found, which could cause the Fund not to be able to maintain certain desired
investment exposures or not to be able to hedge other investment positions or risks, which could cause losses to the
Fund. Furthermore, after such an expiration or termination of a particular contract, a Fund may have fewer
counterparties with which to engage in additional derivative transactions, which could lead to potentially greater
exposure to one or more counterparties and which could increase the cost of entering into certain derivatives. In such
cases, the Fund may lose money.
■
Storage: Unlike the financial futures markets, in the commodity futures markets there are costs of physical storage
associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the
storage costs of purchasing the physical commodity, including the time value of money invested in the physical
commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in
futures contracts on that commodity, the value of the futures contract may change proportionately.
■
Reinvestment: In the commodity futures markets, producers of the underlying commodity may decide to hedge the
price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at
delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the
commodity producer generally must sell the futures contract at a lower price than the expected future spot price.
Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices,
then speculators will only sell the other side of the futures contract at a higher futures price than the expected
future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets
will influence whether futures prices are above or below the expected future spot price, which can have significant
implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a
Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or
lower futures prices, or choose to pursue other investments.
■
Other Economic Factors: The commodities which underlie commodity futures contracts may be subject to
additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes,
tariffs, and international economic, political and regulatory developments. These factors may have a larger impact
on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities.
Certain commodities are also subject to limited pricing flexibility because of supply and demand factors. Others are
subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the
instability of supplies of other materials. These additional variables may create additional investment risks which
subject a Fund’s investments to greater volatility than investments in traditional securities.
Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to a
Fund thereunder, and conversely, that a Fund will not be able to meet its obligation to the counterparty. Generally, a
Fund will enter into total return swaps on a net basis (i.e., the two payment streams are netted against one another
with a Fund receiving or paying, as the case may be, only the net amount of the two payments).
Like other when-issued securities or firm commitment agreements, dollar roll transactions involve the risk that the
market value of the securities sold by a Fund may decline below the price at which the Fund is committed to purchase
similar securities. In the event the buyer of securities from a Fund under a dollar roll transaction becomes insolvent, the
Fund’s use of the proceeds of the transaction may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. A Fund will engage in dollar
roll transactions for the purpose of acquiring securities for its portfolio and not for investment leverage.
The mortgage loans underlying ARMS guaranteed by GNMA are typically federally insured by the Federal Housing
Administration or guaranteed by the Department of Veterans Affairs, whereas the mortgage loans underlying ARMS
issued by FNMA or FHLMC are typically conventional residential mortgages which are not so insured or guaranteed,
but which conform to specific underwriting, size and maturity standards. ARMS are also offered by private issuers.
As a result of adjustable interest rates, the yields on ARMS typically lag behind changes in the prevailing market
interest rate. This results in ARMS generally experiencing less decline in value during periods of rising interest rates
than traditional long-term, fixed-rate mortgage-backed securities. On the other hand, during periods of declining
interest rates, the interest rates on the underlying mortgages may reset downward with a similar lag. As a result, the
values of ARMS are expected to rise less than the values of securities backed by fixed-rate mortgages during periods of
declining interest rates.
Preferred Stock.
Preferred stock represents an equity interest in a company that generally entitles the holder to receive,
in preference to the holders of other stocks, such as common stocks, dividends and a fixed share of the proceeds
resulting from a liquidation of the company. Some preferred stock also entitles holders to receive additional
liquidation proceeds on the same basis as holders of a company’s common stock and, thus, also represent an
As with a straight fixed-income security, a convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible security also
tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest-rate and market movements, a
convertible security tends not to be as sensitive to interest rate changes as a similar fixed-income security, and tends
not to be as sensitive to share price changes as its underlying stock.
Except with respect to funds structured as funds-of-funds or so-called master/feeder funds or other funds whose
strategies otherwise allow such investments, the 1940 Act generally requires that a fund limit its investments in
another investment company or series thereof so that, as of the time at which a securities purchase is made: i) no more
than 3% of the outstanding voting stock of any one investment company or series thereof will be owned by a fund or
by companies controlled by a fund; ii) no more than 5% of the value of its total assets will be invested in the securities
of any one investment company; and iii) no more than 10% of the value of its total assets will be invested in the
aggregate in securities of other investment companies.
For lending its securities, a Fund will earn either a fee payable by the borrower (on loans that are collateralized by U.S.
Government securities or a letter of credit) or the income on instruments purchased with cash collateral (after
payment of a rebate fee to the borrower and a portion of the investment income to the securities lending agent). Cash
collateral may be invested on behalf of a Fund by the Fund’s sub-adviser in U.S. dollar-denominated short-term money
market instruments that are permissible investments for the Fund and that, at the time of investment, are considered
high-quality. Currently, cash collateral generated from securities lending is invested in shares of Securities Lending
Cash Investments, LLC (the “Cash Collateral Fund”). The Cash Collateral Fund is a Delaware limited liability company
that is exempt from registration under the 1940 Act. The Cash Collateral Fund is managed by Wells Fargo Funds
Management, LLC (“Funds Management”) and is sub-advised by Wells Capital Management Incorporated (“Wells
Capital Management”). The Cash Collateral Fund is required to comply with the credit quality, maturity and other
limitations set forth in Rule 2a-7 under the 1940 Act. The Cash Collateral Fund seeks to provide preservation of
principal and daily liquidity by investing in high-quality, U.S. dollar-denominated short-term money market
instruments. The Cash Collateral Fund may invest in securities with fixed, variable, or floating rates of interest. The Cash
Collateral Fund seeks to maintain a stable price per share of $1.00, although there is no guarantee that this will be
achieved. Income on shares of the Cash Collateral Fund is reinvested in shares of the Cash Collateral Fund. The net
asset value of a Fund will be affected by an increase or decrease in the value of the securities loaned by it, and by an
increase or decrease in the value of instruments purchased with cash collateral received by it.
Repurchase agreements also may be viewed as loans made by a Fund that are collateralized by the securities subject
to repurchase, which may consist of a variety of security types. The maturities of the underlying securities in a
repurchase agreement transaction may be greater than twelve months, although the maximum term of a repurchase
agreement will always be less than twelve months. Repurchase agreements may involve risks in the event of default or
insolvency of the counterparty that has agreed to repurchase the securities from a Fund, including possible delays or
restrictions upon the Fund’s ability to sell the underlying security and additional expenses in seeking to enforce the
Fund’s rights and recover any losses. Although the Fund seeks to limit the credit risk under a repurchase agreement by
carefully selecting counterparties and accepting only high quality collateral, some credit risk remains. The
counterparty could default, which may make it necessary for the Fund to incur expenses to liquidate the collateral. In
addition, the collateral may decline in value before it can be liquidated by the Fund.
Short positions in futures and options create opportunities to increase a Fund’s return but, at the same time, involve
special risk considerations and may be considered speculative. Since a Fund in effect profits from a decline in the price
of the futures or options sold short without having to invest the full purchase price of the futures or options on the
date of the short sale, a Fund’s NAV per share will tend to increase more when the futures or options it has sold short
decrease in value, and to decrease more when the futures or options it has sold short increase in value, than would
otherwise be the case if it had not engaged in such short sales. Short sales theoretically involve unlimited loss
potential, as the market price of futures or options sold short may continuously increase, although a Fund may
mitigate such losses by replacing the futures or options sold short before the market price has increased significantly.
Under adverse market conditions, a Fund might have difficulty purchasing futures or options to meet its short sale
delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale
obligations at a time when fundamental investment considerations would not favor such sales.
After a Fund liquidation is announced, such Fund may begin to experience greater redemption activity as the Fund
approaches its liquidation date. As portfolio managers effect portfolio transactions to meet redemptions and prepare
the Fund for liquidation, the Fund may not meet its investment objective and principal investment strategies. The Fund
will incur transaction costs as a result of these portfolio transactions which will indirectly be borne by the Fund’s
shareholders. The Fund may be required to make a distribution of income and capital gains realized, if any, from
liquidating its portfolio. It is anticipated that any distribution would be paid to shareholders prior to liquidation.
Shareholders of the Fund on the date of liquidation would receive a distribution of their account proceeds on the
settlement date in complete redemption of their shares. In the event of a liquidation, please consult with a tax advisor
to determine your specific tax consequences, if any.
The Funds are also subject to the risk of potential cyber incidents, which may include, but are not limited to, the
(Born 1957)
(Born 1953)
(Born 1952)
(Born 1949)
Audit
Committee
Chairman, from
2009 to 2018
(Born 1950)
(Born 1953)
(Born 1951)
(Born 1959)
(Born 1959)
1.
Length of service dates reflect the Trustee’s commencement of service with the Trust’s predecessor entities, where applicable.
2.
Isaiah Harris, Jr. became Chairman of the Audit Committee effective January 1, 2019.
(Born 1974)
2
(Born 1967)
2
(Born 1973)
(Born 1967)
(Born 1975)
1.
Length of service dates reflect the Trustee’s commencement of service with the Trust’s predecessor entities, where applicable.
2.
Nancy Wiser currently serves as Treasurer of 76 funds in the Fund Complex. Jeremy DePalma currently serves as Treasurer of 76 funds in the Fund Complex and Assistant
Treasurer of 76 funds in the Fund Complex.
Judith M. Johnson
. Ms. Johnson has served as a Trustee of the Trusts in the Fund Complex since 2008 and as Chair of the
Audit Committee from 2009 to 2018. She has also served as a trustee and chair of the audit committee of Asset
Allocation Trust from 2010 to 2018. She served as the Chief Executive Officer and Chief Investment Officer of the
Minneapolis Employees Retirement Fund for twelve years until her retirement in 2008. Ms. Johnson is a licensed
attorney, as well as a certified public accountant and a certified managerial accountant. Ms. Johnson has been
determined by the Board to be an audit committee financial expert, as such term is defined in the applicable rules of
the SEC.
David F. Larcker
. Mr. Larcker has served as a Trustee of the Trusts in the Fund Complex since 2009 and was an Advisory
Board Member from 2008 to 2009. He also served as a Trustee of Asset Allocation Trust from 2010 to 2018. Mr. Larcker
is the James Irvin Miller Professor of Accounting at the Graduate School of Business of Stanford University. He is also
the Morgan Stanley Director of the Center for Leadership Development and Research and Co-director of The Rock
Center for Corporate Governance at Stanford University. He has been a professor of accounting for over 30 years. He
has written numerous articles on a range of topics, including managerial accounting, financial statement analysis and
corporate governance.
Olivia S. Mitchell
. Ms. Mitchell has served as a Trustee of the Trusts in the Fund Complex since 2006 and as chairman of
the Nominating and Governance Committee since 2018. She also served as a Trustee of Asset Allocation Trust from
2010 to 2018. Ms. Mitchell is the International Foundation of Employee Benefit Plans Professor at the Wharton School
of the University of Pennsylvania, where she is also Professor of Insurance/Risk Management and Business Economics/
Policy. She also serves in senior positions with academic and policy organizations that conduct research on pensions,
retirement, insurance, risk management and related topics, including as Executive Director of the Pension Research
Council and Director of the Boettner Center on Pensions and Retirement Research, both at the University of
Pennsylvania. She has taught on, and served as a consultant on economics, insurance, and risk management, served as
Department Chair, advised numerous governmental entities, and written numerous articles and books on topics
including retirement systems, private and social insurance, and health and retirement policy.
Timothy J. Penny
. Mr. Penny has served as a Trustee of the Trusts in the Fund Complex and their predecessor funds since
1996, and Chairman of the Board of Trustees since 2018. He also served as a Trustee of Asset Allocation Trust from 2010
to 2018. He has been President and Chief Executive Officer of Southern Minnesota Initiative Foundation since 2007. He
also serves as a member of the board of another non-profit organization. Mr. Penny was a member of the U.S. House of
Representatives for 12 years representing Southeastern Minnesota’s First Congressional District.
Overall responsibility for oversight of the Trust and the Fund rests with the Board of Trustees. The Board has engaged
Funds Management to manage the Fund on a day-to day basis. The Board is responsible for overseeing Funds
Management and other service providers in the operation of the Trust in accordance with the provisions of the 1940
Act, applicable provisions of Delaware law, other applicable laws and the Fund’s charter. The Board is currently
composed of nine members, each of whom is an Independent Trustee. The Board currently conducts regular meetings
five times a year. In addition, the Board may hold special in-person or telephonic meetings or informal conference calls
to discuss specific matters that may arise or require action between regular meetings. The Independent Trustees have
engaged independent legal counsel to assist them in performing their oversight responsibilities.
The Board has appointed an Independent Trustee to serve in the role of Chairman. The Chairman’s role is to preside at
all meetings of the Board and to act as a liaison with service providers, officers, attorneys, and other Trustees generally
between meetings. The Chairman may also perform such other functions as may be delegated by the Board from time
to time. In order to assist the Chairman in maintaining effective communications with the other Trustees and Funds
Management, the Board has appointed a Chair Liaison to work with the Chairman to coordinate Trustee
communications and to help coordinate timely responses to Trustee inquiries, board governance and fiduciary
matters. The Chair Liaison serves for a one-year term, which may be extended with the approval of the Board. Except
for any duties specified herein or pursuant to the Trust’s charter document, the designation of Chairman or Chair
Liaison does not impose on such Independent Trustee any duties, obligations or liability that are greater than the
duties, obligations or liability imposed on such person as a member of the Board generally.
The Board also has established a Governance Committee, an Audit Committee and a Dividend Committee to assist the
Board in the oversight and direction of the business and affairs of the Trust, and from time to time may establish
informal working groups to review and address the policies and practices of the Trust with respect to certain specified
matters. Additionally, the Board has established investment teams to review in detail the performance of the Fund, to
meet with portfolio managers, and to report back to the full Board. The Board occasionally engages independent
consultants to assist it in evaluating initiatives or proposals. The Board believes that the Board’s current leadership
structure is appropriate because it allows the Board to exercise informed and independent judgment over matters
under its purview, and it allocates areas of responsibility among committees of Trustees and the full Board in a manner
that enhances effective oversight. The leadership structure of the Board may be changed, at any time and in the
discretion of the Board, including in response to changes in circumstances or the characteristics of the Trust.
The Fund and Trust are subject to a number of risks, including investment, compliance, operational, liquidity and
valuation risks, among others. Day-to-day risk management functions are subsumed within the responsibilities of
Funds Management, the sub-advisers and other service providers (depending on the nature of the risk), who carry out
the Fund’s investment management and business affairs. Each of Funds Management, the sub-advisers and other
Risk oversight forms part of the Board’s general oversight of the Fund and Trust and is addressed as part of various
Board and Committee activities. The Board recognizes that it is not possible to identify all of the risks that may affect a
Fund or to develop processes and controls to eliminate or mitigate their occurrence or effects. As part of its regular
oversight of the Trusts, the Board, directly or through a Committee, interacts with and reviews reports from, among
others, Funds Management, sub-advisers, the Chief Compliance Officer of the Funds, the Chief Risk Officer of Funds
Management, the independent registered public accounting firm for the Funds, and internal auditors for Funds
Management or its affiliates, as appropriate, regarding risks faced by the Fund and relevant risk functions. The Board,
with the assistance of its investment teams, reviews investment policies and risks in connection with its review of the
Funds’ performance, and considers information regarding the oversight of liquidity risks from Funds Management’s
investment personnel. The Board has appointed a Chief Compliance Officer who oversees the implementation and
testing of the Funds’ compliance program and regularly reports to the Board regarding compliance matters for the
Funds and their principal service providers. Funds Management has appointed a Chief Risk Officer to enhance the
framework around the assessment, management, measurement and monitoring of risk indicators and other risk
matters concerning the Funds and develop periodic reporting of risk management matters to the Board. In addition, as
part of the Board’s periodic review of the Funds’ advisory, subadvisory and other service provider agreements, the
Board may consider risk management aspects of their operations and the functions for which they are responsible.
With respect to valuation, the Board oversees a management valuation team comprised of officers and employees of
Funds Management, has approved and periodically reviews written valuation policies and procedures applicable to
valuing the Fund portfolio investments, and has established a valuation committee of Trustees. The Board may, at any
time and in its discretion, change the manner in which it conducts its risk oversight role.
1.
As of December 31, 2018, there were 152 funds in the Fund Complex.
1.
Includes Trustee ownership in shares of funds within the entire Wells Fargo Fund Complex (consisting of 152 funds).
Lyle J. Fitterer, CFA, CPA
Terry J. Goode
Robert J. Miller
Adrian Van Poppel
1.
This portoflio manager was added to the Fund on March 28, 2019. The information presented for this Fund is as of December 31, 2018, at which time they were not a manager
of the Fund.
Wells Capital Management’s investment incentive program plays an important role in aligning the interests of our
portfolio managers, investment team members, clients and shareholders. Incentive awards for portfolio managers are
determined based on a review of relative investment and business/team performance. Investment performance is
generally evaluated for 1, 3, and 5 year performance results, with a predominant weighting on the 3- and 5- year time
periods, versus the relevant benchmarks and/or peer groups consistent with the investment style. In the case of each
Fund, the benchmark(s) against which the performance of the Fund’s portfolio may be compared for these purposes
generally are indicated in the “Average Annual Total Returns” table in the Prospectus. Once determined, incentives are
awarded to portfolio managers annually, with a portion awarded as annual cash and a portion awarded as long term
incentive. The long term portion of incentives generally carry a pro-rated vesting schedule over a three year period. For
many of our portfolio managers, Wells Capital Management further requires a portion of their annual long-term award
be allocated directly into each strategy they manage through a deferred compensation vehicle. In addition, our
investment team members who are eligible for long term awards also have the opportunity to invest up to 100% of
their awards into investment strategies they support (through a deferred compensation vehicle).
$1 - $10,000;
$10,001 - $50,000;
$50,001 - $100,000;
$100,001 - $500,000;
$500,001 - $1,000,000; and
over $1,000,000.
1.
This portoflio manager was added to the Fund on March 28, 2019. The information presented for this Fund is as of December 31, 2018, at which time they were not a manager
of the Fund.
The Distributor may enter into dealer agreements with one or more broker-dealers under which such broker-dealers
may receive compensation for distribution-related services from the Distributor, including, but not limited to,
payments to such broker-dealers based on the average daily net assets of Fund shares attributable to their customers.
For the fiscal year ended December 31, 2018, the Fund did not pay the Distributor any fees for distribution-related
services.
Second, any voting items for meetings deemed of “high importance” (e.g., proxy contests, mergers and acquisitions,
capitalization proposals and anti-takeover proposals) where ISS opposes management recommendations will be
referred to the portfolio management teams for recommendation or the Proxy Voting Sub-Committee (or escalated to
the Proxy Governance Sub- Committee) for case-by-case review and vote determination.
Third, with respect to any voting items where ISS Sustainability Voting Guidelines provide a different recommendation
than ISS Standard Voting Guidelines, the following steps are taken:
a. The WFAM Portfolio Risk Management and Analytics team (the “PRMA team”) evaluates the matter for materiality
and any other relevant considerations.
b. If the PRMA team recommends further review, the voting item is then referred to the portfolio management teams
for recommendation or the Proxy Voting Sub-Committee (or escalated to the Proxy Governance Sub-Committee) for
case-by-case review and vote determination.
c. If the PRMA team does not recommend further review, the matter is voted in accordance with ISS Standard Voting
Guidelines.
Fourth, any remaining proposals are voted in accordance with ISS Standard Voting Guidelines.
In most cases, any potential conflicts of interest involving Funds Management or any affiliate regarding a proxy are
avoided through the strict and objective application of the Fund’s voting guidelines. However, when the Proxy
Committee is aware of a material conflict of interest regarding a matter that would otherwise be considered on a
case-by-case basis by the Proxy Committee, the Proxy Committee shall address the material conflict by using any of
the following methods: (i) instructing the proxy voting agent to vote in accordance with the recommendation it makes
to its clients; (ii) disclosing the conflict to the Board and obtaining their consent before voting; (iii) submitting the
matter to the Board to exercise its authority to vote on such matter; (iv) engaging an independent fiduciary who will
direct the Proxy Committee on voting instructions for the proxy; (v) consulting with outside legal counsel for guidance
on resolution of the conflict of interest; (vi) erecting information barriers around the person or persons making voting
decisions; (vii) voting in proportion to other shareholders; or (viii) voting in other ways that are consistent with each
Fund’s obligation to vote in the best interests of its shareholders. Additionally, the Proxy Committee does not permit its
votes to be influenced by any conflict of interest that exists for any other affiliated person of the Funds (such as a
subadviser or principal underwriter) and the Proxy Committee votes all such matters without regard to the conflict.
The Proxy Voting Procedures may reflect voting positions that differ from practices followed by other companies or
subsidiaries of Wells Fargo & Company.
While Funds Management uses its best efforts to vote proxies, in certain circumstances it may be impractical or
impossible for Funds Management to vote proxies (e.g., limited value or unjustifiable costs). For example, in
accordance with local law or business practices, many foreign companies prevent the sales of shares that have been
voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting
(“share blocking”). Due to these restrictions, Funds Management must balance the benefits to its clients of voting
proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the
underlying shares at the most advantageous time. As a result, Funds Management will generally not vote those proxies
in the absence of an unusual, significant vote or compelling economic importance. Additionally, Funds Management
may not be able to vote proxies for certain foreign securities if Funds Management does not receive the proxy
statement in time to vote the proxies due to custodial processing delays.
As a general matter, securities on loan will not be recalled to facilitate proxy voting (in which case the borrower of the
security shall be entitled to vote the proxy). However, if the Proxy Committee is aware of an item in time to recall the
security and has determined in good faith that the importance of the matter to be voted upon outweighs the loss in
lending revenue that would result from recalling the security (i.e., if there is a controversial upcoming merger or
acquisition, or some other significant matter), the security will be recalled for voting.
Information regarding how the Funds voted proxies relating to portfolio securities held during the most recent
12-month period ended June 30 may be obtained on the Funds’ website at wellsfargofunds.com or by accessing the
SEC’s website at sec.gov.
1. The underlying funds held by a Fund that operates as a fund of funds and invests exclusively in multiple affiliated
underlying funds or multiple unaffiliated underlying funds or in a combination of affiliated and unaffiliated underlying
funds (“fund of funds”) shall be posted to the Funds’ website on a monthly, one-month delayed basis.
2. The individual holdings of the underlying master funds held by Funds that operate as a feeder fund in a
master-feeder structure shall be posted to the Funds’ website on a monthly, one-month delayed basis.
3. A change to the underlying funds held by a fund of funds or changes in fund of funds’ target allocations between or
among its fixed-income and/or equity investments may be posted to the Funds’ website simultaneous with the
occurrence of the change.
The following holdings disclosure policy applies to Alternative Funds:
1. Complete Holdings as of Fiscal Quarter Ends. As of each fiscal quarter end, the Alternative Funds’ complete portfolio
holdings shall be made publicly available quarterly on the Funds’ website, on a one-month delayed basis.
2. Holdings as of Other Month Ends. As of each month end other than a month end that coincides with a fiscal quarter
end, each Alternative Fund shall make publicly available monthly on the Fund’s website, on a one-month delayed
basis, the following: (i) all portfolio holdings held long other than any put options on equity securities; (ii) portfolio
holdings held short other than short positions in equity securities of single issuers; and (iii) the aggregate dollar value
of each of the following: (a) equity securities of single issuers held short, and (b) any put options on equity securities
held long.
3. Top Ten Holdings. Each Alternative Fund shall make publicly available on the Fund’s website on a monthly,
seven-day or more delayed basis information about its top ten holdings information, provided that the following
holdings shall be excluded: (i) derivative positions; and (ii) short positions (other than any Publicly Disclosed Short
Positions).
1. The complete portfolio holdings of Master Portfolios shall be posted to the Funds’ website on a semi-annual,
one-month delayed basis.
1. Funds Management personnel that deal directly with the processing, settlement, review, control, auditing,
reporting, and/or valuation of portfolio trades shall have full daily access to Fund portfolio holdings through access to
the fund accountant’s system.
2. Funds Management personnel that deal directly with investment review and analysis of the Funds shall have full
daily access to Fund portfolio holdings. through FactSet, a program that is used, among other things, to evaluate
portfolio characteristics against available benchmarks.
3. Funds Management and Distributor personnel may be given advance disclosure of any changes to the underlying
funds in a fund of funds structure or changes in a Fund’s target allocations that result in a shift between or among
asset classes.
A shareholder’s tax treatment may vary depending upon the shareholder’s particular situation. Except as specifically
set forth below, this discussion applies only to U.S. individual shareholders holding Fund shares as capital assets within
the meaning of the Code. A shareholder may also be subject to special rules not discussed below if they are a certain
kind of shareholder, including, but not limited to: an insurance company; a tax-exempt organization; a shareholder
holding a Fund’s shares through tax-advantaged accounts (such as an individual retirement account (an “IRA”), a 401(k)
plan account or other qualified retirement account); a financial institution or broker-dealer; a person who is neither a
citizen nor resident of the United States or entity that is not organized under the laws of the United States or political
subdivision thereof; a shareholder who holds Fund shares as part of a hedge, straddle or conversion transaction; a
shareholder subject to the alternative minimum tax; or an entity taxable as a partnership for U.S. federal income tax
purposes and investors in such an entity. The summary discussion that follows may not be considered to be individual
tax advice and may not be relied upon by any shareholder.
The Trust has not requested and will not request an advance ruling from the Internal Revenue Service (the “IRS”) as to
the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below
and such positions could be sustained. In addition, the following discussion and the discussions in each Prospectus
applicable to each shareholder address only some of the U.S. federal income tax considerations generally affecting
investments in the Funds.
Prospective shareholders are urged to consult their own tax advisers and financial planners regarding the U.S.
federal tax consequences of an investment in a Fund, the application of state, local or foreign laws, and the
effect of any possible changes in applicable tax laws on their investment in the Funds.
Qualification as a Regulated Investment Company.
It is intended that each Fund qualify as a regulated investment
company (“RIC”) under Subchapter M of Subtitle A, Chapter 1 of the Code. Each Fund will be treated as a separate
entity for U.S. federal income tax purposes. Thus, the provisions of the Code applicable to RICs generally will apply
separately to each Fund even though each Fund is a series of the Trust. Furthermore, each Fund will separately
determine its income, gains, losses and expenses for U.S. federal income tax purposes.
In order to qualify as a RIC under the Code, each Fund must, among other things, derive at least 90% of its gross
income each taxable year generally from (i) dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock, securities or foreign currencies, and other income attributable to its
business of investing in such stock, securities or foreign currencies (including, but not limited to, gains from options,
futures or forward contracts) and (ii) net income derived from an interest in a qualified publicly traded partnership, as
defined in the Code (together with (i) the “qualifying income requirement”). Future U.S. Treasury regulations may
(possibly retroactively) exclude from qualifying income foreign currency gains that are not directly related to a Fund’s
principal business of investing in stock, securities or options and futures with respect to stock or securities. In general,
for purposes of this 90% gross income requirement, income derived from a partnership, except a qualified publicly
traded partnership, will be treated as qualifying income only to the extent such income is attributable to items of
income of the partnership which would be qualifying income if realized by the RIC.
Each Fund must also diversify its holdings so that, at the end of each quarter of the Fund’s taxable year: (i) at least 50%
of the fair market value of its assets consists of (A) cash and cash items (including receivables), U.S. government
securities and securities of other RICs, and (B) securities of any one issuer (other than those described in clause (A)) to
the extent such securities do not exceed 5% of the value of the Fund’s total assets and do not exceed 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund’s total assets consists
of the securities of any one issuer (other than those described in clause (i)(A)), the securities of two or more issuers the
Fund controls and which are engaged in the same, similar or related trades or businesses, or the securities of one or
more qualified publicly traded partnerships (together with (i), the “diversification requirement”). In addition, for
purposes of meeting this diversification requirement, the term “outstanding voting securities of such issuer” includes
the equity securities of a qualified publicly traded partnership. The qualifying income and diversification requirements
applicable to a Fund may limit the extent to which it can engage in transactions in options, futures contracts, forward
contracts and swap agreements.
In addition, with respect to each taxable year, each Fund generally must distribute to its shareholders at least 90% of
its investment company taxable income, which generally includes its ordinary income and the excess of any net
short-term capital gain over net long-term capital loss, and at least 90% of its net tax-exempt interest income earned
for the taxable year. If a Fund meets all of the RIC qualification requirements, it generally will not be subject to U.S.
federal income tax on any of the investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) it distributes to its shareholders. For this purpose, a Fund
generally must make the distributions in the same year that it realizes the income and gain, although in certain
circumstances, a Fund may make the distributions in the following taxable year. Shareholders generally are taxed on
any distributions from a Fund in the year they are actually distributed. However, if a Fund declares a distribution to
shareholders of record in October, November or December of one year and pays the distribution by January 31 of the
following year, the Fund and its shareholders will be treated as if the Fund paid the distribution by December 31 of the
first taxable year. Each Fund intends to distribute its net income and gain in a timely manner to maintain its status as a
RIC and eliminate fund-level U.S. federal income taxation of such income and gain. However, no assurance can be
given that a Fund will not be subject to U.S. federal income taxation.
Moreover, the Funds may retain for investment all or a portion of their net capital gain. If a Fund retains any net capital
gain, it will be subject to a tax at regular corporate rates on the amount retained, but may report the retained amount
as undistributed capital gain in a written statement furnished to its shareholders, who (i) will be required to include in
income for U.S. federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and
(ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be
increased by an amount equal to the difference between the amount of undistributed capital gain included in the
shareholder’s gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. A
Fund is not required to, and there can be no assurance that it will, make this designation if it retains all or a portion of
its net capital gain in a taxable year.
If, for any taxable year, a Fund fails to qualify as a RIC, and is not eligible for relief as described above, it will be taxed in
the same manner as an ordinary corporation without any deduction for its distributions to shareholders, and all
distributions from the Fund’s current and accumulated earnings and profits (including any distributions of its net
tax-exempt income and net long-term capital gain) to its shareholders will be taxable as dividend income. To re-qualify
to be taxed as a RIC in a subsequent year, the Fund may be required to distribute to its shareholders its earnings and
Equalization Accounting.
Each Fund may use the so-called “equalization method” of accounting to allocate a portion of
its “earnings and profits,” which generally equals a Fund’s undistributed investment company taxable income and net
capital gain, with certain adjustments, to redemption proceeds. This method permits a Fund to achieve more balanced
distributions for both continuing and redeeming shareholders. Although using this method generally will not affect a
Fund’s total returns, it may reduce the amount that the Fund would otherwise distribute to continuing shareholders by
reducing the effect of redemptions of Fund shares on Fund distributions to shareholders. However, the IRS may not
have expressly sanctioned the particular equalization method used by a Fund, and, thus a Fund’s use of this method
may be subject to IRS scrutiny.
Capital Loss Carry-Forwards.
For net capital losses realized in taxable years beginning before January 1, 2011, a Fund is
permitted to carry forward a net capital loss to offset its capital gain, if any, realized during the eight years following
the year of the loss, and such capital loss carry-forward is treated as a short-term capital loss in the year to which it is
carried. For net capital losses realized in taxable years beginning on or after January 1, 2011, a Fund is permitted to
carry forward a net capital loss to offset its capital gain indefinitely. For capital losses realized in taxable years
beginning after January 1, 2011, the excess of a Fund’s net short-term capital loss over its net long-term capital gain is
treated as a short-term capital loss arising on the first day of the Fund’s next taxable year and the excess of a Fund’s net
long-term capital loss over its net short-term capital gain is treated as a long-term capital loss arising on the first day of
the Fund’s next taxable year. If future capital gain is offset by carried-forward capital losses, such future capital gain is
not subject to fund-level U.S. federal income tax, regardless of whether it is distributed to shareholders. Accordingly,
the Funds do not expect to distribute any such offsetting capital gain. The Funds cannot carry back or carry forward
any net operating losses.
Excise Tax.
If a Fund fails to distribute by December 31 of each calendar year at least the sum of 98% of its ordinary
income for that year (excluding capital gains and losses), 98.2% of its capital gain net income (adjusted for certain net
ordinary losses) for the 12-month period ending on October 31 of that year, and any of its ordinary income and capital
gain net income from previous years that was not distributed during such years, the Fund will be subject to a
nondeductible 4% U.S federal excise tax on the undistributed amounts (other than to the extent of its tax-exempt
interest income, if any). For these purposes, a Fund will be treated as having distributed any amount on which it is
subject to corporate level U.S. federal income tax for the taxable year ending within the calendar year. Each Fund
generally intends to actually, or be deemed to, distribute substantially all of its ordinary income and capital gain net
income, if any, by the end of each calendar year and thus expects not to be subject to the excise tax. However, no
assurance can be given that a Fund will not be subject to the excise tax. Moreover, each Fund reserves the right to pay
an excise tax rather than make an additional distribution when circumstances warrant (for example, the amount of
excise tax to be paid by a Fund is determined to be de minimis).
Investment through Master Portfolio.
A Fund that invests its assets through one or more master portfolios will seek to
Taxation of Investments.
In general, realized gains or losses on the sale of securities held by a Fund will be treated as
capital gains or losses, and long-term capital gains or losses if the Fund has held the disposed securities for more than
one year at the time of disposition.
If a Fund purchases a debt obligation with original issue discount (“OID”) (generally, a debt obligation with a purchase
price at original issuance less than its principal amount, such as a zero-coupon bond), which generally includes
“payment-in-kind” or “PIK” bonds, the Fund generally is required to annually include in its taxable income a portion of
the OID as ordinary income, even though the Fund may not receive cash payments attributable to the OID until a later
date, potentially until maturity or disposition of the obligation. A portion of the OID includible in income with respect
to certain high-yield corporate discount obligations may be treated as a dividend for U.S. federal income tax purposes.
Similarly, if a Fund purchases a debt obligation with market discount (generally a debt obligation with a purchase price
after original issuance less than its principal amount (reduced by any OID)) and a Fund elects to include market
discount in income as it accrues, the Fund generally is required to annually include in its taxable income a portion of
the market discount as ordinary income, even though the Acquiring Fund may not receive cash payments attributable
to the market discount until a later date, potentially until maturity or disposition of the obligation. A Fund generally
will be required to make cash distributions to shareholders representing the OID or market discount income on debt
obligations that is currently includible in income, even though the cash representing such income may not have been
received by a Fund. Cash to pay such distributions may be obtained from sales proceeds of securities held by the Fund
which a Fund otherwise might have continued to hold; obtaining such cash might be disadvantageous for the Fund.
If an option granted by a Fund is sold, lapses or is otherwise terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will realize a short-term capital gain or loss, depending
on whether the premium income is greater or less than the amount paid by the Fund in the closing transaction. Some
capital losses realized by a Fund in the sale, exchange, exercise, or other disposition of an option may be deferred if
they result from a position that is part of a “straddle,” discussed below. If securities are sold by a Fund pursuant to the
exercise of a covered call option granted by it, the Fund generally will add the premium received to the sale price of
Some regulated futures contracts, certain foreign currency contracts, and non-equity, listed options used by a Fund
will be deemed “Section 1256 contracts.” A Fund will be required to “mark-to-market” any such contracts held at the
end of the taxable year by treating them as if they had been sold on the last day of that year at market value. Provided
such positions are held as capital assets and are not part of a “hedging transaction” nor part of a “straddle,” 60% of any
net gain or loss realized on all dispositions of Section 1256 contracts, including deemed dispositions under the
“mark-to-market” rule, generally will be treated as long-term capital gain or loss, and the remaining 40% will be treated
as short-term capital gain or loss (although certain foreign currency gains and losses from such contracts may be
treated as ordinary income or loss (as described below)). These provisions may require a Fund to recognize income or
gains without a concurrent receipt of cash. Transactions that qualify as designated hedges are exempt from the
mark-to-market rule and the “60%/40%” rule and may require the Fund to defer the recognition of losses on certain
futures contracts, foreign currency contracts and non-equity options.
Foreign currency gains and losses realized by a Fund in connection with certain transactions involving foreign
currency-denominated debt obligations, certain options, futures contracts, forward contracts, and similar instruments
relating to foreign currency, foreign currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses to be treated as ordinary income or
loss and may affect the amount and timing of recognition of the Fund’s income. Under future U.S. Treasury regulations,
any such transactions that are not directly related to a Fund’s investments in stock or securities (or its options contracts
or futures contracts with respect to stock or securities) may have to be limited in order to enable the Fund to satisfy the
90% income test described above. If the net foreign currency loss exceeds a Fund’s net investment company taxable
income (computed without regard to such loss) for a taxable year, the resulting ordinary loss for such year will not be
deductible by the Fund or its shareholders in future years.
Offsetting positions held by a Fund involving certain derivative instruments, such as financial forward, futures, and
options contracts, may be considered, for U.S. federal income tax purposes, to constitute “straddles.” “Straddles” are
defined to include “offsetting positions” in actively traded personal property. The tax treatment of “straddles” is
governed by Section 1092 of the Code which, in certain circumstances, overrides or modifies the provisions of Section
1256. If a Fund is treated as entering into a “straddle” and at least one (but not all) of the Fund’s positions in derivative
contracts comprising a part of such straddle is governed by Section 1256 of the Code, described above, then such
straddle could be characterized as a “mixed straddle.” A Fund may make one or more elections with respect to “mixed
straddles.” Depending upon which election is made, if any, the results with respect to a Fund may differ. Generally, to
the extent the straddle rules apply to positions established by a Fund, losses realized by the Fund may be deferred to
the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle rules, short-term capital
loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain. In addition, the existence of a straddle may affect the holding period of the
offsetting positions. As a result, the straddle rules could cause distributions that would otherwise constitute qualified
dividend income (defined below) to fail to satisfy the applicable holding period requirements (described below) and
therefore to be taxed as ordinary income. Furthermore, the Fund may be required to capitalize, rather than deduct
currently, any interest expense and carrying charges applicable to a position that is part of a straddle, including any
interest expense on indebtedness incurred or continued to purchase or carry any positions that are part of a straddle.
Because the application of the straddle rules may affect the character and timing of gains and losses from affected
straddle positions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased substantially as compared to the situation
where a Fund had not engaged in such transactions.
The amount of long-term capital gain a Fund may recognize from certain derivative transactions with respect to
interests in certain pass-through entities is limited under the Code’s constructive ownership rules. The amount of
long-term capital gain is limited to the amount of such gain a Fund would have had if the Fund directly invested in the
pass-through entity during the term of the derivative contract. Any gain in excess of this amount is treated as ordinary
income. An interest charge is imposed on the amount of gain that is treated as ordinary income.
In addition, a Fund’s transactions in securities and certain types of derivatives (e.g., options, futures contracts, forward
contracts, and swap agreements) may be subject to other special tax rules, such as the wash sale rules or the short sale
rules, the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments to the
holding periods of the Fund’s securities, convert long-term capital gains into short-term capital gains, and/or convert
short-term capital losses into long- term capital losses. These rules could therefore affect the amount, timing, and
character of distributions to shareholders.
Rules governing the U.S. federal income tax aspects of derivatives, including swap agreements, are not entirely clear in
certain respects, particularly in light of IRS revenue rulings that held that income from a derivative contract with
respect to a commodity index is not qualifying income for a RIC. Accordingly, while each Fund intends to account for
such transactions in a manner it deems appropriate, the IRS might not accept such treatment. If the IRS did not accept
such treatment, the status of a Fund as a RIC might be jeopardized. Certain requirements that must be met under the
Code in order for each Fund to qualify as a RIC may limit the extent to which a Fund will be able to engage in
derivatives transactions.
A Fund may invest in real estate investment trusts (“REITs”). Investments in REIT equity securities may require a Fund to
accrue and distribute income not yet received. To generate sufficient cash to make the requisite distributions, the Fund
may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise
would have continued to hold. A Fund’s investments in REIT equity securities may at other times result in the Fund’s
receipt of cash in excess of the REIT’s earnings if the Fund distributes these amounts, these distributions could
constitute a return of capital to Fund shareholders for U.S. federal income tax purposes. Dividends received by the
Fund from a REIT generally will not constitute qualified dividend income and will not qualify for the dividends-received
deduction.
A Fund may invest directly or indirectly in residual interests in real estate mortgage investment conduits (“REMICs”) or
in other interests that may be treated as taxable mortgage pools (“TMPs”) for U.S. federal income tax purposes. Under
IRS guidance, a Fund must allocate “excess inclusion income” received directly or indirectly from REMIC residual
interests or TMPs to its shareholders in proportion to dividends paid to such shareholders, with the same
consequences as if the shareholders had invested in the REMIC residual interests or TMPs directly.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a
limited exception for certain thrift institutions), (ii) constitutes unrelated business taxable income to Keogh, 401(k) and
qualified pension plans, as well as investment retirement accounts and certain other tax exempt entities, thereby
potentially requiring such an entity, which otherwise might not be required to file a tax return, to file a tax return and
pay tax on such income, and (iii) in the case of a foreign shareholder, does not qualify for any reduction, by treaty or
otherwise, in the 30% U.S. federal withholding tax. In addition, if at any time during any taxable year a “disqualified
organization” (as defined in the Code) is a record holder of a share in a Fund, then the Fund will be subject to a tax
A Fund will not be permitted to pass through to its shareholders any credit or deduction for taxes and interest charges
incurred with respect to PFICs. Elections may be available that would ameliorate these adverse tax consequences, but
such elections could require a Fund to recognize taxable income or gain without the concurrent receipt of cash.
Investments in PFICs could also result in the treatment of associated capital gains as ordinary income. The Funds may
attempt to limit and/or manage their holdings in PFICs to minimize their tax liability or maximize their returns from
these investments but there can be no assurance that they will be able to do so. Moreover, because it is not always
possible to identify a foreign corporation as a PFIC in advance of acquiring shares in the corporation, a Fund may incur
the tax and interest charges described above in some instances. Dividends paid by PFICs will not be eligible to be
treated as qualified dividend income.
In addition to the investments described above, prospective shareholders should be aware that other investments
made by the Funds may involve complex tax rules that may result in income or gain recognition by the Funds without
corresponding current cash receipts. Although the Funds seek to avoid significant non-cash income, such non-cash
income could be recognized by the Funds, in which case the Funds may distribute cash derived from other sources in
order to meet the minimum distribution requirements described above. In this regard, the Funds could be required at
times to liquidate investments prematurely in order to satisfy their minimum distribution requirements.
Taxation of Distributions.
Except for exempt-interest dividends (defined below) paid out by “Tax-Free Funds”,
distributions paid out of a Fund’s current and accumulated earnings and profits (as determined at the end of the year),
whether paid in cash or reinvested in the Fund, generally are deemed to be taxable distributions and must be reported
by each shareholder who is required to file a U.S. federal income tax return. Dividends and distributions on a Fund’s
shares are generally subject to U.S. federal income tax as described herein to the extent they do not exceed the Fund’s
realized income and gains, even though such dividends and distributions may economically represent a return of a
particular shareholder’s investment. Such distributions are likely to occur in respect of shares acquired at a time when
the Fund’s net asset value reflects gains that are either unrealized, or realized but not distributed. For U.S. federal
income tax purposes, a Fund’s earnings and profits, described above, are determined at the end of the Fund’s taxable
year and are allocated pro rata to distributions paid over the entire year. Distributions in excess of a Fund’s current and
accumulated earnings and profits will first be treated as a return of capital up to the amount of a shareholder’s tax
basis in the shareholder’s Fund shares and then as capital gain. A Fund may make distributions in excess of its earnings
and profits, from time to time.
For U.S. federal income tax purposes, distributions of investment income are generally taxable as ordinary income, and
distributions of gains from the sale of investments that a Fund owned for one year or less will be taxable as ordinary
income. Distributions properly designated by a Fund as capital gain dividends will be taxable to shareholders as
long-term capital gain (to the extent such distributions do not exceed the Fund’s net capital gain for the taxable year),
regardless of how long a shareholder has held Fund shares, and do not qualify as dividends for purposes of the
dividends-received deduction or as qualified dividend income. Each Fund will report capital gain dividends, if any, in a
written statement furnished to its shareholders after the close of the Fund’s taxable year.
Some states will not tax distributions made to individual shareholders that are attributable to interest a Fund earned
on direct obligations of the U.S. government if the Fund meets the state’s minimum investment or reporting
requirements, if any. Investments in GNMA or FNMA securities, bankers’ acceptances, commercial paper and
repurchase agreements collateralized by U.S. government securities generally do not qualify for tax-free treatment.
This exemption may not apply to corporate shareholders.
If a shareholder sells or exchanges Fund shares within 90 days of having acquired such shares and if, before January 31
of the calendar year following the calendar year of the sale or exchange, as a result of having initially acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new purchase of shares of the Fund or a
different RIC, the sales charge previously incurred in acquiring the Fund’s shares generally shall not be taken into
account (to the extent the previous sales charges do not exceed the reduction in sales charges on the new purchase)
for the purpose of determining the amount of gain or loss on the disposition, but generally will be treated as having
been incurred in the new purchase. Also, if a shareholder recognizes a loss on a disposition of Fund shares, the loss will
be disallowed under the “wash sale” rules to the extent the shareholder purchases substantially identical shares within
the 61-day period beginning 30 days before and ending 30 days after the disposition. Any disallowed loss generally
will be reflected in an adjustment to the tax basis of the purchased shares.
If a shareholder receives a capital gain dividend with respect to any Fund share and such Fund share is held for six
months or less, then (unless otherwise disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the capital gain dividend. If such loss is incurred from the redemption of
shares pursuant to a periodic redemption plan then U.S. Treasury regulations may permit an exception to this
six-month rule. No such regulations have been issued as of the date of this SAI.
In addition, if a shareholder of a Tax-Free Fund holds such Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of exempt-interest dividends (defined below)
received with respect to the shares. If such loss is incurred from the redemption of shares pursuant to a periodic
redemption plan then U.S. Treasury regulations may permit an exception to this six-month rule. Such a loss will also
not be disallowed where the loss is incurred with respect to shares of a Fund that declares exempt-interest dividends
on a daily basis in an amount equal to at least 90% of its net-tax exempt interest and distributes such dividends on a
monthly, or more frequent, basis. Additionally, where a Fund regularly distributes at least 90% of its net tax-exempt
interest, if any, the Treasury Department is authorized to issue regulations reducing the six month holding period
requirement to a period of not less than the greater of 31 days or the period between regular distributions. No such
regulations have been issued as of the date of this filing.
Foreign Taxes.
Amounts realized by a Fund from sources within foreign countries may be subject to withholding and
other taxes imposed by such countries. Although in some countries a portion of these taxes is recoverable by the Fund,
the unrecovered portion of foreign withholding taxes will reduce the income received from such securities. If more
than 50% of the value of a Fund’s total assets at the close of its taxable year consists of securities of foreign
Even if a Fund qualifies for the election, foreign income and similar taxes will only pass through to the Fund’s
shareholders if the Fund and its shareholders meet certain holding period requirements. Specifically, (i) the
shareholders must have held the Fund shares for at least 16 days during the 31-day period beginning 15 days prior to
the date upon which the shareholders became entitled to receive Fund distributions corresponding with the pass
through of such foreign taxes paid by the Fund, and (ii) with respect to dividends received by the Fund on foreign
shares giving rise to such foreign taxes, the Fund must have held the shares for at least 16 days during the 31-day
period beginning 15 days prior to the date upon which the Fund became entitled to the dividend. These holding
periods increase for certain dividends on preferred stock. A Fund may choose not to make the election if the Fund has
not satisfied its holding requirement.
In general, an individual with $300 ($600 if married filing jointly) or less of creditable foreign taxes may elect to be
exempt from the foreign source taxable income and qualified dividend income limitations if the individual has no
foreign source income other than qualified passive income. A deduction for foreign taxes paid may only be claimed by
shareholders that itemize their deductions. Notably, for tax years beginning after December 31, 2017 (but not for tax
years beginning after December 31, 2025), miscellaneous itemized deductions are suspended for non-corporate
taxpayers. Accordingly, during this time period, individuals may be more likely to take advantage of a foreign tax
credit. Shareholders should consult their tax advisers regarding the impact of these changes on their personal
situation.
U.S. Federal Income Tax Rates.
Noncorporate Fund shareholders (i.e., individuals, trusts and estates) currently are taxed
at a maximum rate of 37% on ordinary income and 20% on long-term capital gain for taxable years.
In general, “qualified dividend income” realized by noncorporate Fund shareholders is taxable at the same rate as net
capital gain. Generally, qualified dividend income is dividend income attributable to certain U.S. and foreign
corporations, as long as certain holding period requirements are met. After this date, all dividend income generally will
be taxed at the same rate as ordinary income. If 95% or more of a Fund’s gross income (excluding net long-term capital
gain over net short-term capital loss) constitutes qualified dividend income, all of its distributions (other than capital
gain dividends) will be generally treated as qualified dividend income in the hands of individual shareholders, as long
as they have owned their Fund shares for at least 61 days during the 121-day period beginning 60 days before the
Fund’s ex-dividend date (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90
days before such date). In general, if less than 95% of a Fund’s income is attributable to qualified dividend income,
then only the portion of the Fund’s distributions that is attributable to qualified dividend income and designated as
such in a timely manner will be so treated in the hands of individual shareholders. Payments received by a Fund from
securities lending, repurchase, and other derivative transactions ordinarily will not qualify. The rules attributable to the
qualification of Fund distributions as qualified dividend income are complex, including the holding period
requirements. Individual Fund shareholders therefore are urged to consult their own tax advisers and financial
The maximum stated corporate U.S. federal income tax rate applicable to ordinary income and net capital gain
currently is 21%. Actual marginal tax rates may be higher for some shareholders, for example, through reductions in
deductions. Distributions from an Income Fund generally will not qualify for the “dividends-received deduction”
applicable to corporate shareholders with respect to certain dividends. Distributions from an Equity Fund may qualify
for the “dividends-received deduction” applicable to corporate shareholders with respect to certain dividends.
Naturally, the amount of tax payable by any taxpayer will be affected by a combination of tax laws covering, for
example, deductions, credits, deferrals, exemptions, sources of income and other matters.
Noncorporate Fund shareholders with income exceeding $200,000 ($250,000 if married and filing jointly) generally will
be subject to a 3.8% tax on their “net investment income,” which ordinarily includes taxable distributions received from
the Funds and taxable gain on the disposition of Fund shares.
Corporate Shareholders.
Subject to limitation and other rules, a corporate shareholder of a Fund may be eligible for the
dividends received deduction on Fund distributions attributable to dividends received by the Fund from domestic
corporations, which, if received directly by the corporate shareholder, would qualify for such a deduction. For eligible
corporate shareholders, the dividends-received deduction may be subject to certain reductions, and a distribution by
a Fund attributable to dividends of a domestic corporation will be eligible for the deduction only if certain holding
period and other requirements are met. These requirements are complex; therefore, corporate shareholders of the
Funds are urged to consult their own tax advisers and financial planners.
Distributions made to foreign shareholders attributable to net investment income generally are subject to U.S. federal
income tax withholding at a 30% rate (or such lower rate provided under an applicable income tax treaty).
Notwithstanding the foregoing, if a distribution described above is effectively connected with the conduct of a trade
or business carried on by a foreign shareholder within the United States (or, if an income tax treaty applies, is
attributable to a permanent establishment in the United States), federal income tax withholding and exemptions
attributable to foreign persons will not apply. Instead, the distribution will be subject to withholding at the highest
applicable U.S. tax rate (currently 37% in the case of individuals and 21% in the case of corporations) and the foreign
shareholder will be subject to federal income tax reporting requirements generally applicable to U.S. persons
described above.
Under U.S. federal tax law, a foreign shareholder is not, in general, subject to federal income tax or withholding tax on
capital gains (and is not allowed a deduction for losses) realized on the sale of shares of the Funds and on long-term
Under current law, if a Fund is considered to be a “United States Real Property Holding Corporation” (as defined in the
Code and Treasury Regulations), then distributions attributable to certain underlying real estate investment trust
(“REIT”) investments and redemption proceeds paid to a foreign shareholder that owns at least 5% of a Fund, generally
will cause the foreign shareholder to treat such gain or distribution as income effectively connected with a trade or
business in the United States, subject to such gain or distribution withholding tax and cause the foreign shareholder to
be required to file a federal income tax return. In addition, in any year when at least 50% of a Fund’s assets are USRPIs
(as defined in the Code and Treasury Regulations), distributions of the Fund that are attributable to gains from the sale
or exchange of shares in USRPIs may be subject to U.S. withholding tax (regardless of such shareholder’s percentage
interest in the Fund) and may require the foreign shareholder to file a U.S. federal income tax return in order to receive
a refund (if any) of the withheld amount.
Subject to the additional rules described herein, federal income tax withholding will apply to distributions attributable
to dividends and other investment income distributed by the Funds. The federal income tax withholding rate may be
reduced (and, in some cases, eliminated) under an applicable tax treaty between the United States and the foreign
shareholder’s country of residence or incorporation. In order to qualify for treaty benefits, a foreign shareholder must
comply with applicable certification requirements relating to its foreign status (generally by providing a Fund with a
properly completed Form W-8BEN).
Pursuant to the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax generally is imposed on
payments of interest and dividends to (i) foreign financial institutions including non-U.S. investment funds and (ii)
certain other foreign entities, unless the foreign financial institution or foreign entity provides the withholding agent
with documentation sufficient to show that it is compliant with FATCA (generally by providing the Fund with a
properly completed Form W-8BEN or Form W-8BEN-E, as applicable). If the payment is subject to the 30% withholding
tax under FATCA, a foreign shareholder will not be subject to the 30% withholding tax described above on the same
income. Starting in 2019, payments of the gross proceeds (including distributions designated as capital gain dividends
to the extent the payment is attributable to property that produces U.S. source interest or dividends) may also be
subject to FATCA withholding absent proof of FATCA compliance prior to January 1, 2019.
Before investing in a Fund’s shares, a prospective foreign shareholder should consult with its own tax advisors,
including whether the shareholder’s investment can qualify for benefits under an applicable income tax treaty.
Prospective investors should contact their tax advisers and financial planners regarding the tax consequences
to them of holding Fund shares through such plans and/or accounts.
Tax-Exempt Shareholders.
Shares of a Tax-Free Fund may not be suitable for tax-exempt shareholders since such
shareholders generally would not benefit from the tax-exempt status of distributions from the Tax-Free Funds
(discussed below). Tax-exempt shareholders should contact their tax advisers and financial planners regarding the tax
consequences to them of an investment in the Funds.
Special tax consequences apply to charitable remainder trusts (“CRTs”) (as defined in Section 664 of the Code) that
invest in RICs that invest directly or indirectly in residual interests in REMICs or equity interests in TMPs. CRTs are urged
to consult their own tax advisers and financial planners concerning these special tax consequences.
Foreign Bank and Financial Accounts and Foreign Financial Assets Reporting Requirements.
A shareholder that owns
directly or indirectly more than 50% by vote or value of the Fund, is urged and advised to consult its own tax adviser
regarding its filing obligations with respect to IRS Form FinCEN114, Report of Foreign Bank and Financial Accounts.
Also, under recently enacted rules, subject to exceptions, individuals (and, to the extent provided in forthcoming
future U.S. Treasury regulations, certain domestic entities) must report annually their interests in “specified foreign
financial assets” on their U.S. federal income tax returns. It is currently unclear whether and under what circumstances
stockholders would be required to report their indirect interests in the Fund’s “specified foreign financial assets” (if any)
under these new rules.
Shareholders may be subject to substantial penalties for failure to comply with these reporting requirements.
Shareholders are urged and advised to consult their own tax advisers to determine whether these reporting
requirements are applicable to them.
Tax Shelter Reporting Regulations.
Generally, under U.S. Treasury regulations, if an individual shareholder recognizes a
loss of $2 million or more or if a corporate shareholder recognizes a loss of $10 million or more, the shareholder must
file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does
not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their own tax advisers to determine the applicability of these regulations in light of their individual
circumstances.
Additional Considerations for the Tax-Free Funds
. If at least 50% of the value of a Fund’s total assets at the close of each
quarter of its taxable years consists of debt obligations that generate interest exempt from U.S. federal income tax
under Section 103 of the Internal Revenue Code, then the Fund may qualify to pass through to its shareholders the
tax-exempt character of its income from such debt obligations by paying exempt-interest dividends. The Tax-Free
Funds intend to so qualify and are designed to provide shareholders with income exempt from U.S. federal income tax
in the form of exempt-interest dividends. “Exempt-interest dividends” are dividends (other than capital gain dividends)
paid by a RIC that are properly reported as such in a written statement furnished to shareholders.
Each Tax-Free Fund will report to its shareholders the portion of the distributions for the taxable year that constitutes
exempt-interest dividends. The designated portion cannot exceed the excess of the amount of interest excludable
from gross income under Section 103 of the Internal Revenue Code received by a Tax-Free Fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Internal Revenue Code.
Interest on indebtedness incurred to purchase or carry shares of the Tax-Free Funds will not be deductible to the
extent that the Tax-Free Funds’ distributions are exempt from U.S. federal income tax. In addition, an investment in a
Tax-Free Fund may result in liability for U.S. federal alternative minimum tax (“AMT”). Certain deductions and
exemptions have been designated “tax preference items” which must be added back to taxable income for purposes of
calculating the U.S. federal AMT. Tax preference items include tax-exempt interest on certain “private activity bonds.” To
the extent a Tax-Free Fund invests in certain private activity bonds, its shareholders will be required to report that
portion of the Fund’s distributions attributable to income from the bonds as a tax preference item in determining their
U.S. federal AMT, if any. Shareholders will be notified of the tax status of distributions made by a Tax-Free Fund.
The IRS is paying increased attention to whether debt obligations intended to produce interest exempt from U.S.
federal income tax in fact meet the requirements for such exemption. Ordinarily, the Tax-Free Funds rely on opinions
from the issuer’s bond counsel that interest on the issuer’s debt obligation will be exempt from U.S. federal income tax.
However, no assurance can be given that the IRS will not successfully challenge such exemption, which could cause
interest on the debt obligation to be taxable and could jeopardize a Tax-Free Fund’s ability to pay any exempt-interest
dividends. Similar challenges may occur as to state-specific exemptions.
A shareholder who receives Social Security or railroad retirement benefits should consult the shareholder’s own tax
adviser to determine what effect, if any, an investment in a Tax-Free Fund may have on the U.S. federal taxation of such
benefits. Exempt-interest dividends are included in income for purposes of determining the amount of benefits that
are taxable.
Distributions of a Tax-Free Fund’s income other than exempt-interest dividends generally will be taxable to
shareholders. Gains realized by a Tax-Free Fund on the sale or exchange of investments that generate tax-exempt
income will also be taxable to shareholders.
Although exempt-interest dividends are generally exempt from U.S. federal income tax, there may not be a similar
exemption under the laws of a particular state or local taxing jurisdiction. Thus, exempt-interest dividends may be
subject to state and local taxes. You should consult your own tax advisor to discuss the tax consequences of your
investment in a Tax-Free Fund.
Legislative Proposals.
Prospective shareholders should recognize that the present U.S. federal income tax treatment of
the Funds and their shareholders may be modified by legislative, judicial or administrative actions at any time, which
may be retroactive in effect. The rules dealing with U.S. federal income taxation are constantly under review by
Congress, the IRS and the Treasury Department, and statutory changes as well as promulgation of new regulations,
revisions to existing statutes, and revised interpretations of established concepts occur frequently. You should consult
your advisors concerning the status of legislative proposals that may pertain to holding Fund shares.
■
Average Cost
. The cost per share is determined by dividing the aggregate cost amount by the total shares in the
account. The basis of the shares redeemed is determined by multiplying the shares redeemed by the cost per share.
Starting in 2012, accounts may maintain two separate average costs: one average for covered shares and a separate
average for noncovered shares. Under the Average Cost method, noncovered shares are generally depleted first.
■
First in first out (FIFO)
. Shares acquired first in the shareholder’s account are the first shares depleted and
determine the shareholder’s cost basis. The basis of the shares redeemed is determined by the adjusted purchase
price of each date the shares were acquired.
■
Specific Identification
. A shareholder selects the shares to be redeemed from any of the purchase lots that still
have shares remaining. The basis of the shares redeemed is determined by the adjusted purchase price of each date
the shares were acquired.
Money Market Fund Shares.
The cost basis reporting rules described above do not apply to shares in money market
funds. Beginning in 2016, pursuant to SEC rules, certain money market funds will begin to use a floating net asset
value rather than a stable net asset value. However, the IRS has issued proposed regulations, upon which taxpayers
may rely, that permit taxpayers to utilize a simplified method of accounting for gains and losses from redemptions of
shares in money market funds that have a floating net asset value (the “NAV method”). If taxpayers properly elect the
NAV method, taxpayers will not compute gain or loss for each redemption. Instead, taxpayers utilizing the NAV
method, will aggregate the gains and losses for a period and report the aggregate gain or loss on an annual basis. If
taxpayers do not elect the NAV method, the wash sales rules shall not apply to losses generated by the redemption of
money market shares. Any capital gains or losses reported utilizing the NAV method will be short-term capital gains or
losses.
WELLS FARGO FUNDS TRUST
FILE NOS. 333-74295; 811-09253
PART C
OTHER INFORMATION
Item 28. Exhibits
Unless otherwise indicated, each of the Exhibits listed below is filed herewith.
Item 29. Persons Controlled by or Under Common Control with Registrant.
Registrant believes that no person is controlled by or under common control with Registrant.
Item 30. Indemnification.
Article IX of the Registrant's Declaration of Trust limits the liability and, in certain instances, provides for mandatory indemnification of the Registrant's Trustees, officers, employees, agents and holders of beneficial interests in the Trust. In addition, the Trustees are empowered under Article III, Section 1(t) of the Registrant's Declaration of Trust to obtain such insurance policies as they deem necessary.
Item 31. Business and Other Connections of the Investment Adviser.
(a) To the knowledge of Registrant, none of the directors or officers of Wells Fargo Funds Management, LLC is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature, except that they also hold various positions with and engage in business for Wells Fargo Bank.
(b) Wells Capital Management Incorporated ("Wells Capital Management"), a wholly owned subsidiary of Wells Fargo Bank, serves as sub-adviser to various Funds of the Trust. The descriptions of Wells Capital Management in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Wells Capital Management is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(c) Schroder Investment Management North America Inc. ("Schroder"), serves as sub-adviser to various funds of the Trust. The descriptions of Schroder in Parts A and B of the Registration Statement are incorporated by reference herein. Schroder Capital Management International Limited ("Schroder Ltd.") is a United Kingdom affiliate of Schroder which provides investment management services to international clients located principally in the United States. Schroder Ltd. and Schroder p.l.c. are located at 31 Gresham St., London ECZV 7QA, United Kingdom. To the knowledge of the Registrant, none of the directors or officers of Schroder is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(d) Allianz Global Investors U.S. LLC ("Allianz") (formerly RCM Capital Management, LLC), serves as sub-adviser for various funds of the Trust. The descriptions of Allianz in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Allianz is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(e) LSV Asset Management ("LSV") serves as sub-adviser to various funds of the Trust. The descriptions of LSV in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of LSV is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation, or employment of a substantial nature.
(f) Cooke & Bieler, L.P. ("Cooke & Bieler") serves as sub-adviser for various funds of the Trust. The descriptions of Cooke & Bieler in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Cooke & Bieler is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation, or employment of a substantial nature.
(g) Artisan Partners Limited Partnership ("Artisan") serves as sub-adviser for various funds of the Trust. The descriptions of Artisan in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Artisan is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation, or employment of a substantial nature.
(h) Wells Fargo Asset Management (International), LLC (WFAMI) (formerly known as First International Advisors, LLC) an indirect wholly-owned subsidiary of Wells Fargo & Company, serves as sub-adviser for various funds of the Trust. The descriptions of WFAMI in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of the sub-adviser is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(i) Crow Point Partners, LLC ("Crow Point") serves as sub-adviser for various funds of the Trust. The descriptions of Crow Point in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Crow Point is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(j) Wells Capital Management Singapore, a separately identifiable division of Wells Fargo Bank, N.A., serves as sub-adviser for various funds of the Trust. The descriptions of Wells Capital Management Singapore in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of Wells Capital Management Singapore is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
(k) Wells Fargo Asset Management (International) Limited ("WFAM (International) Limited"), an indirect wholly-owned subsidiary of Wells Fargo & Company, serves as sub-adviser for various funds of the Trust. The descriptions of WFAM (International) Limited in Parts A and B of the Registration Statement are incorporated by reference herein. To the knowledge of the Registrant, none of the directors or officers of the sub-adviser is or has been at any time during the last two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature.
Item 32. Principal Underwriter.
(a) Wells Fargo Funds Distributor, LLC, distributor for the Registrant, also acts as principal underwriter for Wells Fargo Variable Trust, and is the exclusive placement agent for Wells Fargo Master Trust, both of which are registered open-end management investment companies.
(b) The following table provides information for each director and officer of Wells Fargo Funds Distributor, LLC.
(c) Not applicable.
Item 33. Location of Accounts and Records.
(a) The Registrant maintains accounts, books and other documents required by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder (collectively, "Records") at the offices of Wells Fargo Funds Management, LLC, 525 Market Street, 12th Floor, San Francisco, CA 94105.
(b) Wells Fargo Funds Management, LLC maintains all Records relating to its services as investment manager and class-level administrator at 525 Market Street, 12th Floor, San Francisco, CA 94105.
(c) DST Asset Manager Solutions, Inc. (formerly Boston Financial Data Services, Inc.) maintains all Records relating to its services as transfer agent at Two Heritage Drive, Quincy, Massachusetts 02171.
(d) Wells Fargo Funds Distributor, LLC maintains all Records relating to its services as distributor at 525 Market Street, 12th Floor, San Francisco, CA 94105.
(e) Wells Fargo Bank, N.A. (formerly Wells Fargo Bank Minnesota, N.A.) maintains all Records relating to its services as former custodian at 6th & Marquette, Minneapolis, MN 55479-0040.
(f) Wells Capital Management Incorporated maintains all Records relating to its services as investment sub-adviser at 525 Market Street, 10th Floor, San Francisco, CA 94105.
(g) Schroder Investment Management North America Inc. maintains all Records relating to its services as investment sub-adviser at 7 Bryant Park, New York, New York 10018-3706.
(h) Allianz Global Investors U.S. LLC (formerly RCM Capital Management, LLC) maintains all Records relating to its services as investment sub-adviser at 555 Mission Street Suite 1700, San Francisco, CA 94105.
(i) LSV Asset Management maintains all Records relating to its services as investment sub-adviser at One North Wacker Drive, Suite 4000, Chicago, Illinois 60606.
(j) Cooke & Bieler, L.P. maintains all Records relating to its services as investment sub-adviser at 1700 Market Street, Philadelphia, PA 19103.
(k) Artisan Partners Limited Partnership maintains all Records relating to its services as investment sub-adviser at 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202.
(l) Wells Fargo Asset Management (International), LLC (formerly known as First International Advisors, LLC) maintains all Records relating to its services as investment sub-adviser at One Plantation Place, 30 Fenchurch, London, England, EC3M 3BD.
(m) Crow Point Partners, LLC maintains all Records relating to its services as investment sub-adviser at 25 Recreation Park Drive, Suite 110, Hingham, Massachusetts 02043.
(n) State Street Bank and Trust Company maintains all Records relating to its services as custodian and fund accountant at 1 Iron Street, Boston, Massachusetts 02210.
(o) Wells Fargo Bank, N.A. d/b/a Wells Capital Management Singapore maintains all Records relating to its services as investment sub-adviser at 26/F, 80 Raffles Place, 20/21, UOB Plaza, Singapore 048624.
(p) Wells Fargo Asset Management (International) Limited maintains all Records relating to its services as investment sub-adviser at 33 King William Street, London, England, United Kingdom, EC4R 9AT.
Item 34. Management Services.
Other than as set forth under the captions "Management of the Funds" in the Prospectuses constituting Part A of this Registration Statement and "Management" in the Statement of Additional Information constituting Part B of this Registration Statement, the Registrant is not a party to any management-related service contract.
Item 35. Undertakings.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of this Amendment to the Registration Statement on Form N-1A, pursuant
to Rule 485(b) under the Securities Act of 1933, and has duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized in the City of San Francisco, State of California on the 26th day
of April, 2019.
WELLS FARGO FUNDS TRUST
By: /s/ Maureen E. Towle
--------------------
Maureen E. Towle
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 630 to its Registration Statement on Form N-1A has been signed below by the following persons in the capacities and on the date indicated:
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/s/ James G. Polisson
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/s/ Isaiah Harris, Jr.
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/s/ Judith M. Johnson
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/s/ David F. Larcker
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/s/ Olivia S. Mitchell
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/s/ Timothy J. Penny
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/s/ Jane A. Freeman
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/s/ William R. Ebsworth
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/s/ Pamela Wheelock
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/s/ Andrew Owen
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/s/ Nancy Wiser
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*By: /s/ Maureen E. Towle
Maureen E. Towle
As Attorney-in-Fact
April 26, 2019
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Exhibit No. |
Exhibits |
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(i) |
Legal Opinion |
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(j)(A) |
Consent of Independent Registered Accounting Firm |
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(p)(2) |
Wells Fargo Asset Management Code of Ethics (Joint Code of Ethics for Wells Fargo Funds Management, LLC, Wells Fargo Funds Distributor, LLC, Wells Capital Management Incorporated, Wells Fargo Bank N.A. (dba Wells Capital Management Singapore), and First International Advisors, LLC (now known as Wells Fargo Asset Management (International), LLC)) |