GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
200 West Street
New York, New York 10282
(212) 902-1000
July 28, 2020
Dear Shareholder:
On behalf of the Board of Trustees of each of Goldman Sachs MLP and Energy Renaissance Fund (GER) and Goldman Sachs MLP Income Opportunities Fund (GMZ) (together, the Board), each a Delaware statutory trust (each a Fund and together, the Funds), we are pleased to invite you to a virtual joint special meeting of shareholders (with any postponements or adjournments, the Special Meeting) of GER and GMZ. The Special Meeting will be held on September 10, 2020, at 10 a.m. (Eastern time), for the purpose of taking various actions in connection with the proposed reorganization of GMZ into GER.
More specifically, at the Special Meeting, the shareholders of GMZ will be asked to consider and approve an Agreement and Plan of Reorganization (the Plan of Reorganization) providing for the transfer of the assets of GMZ to GER in exchange for common shares of GER and the assumption of GMZs liabilities by GER, followed by the complete liquidation of GMZ (the Reorganization). GER and GMZ are both managed by Goldman Sachs Asset Management, L.P., the Investment Adviser for the Funds, and have the same investment objective and similar investment strategies. In addition, at the Special Meeting, shareholders of GER will be asked to consider and approve the issuance of additional common shares of GER in connection with the Reorganization. Shareholders of GMZ and GER are also being asked to ratify the selection of PricewaterhouseCoopers LLP as each Funds independent registered public accounting firm for the fiscal year ending November 30, 2020.
Each of these proposals are described in more detail in the enclosed Joint Proxy Statement/Prospectus, which you should read carefully.
The Board of each Fund believes each proposal, as applicable, is in the best interests of its respective Fund and shareholders and unanimously recommends that you vote FOR each proposal.
Shareholders of record at the close of business on July 1, 2020, the record date for the Special Meeting, are entitled to receive notice of and to vote at the Special Meeting. The Special Meeting will be conducted as a virtual meeting hosted by means of a live webcast. The virtual meeting format reflects our and global concerns regarding the spread of COVID-19. Each shareholder is invited to attend the Special Meeting virtually. You or your proxyholder will be able to attend the Special Meeting online, vote and submit questions by visiting http://www.meetingcenter.io/205922342 and using a control number assigned by Computershare Fund Services. To register and receive access to the virtual Special Meeting, you will need to follow the instructions provided in the Notice of Joint Special Meeting of Shareholders and Joint Proxy Statement/Prospectus that follow.
If you will not be present at the Special Meeting, we urge you to sign, date and promptly return the enclosed proxy card or voting instruction form in the envelope provided, which is addressed for your convenience and needs no postage if mailed in the United States. You may also vote easily and quickly by Internet or by telephone. In order to avoid the additional expense to the Funds of further solicitation, we ask your cooperation in returning your proxy promptly.
By Order of the Boards of Trustees
of Goldman Sachs MLP Income
Opportunities Fund and Goldman Sachs
MLP and Energy Renaissance Fund
Caroline L. Kraus
Secretary
JULY 28, 2020
IMPORTANT INFORMATION
FOR SHAREHOLDERS OF
GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND AND
GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
QUESTIONS & ANSWERS
Although we recommend that you read the entire Joint Proxy Statement/Prospectus, we have provided for your convenience a brief overview of the issues to be voted on.
Q: |
Why is a shareholder meeting being held? |
A: |
For Shareholders of Goldman Sachs MLP Income Opportunities Fund: You are being asked to consider and approve an Agreement and Plan of Reorganization (the Plan of Reorganization) providing for the reorganization (the Reorganization) of Goldman Sachs MLP Income Opportunities Fund (GMZ) into Goldman Sachs MLP and Energy Renaissance Fund (GER and as it would exist following the Reorganization, the Combined Fund) (each, a Fund and together the Funds). GER is a non-diversified, closed-end management investment company that pursues the same investment objective and similar investment strategies as GMZ. Pursuant to the Plan of Reorganization, GMZ will transfer of all of its assets to GER in exchange for newly issued common shares of beneficial interest (Common Shares) of GER, which would be distributed to GMZs shareholders prior to GMZs liquidation and termination, and the assumption by GER of all of the liabilities of GMZ. GMZ and GER are both managed by Goldman Sachs Asset Management, L.P. (GSAM or the Investment Adviser). |
GMZ shareholders are also being asked to ratify the selection of PricewaterhouseCoopers LLP (PwC) as GMZs independent registered public accounting firm for the fiscal year ending November 30, 2020.
For Shareholders of Goldman Sachs MLP and Energy Renaissance Fund: You are being asked to consider and vote on the issuance of additional Common Shares of GER in connection with the Reorganization (the Issuance of GER Common Shares).
GER shareholders are also being asked to ratify the selection of PwC as GERs independent registered public accounting firm for the fiscal year ending November 30, 2020.
Q: |
Why is the Reorganization being recommended? |
A: |
The Board of Trustees of each Fund (together, the Board) anticipates that the Reorganization could benefit shareholders of each Fund and considered the following factors: |
i. |
Investment Objective and Strategy. The Combined Fund will have the same investment objective as GMZ and GER and investment strategies that are identical to those of GER and similar to those of GMZ. GMZs and GERs current investment objective is to seek a high level of total return with an emphasis on current distributions to shareholders. GMZ currently invests, under normal market conditions, at least 80% of its Managed Assets (as defined below) in master limited partnership (MLP) investments. GMZ may also invest up to 20% of its Managed Assets in non-MLP investments, including without limitation, securities of corporations that operate in the energy sector or that hold energy assets. The Combined Fund, similar to GER, will invest, under normal market conditions, at least 80% of its Managed Assets in MLPs and other energy investments. GER may also invest up to 20% of its Managed Assets in U.S. and non-U.S. equity and fixed income securities and derivative instruments that are not MLP investments or other energy investments. |
Managed Assets means the total assets of a Fund (including any assets attributable to borrowings for investment purposes) minus the sum of the Funds accrued liabilities (other than liabilities representing borrowings for investment purposes).
ii. |
Potential for Operational Cost Savings: Shareholders of the Combined Fund are expected to benefit from greater potential for efficiencies and economies of scale through consolidation, thus reducing the expense ratio of the Combined Fund. In particular, certain overlapping expenses will be consolidated and there will also be an opportunity to reduce expenses over time in the Combined Fund by spreading fees over a larger asset base. For example, the expense benefits may include administrative economies of scale, such as the need to only conduct one audit instead of two. |
iii. |
Distribution: It is anticipated that the Combined Fund will continue to pay quarterly distributions in an amount representing a distribution rate similar to the current distribution rate of GER and comparable to the current distribution rate of GMZ. |
Q: |
How will the Reorganization affect the fees and expenses of the Funds? |
A: |
Each Funds current management fee of 1.00% of the Funds average daily Managed Assets would remain unchanged after the Reorganization. Following the consummation of the Reorganization, the total annual operating expense ratio of the Combined Fund is expected to be lower than the current total annual operating expense ratios for GMZ and GER. |
Q: |
What happens if the Plan of Reorganization is not approved by GMZ shareholders or the Issuance of GER Common Shares is not approved by GER shareholders? |
A: |
Completion of the Reorganization requires both the approval by shareholders of GMZ of the Plan of Reorganization and approval by shareholders of GER of the Issuance of GER Common Shares. If the Plan of Reorganization or the Issuance of GER Common Shares is not approved by shareholders of the applicable Fund, the Board will take such actions as it deems to be in the best interests of each Fund, which may include additional solicitations, continuing to operate GMZ as a standalone fund, liquidation of GMZ, or merging GMZ into another fund. |
Q: |
How similar are the Funds? |
A: |
Each Fund is a Delaware statutory trust and a non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Board of each Fund consists of the same Trustees. Each Funds Common Shares are listed on the New York Stock Exchange. The Funds have the same investment adviser and an identical investment objective. |
Each Funds investment objective is to seek a high level of total return with an emphasis on current distributions to shareholders. The principal differences between the investment strategies of GMZ and GER are discussed below.
GMZ seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its Managed Assets in MLP investments. GMZs MLP investments may include, but are not limited to, MLPs structured as limited partnerships (LPs) or limited liability companies (LLCs); MLPs that are organized as LPs or LLCs, but taxed as C corporations; equity securities that represent an indirect interest in an MLP issued by an MLP affiliate, including institutional units (I-Units) and MLP general partner or managing member interests; C corporations whose predominant assets are interests in MLPs; MLP equity securities, including MLP common units, MLP subordinated units, MLP convertible subordinated units and MLP preferred units; private investments in public equities (PIPEs) issued by MLPs; MLP debt securities; and other U.S. and non-U.S. equity and fixed income securities and derivative instruments that provide exposure to the MLP market, including pooled investment vehicles that primarily hold MLP interests and exchange-traded notes (ETNs). GMZ currently expects to concentrate its investments in the energy sector, with an emphasis on midstream MLP investments, including companies that are engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude oil, refined products or coal.
GER seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its Managed Assets in MLP and other energy investments. The Funds MLP investments may include, but are not limited to, MLPs structured as LPs or LLCs; MLPs that are organized as LPs or LLCs, but taxed as C corporations; equity securities that represent an indirect interest in an MLP issued by an MLP affiliate, including I-Units and MLP general partner or managing member interests; C corporations whose predominant assets are interests in MLPs; MLP equity securities, including MLP common units, MLP subordinated units, MLP convertible subordinated units and MLP preferred units; PIPEs issued by MLPs; MLP debt securities; and other U.S. and non-U.S. equity and fixed income securities and derivative instruments that provide exposure to the MLP market, including pooled investment vehicles that primarily hold MLP interests and ETNs. GERs other energy investments may include equity and fixed income securities of U.S. and non-U.S. companies other than MLPs that (i) are classified by a third party as operating within the oil and gas storage, transportation, refining, marketing, drilling, exploration or production sub-industries or (ii) have at least 50% of their assets, income, sales or profits committed to, or derived from, the exploration, development, production, gathering, transportation (including marine), transmission, terminal operation, processing, storage, refining, distribution, mining or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, coal, electricity or other energy sources, energy-related equipment or services.
The primary difference between the Funds is that in seeking to achieve their respective investment objectives under normal market conditions, GMZ will invest at least 80% of its Managed Assets in MLP investments, while GER will invest at least 80% of its Managed Assets in MLP and other energy investments (as described above). GER therefore may hold a broader range of securities than GMZ.
Please see the Joint Proxy Statement/Prospectus for additional comparison information.
Q: |
What will be the investment objective and strategies of the Combined Fund? |
A: |
The Combined Funds investment objective will be to seek a high level of total return with an emphasis on current distributions to shareholders, the same investment objective as GMZ and GER. The Combined Funds investment strategies will be the current investment strategies of GER. |
Q: |
How will the Reorganization be effected? |
A: |
Assuming shareholders of GMZ approve the Plan of Reorganization and shareholders of GER approve the Issuance of GER Common Shares, GMZ will transfer all of its assets to GER in exchange for Common Shares of GER and the assumption by GER of all of the liabilities of GMZ. Following the Reorganization, GMZ will be liquidated and terminated in accordance with its Declaration of Trust, Amended and Restated Bylaws, the 1940 Act and Delaware law. GER will be the accounting and performance survivor following the Reorganization. In addition, the Reorganization will be accounted for as an asset acquisition for accounting purpose. |
Shareholders of GMZ: You will become a shareholder of the Combined Fund. Shareholders of GMZ will receive newly issued Common Shares of GER, par value $0.001 per share, the aggregate NAV (not the market value) of which will equal the aggregate NAV (not the market value) of the Common Shares of GMZ you held immediately prior to the Reorganization (although shareholders will receive cash for fractional Common Shares).
Shareholders of GER: You will remain a shareholder of the Combined Fund.
Q: |
At what prices have Common Shares of GMZ and GER historically traded? |
A: |
As with any exchange-traded securities, the market price of a Funds Common Shares will fluctuate based on market conditions and other factors. If a Funds Common Shares are sold, the price received may be more or less than the original investment. A Funds Common Shares designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk may be greater for investors who sell their Common Shares in a relatively short period of time after completion of the Reorganization. |
Common Shares of each Fund have historically fluctuated between a discount and a premium. As of June 30, 2020, GMZ Common Shares were trading at a 21% discount to its NAV and GER Common Shares were trading at a 18% discount to its NAV. To the extent that Common Shares of GMZ are trading at a wider discount (or a narrower premium) than Common Shares of GER at the time of the Reorganization, GMZ shareholders would have the potential for an economic benefit. To the extent that Common Shares of GMZ are trading at a narrower discount (or wider premium) than Common Shares of GER at the time of the Reorganization, GMZ shareholders may be negatively impacted if the Reorganization is consummated. Under such circumstances, GMZ shareholders would only benefit from a trading discount perspective to the extent the post-Reorganization trading discount (or premium) of the Combined Fund improves relative to GMZ.
There can be no assurance that, after the Reorganization, Common Shares of the Combined Fund will trade at, above or below NAV. Upon consummation of the Reorganization, Common Shares of the Combined Fund may trade at a price that is less than their current trading market price of Common Shares of GER. In the Reorganization, GMZ shareholders will receive Common Shares of GER based on the NAV (not the market price) of each Funds Common Shares. The market value of the Common Shares of the Combined Fund may be less than the market value of the Common Shares of your Fund prior to the Reorganization.
Q: |
Will the Reorganization impact Fund distributions to shareholders? |
A: |
GMZ and GER currently pay a quarterly distribution of $0.205 and $0.155 per Common Share, respectively. It is anticipated that the Combined Fund will continue to pay quarterly distributions in an amount representing a distribution rate similar to the current distribution rate of GER and comparable to the current distribution rate of GMZ. |
The distribution level of each Fund is subject to change based upon a number of factors, including the current and projected level of the Funds net investment income, and may fluctuate over time; thus, subject to a number of other factors, including the Funds distribution policy, a higher net investment income level may potentially have a positive impact on such Funds distribution level over time. The Combined Funds net investment income level and distribution rate on NAV will change over time, and depending on market conditions, may be higher or lower than the net investment income level and distribution rate on NAV of GMZ or GER prior to the Reorganization. A Funds net investment income depends on many factors, including its asset mix, portfolio turnover level, the amount of leverage utilized by the Fund, the costs of such leverage, the performance of its investments, the movement of interest rates and general market conditions. There can be no assurance that the future net investment income level of a Fund, including the Combined Fund after the Reorganization, will remain constant.
The Combined Fund intends to make its first distribution to shareholders, if and when declared by the Board, in the quarter immediately following the Reorganization so there is no gap in distribution payments. In addition, the Combined Fund expects to follow the same frequency of payments as each Fund and make quarterly distributions to shareholders.
Q: |
Who will manage the Combined Funds portfolio? |
A: |
The Combined Fund will be managed by GSAM. Furthermore, GERs current portfolio management team (which is the same portfolio management team that currently manages GMZs portfolio) will be primarily responsible for the day-to-day management of the Combined Funds portfolio. |
Q: |
Will there be any significant portfolio turnover in connection with the Reorganization? |
A: |
The Combined Fund will have a broad mandate that permits investments in many types of securities that GMZ may hold, as well as other types of securities that are not normally held by GMZ under GMZs current principal investment strategies. Nonetheless, under current market conditions and based on current portfolio models, it is not anticipated that it will be necessary to materially reposition the Funds portfolios outside the normal course of trading in connection with the Reorganization. |
Q: |
Will I have to pay any sales load, commission or other similar fees in connection with the Reorganization? |
A: |
You will pay no sales load or commission in connection with the Reorganization. |
Q: |
Who will pay for the costs associated with the Special Meeting and the Reorganization? |
A: |
Regardless of whether the Reorganization is completed, the costs associated with the Special Meeting and Reorganization will be borne by GSAM. As noted above, it is not anticipated that it will be necessary to materially reposition the Funds portfolios outside the normal course of trading in anticipation of the Reorganization. However, to the extent there are transaction costs associated with portfolio repositioning prior to the Reorganization, such costs will be borne by the respective Fund. To the extent there are transaction costs associated with portfolio repositioning after the Reorganization, such costs will be borne by the Combined Fund. |
Q: |
Will I have to pay any federal taxes as a result of the Reorganization? |
A: |
The Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the Code). If the Reorganization so qualifies, in general, shareholders of GMZ will recognize no gain or loss for federal income tax purposes upon the exchange of their GMZ Common Shares for GER Common Shares pursuant to the Reorganization (except any gain or loss that may result from the receipt of cash in lieu of fractional GER Common Shares). Additionally, GMZ will recognize no gain or loss for federal income tax purposes by reason of the Reorganization. Neither GER nor its shareholders will recognize any gain or loss for federal income tax purposes pursuant to the Reorganization. It is a condition to the closing of the Reorganization that GMZ and GER receive an opinion from Dechert LLP regarding the characterization of the Reorganization as a reorganization within the meaning of Section 368(a) of the Code. |
Q: |
Why is the vote of shareholders of GER being solicited in connection with the Reorganization? |
A: |
Although GER will continue its legal existence and operations after the Reorganization, the rules of the New York Stock Exchange (on which GER Common Shares are listed) require shareholders of GER to approve the Issuance of GER Common Shares in connection with the Reorganization. |
Q: |
Why are shareholders of each Fund being asked to ratify the selection of PwC as the Funds independent registered public accounting firm? |
A: |
PwC has been selected by the audit committee and ratified by the Board, including a majority of the non-interested Board members, as each Funds independent registered public accounting firm for the fiscal year ending November 30, 2020. The shareholders of GMZ and GER are being asked to ratify this selection for their respective Fund. Approval of these Proposals and the Proposals relating to the Reorganization are not contingent on one another. |
Q: |
How does the Board of my Fund suggest that I vote? |
A: |
After careful consideration, the Board of your Fund recommends that you vote FOR each of the items proposed for your Fund. |
Q: |
How do I vote my proxy? |
A: |
If your Common Shares are held in street name by a broker or bank, you will receive information regarding how to instruct your bank or broker to cast your votes. If you are a shareholder of record, you may authorize a proxy to vote your Common Shares by mail, phone, or internet or you may vote at the Special Meeting. To authorize a proxy to vote your Common Shares by mail, please mark your vote on the enclosed proxy card and sign, date and return the card in the postage-paid envelope provided. If you choose to |
authorize a proxy to vote your Common Shares by phone or internet, please refer to the instructions found on the proxy card accompanying this Joint Proxy Statement/Prospectus. To authorize a proxy to vote your Common Shares by phone or internet, you will need the control number that appears on the proxy card. |
Q: |
Whom do I contact for further information? |
A: |
If you need any assistance, or have any questions regarding the Proposals or how to vote your Common Shares, please call Computershare Fund Services (CFS), the Funds proxy solicitor, toll-free at 1-(800) 337-3503 with your proxy materials. |
Q: |
Will anyone contact me? |
A: |
You may receive a call from CFS, the Funds proxy solicitor, to verify that you received your proxy materials, to answer any questions you may have about the Proposals and to encourage you to vote your proxy. |
Please authorize your proxy now. Your vote is important.
To avoid the wasteful and unnecessary expense of further solicitation, we urge you to indicate your voting instructions on the enclosed proxy card(s), date and sign it and return it promptly in the envelope provided, or record your voting instructions by telephone or via the Internet, no matter how large or small your holdings may be. If you submit a properly executed proxy but do not indicate how you wish your Common Shares to be voted, your Common Shares will be voted FOR each Proposal, as applicable. If your Common Shares are held through a broker, you must provide voting instructions to your broker about how to vote your Common Shares in order for your broker to vote your Common Shares at the Special Meeting. |
GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
200 West Street
New York, New York 10282
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 10, 2020
July 28, 2020
To the Shareholders of the Goldman Sachs MLP Income Opportunities Fund (GMZ) and the Goldman Sachs MLP and Energy Renaissance Fund (GER) (each, a Fund and together, the Funds):
A virtual joint special meeting (the Special Meeting) of the Funds will be held on September 10, 2020, at 10 a.m. (Eastern time), and any adjournments or postponements thereof, to consider the following proposals:
Proposal 1 To Approve the Agreement and Plan of Reorganization for Goldman Sachs MLP Income Opportunities Fund
Shareholders of Goldman Sachs MLP Income Opportunities Fund (GMZ):
The shareholders of GMZ are being asked to consider and approve an Agreement and Plan of Reorganization (the Plan of Reorganization) providing for the reorganization (the Reorganization) of GMZ into GER. GER is a non-diversified, closed-end management investment company that pursues the same investment objective and similar investment strategies as GMZ. Pursuant to the Plan of Reorganization, GMZ will transfer of all of its assets to GER in exchange for newly issued common shares of beneficial interest (Common Shares) of GER, which would be distributed to GMZs shareholders prior to GMZs liquidation and termination, and the assumption by GER of all of the liabilities of GMZ.
Proposal 2 To Approve the Issuance of Common Shares by Goldman Sachs MLP and Energy Renaissance Fund
Shareholders of Goldman Sachs MLP and Energy Renaissance Fund (GER):
The shareholders of GER are being asked to consider and approve the issuance of additional Common Shares of GER in connection with the Reorganization.
Proposal 3 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP Income Opportunities Fund
Shareholders of Goldman Sachs MLP Income Opportunities Fund (GMZ):
The shareholders of GMZ are being asked to consider and ratify the selection of PricewaterhouseCoopers LLP (PwC) as the Funds independent registered public accounting firm for the fiscal year ending November 30, 2020.
Proposal 4 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP and Energy Renaissance Fund
Shareholders of Goldman Sachs MLP and Energy Renaissance Fund (GER):
The shareholders of GER are being asked to consider and ratify the selection of PwC as the Funds independent registered public accounting firm for the fiscal year ending November 30, 2020.
THE BOARD OF GMZ RECOMMENDS THAT YOU CAST YOUR VOTE:
|
FOR THE PLAN OF REORGANIZATION THAT PROVIDES FOR THE REORGANIZATION OF YOUR FUND AS DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS. |
THE BOARD OF GMZ RECOMMENDS THAT YOU CAST YOUR VOTE:
|
FOR THE RATIFICATION OF SELECTION OF PwC AS THE FUNDS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING NOVEMBER 30, 2020. |
THE BOARD OF GER RECOMMENDS THAT YOU CAST YOUR VOTE:
|
FOR THE ISSUANCE OF ADDITIONAL COMMON SHARES OF YOUR FUND IN CONNECTION WITH THE REORGANIZATION. |
THE BOARD OF GER RECOMMENDS THAT YOU CAST YOUR VOTE:
|
FOR THE RATIFICATION OF SELECTION OF PwC AS THE FUNDS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING NOVEMBER 30, 2020. |
The matters referred to above are discussed in the Joint Proxy Statement/Prospectus attached to this notice. The Board of your Fund believes that each applicable proposal is in the best interests of the Fund and its Shareholders.
Shareholders of record at the close of business on July 1, 2020, the record date for the Special Meeting, are entitled to receive notice of and to vote at the Special Meeting. The Special Meeting will be conducted as a virtual meeting hosted by means of a live webcast. The virtual meeting format reflects our and global concerns regarding the spread of COVID-19. Each shareholder is invited to attend the Special Meeting virtually. You or your proxyholder will be able to attend the Special Meeting online, vote and submit questions by visiting http://www.meetingcenter.io/205922342 and using a control number assigned by Computershare Fund Services, which is included on the proxy card that you received. The password to attend the Special Meeting is GMZ2020.
If your Common Shares are held through a stock brokerage account or by a bank or other holder of record you will need to request a legal proxy in order to receive access to the virtual Special Meeting. To do so, you must submit proof of your proxy power (legal proxy) reflecting your holdings along with your name and email address to Computershare Fund Services. Requests for registration must be labeled as Legal Proxy and be received no later than 5:00 p.m. (Eastern Time) on September 4, 2020. You will receive a confirmation of your registration by email that includes the control number necessary to access and vote at the Special Meeting. Requests for registration should be directed to Computershare at shareholdermeetings@computershare.com.
The meeting webcast will begin promptly at 10 a.m. (Eastern Time) on September 10, 2020. We encourage you to access the meeting prior to the start time. For additional information on how you can attend and participate in the virtual Special Meeting, please see the instructions beginning on page iii of the Joint Proxy Statement/Prospectus that follows. Because the Special Meeting will be a completely virtual meeting, there will be no physical location for stockholders to attend.
If you will not be present at the Special Meeting, we urge you to sign, date and promptly return the enclosed proxy card or voting instruction form in the envelope provided, which is addressed for your convenience and needs no postage if mailed in the United States. You may also vote easily and quickly by Internet or by telephone. In order to avoid the additional expense to the Funds of further solicitation, we ask your cooperation in returning your proxy promptly.
By Order of the Boards of Trustees
of Goldman Sachs MLP Income
Opportunities Fund and Goldman Sachs
MLP and Energy Renaissance Fund
Caroline L. Kraus
Secretary
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
To secure the largest possible representation at the Special Meeting, please mark your proxy card or voting instruction form, sign it, date it, and return it in the postage paid envelope provided (unless you are voting by Internet or by telephone). If you sign, date and return a proxy card or voting instruction form but give no voting instructions, your shares will be voted FOR all of the proposals indicated on the card. If you prefer, you may instead vote via the Internet or by telephone. To vote in this manner, you should refer to the directions below.
To vote via the Internet, please access the website found on your proxy card or voting instruction form and follow the on-screen instructions on the website.
To vote by telephone from within the United States, please call the toll-free number found on your proxy card or voting instruction form, and follow the recorded instructions. Shareholders outside the United States should vote via the Internet or by submitting a proxy card or voting instruction form instead.
You may revoke your proxy or voting instruction form at any time at or before the Special Meeting, by submitting to the Secretary of the Funds, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306, a written notice of revocation or subsequently executed proxy or voting instruction form or by virtually attending and voting at the Special Meeting.
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general guidelines for signing proxy cards may be of assistance to you and will help avoid the time and expense to a Fund involved in validating your vote if you fail to sign your proxy card properly.
1. |
Individual Accounts: Sign your name exactly as it appears in the registration on the proxy card or voting instruction form. |
2. |
Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to the name shown in the registration on the proxy card or voting instruction form. |
3. |
All Other Accounts: The capacity of the individual signing the proxy card or voting instruction form should be indicated unless it is reflected in the form of registration. For example: |
Registration | Valid Signature | |
Corporate Accounts |
||
(1) ABC Corp. |
ABC Corp. | |
John Doe, Treasurer | ||
(2) ABC Corp. |
John Doe, Treasurer | |
(3) ABC Corp. c/o John Doe, Treasurer |
John Doe | |
(4) ABC Corp. Profit Sharing Plan |
John Doe, Trustee | |
Partnership Accounts |
||
(1) The XYZ Partnership |
Jane B. Smith, Partner | |
(2) Smith and Jones, Limited Partnership |
Jane B. Smith, General Partner | |
Trust Accounts |
||
(1) ABC Trust Account |
Jane B. Doe, Trustee | |
(2) Jane B. Doe, Trustee u/t/d 12/18/98 |
Jane B. Doe | |
Custodial or Estate Accounts |
||
(1) John B. Smith, Cust. f/b/o |
||
John B. Smith Jr. UGMA/UTMA |
John B. Smith | |
(2) Estate of John B. Smith |
John B. Smith, Jr., Executor |
JOINT PROXY STATEMENT/PROSPECTUS
GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
200 West Street
New York, New York 10282
(212) 902-1000
JOINT SPECIAL MEETING OF SHAREHOLDERS
July 28, 2020
This Joint Proxy Statement/Prospectus is furnished to you as a common shareholder of Goldman Sachs MLP Income Opportunities Fund (GMZ) and/or Goldman Sachs MLP and Energy Renaissance Fund (GER), each a Delaware statutory trust and a non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). A virtual joint special meeting (the Special Meeting) of shareholders of GMZ and GER (each, a Fund and collectively, the Funds) will be held to consider the items listed below and discussed in greater detail elsewhere in this Joint Proxy Statement/Prospectus. If you are unable to attend the Special Meeting or any adjournment thereof, the Board of Trustees of each Fund (together, the Board) requests that you vote your common shares of beneficial interest (Common Shares) by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the Internet. The approximate mailing date of this Joint Proxy Statement/Prospectus and accompanying form of proxy is August 10, 2020.
The purposes of the Special Meeting are to consider the following proposals:
Proposal 1 To Approve the Agreement and Plan of Reorganization for Goldman Sachs MLP Income Opportunities Fund
Shareholders of Goldman Sachs MLP Income Opportunities Fund (GMZ):
The shareholders of GMZ are being asked to consider and approve an Agreement and Plan of Reorganization (the Plan of Reorganization) providing for the reorganization (the Reorganization) of GMZ into GER. GER is a non-diversified, closed-end management investment company that pursues the same investment objective and similar investment strategies as GMZ. Pursuant to the Plan of Reorganization, GMZ will transfer all of its assets to GER in exchange for newly issued Common Shares of GER, which would be distributed to GMZs shareholders prior to GMZs liquidation and termination, and the assumption by GER of all of the liabilities of GMZ.
Proposal 2 To Approve the Issuance of Common Shares by Goldman Sachs MLP and Energy Renaissance Fund
Shareholders of Goldman Sachs MLP and Energy Renaissance Fund (GER):
The shareholders of GER are being asked to consider and approve the issuance of additional Common Shares of GER in connection with the Reorganization.
Proposal 3 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP Income Opportunities Fund
Shareholders of Goldman Sachs MLP and Energy Renaissance Fund (GMZ):
The shareholders of GMZ are being asked to consider and ratify the selection of PricewaterhouseCoopers LLP (PwC) as the Funds independent registered public accounting firm for the fiscal year ending November 30, 2020.
Proposal 4 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP and Energy Renaissance Fund
Shareholders of Goldman Sachs MLP and Energy Renaissance Fund (GER):
The shareholders of GER are being asked to consider and ratify the selection of PwC as the Funds independent registered public accounting firm for the fiscal year ending November 30, 2020.
Shareholders of record as of the close of business on July 1, 2020 are entitled to vote at the Special Meeting or any adjournment thereof.
For purposes of this Joint Proxy Statement/Prospectus, GER as it would exist after the Reorganization is referred to as the Combined Fund. The transactions associated with the reorganization of GMZ into GER pursuant to the Plan of Reorganization, including the Issuance of GER Common Shares, are referred to as the Reorganization.
The Reorganization seeks to combine two affiliated closed-end management investment companies. In the Reorganization, GMZ will transfer all of its assets to GER in exchange for Common Shares of GER and the assumption by GER of all of the liabilities of GMZ. The aggregate net asset value (NAV) of GER Common Shares received by the shareholders of GMZ in the Reorganization will equal the aggregate NAV of GMZ Common Shares held by such shareholders immediately prior to the Reorganization (though shareholders will receive cash for their fractional Common Shares). GMZ will terminate its registration under the 1940 Act after the completion of the Reorganization and will be liquidated and terminated in accordance with its Declaration of Trust, Amended and Restated Bylaws, the 1940 Act and Delaware law. GER will continue to operate after the Reorganization as a registered, non-diversified, closed-end management investment company with the investment objective and policies described in this Joint Proxy Statement/Prospectus.
GMZ and GER would each continue to exist and operate on a stand-alone basis if either the shareholders of GMZ do not approve the Plan of Reorganization or the shareholders of GER do not approve the Issuance of GER Common Shares.
The following documents have been filed with the Securities and Exchange Commission (SEC) and are incorporated into this Joint Proxy Statement/Prospectus by reference:
|
A Statement of Additional Information, dated July 28, 2020, relating to this Joint Proxy Statement/Prospectus (the Statement of Additional Information); |
|
|
The Funds are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports, proxy statements, proxy materials and other information with the SEC. Materials filed with the SEC can be reviewed and copied at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or downloaded from the SECs website at www.sec.gov. Information on the operation of the SECs Public Reference Room may be obtained by calling the SEC at (202) 551-8090. You may also request copies of these materials, upon payment at the prescribed rates of a duplicating fee, by electronic request to the SECs e-mail address (publicinfo@sec.gov) or by writing the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549-0102.
If (i) you are a member of a household in which multiple Shareholders of a Fund share the same address, (ii) your shares are held in street name and (iii) your broker or bank has received consent to household material, then your broker or bank may have sent to your household only one copy of this Joint Proxy Statement/Prospectus, unless your broker or bank previously received contrary instructions from a shareholder in your household. If you are part of a household that has received only one copy of this Joint Proxy Statement/Prospectus, your Fund will deliver promptly a separate copy of this Joint Proxy Statement/Prospectus to you upon written or oral request. To receive a separate copy of this Joint Proxy Statement/Prospectus, please contact your Fund by calling toll free 1-866-963-5821 or by mail at such Fund, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306. If your shares are held with certain banks, trust companies, brokers, dealers, investment advisers and other financial intermediaries (each, an Authorized Institution) and you would like to receive a separate copy of future proxy statements, prospectuses or annual reports or you are now receiving multiple copies of these documents and would like to receive a single copy in the future, please contact your Authorized Institution.
The Common Shares of GER are listed on the New York Stock Exchange (NYSE) under the ticker symbol GER and will continue to be so listed following the Reorganization. The Common Shares of GMZ are listed on the NYSE under the ticker symbol GMZ and will be delisted from the NYSE in connection with the Reorganization.
This Joint Proxy Statement/Prospectus serves as a prospectus of GER in connection with the Issuance of GER Common Shares in the Reorganization. This Joint Proxy Statement/Prospectus sets forth concisely the information that shareholders of each Fund should know before voting on the proposals for their Fund. Please read it carefully and retain it for future reference. No person has been authorized to give any information or make any representation not contained in this Joint Proxy Statement/Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized. This Joint Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION REGARDING ATTENDING THE MEETING
The Meeting will be a virtual meeting conducted exclusively via live webcast starting at 10 a.m. (Eastern Time) on September 10, 2020. You will be able to attend the Special Meeting online, submit your questions during the meeting and vote your Common Shares electronically at the meeting by going to http://www.meetingcenter.io/205922342 and entering your control number, which is included on the proxy card that you received. The password to attend the Special Meeting is GMZ2020. Because the Special Meeting is completely virtual and being conducted via live webcast, shareholders will not be able to attend the meeting in person.
If your Common Shares are held through a stock brokerage account or by a bank or other holder of record you will need to request a legal proxy in order to receive access to the virtual Special Meeting. To do so, you must submit proof of your proxy power (legal proxy) reflecting your holdings along with your name and email address to Computershare Fund Services. Requests for registration must be labeled as Legal Proxy and be received no later than 5:00 p.m. (Eastern Time) on September 4, 2020. You will receive a confirmation of your registration by email that includes the control number necessary to access and vote at the Special Meeting. Requests for registration should be directed to Computershare at shareholdermeetings@computershare.com.
In light of the rapidly changing developments related to coronavirus (COVID-19), we are pleased to offer our shareholders a completely virtual Special Meeting, which provides worldwide access and communication, while protecting the health and safety of our shareholders, trustees, management and other stakeholders. We are
committed to ensuring that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting. We will try to answer as many shareholders-submitted questions as time permits that comply with the Special Meeting rules of conduct. However, we reserve the right to edit profanity or other inappropriate language, or to exclude questions that are not pertinent to meeting matters or that are otherwise inappropriate. If substantially similar questions are received, we will group such questions together and provide a single response to avoid repetition.
The date of this Joint Proxy Statement/Prospectus is July 28, 2020.
1 | ||||
BOARD CONSIDERATIONS AND RECOMMENDATIONS REGARDING THE REORGANIZATION |
5 | |||
7 | ||||
FUND FEES AND EXPENSES TABLE AND SUPPLEMENTAL FINANCIAL INFORMATION |
33 | |||
35 | ||||
55 | ||||
63 | ||||
67 | ||||
72 | ||||
73 | ||||
75 | ||||
78 | ||||
80 | ||||
80 | ||||
80 | ||||
80 | ||||
81 | ||||
83 | ||||
84 | ||||
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION |
85 | |||
92 | ||||
96 | ||||
97 | ||||
99 | ||||
100 | ||||
101 | ||||
102 | ||||
103 | ||||
A-1 |
The following is a summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus and is qualified in its entirety by reference to the more complete information contained in this Joint Proxy Statement/Prospectus and in the Statement of Additional Information. Shareholders should read the entire Joint Proxy Statement/Prospectus carefully.
The Proposed Reorganization
The Board of each Fund, including the Trustees who are not interested persons of each Fund (as defined in the 1940 Act) (the Independent Trustees), has unanimously approved the Reorganization as described in the Plan of Reorganization. If the shareholders of GMZ approve the Plan of Reorganization and the shareholders of GER approve the Issuance of GER Common Shares in connection with the Reorganization, GMZ will transfer all of its assets to GER in exchange for Common Shares of GER and GER will assume all of the liabilities of GMZ. Following the Reorganization, GMZ will be liquidated and terminated in accordance with its Declaration of Trust, Amended and Restated Bylaws, the 1940 Act and Delaware law.
The aggregate NAV (not the market value) of GER Common Shares received by shareholders of GMZ in the Reorganization will equal the aggregate NAV (not the market value) of the GMZ Common Shares held immediately prior to the Reorganization. The market value of the Common Shares of the Combined Fund may be less than the market value of the Common Shares of GMZ or GER prior to the Reorganization.
Background and Reasons for the Proposed Reorganization
The Reorganization seeks to combine two affiliated closed-end management investment companies that have identical investment objectives and similar investment strategies. The Board of GMZ, based upon its evaluation of all relevant information, anticipates that the Reorganization would benefit shareholders of GMZ. The Board of GER, based upon its evaluation of all relevant information, anticipates that the Reorganization would benefit shareholders of GER.
In considering the Reorganization, the Board reviewed information provided by Goldman Sachs Asset Management, L.P., the Investment Adviser to each Fund (GSAM or the Investment Adviser). In considering such information, the Board took into account that, in presenting this recommendation, the Investment Adviser may be subject to a conflict of interest, as the Investment Adviser would realize certain operating efficiencies (such as reduced administrative and oversight burdens in managing one portfolio rather than two portfolios) and economies of scale (such as the need for only one audit) if the Reorganization is consummated. The Board also took into account that over a period of time it had discussed with the Investment Adviser the potential benefits of combining the Funds, given the benefit associated with a larger fund that is more liquid.
The Board also received a memorandum outlining, among other things, the legal standards and certain other considerations relevant to the Boards deliberations. The Independent Trustees also discussed these matters in detail with its own independent counsel.
After consideration of these and other factors, the Board, including all of the Independent Trustees, approved the Reorganization as described in the Plan of Reorganization at a meeting held on June 8-9, 2020. In approving the proposed Reorganization, the Board of each Fund, including the Independent Trustees, determined that the proposed Reorganization is in the best interests of each Fund and its shareholders and that the interests of each Funds shareholders will not be diluted with respect to the NAV of such Fund as a result of the Reorganization. Before reaching these conclusions, the Board of each Fund, including the Independent Trustees, engaged in a thorough review process relating to the proposed Reorganization.
1
The following primary factors were considered by the Board with regard to the Reorganization.
(1) The Board considered that each Fund currently has the same management fee of 1.00% of the Funds average daily total assets (including any assets attributable to borrowings for investment purposes) minus the sum of the Funds accrued liabilities (other than liabilities representing borrowings for investment purposes) (Managed Assets), and that management fee rate would remain unchanged after the Reorganization.
(2) The Board considered that, following the consummation of the Reorganization, the total annual operating expense ratio of the Combined Fund is expected to be lower than the current total annual operating expense ratios of GMZ and GER.
(3) The Board considered that shareholders of GMZ will remain invested in an exchange-listed, closed-end management investment company that will have substantially greater net assets than GMZ, an identical investment objective and similar investment strategies to those of GMZ and, as a result, the risk/return profile of the Combined Fund will remain comparable to that of GMZ. The Board also considered the salient differences between the Combined Fund and GMZ and noted that shareholders of GMZ may also benefit from the Combined Funds broader investment strategies that include other energy investments (as further described below in Comparison of the Funds) while maintaining a continued focus on the energy sector and master limited partnership (MLP) investments.
(4) The Board considered that the Combined Fund expects to continue to pay quarterly distributions in an amount representing a distribution rate, as a percentage of NAV and market price, similar to the current distribution rate of GER and comparable to the current distribution rate of GMZ.
(5) The Board considered that the Combined Fund may achieve certain operating and administrative efficiencies and economies of scales from its larger net asset size.
(6) The Board considered that shareholders of GMZ and GER will recognize no gain or loss for federal income tax purposes as a result of the Reorganization (except any gain or loss that may result from the receipt of cash in lieu of fractional shares).
(7) The Board considered that shareholders of GMZ and GER will benefit from the continuing experience and expertise of the portfolio management team designated for the Combined Fund and that shareholders of GMZ and GER will receive substantially the same services after the Reorganization.
(8) The Board considered that that the aggregate NAV of Common Shares of GER that GMZ shareholders will receive in the Reorganization is expected to equal the aggregate NAV of the GMZ Common Shares owned by GMZ shareholders immediately prior to the Reorganization, and the NAV of GMZ Common Shares or GER Common Shares will not be diluted as a result of the Reorganization.
(9) The Board considered the capital and net operating loss carryforwards of the Combined Fund that will be attributable to GMZ.
(10) The Board considered that shareholders of the Combined Fund will have the same voting rights and rights with respect to the payment of dividends and distribution of assets as with GMZ and GER.
(11) The Board considered that each Fund and the Combined Fund reserve the right to employ leverage to the extent permitted under the 1940 Act and the terms of the credit facility of the Combined Fund will be substantially similar to those of the credit facility currently used by GMZ.
(12) The Board considered that minimal portfolio repositioning is expected as a result of the Reorganization.
2
(13) The Board considered that GSAM will bear the cost of the Reorganization.
(14) The Board of each Fund considered various alternatives to the Reorganization.
Additional Information about Common Shares of the Funds
As closed-end management investment companies, the Funds do not continuously offer their Commons Shares and do not provide daily redemptions. If a shareholder determines to buy additional Common Shares of a Fund or sell Common Shares already held, the shareholder may do so by trading on the NYSE through a broker or otherwise. The Funds Common Shares are fully paid and non-assessable, and have no preemptive or conversion rights (except as may otherwise be determined by the Board in their sole discretion) or rights to cumulative voting. Shareholders of GMZ and GER do not have appraisal rights for their Common Shares.
The Funds have substantially similar policies with respect to distributions. For additional information, see Dividends and Distributions.
Further Information Regarding the Reorganization
The Board of GMZ has determined that the Reorganization is in the best interests of GMZ and its shareholders and that the interests of shareholders of GMZ will not be diluted as a result of the Reorganization. Similarly, the Board of GER has determined that the Reorganization is in the best interests of GER and its shareholders and that the interests of shareholders of GER will not be diluted as a result of the Reorganization. As a result of the Reorganization, however, shareholders of each Fund will hold a reduced percentage of ownership in the larger Combined Fund than they did in any of the individual Funds.
The Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the Code). If the Reorganization so qualifies, in general, shareholders of GMZ will recognize no gain or loss for federal income tax purposes upon the exchange of their GMZ Common Shares for GER Common Shares pursuant to the Reorganization (except any gain or loss that may result from the receipt of cash in lieu of fractional GER Common Shares). Additionally, GMZ will recognize no gain or loss for federal income tax purposes by reason of the Reorganization. Neither GER nor its shareholders will recognize any gain or loss for federal income tax purposes pursuant to the Reorganization. It is a condition to the closing of the Reorganization that GMZ and GER receive an opinion from Dechert LLP (Dechert), dated as of the closing date of the Reorganization (the Closing Date), regarding the characterization of the Reorganization as a reorganization within the meaning of Section 368(a) of the Code. Subject to the requisite approval of the shareholders of each Fund with regard to the Reorganization, it is expected that the Closing Date will be sometime during the third quarter of 2020.
Investing in the Combined Fund following the Reorganization involves risks. For additional information, see Description of Investment Securities and Practices in the Statement of Additional Information.
PROPOSAL 1 TO APPROVE THE PLAN OF REORGANIZATION FOR GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
The Board of GMZ recommends that shareholders of GMZ vote FOR the Plan of Reorganization at the Special Meeting.
The proposal will require the affirmative vote of shareholders of GMZ representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
3
PROPOSAL 2 TO APPROVE THE ISSUANCE OF COMMON SHARES BY GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
The Board of GER recommends that shareholders of GER vote FOR the Issuance of GER Common Shares in connection with the Reorganization at the Special Meeting.
The proposal will require the affirmative vote of shareholders of GER representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
PROPOSAL 3 TO RATIFY THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND
The Audit Committee and the Board of GMZ, including all of the Independent Trustees of GMZ, have selected PwC as the independent registered public accounting firm for GMZ for the fiscal year ending November 30, 2020 and are submitting the selection of PwC to shareholders for ratification.
The Board of GMZ recommends that shareholders of GMZ vote FOR the ratification of the selection of PwC as GMZs independent registered public accounting firm for the fiscal year ending November 30, 2020.
The proposal will require the affirmative vote of shareholders representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
PROPOSAL 4 TO RATIFY THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
The Audit Committee and the Board of GER, including all of the Independent Trustees of GER, have selected PwC as the independent registered public accounting firm for GER for the fiscal year ending November 30, 2020 and are submitting the selection of PwC to shareholders for ratification.
The Board of GER recommends that shareholders of GER vote FOR the ratification of the selection of PwC as GERs independent registered public accounting firm for the fiscal year ending November 30, 2020.
The proposal will require the affirmative vote of shareholders representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
For additional information regarding voting requirements, see Voting Information and Requirements.
4
BOARD CONSIDERATIONS AND RECOMMENDATIONS REGARDING THE REORGANIZATION
The Board of each Fund considered the Reorganization at a meeting held on June 8-9, 2020. Prior to the June 8-9, 2020 meeting, the Board received information from the Investment Adviser regarding the Reorganization, including the reasons for proposing the Reorganization. The Trustees also received a memorandum from counsel regarding the findings to be made under the 1940 Act and their duties under Delaware law with respect to the Reorganization. The Independent Trustees also discussed these matters with their own counsel. At the Board meeting, the Board considered all of the information presented and discussed the proposed Reorganization as described in the Plan of Reorganization with the Investment Adviser and counsel. At that meeting, the Board received a presentation from the Investment Adviser regarding the benefits associated with managing one Combined Fund with a larger asset base. Based on all of the information considered, the Board determined to approve the Reorganization as described in the Plan of Reorganization and to recommend that the shareholders of GMZ and GER approve the Plan of Reorganization and the Issuance of GER Common Shares, respectively. The Board, including the Independent Trustees, also determined that the Reorganization would be in the best interests of the each Fund and its shareholders and that the interests of the existing shareholders of each Fund would not be diluted as a result of the Reorganization. The following primary factors were considered by the Board of each Fund with regard to the Reorganization.
(1) The Board considered that each Fund currently has the same management fee of 1.00% of the Funds average daily Managed Assets, and that management fee rate would remain unchanged after the Reorganization.
(2) The Board considered that, following the consummation of the Reorganization, the total annual operating expense ratio of the Combined Fund is expected to be lower than the current total annual operating expense ratios of GMZ and GER.
(3) The Board considered that shareholders of GMZ will remain invested in an exchange-listed, closed-end management investment company that will have substantially greater net assets than GMZ, an identical investment objective and similar investment strategies to those of GMZ and, as a result, the risk/return profile of the Combined Fund will remain comparable to that of GMZ. The Board also considered the salient differences between the Combined Fund and GMZ and noted that shareholders of GMZ may also benefit from the Combined Funds broader investment strategies that include other energy investments (as further described below in Comparison of the Funds) while maintaining a continued focus on the energy sector and MLP investments.
(4) The Board considered the Investment Advisers views as to the sustainability of GMZs and GERs current distribution rates. The Board noted that the Combined Fund expects to continue to pay quarterly distributions in an amount representing a distribution rate, as a percentage of NAV and market price, similar to the current distribution rate of GER and comparable to the current distribution rate of GMZ.
(5) The Board considered that the Combined Fund may achieve certain operating and administrative efficiencies and economies of scales from its larger net asset size. The Board also noted that the Combined Fund may experience potential benefits from having fewer similar funds in the same fund complex, including a simplified operational model, potential benefits from the elimination of complexities involved with having multiple funds, increased attractiveness of the Combined Fund to potential investors due to clearer product differentiation and reduced risk of operational or administrative errors. While there are anticipated to be certain ancillary benefits to the Investment Adviser as a result of the Reorganization, the Board noted that the primary beneficiaries will be the Funds shareholders.
(6) The Board considered that shareholders of GMZ and GER will recognize no gain or loss for federal income tax purposes as a result of the Reorganization, as the Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code, and that it is a condition to the closing of the Reorganization that GMZ and GER receive an opinion from Dechert LLP regarding the characterization of the Reorganization as a reorganization within the meaning of Section 368(a) of the Code.
5
(7) The Board considered that shareholders GMZ and GER will benefit from the continuing experience and expertise of the portfolio management team designated for the Combined Fund, and the teams commitment to the investment style and strategies to be used in managing the portfolio of the Combined Fund. The Board also considered that shareholders GMZ and GER will receive substantially the same services after the Reorganization.
(8) The Board considered that that the aggregate NAV of Common Shares of GER that GMZ shareholders will receive in the Reorganization is expected to equal the aggregate NAV of the GMZ Common Shares owned by GMZ shareholders immediately prior to the Reorganization, and the NAV of GMZ Common Shares or GER Common Shares will not be diluted as a result of the Reorganization.
(9) The Board considered the capital and net operating loss carryforwards of the Combined Fund that will be attributable to GMZ. The Board noted that such tax loss carryforwards will be subject to tax loss limitation rules by reason of GMZ undergoing an ownership change in the Reorganization. The Board also considered the timing of expiration of the tax loss carryforwards and the likelihood of utilization of such tax loss carryforwards by GMZ were they not limited as a result of the Reorganization.
(10) The Board considered that the Funds are organized as Delaware statutory trusts and the governing documents of GER are substantially similar to those of GMZ. The Board also noted that shareholders of the Combined Fund will have the same voting rights and rights with respect to the payment of dividends and distribution of assets as GMZ and GER shareholders.
(11) The Board considered that each Fund and the Combined Fund reserve the right to employ leverage to the extent permitted under the 1940 Act and the terms of the credit facility of the Combined Fund will be substantially similar to those of the credit facility currently used by GMZ.
(12) The Board considered that minimal portfolio repositioning is expected as a result of the Reorganization. The Board also considered that the Funds holdings were in markets with significant liquidity and low trading costs. Accordingly, the Board noted that the Combined Fund is not expected to experience significant costs in combining the portfolio holdings of the Funds.
(13) The Board considered that GSAM will bear the cost of the Reorganization.
(14) The Board of each Fund considered various alternatives to the Reorganization, including continuing to operate each Fund as a separate fund.
Considering these and other reasons, the Board of GMZ unanimously concluded that completion of the Reorganization as described in the Plan of Reorganization is in the best interests of GMZ and its shareholders and that the interests of the shareholders of GMZ will not be diluted as a result of the Reorganization. Similarly, the Board of GER has determined that the Reorganization, including the Issuance of GER Common Shares, is in the best interests of GER and its shareholders and that the interests of the shareholders of GER will not be diluted as a result of the Reorganization. This determination was made on the basis of each Trustees business judgment after consideration of all of the factors taken as a whole, although individual Trustees may have placed different weight and assigned different degrees of materiality to various factors. If the Plan of Reorganization is not approved by the shareholders of GMZ or if the Issuance of GER Common Shares is not approved by the shareholders of GER, the Board will take such actions as it deems to be in the best interests of each Fund, which may include additional solicitations, continuing to operate GMZ as a standalone fund, liquidation of GMZ, or merging GMZ into another fund.
6
Comparison of Principal Risks of Investing in the Funds and the Combined Fund
The Chart below compares the principal risks of investing in each Fund and of the Combined Fund (for the purpose of this section, the Fund or a Fund refers to each of GMZ, GER and the Combined Fund, where applicable). An investment in a Fund may not be appropriate for all investors. Descriptions of these risks and special considerations associated with investing in each Fund are set forth in greater detail below, under Risks of Investing in the Funds and the Combined Fund.
The Funds and the Combined Fund are not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Funds or the Combined Fund will achieve their investment objectives. Investors should consider their long-term investment goals and financial needs when making an investment decision with respect to a Fund. An investment in a Fund is intended to be a long-term investment, and you should not view a Fund as a trading vehicle. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions, if applicable.
Principal Investment Risks |
GMZ | GER |
Combined
Fund |
|||||||||
Investment Risk |
X | X | X | |||||||||
Market Risk |
X | X | X | |||||||||
Market Discount Risk |
X | X | X | |||||||||
Master Limited Partnership Risk |
X | X | X | |||||||||
Equity Securities Risk |
X | X | X | |||||||||
Energy Sector Risk |
X | X | X | |||||||||
Industry Specific Risks |
X | X | X | |||||||||
PIPES Risk |
X | X | X | |||||||||
Small Capitalization MLP Risk |
X | X | ||||||||||
Derivatives Risk |
X | X | X | |||||||||
Leverage Risk |
X | X | X | |||||||||
Counterparty Risk |
X | X | X | |||||||||
Risks Related to the Funds Clearing Broker and Central Clearing Counterparty |
X | X | X | |||||||||
Convertible Securities Risk |
X | X | X | |||||||||
Restricted and Illiquid Securities Risk |
X | X | X | |||||||||
Tax Risks |
X | X | X | |||||||||
Foreign Investments Risk |
X | X | X | |||||||||
Private Company Investments Risk |
X | X | ||||||||||
Pre-IPO Investments Risk |
X | X | ||||||||||
Initial Public Offering Risk |
X | X | X | |||||||||
Interest Rate Risk |
X | X | X | |||||||||
Liquidity Risk |
X | X | X | |||||||||
Valuation Risk |
X | X | X | |||||||||
Natural Resources Risk |
X | X | X | |||||||||
Mid-Cap and Small-Cap Risk |
X | X | X | |||||||||
Cash Flow Risk |
X | X | X | |||||||||
Capital Market Risk |
X | X | X | |||||||||
Competition Risk |
X | X | X | |||||||||
Royalty Trust Risk |
X | X | X | |||||||||
Credit/Default Risk |
X | X | X | |||||||||
Non-Investment Grade Securities Risk |
X |
7
Principal Investment Risks |
GMZ | GER |
Combined
Fund |
|||||||||
Strategy Risk |
X | X | X | |||||||||
Other Investment Company Risk |
X | X | X | |||||||||
ETNs Risk |
X | X | X | |||||||||
Non-Diversification Risk |
X | X | X | |||||||||
Anti-Takeover Provisions Risk |
X | X | X | |||||||||
Temporary Defensive Strategies Risk |
X | X | X | |||||||||
REIT Risk |
X | X | X | |||||||||
Market Disruption and Geopolitical Risk |
X | X | X | |||||||||
U.S. Government Securities Risk |
X | X | X | |||||||||
Dividend-Paying Investments Risk |
X | X | X | |||||||||
Potential Conflicts of Interest Risk |
X | X | X |
Risks of Investing in the Funds and the Combined Fund
Investment RiskThe value of the instruments in which the Fund invests may go up or down in response to the prospects of individual companies, particular sectors or governments and/or general economic conditions throughout the world due to increasingly interconnected global economies and financial markets. Price changes may be temporary or last for extended periods. The Funds investments may be overweighted from time to time in one or more sectors or countries, which will increase the Funds exposure to risk of loss from adverse developments affecting those sectors or countries. The Fund may use leverage, which will magnify the Funds investment, market and certain other risks.
Market RiskAn investment in Common Shares represents an indirect investment in the securities owned by the Fund, a significant portion of which are traded on a national securities exchange or in the over-the-counter (OTC) markets. The value of these securities, like other investments, may move up or down, sometimes rapidly and unpredictably in response to the prospects of individual companies, particular sectors or governments and/or general economic conditions throughout the world due to increasingly interconnected global economies and financial markets. Events such as war, acts of terrorism, social unrest, natural disasters, the spread of infectious illness or other public health threats could also significantly impact the Fund and its investments. Your Common Shares at any point in time may be worth less than what you invested, even after taking into account the reinvestment of Fund dividends and distributions. The Fund may utilize leverage, which magnifies the market risk.
Market Discount RiskShares of closed-end investment companies frequently trade at a discount from their NAV. This characteristic is a risk separate and distinct from the risk that the Funds NAV per Common Share could decrease as a result of its investment activities and may be greater for investors expecting to sell their Common Shares in a relatively short period of time following completion of the Reorganization. Although the value of the Funds net assets is generally considered by market participants in determining whether to purchase or sell Common Shares, whether investors will realize gains or losses upon the sale of the Common Shares will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the investors purchase price for the Common Shares. Because the market price of the Common Shares will be determined by factors such as (i) NAV, (ii) dividend and distribution levels and their stability (which will in turn be affected by levels of distributions, dividend and interest payments by the Funds portfolio holdings, the timing and success of the Funds investment strategies, regulations affecting the timing and character of Fund distributions, Fund expenses and other factors), (iii) supply of and demand for the Common Shares, (iv) trading volume of the Common Shares, (v) general market, interest rate and economic conditions and (vi) other factors that may be beyond the control of the Fund.
Master Limited Partnership RiskInvestments in securities of MLPs involve risks that differ from investments in common stock, including risks related to limited control and limited rights to vote on matters affecting MLPs, risks related to potential conflicts of interest between an MLP and the MLPs general partner,
8
cash flow risks, dilution risks and risks related to the general partners right to require unit-holders to sell their common units at an undesirable time or price. Many of the Funds investments in MLPs will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. Certain MLP securities may trade in lower volumes due to their smaller capitalizations. Accordingly, those MLPs may be subject to more abrupt or erratic price movements and may lack sufficient market liquidity to enable the Fund to effect sales at an advantageous time or without a substantial drop in price. Investment in those MLPs may restrict the Funds ability to take advantage of other investment opportunities. If the Fund is one of the largest investors in certain MLPs, it may be more difficult for the Fund to buy and sell significant amounts of such investments without an unfavorable impact on prevailing market prices. Larger purchases or sales of MLP investments by the Fund in a short period of time may cause abnormal movements in the market price of these investments. As a result, these investments may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. MLPs are generally considered interest-rate sensitive investments that generally rely on capital markets to finance capital expenditures and growth opportunities. During periods of interest rate volatility, limited capital markets access and/or low commodities pricing, these investments may not provide attractive returns, which may adversely impact the overall performance of the Fund.
The Funds ability to meet its investment objective will depend largely on the amount of the distributions it receives from the MLPs (in relation to the taxable income, gains, losses, and deductions allocated to it). The amount and tax characterization of cash available for distribution by an MLP depends upon the amount of cash generated by such entitys operations. Cash available for distribution by MLPs will vary widely from quarter to quarter and is affected by various factors affecting the entitys operations. In addition to the risks described herein, operating costs, capital expenditures, acquisition costs, construction costs, exploration costs and borrowing costs may reduce the amount of cash that an MLP has available for distribution in a given period. MLPs have the ability to modify their distribution policies from time to time without input from or approval of the Fund.
Conflicts of interest may arise from incentive distribution payments paid to the general partner, or referral of business opportunities by the general partner or one of its affiliates to an entity other than the MLP. Holders of general partner or managing member interests typically receive incentive distribution rights, which provide them with an increasing share of the entitys aggregate cash distributions upon the payment of per common unit distributions that exceed specified threshold levels above the minimum quarterly distribution (the MQD). Due to the incentive distribution rights, general partners of MLPs have higher distribution growth prospects than their underlying MLPs, but quarterly incentive distribution payments would also decline at a greater rate than the decline rate in quarterly distributions to common and subordinated unit holders in the event of a reduction in the MLPs quarterly distribution. The ability of the limited partners or members to remove the general partner or managing member without cause is typically very limited. In addition, some MLPs permit the holder of incentive distribution rights to reset, under specified circumstances, the incentive distribution levels and receive compensation in exchange for the distribution rights given up in the reset.
MLPs are subject to various risks related to the underlying operating companies they control, including dependence upon specialized management skills and the risk that those operating companies may lack or have limited operating histories. The success of the Funds investments in an MLP will vary depending on the underlying industry represented by the MLPs portfolio. Certain MLPs in which the Fund may invest depend upon their parent or sponsor entities for the majority of their revenues. If the parent or sponsor entities fail to make payments or satisfy their obligations to an MLP, the revenues and cash flows of that MLP and ability of that MLP to make distributions to unit holders such as the Fund would be adversely affected.
To the extent a distribution received by a Fund from an MLP is treated as a return of capital, the Funds adjusted tax basis in the interests of the MLP may be reduced, which will result in an increase in an amount of income or gain (or decrease in the amount of loss) that will be recognized by the Fund for tax purposes upon the sale of any such interests or upon subsequent distributions in respect of such interests. Furthermore, any return of capital distribution received from the MLP may require a Fund to restate the character of its distributions and
9
amend any shareholder tax reporting previously issued. Moreover, a change in current tax law, or a change in the underlying business mix of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which could result in a reduction of the value of a Funds investment in the MLP and lower income to the Fund.
Certain MLPs in which the Fund may invest depend upon a limited number of customers for substantially all of their revenue. Similarly, certain MLPs in which the Fund may invest depend upon a limited number of suppliers of goods or services to continue their operations. The loss of those customers or suppliers could have a material adverse effect on an MLPs results of operations and cash flow, and on its ability to make distributions to unit holders such as the Fund.
The Fund is not responsible for operating MLPs and similar entities and cannot control or monitor their compliance with applicable tax, securities and other laws and regulations necessary for the profitability of such investments. Holders of MLP units could potentially become subject to liability for all of the obligations of an MLP, if a court determines that the rights of the unitholders to take certain action under the limited partnership agreement would constitute control of the business of that MLP, or if a court or governmental agency determines that the MLP is conducting business in a state without complying with the limited partnership statute of that state. Furthermore, the structures and terms of the MLPs and other entities described in this Joint Proxy Statement/Prospectus may not be indicative of the structure and terms of every entity in which the Fund invests. Although the MLP sector has grown significantly in recent years, such market trends may not continue due to economic conditions, which are not predictable, or other factors.
Market prices generally will be unavailable for some of the Funds investments, including MLP subordinated units, direct ownership of general partner or managing member interests and restricted or unregistered securities of certain MLPs and private companies. The value of such securities will be determined by fair valuations determined by the Board of Trustees or its designee in accordance with procedures governing the valuation of portfolio securities adopted by the Board of Trustees. Proper valuation of such securities may require more reliance on the judgment of GSAM than for valuation of securities for which an active trading market exists.
Equity Securities RiskA substantial percentage of the Funds assets are invested in equity securities, including MLP common units, MLP subordinated units, MLP preferred units, equity securities of MLP affiliates, including I-Units, and common stocks of other issuers. Equity risk is the risk that MLP units or other equity securities held by the Fund will fall due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate, changes in interest rates, and the particular circumstances and performance of particular companies whose securities the Fund holds. The price of an equity security of an issuer may be particularly sensitive to general movements in the stock market, or a drop in the stock market may depress the price of most or all of the equity securities held by the Fund. In addition, MLP units or other equity securities held by the Fund may decline in price if the issuer fails to make anticipated distributions or dividend payments because, among other reasons, the issuer experiences a decline in its financial condition. Prices and volatilities of I-Units tend to correlate to the price of MLP common units. Holders of I-Units are subject to the same risks as holders of MLP common units.
Energy Sector RiskMany MLPs and other entities in which the Fund may invest operate oil, gas or petroleum facilities, or other facilities within the energy sector. As a result, the Fund will be concentrated in the energy sector, and will therefore be susceptible to adverse economic, environmental or regulatory occurrences affecting that sector. A downturn in the energy sector could have a larger impact on the Fund than on funds that are broadly diversified across many sectors and industries. At times, the performance of securities of companies in the energy sector may lag behind the performance of other sectors or industries or the broader market as a whole. MLPs and other companies operating in the energy sector are subject to specific risks, including, but not limited to, the following:
Commodity Pricing Risk. MLPs and other companies operating in the energy sector may be affected by fluctuations in the prices of energy commodities, including, for example, natural gas, natural gas liquids,
10
crude oil and coal in the short-term and long-term. Fluctuations in energy commodity prices would impact directly companies that own such energy commodities and could impact indirectly companies that engage in transportation, storage, processing, distribution or marketing of such energy commodities. Fluctuations in energy commodity prices can result from changes in general economic conditions or political circumstances (especially of key energy producing and consuming countries); market conditions; weather patterns; domestic production levels; volume of imports; energy conservation; domestic and foreign governmental regulation; international politics; policies of the Organization of Petroleum Exporting Countries (OPEC); taxation; tariffs; and the availability and costs of local, intrastate and interstate transportation methods. The energy sector as a whole may also be impacted by the perception that the performance of energy sector companies is directly linked to commodity prices. High commodity prices may drive further energy conservation efforts, and a slowing economy may adversely impact energy consumption, which may adversely affect the performance of MLPs and other companies operating in the energy sector.
Supply and Demand Risk. MLPs and other companies operating in the energy sector may be impacted by the levels of supply and demand for energy commodities. The volume of production of energy commodities and the volume of energy commodities available for transportation, storage, processing or distribution could be affected by a variety of factors, including depletion of resources; depressed commodity prices; catastrophic events; labor relations; increased environmental or other governmental regulation; equipment malfunctions and maintenance difficulties; import volumes; international politics, policies of OPEC; and increased competition from alternative energy sources. Alternatively, a decline in demand for energy commodities could result from factors such as adverse economic conditions (especially in key energy-consuming countries); increased taxation; increased environmental or other governmental regulation; increased fuel economy; increased energy conservation or use of alternative energy sources; legislation intended to promote the use of alternative energy sources; or increased commodity prices.
Depletion Risk. Energy reserves naturally deplete as they are consumed over time. MLPs and other companies operating in the energy sector rely on the expansion of reserves through exploration of new sources of supply or the development of existing sources in order to grow or maintain their revenues. The financial performance of MLPs and other companies operating in the energy sector may be adversely affected if they, or the companies to which they provide services, are unable to cost-effectively acquire additional energy deposits sufficient to replace the natural decline of existing reserves. If an energy company is not able to raise capital on favorable terms, it may not be able to add to or maintain its reserves.
Environmental and Regulatory Risk. The energy sector is highly regulated. MLPs and other companies operating in the energy sector are subject to significant regulation of nearly every aspect of their operations by federal, state and local governmental agencies. Such regulation can change over time in both scope and intensity. For example, a particular by-product may be declared hazardous by a regulatory agency and unexpectedly increase production costs. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both.
There is an inherent risk that MLPs and other companies operating in the energy sector may incur environmental costs and liabilities due to the nature of their businesses and the substances they handle. For example, an accidental release from wells or energy assets could subject an MLP to substantial liabilities for environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage, and fines or penalties for related violations of environmental laws or regulations.
Specifically, the operations of wells, gathering systems, pipelines, refineries and other facilities are subject to stringent and complex federal, state and local environmental laws and regulations. These include, for example: the Federal Clean Air Act and comparable state laws and regulations that impose obligations related to air emissions; the Federal Clean Water Act and comparable state laws and regulations that impose obligations related to discharges of pollutants into regulated bodies of water; the Federal Resource Conservation and Recovery Act and comparable state laws and regulations that impose requirements for the
11
handling and disposal of waste from facilities; and the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as Superfund, and comparable state laws and regulations that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by MLPs or at locations to which they have sent waste for disposal.
Pipeline MLPs and other pipeline companies are subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to tariff rates these companies may charge for interstate pipeline transportation services. An adverse determination by FERC with respect to the tariff rates of a pipeline MLP could have a material adverse effect on the business, financial condition, results of operations, cash flows and prospects of that pipeline MLP and its ability to make cash distributions to its equity owners. Moreover, the possibility exists that stricter laws, regulations or enforcement policies could be enacted in the future that would significantly increase compliance costs and remediation costs, thus adversely affecting the financial performance of MLPs. MLPs may not be able to recover remediation costs from insurance.
Hydraulic fracturing, or fracking, is a technique for releasing and extracting oil and natural gas trapped in underground shale formations. The fracking sector is facing allegations from environmentalists and some landowners that the technique may cause serious difficulties, which has led to uncertainty about the nature, extent, and cost of the environmental regulation to which it may ultimately be subject.
Voluntary initiatives and mandatory controls have been adopted or are being discussed both in the United States and worldwide to reduce emissions of greenhouse gases such as carbon dioxide, a by-product of burning fossil fuels, and methane, the major constituent of natural gas, which many scientists and policymakers believe contribute to global climate change. These measures and future measures could result in increased costs to certain MLPs and other companies in which the Fund may invest to operate and maintain facilities and administer and manage a greenhouse gas emissions program and may reduce demand for fuels that generate green house gases and that are managed or produced by MLPs and other companies in which the Fund may invest.
In the wake of a Supreme Court decision holding that the U.S. Environmental Protection Agency (EPA) has legal authority to deal with climate change under the Clean Air Act, the EPA and the U.S. Department of Transportation jointly wrote regulations to cut gasoline use and control greenhouse gas emissions from cars and trucks. The EPA has also taken action to require certain entities to measure and report greenhouse gas emissions, and certain facilities may be required to control emissions of greenhouse gases pursuant to EPA air permitting and other regulatory programs. These measures, and other programs addressing greenhouse gas emissions, could reduce demand for energy and/or raise prices, which may adversely affect the total return of certain of the Funds investments.
Weather Risk. Weather plays a role in the seasonality of some MLPs cash flows. MLPs and other companies in the propane sector, for example, rely on the winter season to generate almost all of their earnings. In an unusually warm winter season, propane MLPs experience decreased demand for their product. Although most MLPs can reasonably predict seasonal weather demand based on normal weather patterns, extreme weather conditions, such as hurricanes, can adversely affect performance and cash flows of MLPs.
Cyclical Industry Risk. The energy industry is cyclical and from time to time may experience a shortage of drilling rigs, equipment, supplies, or qualified personnel, or due to significant demand, such services may not be available on commercially reasonable terms. An MLPs ability to successfully and timely complete capital improvements to existing or other capital projects is contingent upon many variables. Should any such efforts be unsuccessful, an MLP could be subject to additional costs and/or the write-off of its investment in the project or improvement. The marketability of oil and gas production depends in large part on the availability, proximity and capacity of pipeline systems owned by third parties. Oil and gas properties are subject to royalty interests, liens and other burdens, encumbrances, easements or restrictions, all of which could impact the production of a particular MLP. Oil and gas MLPs operate in a highly competitive and cyclical industry, with intense price competition. A significant portion of their revenues may depend on a relatively small number of customers, including governmental entities and utilities.
12
Catastrophic Event Risk. MLPs and other companies operating in the energy sector are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum and petroleum products and other hydrocarbons. These dangers include leaks, fires, explosions, damage to facilities and equipment resulting from natural disasters, inadvertent damage to facilities and equipment and terrorist acts. Since the September 11 terrorist attacks, the U.S. government has issued warnings that energy assets, specifically U.S. pipeline infrastructure, may be targeted in future terrorist attacks. These dangers give rise to risks of substantial losses as a result of loss or destruction of commodity reserves; damage to or destruction of property, facilities and equipment; pollution and environmental damage; and personal injury or loss of life. Any occurrence of such catastrophic events could bring about a limitation, suspension or discontinuation of the operations of MLPs and other companies operating in the energy sector. MLPs and other companies operating in the energy sector may not be fully insured against all risks inherent in their business operations and therefore accidents and catastrophic events could adversely affect such companies financial conditions and ability to pay distributions to shareholders.
Acquisition Risk. MLPs owned by the Fund may depend on their ability to make acquisitions that increase adjusted operating surplus per unit in order to increase distributions to unit holders. The ability of such MLPs to make future acquisitions is dependent on their ability to identify suitable targets, negotiate favorable purchase contracts, obtain acceptable financing and outbid competing potential acquirers. To the extent that MLPs are unable to make future acquisitions, or such future acquisitions fail to increase the adjusted operating surplus per unit, their growth and ability to make distributions will be limited. There are risks inherent in any acquisition, including erroneous assumptions regarding revenues, acquisition expenses, operating expenses, cost savings and synergies; assumption of unknown liabilities; indemnification; customer losses; key employee defections; distraction from other business operations; and unanticipated difficulties in operating or integrating new product areas and geographic regions.
Volatility Risk. During periods of heightened volatility, energy producers that are burdened with debt may seek bankruptcy relief. Bankruptcy laws may permit the revocation or renegotiation of contracts between energy producers and MLPs/energy infrastructure companies, which could have a dramatic impact on the ability of MLPs/energy infrastructure companies to pay distributions to its investors, including the Fund, which in turn could impact the ability of the Fund to pay dividends and dramatically impact the value of the Funds investments.
Furthermore, even if an MLP does consummate an acquisition that it believes will be accretive, the acquisition may instead result in a decrease in free cash flow.
Industry Specific RisksMLPs and other companies operating in the energy sector are also subject to risks that are specific to the industry in which they operate.
Pipeline. Pipeline companies are subject to many risks, including varying demand for crude oil, natural gas, natural gas liquids or refined products in the markets served by the pipeline; changes in the availability of products for gathering, transportation, processing or sale due to natural declines in reserves and production in the supply areas serviced by the companies facilities; sharp decreases in crude oil or natural gas prices that cause producers to curtail production or reduce capital spending for exploration activities; and environmental regulation. Specifically, demand for gasoline, which accounts for a substantial portion of refined product transportation, depends on price, prevailing economic conditions in the markets served, and demographic and seasonal factors.
Gathering and processing. Gathering and processing companies are subject to natural declines in the production of oil and natural gas fields, which utilize their gathering and processing facilities as a way to market their production, prolonged declines in the price of natural gas or crude oil, which curtails drilling activity and therefore production, and declines in the prices of natural gas liquids and refined petroleum products, which cause lower processing margins. In addition, some gathering and processing contracts subject the gathering or processing company to direct commodities price risk.
13
Midstream. Midstream MLPs and other companies that provide crude oil, refined product and natural gas services are subject to supply and demand fluctuations in the markets they serve which may be impacted by a wide range of factors including fluctuating commodity prices, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among others.
Upstream. Exploration, development and production companies are particularly vulnerable to declines in the demand for and prices of crude oil and natural gas. Reductions in prices for crude oil and natural gas can cause a given reservoir to become uneconomic for continued production earlier than it would if prices were higher, resulting in the plugging and abandonment of, and cessation of production from, that reservoir. In addition, lower commodity prices not only reduce revenues but also can result in substantial downward adjustments in reserve estimates. The accuracy of any reserve estimate is a function of the quality of available data, the accuracy of assumptions regarding future commodity prices and future exploration and development costs and engineering and geological interpretations and judgments. Different reserve engineers may make different estimates of reserve quantities and related revenue based on the same data. Actual oil and gas prices, development expenditures and operating expenses will vary from those assumed in reserve estimates, and these variances may be significant. Any significant variance from the assumptions used could result in the actual quantity of reserves and future net cash flow being materially different from those estimated in reserve reports. In addition, results of drilling, testing and production and changes in prices after the date of reserve estimates may result in downward revisions to such estimates. Substantial downward adjustments in reserve estimates could have a material adverse effect on a given exploration and production companys financial position and results of operations. In addition, due to natural declines in reserves and production, exploration and production companies must economically find or acquire and develop additional reserves in order to maintain and grow their revenues and distributions.
Downstream. Downstream companies are businesses engaged in refining, marketing and other end-customer distribution activities relating to refined energy sources, such as: customer-ready natural gas, propane and gasoline; the production and manufacturing of petrochemicals including olefins, polyolefins, ethylene and similar co-products as well as intermediates and derivatives; and the generation, transmission and distribution of power and electricity. In addition to the other risks described herein, downstream companies may be more susceptible to risks associated with reduced customer demand for the products and services they provide.
Oil. In addition to the risks applicable to pipeline companies described above, gathering and processing companies and exploration and production companies, companies involved in the transportation, gathering, processing, exploration, development or production of crude oil or refined petroleum products may be adversely affected by increased regulations, increased operating costs and reductions in the supply of and/or demand for crude oil and refined petroleum products. Increased regulation may result in a decline in production and/or increased cost associated with offshore oil exploration in the United States and around the world, which may adversely affect certain MLPs and the oil industry in general.
Oilfield Services. The oilfield services business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these should occur, such companies could incur legal defense costs and could suffer substantial losses due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. Any horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations. Adverse developments affecting the oil and natural gas industry or drilling activity, including sustained low natural gas prices, a decline in oil or natural gas liquids prices, reduced demand for oil and natural gas products and increased regulation of drilling and production, could have a material adverse effect on a companys business, financial condition and results of operations.
14
Fracturing Services. Changes in laws or government regulations regarding hydraulic fracturing could increase a companys costs of doing business, limit the areas in which it can operate and reduce oil and natural gas production by the company. Hydraulic fracturing involves the injection of water, sand or an alternative proppant and chemicals under pressure into target geological formations to fracture the surrounding rock and stimulate production. Recently, there has been increased public concern regarding an alleged potential for hydraulic fracturing to adversely affect drinking water supplies, and proposals have been made to enact separate federal, state and local legislation that would increase the regulatory burden imposed on hydraulic fracturing. Congress has in recent legislative sessions considered legislation to amend the Safe Water Drinking Act (the SDWA), including legislation that would repeal the exemption for hydraulic fracturing from the definition of underground injection and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. The U.S. Congress may consider similar SDWA legislation in the future. In addition, the EPA has asserted federal regulatory authority pursuant to the SDWA over certain hydraulic fracturing activities involving the use of diesel fuels and published permitting guidance on February 11, 2014 addressing the performance of such activities using diesel fuels in those states where EPA is the permitting authority.
Presently, hydraulic fracturing is regulated primarily at the state level, typically by state oil and natural gas commissions and similar agencies. Several states, such as Texas and Pennsylvania, have either adopted or proposed laws and/or regulations to require oil and natural gas operators to disclose chemical ingredients and water volumes used to hydraulically fracture wells, in addition to more stringent well construction and monitoring requirements. The availability of information regarding the constituents of hydraulic fracturing fluids could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. Disclosure of proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to companies. Various federal, state and local limitations may prohibit or restrict drilling and hydraulic fracturing operations in certain locales including geographic locales considered environmentally sensitive such as wetlands, endangered species habitats, floodplains, and the like. If hydraulic fracturing becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA, fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in cost, which could adversely affect a companys business.
Oil Rig Services. The April 20, 2010 blowout and oil spill at the BP Deepwater Horizon oil rig has prompted the federal government to impose heightened regulation of oil and gas exploration and production on the outer continental shelf (OCS) to improve offshore safety systems and environmental protection regulations have been issued which have increased the complexity of the drilling permit process and may limit the opportunity for some operators to continue deepwater drilling in the U.S. Gulf of Mexico, which could adversely affect a companys financial operations. For example, the U.S. government has indicated that before any recipient of a deepwater drilling permit may resume drilling, (i) the operator must demonstrate that containment resources are available promptly in the event of a deepwater blowout, (ii) the chief executive officer of the operator seeking to perform deepwater drilling must certify that the operator has complied with all applicable regulations and (iii) the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE) will conduct inspections of such deepwater drilling operation for compliance with the applicable regulations. Oil rig companies cannot predict when the applicable government agency will determine that any deepwater driller is in compliance with the new regulations.
Propane. Propane companies are subject to earnings variability based upon weather patterns in the locations where they operate and increases in the wholesale price of propane which reduce profit margins. In addition, propane companies are facing increased competition due to the growing availability of natural gas, fuel oil and alternative energy sources for residential heating.
15
Coal. Coal companies are subject to declines in the demand for and prices of coal. Demand variability can be based on weather conditions, the strength of the domestic economy, the level of coal stockpiles in their customer base, and the prices of competing sources of fuel for electric generation. They are also subject to supply variability based on geological conditions that reduce the productivity of mining operations, the availability of regulatory permits for mining activities and the availability of coal that meets the standards of the Clean Air Act of 1990, as amended.
Power Infrastructure. Power infrastructure companies are subject to many risks, including earnings variability based upon weather patterns in the locations where the company operates, the change in the demand for electricity, the cost to produce power, and the regulatory environment. Further, share prices are partly based on the interest rate environment, the sustainability and potential growth of the dividend, and the outcome of various rate cases undertaken by the company or a regulatory body.
Marine Transportation. Marine transportation (or tanker) companies are exposed to the highly cyclical nature of the tanker industry and may be subject to volatile changes in charter rates and vessel values, which may adversely affect the earnings of tanker companies. Fluctuations in charter rates and vessel values result from changes in the supply and demand for tanker capacity and changes in the supply and demand for oil and oil products. Changes in demand for transportation of oil over longer distances and the supply of tankers to carry that oil may materially affect the revenues, profitability and cash flows of tanker companies. The successful operation of vessels in the charter market depends upon, among other things, obtaining profitable spot charters and minimizing time spent waiting for charters and traveling unladen to pick up cargo. The value of tanker vessels may fluctuate and could adversely affect the value of tanker company securities in the Funds portfolio. Declining tanker values could affect the ability of tanker companies to raise cash by limiting their ability to refinance their vessels, thereby adversely impacting tanker company liquidity. Tanker company vessels are at risk of damage or loss because of events such as mechanical failure, collision, human error, war, terrorism, piracy, cargo loss and bad weather. In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes, boycotts and government requisitioning of vessels. These sorts of events could interfere with shipping lanes and result in market disruptions and a significant loss of tanker company earnings.
PIPEs RiskThe Fund may make private investments in public equities (PIPE). PIPE transactions typically involve the purchase of securities directly from a publicly traded company or its affiliates in a private placement transaction, typically at a discount to the market price of the companys common stock. In a PIPE transaction, the Fund may bear the price risk from the time of pricing until the time of closing. Equity issued in this manner is often subject to transfer restrictions and is therefore less liquid than equity issued through a registered public offering. The Fund may be subject to lock-up agreements that prohibit transfers for a fixed period of time. In addition, because the sale of the securities in a PIPE transaction is not registered under the Securities Act, the securities are restricted and cannot be immediately resold into the public markets. The Fund may enter into a registration rights agreement with the issuer pursuant to which the issuer commits to file a resale registration statement allowing the Fund to publicly resell its securities. However, the ability of the Fund to freely transfer the shares is conditioned upon, among other things, the SECs preparedness to declare the resale registration statement effective and the issuers right to suspend the Funds use of the resale registration statement if the issuer is pursuing a transaction or some other material non-public event is occurring. Accordingly, PIPE securities may be subject to risks associated with illiquid investments.
Small Capitalization MLP RiskThe Fund may invest in securities of MLPs and other issuers that have comparatively smaller capitalizations relative to issuers whose securities are included in major benchmark indexes, which presents unique investment risks. These companies often have limited product lines, markets, distribution channels or financial resources, and the management of such companies may be dependent upon one or a few key people. The market movements of equity securities issued by MLPs with smaller capitalizations may be more abrupt or erratic than the market movements of equity securities of larger, more established companies or the stock market in general. Historically, smaller capitalization companies have sometimes gone
16
through extended periods when they did not perform as well as larger companies. In addition, equity securities of smaller capitalization companies generally are less liquid than those of larger companies. This means that the Fund could have greater difficulty selling such securities at the time and price that the Fund would like.
Derivatives RiskThe Fund may invest in derivative instruments including without limitation, options, futures, options on futures, forwards, swaps, options on swaps, structured securities and other derivatives. Investments in derivative instruments may be for both hedging and nonhedging purposes (that is, to seek to increase total return), although suitable derivative instruments may not always be available to the Investment Adviser for these purposes. Derivative instruments can be illiquid, may disproportionately increase losses, and may have a potentially large impact on Fund performance. Losses from investments in derivative instruments can result from a lack of correlation between changes in the value of derivative instruments and the portfolio assets (if any) being hedged, the potential illiquidity of the markets for derivative instruments, the failure of the counterparty to perform its contractual obligations, or the risks arising from margin requirements and related leverage factors associated with such transactions. Losses may also arise if the Fund receives cash collateral under the transactions and some or all of that collateral is invested in the market. To the extent that cash collateral is so invested, such collateral will be subject to market depreciation or appreciation, and the Fund may be responsible for any loss that might result from its investment of the counterpartys cash collateral. The use of these management techniques also involves the risk of loss if the Investment Adviser is incorrect in its expectation of the timing or level of fluctuations in securities prices, interest rates or currency prices. Investments in derivative instruments may be harder to value, subject to greater volatility and more likely subject to changes in tax treatment than other investments. For these reasons, the Investment Advisers attempts to hedge portfolio risks through the use of derivative instruments may not be successful, and the Investment Adviser may choose not to hedge certain portfolio risks. Investing for nonhedging purposes is considered a speculative practice and presents even greater risk of loss.
The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with investments in more traditional securities and instruments, and there is no guarantee that the use of derivatives will achieve their intended result. If the Investment Adviser is incorrect in its expectation of the timing or level of fluctuation in securities prices, interest rates, currency prices or other variables, the use of derivatives could result in losses, which in some cases may be significant. A lack of correlation between changes in the value of derivative instruments and the value of the portfolio assets (if any) being hedged could also result in losses. In addition, there is a risk that the performance of the derivatives or other investments used by the Investment Adviser to replicate the performance of a particular asset class may not accurately track the performance of that asset class. Derivatives are also subject to liquidity risk and risks arising from margin requirements. There is also risk of loss if the Investment Adviser is incorrect in its expectation of the timing or level of fluctuation in securities prices, interest rates, currency prices or other variables.
As an investment company registered with the SEC, the Fund must identify on its books (often referred to as asset segregation) liquid assets, or engage in other SEC- or SEC staff-approved or other appropriate measures, to cover open positions with respect to certain kinds of derivative instruments.
Leverage RiskThe use of leverage creates an opportunity for increased Common Share net investment income dividends, but also creates risks for shareholders. There is no assurance that the Funds intended leveraging strategy will be successful. Leverage involves risks and special considerations for common shareholders, including the likelihood of greater volatility of NAV, market price and dividend rate of the Common Shares than a comparable portfolio without leverage; the risk that fluctuations in interest rates on borrowings and short-term debt or in the interest or dividend rates on any leverage that the Fund must pay will reduce the return to the common shareholders; the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; when the Fund uses financial leverage, the investment advisory fees payable to the Investment Adviser will be higher than if the Fund did not use leverage; and leverage may increase operating costs, which may reduce total return. In addition, in the event of an early
17
termination of any fixed rate borrowing, the Funds may have to pay any loss associated with the lenders interest rate hedge, which could be material in certain circumstances, as well as any related termination costs.
Certain types of leverage used by the Fund may result in the Fund being subject to covenants relating to asset coverage and portfolio composition requirements, or being subject to segregation requirements under the 1940 Act. These coverage, composition and segregation requirements could result in the Fund maintaining securities positions that it would otherwise liquidate, segregating assets at a time when it might be disadvantageous to do so or otherwise restricting portfolio management. Such segregation and coverage requirements will not limit or offset losses on related positions. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for fixed income securities or Preferred Shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Adviser does not believe that these covenants or guidelines will impede it from managing the Funds portfolio in accordance with the Funds investment objective and policies.
The Fund may also engage in reverse repurchase agreements and short sales, which would create similar risks as leveraging the Funds investment portfolio.
Counterparty RiskMany of the protections afforded to participants on some organized exchanges and cleared transactions, such as the performance guarantee of an exchange clearing house, might not be available in connection with OTC transactions. Therefore, in those instances in which the Fund enters into uncleared OTC transactions, the Fund will be subject to the risk that its direct counterparty will not perform its obligations under the transactions and that the Fund will sustain losses.
Risks Related to the Funds Clearing Broker and Central Clearing CounterpartyThe Commodity Exchange Act (the CEA) requires swaps and futures clearing brokers registered as futures commission merchants to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts and cleared swaps from the brokers proprietary assets. Similarly, the CEA requires each futures commission merchant to hold in separate secure accounts all funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts and cleared swaps and segregate any such funds. However, all funds and other property received by a clearing broker from its customers are held by the clearing broker on a commingled basis in an omnibus account and may be invested in certain instruments permitted under applicable regulations. There is a risk that assets deposited by the Fund with any swaps or futures clearing broker as margin for futures contracts or cleared swaps may, in certain circumstances and to varying degrees for swaps and futures and options contracts, be used to satisfy losses of other clients of the Funds clearing broker. In addition, for both cleared swaps and futures and options contracts, the assets of the Fund might not be fully protected in the event of the Funds clearing brokers bankruptcy, as the Fund would be limited to recovering only a pro rata share of all available funds segregated on behalf of the clearing brokers customers for the relevant account class.
Similarly, the CEA requires a clearing organization approved by the Commodity Futures Trading Commission (CFTC) as a derivatives clearing organization to segregate all funds and other property received from a clearing members clients in connection with domestic cleared derivative contracts from any funds held at the clearing organization to support the clearing members proprietary trading. Nevertheless, all customer funds held at a clearing organization in connection with any futures contracts are held in a commingled omnibus account and are not identified to the name of the clearing members individual customers. All customer funds held at a clearing organization with respect to cleared swaps of customers of a clearing broker are also held in an omnibus account, but CFTC rules require that the clearing broker notify the clearing organization of the amount of the initial margin provided by the clearing broker to the clearing organization that is attributable to each customer.
With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account of a clearing member at the clearing organization to satisfy payment
18
obligations to the clearing organization of a defaulting customer of the clearing member that also defaults on its payment obligations to the clearing organization. With respect to cleared swaps, a clearing organization generally cannot do so, but may do so if the clearing member does not provide accurate reporting to the clearing organization as to the attribution of margin among its clients. Also, since clearing brokers generally provide to clearing organizations the net amount of variation margin required for cleared swaps for all of its customers in the aggregate, rather than the gross amount of each customer, the Fund is subject to the risk that a clearing organization will not make variation margin payments owed to the Fund if another customer of the clearing member has suffered a loss and is in default. As a result, in the event of a default of the clearing brokers other clients or the clearing brokers failure to extend its own funds in connection with any such default, the Fund may not be able to recover the full amount of assets deposited by the clearing broker on behalf of the Fund with the clearing organization.
Convertible Securities RiskThe market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock or other security. A unique feature of convertible securities is that as the market price of the underlying security declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying security. When the market price of the underlying security increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying security.
Restricted and Illiquid Securities RiskThe Fund may invest up to 30% of its Managed Assets in illiquid securities which cannot be disposed of in seven days in the ordinary course of business at fair value. The Fund may purchase Rule 144A securities for which there is a secondary market of qualified institutional buyers, as defined in Rule 144A promulgated under the 1933 Act. Rule 144A provides an exemption from the registration requirements of the 1933 Act for the resale of certain restricted securities to qualified institutional buyers. Investing in 144A Securities may decrease the liquidity of the Funds portfolio to the extent that qualified institutional buyers become for a time uninterested in purchasing these restricted securities. The purchase price and subsequent valuation of restricted and illiquid securities normally reflect a discount, which may be significant, from the market price of comparable securities for which a liquid market exists.
Investments purchased by the Fund, particularly debt securities and over-the-counter traded instruments that are liquid at the time of purchase, may subsequently become illiquid due to events relating to the issuer of the securities, markets events, economic conditions or investor perceptions. Domestic and foreign markets are becoming more and more complex and interrelated, so that events in one sector of the market or the economy, or in one geographical region, can reverberate and have negative consequences for other market, economic or regional sectors in a manner that may not be reasonably foreseen. With respect to over-the-counter traded securities, the continued viability of any over-the-counter secondary market depends on the continued willingness of dealers and other participants to purchase the instruments.
In cases where no clear indication of the value of the Funds portfolio instruments is available, the portfolio instruments will be valued at their fair value according to the valuation procedures approved by the Board of Trustees. These cases include, among others, situations where a security or other asset or liability does not have a price source.
Tax RiskTax risks associated with investments in the Fund include but are not limited to the following:
MLP Tax Risk. Much of the benefit that the Fund may derive from its investment in equity securities of MLPs is a result of MLPs generally being treated as partnerships for U.S. federal income tax purposes. Partnerships do not pay U.S. federal income tax at the partnership level. Rather, each partner is allocated a share of the partnerships income, gains, losses, deductions and expenses. A change in current tax law or a change in the underlying business mix of a given MLP could result in an MLP being treated as a corporation
19
for U.S. federal income tax purposes, which would result in the MLP being required to pay U.S. federal income tax (as well as state and local income taxes) on its taxable income. Furthermore, an MLP could elect to reorganize as a taxable entity or corporation. There can be no guarantee that each MLP in which the Fund invests will remain structured as an MLP. A restructuring by an MLP in which the Fund invests could alter the tax status of the Funds investment. The classification of an MLP as a corporation for U.S. federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP. If any MLP in which the Fund invests were treated as a corporation for U.S. federal income tax purposes, it could result in a reduction of the value of the Funds investment in the MLP and lower income to the Fund.
To the extent that the Fund invests in the equity securities of an MLP classified as a partnership, the Fund will be required to include in its taxable income the Funds allocable share of the income, gains, losses and deductions recognized by each such MLP and take into account its allocable share of the MLPs tax credits, regardless of whether the MLP distributes cash to the Fund. Based upon a review of the historic results of the type of MLPs in which the Fund intends to invest, the Fund expects that the cash distributions it will receive with respect its investments in equity securities of MLPs will exceed the taxable income allocated to the Fund from such MLPs. No assurance, however, can be given in this regard. If this expectation is not realized, the Fund will have a larger corporate income tax expense than expected, which will result in less cash available to distribute to shareholders.
The portion of an MLPs distributions to the Fund which are not derived from the MLPs taxable income (return of capital distributions) generally will not be taxable to the Fund unless the amount distributed exceeds the Funds basis in its interest in the MLP. Distributions received by the Fund from an MLP will reduce the Funds adjusted basis in its interest in the MLP, but not below zero. A reduced basis generally will result in an increase in the amount of gain (or decrease in the amount of loss) that will be recognized by the Fund for tax purposes on the sale of its interest in the MLP. Distributions from an MLP to the Fund in excess of the Funds basis in the MLP generally will be taxable to the Fund as capital gain. The Fund will not benefit from current favorable federal income tax rates on long-term capital gains because it will be taxed as a corporation for federal income tax purposes. Furthermore, any return of capital distribution received from the MLP may require the Fund to restate the character of its distributions and amend any shareholder tax reporting previously issued.
Historically, energy and certain other MLPs have been able to offset a significant portion of their taxable income with tax deductions. The Fund will incur a current income tax liability on the portion of its share of the income and gain from each MLP investment that is not offset by its share of the MLPs tax deductions, by its share of the MLPs tax credits or by the Funds net operating losses or net operating loss carryforwards, if any. The percentage of an MLPs income that is offset by the MLPs tax deductions will fluctuate over time. For example, new acquisitions of depreciable property by MLPs tend to generate accelerated depreciation and other tax deductions, and therefore a decline in acquisition activity by such MLPs owned by the Fund could increase the Funds current tax liability. If the percentage of the income allocated to the Fund that is offset by tax deductions declines, the Fund receives taxable dividends from C corporations that are not offset by deductions and/or by the Funds allocable share of net ordinary losses with respect to investments in MLPs, any MLPs held convert to C corporations in taxable conversion or the Funds portfolio turnover increases, the Fund could incur increased tax liabilities and the portion of the distributions paid by the Fund that is treated as tax-deferred return of capital would be reduced and the portion treated as taxable dividend income would be increased. This generally would result in lower after-tax distributions to shareholders. If the amount of the Funds distributions to U.S. shareholders exceeds the Funds current and accumulated earnings and profits, such excess will be treated first as a tax-free return of capital to the extent of, and in reduction of, U.S. shareholders tax basis in the shares, and thereafter as capital gain. Any such capital gain will be long-term capital gain if such U.S. shareholder has held the applicable shares for more than one year. The portion of the distribution received by the U.S. shareholder from the Fund that constitutes a return of capital will decrease the U.S. Shareholders tax basis in his or her Fund Common Shares (but not below zero), which will result in an increase in the amount of gain (or
20
decrease in the amount of loss) that will be recognized by the U.S. shareholder for tax purposes on the later sale of such Fund Common Shares.
Depreciation or other cost recovery deductions passed through to the Fund from investments in MLPs in a given year generally will reduce the Funds taxable income (and earnings and profits), but those deductions may be recaptured in the Funds taxable income (and earnings and profits) in subsequent years when the MLPs dispose of their assets or when the Fund disposes of its interests in the MLPs. When deductions are recaptured, distributions to the Funds shareholders may be taxable, even though the shareholders at the time of the distribution might not have held Common Shares in the Fund at the time the deductions were taken by the Fund, and even though the Funds shareholders at the time of the distribution will not have corresponding economic gain on their Common Shares at the time of the distribution.
The portion of the distributions received by the Fund each year that is considered a return of capital for tax purposes from the MLPs will not be known until the Fund receives a schedule K-1 for that year with respect to each of its MLP investments. The Funds tax liability will not be known until the Fund completes its annual tax return. The Funds tax estimates could vary substantially from the actual liability and therefore the determination of the Funds actual tax liability may have a material impact on the Funds NAV. The payment of corporate income taxes imposed on the Fund will decrease cash available for distribution to shareholders.
Investment in MLP C Corporations. As discussed above, the Fund may invest in MLPs taxed as C corporations. Such MLPs are obligated to pay federal income tax on their taxable income at the corporate tax rate and the amount of cash available for distribution by such MLPs would generally be reduced by any such tax. Additionally, distributions received by the Fund would be taxed under federal income tax laws applicable to corporate dividends (as dividend income, potentially subject to the corporate dividends received deduction, return of capital, or capital gain). Thus, investment in MLPs taxed as C corporations could result in a reduction of the value of your investment in the Fund and lower income, as compared to investments in MLPs that are classified as partnerships for tax purposes.
Fund Structure Risk. Unlike traditional mutual funds that are structured as regulated investment companies for U.S. federal income tax purposes, the Fund will be taxable as a regular corporation, or C corporation, for U.S. federal income tax purposes. This means the Fund generally will be subject to U.S. federal income tax on its taxable income at the rates applicable to corporations (currently a maximum rate of 21%), and will also be subject to state and local income taxes.
Over the long term, the Fund intends to distribute substantially all of the Funds distributable cash flow received as cash distributions from MLPs, interest payments received on debt securities owned by the Fund and other payments on securities owned by the Fund, less Fund expenses. The Fund currently anticipates making distributions to its shareholders each fiscal quarter out of legally available funds. Consequently, the Fund may maintain cash reserves, borrow or may be required to sell certain investments at times when it would not otherwise be desirable to do so in order to pay the expenses of the Fund. Such sales could result in the Funds recognition of taxable income and gains, could result in the imposition of U.S. federal, state and local corporate income taxes on the Fund, and may increase the Funds current and accumulated earnings and profits, which would result in a greater portion of distributions to Fund shareholders being treated as dividends. This practice also could require the Fund to sell an investment at a price lower than the price at which it is valued, or lower than the price the Fund could have obtained if it were able to sell the investment at a more advantageous time.
Unlike the MLP investments in which it invests, the Fund is not a pass-through vehicle. Consequently, the tax characterization of the distributions paid by the Fund, as dividend income or return of capital, may differ greatly from those of the underlying MLPs.
Changes in tax laws or regulations, or future interpretations of such laws or regulations, could adversely affect the Fund or the MLPs in which the Fund invests. Legislation could also negatively impact the amount and tax characterization of dividends received by the Funds shareholders. For example,
21
Congress could take action which would eliminate the tax benefits of depreciation, depletion and amortization deductions realized by MLPs. Alternatively, Congress could impose a tax on pass-through entities such as MLPs or eliminate the use of pass-through taxation entirely. The tax benefits of depreciation, depletion and amortization deductions realized by MLPs effectively defer the income of the MLPs and, in turn, the taxable income of the Fund. Without these benefits the Fund would be subject to current U.S. federal, state and local corporate income taxes on a greater proportion of its allocable share of the income and gains of MLPs in which it invests, and the Funds ability to pay distributions treated as return-of-capital distributions (for tax purposes) or as capital gains would be reduced. Imposing a tax on pass-through entities and/or eliminating the use of pass-through taxation entirely could result in three levels of taxat the MLP level, the Fund level and the shareholder level.
Tax Estimation/NAV Risk. Because the Fund is treated as a regular corporation, or a C corporation, for U.S. federal income tax purposes, the Fund will incur tax expenses. In calculating the Funds NAV, the Fund will account for its current taxes and deferred tax liability and/or asset balances.
The Fund will accrue a deferred income tax liability balance at the rates applicable to corporations, plus an estimated state and local income tax rate, for its future tax liability associated with the capital appreciation of its investments and the distributions received by the Fund on equity securities of MLPs considered to be return of capital and for any net operating gains. Any deferred tax liability balance will reduce the Funds NAV which could have an effect on the market price of the Common Shares. Upon the Funds sale of its interest in an MLP, the Fund may be liable for previously deferred taxes. The Fund may also accrue a deferred tax asset balance, which reflects an estimate of the Funds future tax benefit associated with net operating losses and unrealized losses. Deferred tax assets may constitute a relatively high percentage of the Funds NAV, thereby increasing the Funds NAV which could have an effect on the market price of the Common Shares. To the extent the Fund has a deferred tax asset balance, the Fund will assess whether a valuation allowance, which would offset the value of some or all of the Funds deferred tax asset balance, is required, considering all positive and negative evidence related to the realization of the Funds deferred tax asset. To the extent a valuation allowance differs from the estimates of the Fund used in calculating the Funds NAV, the application of such valuation allowance could have a material impact on the Funds NAV which could have an effect on the market price of the Common Shares.
An estimate of current taxes and deferred tax liability and/or asset balances is dependent upon the Funds net investment income and unrealized gains on investments and such expenses may vary greatly from year to year depending on the nature of the Funds investments, the performance of those investments and general market conditions. Therefore, any estimate of current taxes and deferred income tax liability and/or asset balances cannot be reliably predicted from year to year.
The Funds deferred tax liability and/or asset balances are estimated using estimates of effective tax rates expected to apply to taxable income in the years such balances are realized. The Fund will rely to some extent on information provided by MLPs regarding the tax characterization of the distributions made by such MLPs, which may not be provided to the Fund on a timely basis, to estimate the Funds current taxes and deferred tax liability and/or asset balances for purposes of financial statement reporting and determining its NAV. The Funds estimates regarding its current taxes and deferred tax liability and/or asset balances are made in good faith; however, the daily estimate of the Funds current taxes and deferred tax liability and/or asset balances used to calculate the Funds NAV could vary dramatically from the Funds actual tax liability or benefit, and, as a result, the determination of the Funds actual tax liability or benefit may have a material impact on the Funds NAV. From time to time, the Fund may modify its estimates or assumptions regarding its current taxes and deferred tax liability and/or asset balances as new information becomes available. Modifications of the Funds estimates or assumptions regarding its current taxes and deferred tax liability and/or asset balances and any applicable valuation allowance, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on net operating losses (if any) and changes in applicable tax law could result in increases or decreases in the Funds NAV, which could be material. Unexpected significant decreases in cash distributions from the Funds MLP investments or significant declines in the fair value of its investments may change the Funds assessment regarding the
22
recoverability of its deferred tax assets and may result in a valuation allowance. If a valuation allowance is required to reduce any deferred tax asset in the future, it could have a material impact on the Funds NAV and results of operations with respect to the Funds shareholders in the period it is recorded, even though the shareholders at such time might not have held shares in the Fund at the time the deferred tax asset had been established.
The Fund may acquire its target assets in varying increments at different prices over time, and the tax basis of each security may vary depending on the Funds receipt of one or more distributions characterized as returns of capital during the Funds holding period of that security. The tax basis of a security may differ significantly from the original cost or the current market value of the security, which if sold, may subject the Fund to taxation on the value received in excess of the adjusted tax basis, even if the sale price of the security is lower than its original acquisition cost. Additionally, distributions of earnings realized by the Fund from the sale of the security would generally be treated as taxable dividend income, as opposed to a non-taxable return of capital. It will be difficult for you to monitor the adjusted tax basis of each individual security in the portfolio, and therefore difficult to estimate the potential for embedded taxable gains if a security were to be sold at the current market price.
The Tax Cuts and Jobs Act (the Act) reduced the general statutory U.S. federal corporate income tax rate from 35% to 21%, limited the use of net operating losses to offset future taxable income, placed limitations on the deductibility of interest expense, repealed the corporate alternative minimum tax, and made other changes which may have effects on the Fund and on the MLPs in which the Fund invests.
Foreign Investments RiskThe Fund may make foreign investments. Foreign investments involve special risks that are not typically associated with U.S. dollar denominated or quoted securities of U.S. issuers. Foreign investments may be affected by changes in currency rates, changes in foreign or U.S. laws or restrictions applicable to such investments and changes in exchange control regulations (e.g., currency blockage). A decline in the exchange rate of the currency (i.e., weakening of the currency against the U.S. dollar) in which a portfolio security is quoted or denominated relative to the U.S. dollar would reduce the value of the portfolio security. In addition, if the currency in which the Fund receives dividends, interest or other payments declines in value against the U.S. dollar before such income is distributed as dividends to shareholders or converted to U.S. dollars, the Fund may have to sell portfolio securities to obtain sufficient cash to pay such dividends.
Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures. International trade barriers or economic sanctions against foreign countries, organizations, entities and/or individuals may adversely affect the Funds foreign holdings or exposures.
Brokerage commissions, custodial services and other costs relating to investment in international securities markets generally are more expensive than in the United States. In addition, clearance and settlement procedures may be different in foreign countries and, in certain markets, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. issuers. There may be less publicly available information about a foreign issuer than about a U.S. issuer. In addition, there is generally less government regulation of foreign markets, companies and securities dealers than in the United States, and the legal remedies for investors may be more limited than the remedies available in the United States. Foreign securities markets may have substantially less volume than U.S. securities markets and securities of many foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Furthermore, with respect to certain foreign countries, there is a possibility of nationalization, expropriation or confiscatory taxation, imposition of withholding or other taxes on dividend or interest payments (or, in some cases, capital gains distributions), limitations on the removal of funds or other assets from such countries, and risks of political or social instability or diplomatic developments which could adversely affect investments in those countries.
23
Certain foreign investments may become less liquid in response to social, political or market developments or adverse investor perceptions, or become illiquid after purchase by the Fund, particularly during periods of market turmoil. Certain foreign investments may become illiquid when, for instance, there are few, if any, interested buyers and sellers or when dealers are unwilling to make a market for certain securities. When the Fund holds illiquid investments, its portfolio may be harder to value, especially in changing markets.
Concentration of the Funds assets in one or a few countries and currencies will subject the Fund to greater risks than if the Funds assets were not geographically concentrated.
Investments in foreign securities may take the form of sponsored and unsponsored American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) or other similar instruments representing securities of foreign issuers. ADRs, GDRs and EDRs represent the right to receive securities of foreign issuers deposited in a bank or other depository. ADRs and certain GDRs are traded in the United States. GDRs may be traded in either the United States or in foreign markets. EDRs are traded primarily outside the United States. Prices of ADRs are quoted in U.S. dollars. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security.
Private Company Investments RiskPrivate companies are not subject to SEC reporting requirements, are not required to maintain their accounting records in accordance with generally accepted accounting principles, and are not required to maintain effective internal controls over financial reporting. As a result, the Investment Adviser may not have timely or accurate information about the business, financial condition and results of operations of the private companies in which the Fund invests. There is risk that the Fund may invest on the basis of incomplete or inaccurate information, which may adversely affect the Funds investment performance. Private companies in which the Fund may invest may have limited financial resources, shorter operating histories, more asset concentration risk, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market conditions, as well as general economic downturns. These companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. These companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. In addition, the Funds investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends until the company meets certain growth and liquidity objectives. The securities of private portfolio companies are illiquid, making it difficult for the Fund to sell such investments.
Pre-IPO Investments RiskPre-IPO companies typically have limited operating histories, narrower, less established product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions, market conditions and consumer sentiment in respect of their products or services, as well as general economic downturns. Such companies may experience operating losses, which may be substantial, and there can be no assurance when or if such companies will operate at a profit. At the time of the Funds investment, there is generally little publicly available information about these businesses since they are primarily privately owned and the Fund may only have access to the companys actual financial results as of and for the most recent quarter end or, in certain cases, the quarter end preceding the most recent quarter end. There can be no assurance that the information that the Fund does obtain with respect to any investment is reliable. Pre-IPO companies may have limited financial resources and may be unable to meet their obligations under their existing credit facilities (to the extent that such facilities exist), which may lead to equity financings, possibly at discounted valuations, in which the Fund could be substantially diluted if the Fund does not or cannot participate, bankruptcy or liquidation and the corresponding reduction in value or loss of the Funds investment. Pre-IPO companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the company and, in turn, on the Fund. Continued global economic uncertainty could also result in investors becoming more risk-averse, which in turn could reduce the amount of growth capital available
24
to the companies from both existing and new investors, could adversely affect their operating performance, and could delay liquidity paths (for example, an IPO or strategic sale/merger) for the companies. The securities of private portfolio companies are illiquid, and the inability of these portfolio companies to complete an IPO within the targeted time frame will extend the holding period of the Funds investments and may adversely affect the value of these investments.
Initial Public Offering RiskAn IPO is a companys first offering of stock to the public. IPO risk is the risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk. When the Funds asset base is small, a significant portion of the Funds performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Funds assets grow, the effect of the Funds investments in IPOs on the Funds performance probably will decline, which could reduce the Funds performance. Because of the price volatility of IPO shares, the Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of the Funds portfolio and may lead to increased expenses to the Fund, such as commissions and other transaction costs. The Fund will generally be subject to tax on the sale of IPO shares at a gain. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. There is no assurance that the Fund will be able to obtain allocable portions of IPO shares. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
Interest Rate RiskWhen interest rates increase, fixed income securities or instruments held by the Fund, including MLPs, will generally decline in value. Long-term fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. Rising interest rates could increase the costs of capital thereby increasing operating costs and reducing the ability of MLPs and other companies operating in the energy sector to carry out acquisitions or expansions in a cost-effective manner. As a result, rising interest rates could negatively affect the financial performance of MLPs and other companies operating in the energy sector. Rising interest rates may also impact the price of the securities of MLPs and other companies operating in the energy sector as the yields on alternative investments increase. With interest rates now close to historic lows, the risk of a rise in interest rates is greater.
The Fund may enter into a swap or cap transaction to attempt to protect itself from increasing dividend or interest expenses resulting from increasing short-term rates. A decline in interest rates may result in a decline in the value of the swap or cap, which may result in a decline in the NAV of the Fund. A sudden and dramatic decline in interest rates may result in a significant decline in the NAV of the Fund.
Liquidity RiskAlthough the equity securities of the MLPs in which the Fund invests generally trade on major stock exchanges, certain securities may trade less frequently, particularly those of MLPs and other issuers with smaller capitalizations. Securities with limited trading volumes may display volatile or erratic price movements. Also, the Fund may make investments that may become less liquid in response to market developments or adverse investor perceptions. In addition, the Fund may be one of the largest investors in certain sub-sectors of the energy or natural resource sectors. Thus, it may be more difficult for the Fund to buy and sell significant amounts of such securities without an unfavorable impact on prevailing market prices. Larger purchases or sales of these securities by the Fund in a short period of time may cause abnormal movements in the market price of these securities. When there is no willing buyer and investments cannot be readily sold at the desired time or price, the Fund may have to accept a lower price or may not be able to sell the security or instrument at all. An inability to sell one or more portfolio positions can adversely affect the Funds value or prevent the Fund from being able to take advantage of other investment opportunities. During certain periods the liquidity of particular issuers or industries, or all securities within particular investment categories, may shrink or disappear suddenly and without warning as a result of adverse economic, market or political events, or adverse investor perceptions, whether or not accurate.
25
The Fund may make investments that are illiquid or that may become less liquid in response to market developments or adverse investor perceptions. Illiquid investments may be more difficult to value. Liquidity risk may also refer to the risk that the Fund will not be able to pay redemption proceeds within the allowable time period because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. To meet redemption requests, the Fund may be forced to sell securities at an unfavorable time and/or under unfavorable conditions. Redemptions by large shareholders may have a negative impact on a Funds liquidity.
Valuation RiskMarket prices may not be readily available for some of the Funds investments, including MLP subordinated units, direct ownership of general partner or managing member interests and restricted or unregistered securities of certain MLPs and private companies. The value of such securities is determined by fair valuations determined by the Board of Trustees or its designee pursuant to procedures governing the valuation of portfolio securities adopted by the Board of Trustees. Proper valuation of such securities may require more reliance on the judgment of the Investment Adviser than for valuation of securities for which an active trading market exists. As a limited partner in MLPs, the Fund includes its allocable share of the MLPs, taxable income in computing its own taxable income. Deferred income taxes in the financial statements of the Fund reflect (i) taxes on unrealized gains/losses, which are attributable to the temporary difference between fair market value and the tax basis of the Funds assets, (ii) the net tax effects of temporary differences between the carrying amounts of such assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net operating losses. To the extent the Fund has a deferred tax asset, consideration is given as to whether or not a valuation allowance is required. In the assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future MLP cash distributions), the duration of statutory carryforward periods and the associated risk that operating loss carryforwards may expire unused.
Natural Resources RiskThe Fund may invest in MLPs and companies principally engaged in owning or developing non-energy natural resources (including timber and minerals) and industrial materials, or supplying goods or services to such companies. The Funds investments in natural resources issuers (including MLPs) will be subject to the risk that prices of these investments may fluctuate widely in response to the level and volatility of commodity prices; exchange rates; import controls; domestic and global competition; environmental regulation and liability for environmental damage; mandated expenditures for safety or pollution control; the success of exploration projects; depletion of resources; tax policies; and other governmental regulation. Investments in natural resources issuers can be significantly affected by changes in the supply of or demand for natural resources. The value of investments in natural resources issuers may be adversely affected by a change in inflation.
Mid-Cap and Small-Cap Risk Investments in mid- and small-capitalization companies involve greater risk and portfolio price volatility than investments in larger capitalization stocks. Among the reasons for the greater price volatility of these investments are the less certain growth prospects of smaller firms and the lower degree of liquidity in the markets for such securities. Mid- and small-capitalization companies may be thinly traded and may have to be sold at a discount from current market prices or in small lots over an extended period of time. In addition, these securities are subject to the risk that during certain periods the liquidity of particular issuers or industries, or all securities in particular investment categories, will shrink or disappear suddenly and without warning as a result of adverse economic or market conditions, or adverse investor perceptions whether or not accurate. Because of the lack of sufficient market liquidity, the Fund may incur losses because it will be required to effect sales at a disadvantageous time and only then at a substantial drop in price. Mid- and small-capitalization companies include unseasoned issuers that do not have an established financial history; often have limited product lines, markets or financial resources; may depend on or use a few key personnel for management; and may be susceptible to losses and risks of bankruptcy.
Mid- and small-capitalization companies may be operating at a loss or have significant variations in operating results; may be engaged in a rapidly changing business with products subject to a substantial risk of
26
obsolescence; may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position; and may have substantial borrowings or may otherwise have a weak financial condition. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel. Transaction costs for these investments are often higher than those of larger capitalization companies. Investments in mid- and small-capitalization companies may be more difficult to price precisely than other types of securities because of their characteristics and lower trading volumes.
Cash Flow RiskThe Fund expects that a substantial portion of the cash flow it receives will be derived from its investments in equity securities of MLPs. The amount and tax characterization of cash available for distribution by an MLP depends upon the amount of cash generated by such entitys operations. Cash available for distribution by MLPs will vary widely from quarter to quarter and is affected by various factors affecting the entitys operations. In addition to the risks described herein, operating costs, capital expenditures, acquisition costs, construction costs, exploration costs and borrowing costs may reduce the amount of cash that an MLP has available for distribution in a given period.
Capital Market RiskGlobal financial markets and economic conditions have been, and continue to be, volatile due to a variety of factors. The cost of raising capital in the debt and equity capital markets has increased substantially while the ability to raise capital from those markets has diminished significantly. In particular, as a result of concerns about the general stability of financial markets and specifically the solvency of lending counterparties, the cost of raising capital from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance debt on existing terms or at all and reduced, or in some cases ceased to provide, funding to borrowers. In addition, lending counterparties under existing revolving credit facilities and other debt instruments may be unwilling or unable to meet their funding obligations. Due to these factors, MLPs may be unable to obtain new debt or equity financing on acceptable terms or at all and therefore MLPs may not be able to meet their obligations as they come due. Moreover, without adequate funding, MLPs may be unable to execute their growth strategies, complete future acquisitions, take advantage of other business opportunities or respond to competitive pressures, any of which could have a material adverse effect on their revenues and results of operations.
Competition RiskA number of alternatives exist for investing in a portfolio of MLPs and their affiliates, including other publicly traded investment companies, structured notes, private funds, open-end funds and indexed products. These competitive conditions may adversely impact the Funds ability to meet its investment objective, which in turn could adversely impact our ability to make distributions or interest or Preferred Share distribution payments.
Royalty Trust RiskRoyalty trusts are exposed to many of the same risks as other MLPs. The value of the equity securities of the royalty trusts in which the Fund invests may fluctuate in accordance with changes in the financial condition of those royalty trusts, the condition of equity markets generally, commodity prices, and other factors. Distributions on royalty trusts in which the Fund may invest will depend upon the declaration of distributions from the constituent royalty trusts, but there can be no assurance that those royalty trusts will pay distributions. Typically royalty trusts own the rights to royalties on the production and sales of a natural resource, including oil, gas, minerals and timber. As these deplete, production and cash flows steadily decline, which may decrease distributions. The declaration of such distributions generally depends upon various factors, including the operating performance and financial condition of the royalty trust and general economic conditions.
In many circumstances, the royalty trusts in which the Fund may invest may have limited operating histories. The value of royalty trust securities depends on factors that are not within the Funds control, including the financial performance of the respective issuers, interest rates, exchange rates and commodity prices (which will vary and are determined by supply and demand factors including weather and general economic and political conditions), the hedging policies employed by such issuers, issues relating to the regulation of the energy industry and operational risks relating to the energy industry.
27
Credit/Default RiskAn issuer or guarantor of fixed income securities or instruments held by the Fund (which may have low credit ratings) may default on its obligation to pay interest and repay principal or default on any other obligation. The credit quality of the Funds portfolio securities or instruments may meet the Funds credit quality requirements at the time of purchase but then deteriorate thereafter, and such a deterioration can occur rapidly. In certain instances, the downgrading or default of a single holding or guarantor of the Funds holding may impair the Funds liquidity and have the potential to cause significant NAV deterioration.
Debt securities rated BBB or higher by Standard & Poors or Baa3 or higher by Moodys or having a comparable credit rating by another NRSRO are considered investment grade. Securities rated BBB or Baa3 are considered medium-grade obligations with speculative characteristics, and adverse economic conditions or changing circumstances may weaken their issuers capacity to pay interest and repay principal. For the purpose of determining compliance with any credit rating requirement, each Fund assigns a security, at the time of purchase, the highest rating by an NRSRO if the security is rated by more than one NRSRO. Therefore, a security will be deemed to have met a rating requirement if it receives the minimum required rating from at least one such rating organization even though it has been rated below the minimum rating by one or more other rating organizations, or if unrated by such rating organizations, the security is determined by the Investment Adviser to be of comparable credit quality.
Strategy RiskThe Funds strategy of investing significantly in MLPs, resulting in its being taxed as a regular corporation, or a C corporation, rather than as a regulated investment company for U.S. federal income tax purposes, is a relatively new investment strategy for funds. This strategy involves complicated and in some cases unsettled accounting, tax and valuation issues that may result in unexpected and potentially significant consequences for the Fund and its shareholders. In addition, accounting, tax and valuation procedures in this area are still developing, and there may not always be a clear consensus among industry participants as to the most appropriate approach. This may result in changes over time in the Funds accounting, tax and valuation practices, which, in turn, could have material adverse consequences on the Fund and its shareholders.
Other Investment Company RiskSubject to the limitations set forth in the 1940 Act and the Funds governing documents or as otherwise permitted by the SEC, the Fund may acquire shares in other investment companies. By investing in other investment companies (including ETFs) indirectly through the Fund, investors will incur a proportionate share of the expenses of the other investment companies held by the Fund (including operating costs and investment management fees) in addition to the fees regularly borne by the Fund. In addition, the Fund will be affected by the investment policies, practices and performance of such investment companies in direct proportion to the amount of assets the Fund invests therein.
ETNs RiskETNs are senior, unsecured, unsubordinated debt securities issued by a sponsoring financial institution. The returns on an ETN are linked to the performance of particular securities, market indices, or strategies, minus applicable fees. ETNs are traded on an exchange (e.g., the New York Stock Exchange) during normal trading hours; however, investors may also hold an ETN until maturity. At maturity, the issuer of an ETN pays to the investor a cash amount equal to the principal amount, subject to application of the relevant securities, index or strategy factor. Similar to other debt securities, ETNs have a maturity date and are backed only by the credit of the sponsoring institution. ETNs are subject to credit risk. The value of an ETN may be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuers credit rating, and economic, legal, political or geographic events that affect the underlying assets. When the Portfolio invests in ETNs, it will bear its proportionate share of any fees and expenses borne by the ETN. Although an ETN is a debt security, it is unlike a typical bond, in that there are no periodic interest payments and principal is not protected. The timing and character of income and gains from ETNs may be affected by future legislation.
Non-Diversification RiskThe Fund is non-diversified, meaning that the Fund is permitted to invest more of its assets in fewer issuers than diversified funds. Thus, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio, and may be more susceptible to greater losses because of these developments.
28
Anti-Takeover Provisions RiskThe Funds Declaration of Trust and Amended and Restated Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status or to change the composition of the Board. Such provisions could limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund.
Temporary Defensive Strategies RiskWhen the Investment Adviser anticipates unusual market or other conditions, the Fund may temporarily depart from its primary investment strategy as a defensive measure and invest all or a portion of its assets in obligations of the U.S. Government; commercial paper rated at least A-2 by S&P, P-2 by Moodys or having a comparable rating by another NRSRO (or, if unrated, determined by the Investment Adviser to be of comparable credit quality); certificates of deposit; bankers acceptances; repurchase agreements; non-convertible preferred stocks and non-convertible corporate bonds with a remaining maturity of less than one year; ETFs; other investment companies; cash items; or any other fixed income securities that the Investment Adviser considers consistent with this strategy. To the extent that the Fund invests defensively, it may not achieve its investment objective.
REIT RiskRisks associated with investments such as REITs, pooled investment vehicles that invest primarily in either real estate or real estate related loans, in the real estate industry include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage financing, variations in rental income, neighborhood values or the appeal of property to tenants; interest rates; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; and changes in zoning laws. REITs whose underlying properties are concentrated in a particular industry or geographic region are subject to risks affecting such industries and regions. The securities of REITs involve greater risks than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements because of interest rate changes, economic conditions and other factors. Securities of such issuers may lack sufficient market liquidity to enable the Fund to effect sales at an advantageous time or without a substantial drop in price.
Market Disruption and Geopolitical RiskThe aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, possible terrorist attacks in the United States and around the world, growing social and political discord in the United States, the European debt crisis, the response of the international communitythrough economic sanctions and otherwiseto Russias annexation of the Crimea region of Ukraine and posture vis-a-vis Ukraine, increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the United Kingdoms pending withdrawal from the EU and the resulting profound and uncertain impacts on the economic and political future of the United Kingdom, the exit or potential exit of one or more countries from the EU or the EMU, the EU and global financial markets, further downgrade of U.S. Government securities, the change in the U.S. president and the new administration, global pandemics, disease outbreak or other public health concerns, such as outbreaks of novel coronavirus, and other similar events, may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the United States and worldwide. The Fund does not know and cannot predict how long the securities markets may be affected by these events and the effects of these and similar events in the future on the U.S. economy and securities markets. The Fund may be adversely affected by abrogation of international agreements and national laws which have created the market instruments in which the Fund may invest, failure of the designated national and international authorities to enforce compliance with the same laws and agreements, failure of local, national and international organization to carry out their duties prescribed to them under the relevant agreements, revisions of these laws and agreements which dilute their effectiveness or conflicting interpretation of provisions of the same laws and agreements. The Fund may be adversely affected by uncertainties such as terrorism, international political developments, and changes in government policies, taxation, restrictions on foreign investment and currency repatriation, currency fluctuations and other developments in the laws and regulations of the countries in which it is invested.
29
U.S. Government Securities RiskThe U.S. government may not provide financial support to U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law. U.S. Government Securities issued by those agencies, instrumentalities and sponsored enterprises, including those issued by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks, are neither issued nor guaranteed by the U.S. Treasury and, therefore, are not backed by the full faith and credit of the United States. The maximum potential liability of the issuers of some U.S. Government Securities held by a Fund may greatly exceed their current resources, including any legal right to support from the U.S. Treasury. It is possible that issuers of U.S. Government Securities will not have the funds to meet their payment obligations in the future. Fannie Mae and Freddie Mac have been operating under conservatorship, with the Federal Housing Finance Administration (FHFA) acting as their conservator, since September 2008. The entities are dependent upon the continued support of the U.S. Department of the Treasury and FHFA in order to continue their business operations. These factors, among others, could affect the future status and role of Fannie Mae and Freddie Mac and the value of their securities and the securities which they guarantee. Additionally, the U.S. government and its agencies and instrumentalities do not guarantee the market values of their securities, which may fluctuate.
Potential Conflicts of Interest RiskThe Investment Advisers investment team is often responsible for managing the Fund as well as one or more funds and other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades. See Activities of Goldman Sachs and its Affiliates and Other Accounts Managed by Goldman Sachs.
The Investment Adviser has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. The Investment Adviser seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end, the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, the Investment Adviser and the Fund have adopted policies limiting the circumstances under which cross-trades may be effected between the Fund and another client account. The Investment Adviser conducts periodic reviews of trades for consistency with these policies.
Dividend-Paying Investments RiskThe Funds investments in dividend-paying securities could cause the Fund to underperform other funds that invest in similar asset classes but employ a different investment style. Securities that pay dividends, as a group, can fall out of favor with the market, causing such securities to underperform securities that do not pay dividends. Depending upon market conditions and political and legislative responses to such conditions, dividend-paying securities that meet the Funds investment criteria may not be widely available and/or may be highly concentrated in only a few market sectors. For example, in response to the outbreak of a novel strain of coronavirus (known as COVID-19), the U.S. Government passed the Coronavirus Aid, Relief and Economic Security Act in March 2020, which established loan programs for certain issuers impacted by COVID-19. Among other conditions, borrowers under these loan programs are generally restricted from paying dividends. The adoption of new legislation could further limit or restrict the ability of issuers to pay dividends. To the extent that dividend-paying securities are concentrated in only a few market sectors, the Fund may be subject to the risks of volatile economic cycles and/or conditions or developments that may be particular to a sector to a greater extent than if its investments were diversified across different sectors. In addition, issuers that have paid regular dividends or distributions to shareholders may not continue to do so at the same level or at all in the future. A sharp rise in interest rates or an economic downturn could cause an issuer to abruptly reduce or eliminate its dividend. This may limit the ability of the Fund to produce current income.
Non-Investment Grade Securities RiskThe Fund may invest in securities that are rated, at the time of investment, non-investment grade quality (rated Ba/BB or below), or securities that are unrated but determined
30
to be of comparable quality by the Investment Adviser. Securities of non-investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal, and are commonly referred to as junk bonds. Non-investment grade securities and unrated securities of comparable credit quality are subject to the increased risk of an issuers inability to meet principal and interest payment obligations. The value of high yield, lower quality bonds is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. These securities may be subject to greater price volatility due to such factors as specific corporate or municipal developments, interest rate sensitivity, negative perceptions of the junk bond markets generally and less secondary market liquidity. Issuers of high yield bonds are not as strong financially as those with higher credit ratings. These issuers are more vulnerable to financial setbacks and recession than more creditworthy issuers, which may impair their ability to make interest and principal payments. Non-investment grade securities may be particularly susceptible to economic downturns, specific corporate or municipal developments, interest rate sensitivity, negative perceptions of the junk bond markets generally and less secondary market liquidity. An economic recession could disrupt severely the market for such securities and may have an adverse impact on the value of such securities. In addition, any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. Non-investment grade securities, though higher yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The retail secondary market for non-investment grade securities may be less liquid than that for higher rated securities. Adverse conditions could make it difficult at times for the Fund to sell certain securities or could result in lower prices than those used in calculating the Funds NAV. Because of the substantial risks associated with investments in non-investment grade securities, you could lose money on your investment in Common Shares of the Fund, both in the short-term and the long-term.
Risks Related to the Reorganization
ExpensesWhile the Investment Adviser currently estimates that the Reorganization will result in a lower expense ratio of the Combined Fund as compared to those of GMZ and GER, the realization of this lower expense ratio may not affect shareholders of GMZ and GER proportionately, and may take longer than expected to be realized or may not be realized at all. There can be no assurance that future expenses will not increase or that any estimated expense savings will be realized.
Premium/Discount to NAVAs with any exchange-traded securities, the market price of a Funds Common Shares will fluctuate based on market conditions and other factors. If a Funds Common Shares are sold, the price received may be more or less than the original investment. A Funds Common Shares designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their NAV. This risk may be greater for investors who sell their Common Shares in a relatively short period of time after completion of the Reorganization.
Common Shares of each Fund have historically fluctuated between a discount and a premium. As of the date of this Joint Proxy Statement/Prospectus, each Fund traded at a discount to its respective NAV. To the extent that Common Shares of GMZ are trading at a wider discount (or a narrower premium) than Common Shares of GER at the time of the Reorganization, GMZ shareholders would have the potential for an economic benefit. To the extent that Common Shares of GMZ are trading at a narrower discount (or wider premium) than Common Shares of GER at the time of the Reorganization, GMZ shareholders may be negatively impacted if the Reorganization is consummated. Under such circumstances, GMZ shareholders would only benefit from a trading discount perspective to the extent the post-Reorganization trading discount (or premium) of the Combined Fund improves relative to GMZ.
There can be no assurance that, after the Reorganization, Common Shares of the Combined Fund will trade at, above or below NAV. Upon consummation of the Reorganization, Common Shares of the Combined Fund may trade at a price that is less than their current trading market price of Common Shares of GER. In the
31
Reorganization, GMZ shareholders will receive Common Shares of GER based on the NAV (not the market price) of each Funds Common Shares. The market value of the Common Shares of the Combined Fund may be less than the market value of the Common Shares of your Fund prior to the Reorganization.
Tax ConsiderationsSee Material Federal Income Tax Consequences of the Reorganization for a summary of certain U.S. federal income tax consequences of the Reorganization.
32
FUND FEES AND EXPENSES TABLE AND SUPPLEMENTAL FINANCIAL INFORMATION
The information under this section is intended to comply with the requirements for voluntary early adoption of Rule 6-11 under Regulation S-X. Rule 6-11(d)(2) requires that, with respect to any fund acquisition, registered investment companies must provide the fees and expenses and supplemental financial information below in lieu of any pro forma financial statements required by Rules 11-01 to 11-03 under Regulation S-X. As a result, the pro forma financial statements of the Combined Fund is not required and is not included.
Total Fees and Expenses Table for Shareholders of the Funds and the Pro Forma Combined Fund
The table below sets forth (i) the total expenses paid by shareholders of GMZ and GER for the period from December 1, 2019 through July 20, 2020 and (ii) the pro forma total expenses for the Combined Fund, assuming the Reorganization had been in effect for the same period. The pro forma fees and expenses are estimated in good faith and are hypothetical. It is important to note that following the Reorganization, shareholders of GMZ would be subject to the actual fees and expenses of the Combined Fund, which may not be the same as the pro forma fees and expenses below. Future fees and expenses may be greater or lesser than those indicated below.
GMZ | GER |
Pro Forma
Combined Fund(1) |
||||||||||
Shareholder Transaction Expenses |
||||||||||||
Sales Load Paid by You(2) |
None | None | None | |||||||||
Dividend Reinvestment Plan Fees(3) |
None | None | None | |||||||||
Annual Total Expenses (as a percentage of average net assets attributable to Common Shares)(4) |
||||||||||||
Management Fees(5) |
1.55 | % | 1.56 | % | 1.56 | % | ||||||
Interest Expense(6) |
1.37 | % | 1.38 | % | 1.37 | % | ||||||
Current Income Tax Expense(7) |
0.00 | % | 0.28 | % | 0.15 | % | ||||||
Deferred Income Tax Expense(7) |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Other Expenses (exclusive of current and deferred income tax expense) |
0.58 | % | 0.47 | % | 0.30 | % | ||||||
Total Annual Operating Expenses |
3.50 | % | 3.69 | % | 3.39 | % |
(1) |
Assumes the Reorganization had been in effect for the period from December 1, 2019 through July 20, 2020. |
(2) |
No sales load will be charged in connection with the Issuance of GER Common Shares as part of the Reorganization. |
(3) |
The expenses of administering a Funds Dividend Reinvestment Plan (as defined below) are included in Other Expenses. You will pay brokerage charges if you direct your broker or the plan agent to sell your Common Shares that you acquired pursuant to a Funds Dividend Reinvestment Plan. You may also pay a pro rata share of brokerage commissions incurred in connection with open-market purchases pursuant to a Funds Dividend Reinvestment Plan. See Dividend Reinvestment Plan. |
(4) |
Annualized with the exceptions of tax expenses and interest expense. |
(5) |
The contractual management fee of each of GMZ, GER and the pro forma Combined Fund is 1.00% of the Funds average daily Managed Assets. The calculation of Management Fees reflects the use of leverage by each Fund during the period as discussed in footnote (6) below. |
(6) |
The calculation of Interest Expense reflects the use of leverage by each Fund during the period from December 1, 2019 through July 20, 2020. During the period from December 1, 2019 through March 31, 2020, (i) GMZ had an average outstanding balance and weighted average annual interest rate of $160,237,705 and 3.734%, respectively; (ii) GER had an average outstanding balance and weighted average annual interest rate of $198,036,885 and 3.797%, respectively; and (iii) the Combined Fund had a pro forma average outstanding balance and weighted average annual interest rate of $358,274,590 and 3.769%, respectively. As of July 20, 2020, GMZ and GER did not employ leverage. |
33
On March 9, 2020, the Investment Adviser determined to eliminate the net leverage of each of GMZ and GER. By terminating its fixed rate borrowings, GMZ and GER incurred significant one-time interest rate breakage costs, which had a material negative impact on the Funds net assets and are not reflected in Interest Expense above. If such breakage costs had been included, the Interest Expense for GMZ, GER and the pro forma Combined Fund would have been 21.53%, 23.16% and 22.20%, respectively.
There can be no assurances that a Fund will be able to obtain or maintain a specific level of leverage, that the terms under which the Fund borrows will not change, or that the Funds use of leverage will be profitable. The future leverage of each Fund may be higher or lower than the levels above. The Combined Fund reserves the right to obtain leverage to the extent permitted by the 1940 Act using any form or combination of financial leverage instruments.
(7) |
Each Fund intends be treated for federal tax purposes as a taxable regular corporation or so-called C corporation. As a C corporation, a Fund will accrue a deferred tax liability balance for its future tax liability associated with the capital appreciation of its investments and the distributions it receives on equity securities of MLPs considered to be returns of capital and for any net operating gains. A Funds accrued deferred tax liability, if any, will be reflected in its NAV. The deferred income tax expenses/(benefit) represent an estimate of a Funds potential tax expenses/(benefit) if it were to recognize the unrealized gains/(losses) in its portfolio. An estimate of deferred income tax expenses/(benefit) is dependent upon a Funds net investment income/(loss) and realized and unrealized gains/(losses) on investments, and such expenses/(benefits) may vary greatly from year to year and from day to day depending on the nature of the Fund s investments, the performance of those investments and general market conditions. Therefore, any estimate of deferred income tax expenses/(benefit) cannot be reliably predicted from year to year. Future actual income tax expense (if any) will be incurred over many years depending on if and when investment gains are realized, the then-current tax basis of assets and federal income tax rates, the level of net loss carryforwards and other factors. |
Example: The following examples illustrate the expenses that a common shareholder would pay on a $1,000 investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Operating Expenses remain the same. The example set forth below assumes Common Shares of each Fund were owned as of the completion of the Reorganization and uses a 5% annual rate of return as mandated by SEC regulations. The examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
GMZ |
$ | 35 | $ | 107 | $ | 182 | $ | 377 | ||||||||
GER |
$ | 37 | $ | 113 | $ | 191 | $ | 394 | ||||||||
Pro forma Combined Fund |
$ | 34 | $ | 104 | $ | 176 | $ | 368 |
Supplemental Financial Information
The Reorganization will not result in a material change to GMZs investment portfolio due to the investment restrictions of the Combined Fund. As a result, a schedule of investments of GMZ modified to show the effects of such change is not required and is not included.
There are no material differences in accounting policies of GMZ as compared to those of the Combined Fund.
34
INVESTMENT OBJECTIVE AND POLICIES OF THE COMBINED FUND
The Combined Funds investment objective and policies will be the same as GERs investment objective and policies, as described in detail below.
The Combined Funds investment objective is to seek a high level of total return with an emphasis on current distributions to shareholders. The Combined Funds investment objective is not fundamental and may be changed without shareholder vote. Shareholders will be provided with at least 60 days prior written notice of any change in the investment objective.
Investment Policies
The Combined Fund seeks a high level of total return with an emphasis on current distributions to shareholders. There can be no assurance that the Combine Fund will achieve its investment objective or that the Combined Fund investment program will be successful.
Under normal market conditions, the Combined Fund will invest at least 80% of its Managed Assets in MLPs and other energy investments. Managed Assets means the total assets of the Combined Fund (including any assets attributable to borrowings for investment purposes) minus the sum of the Combined Funds accrued liabilities (other than liabilities representing borrowings for investment purposes). The Combined Fund may also invest in securities and other instruments issued by income and royalty trusts and other issuers.
The Combined Funds MLP investments may include, but are not limited to, MLPs structured as LPs or LLCs; MLPs that are organized as LPs or LLCs, but taxed as C corporations; equity securities that represent an indirect interest in an MLP issued by an MLP affiliate, including I-Units and MLP general partner or managing member interests; C corporations whose predominant assets are interests in MLPs; MLP equity securities, including MLP common units, MLP subordinated units, MLP convertible subordinated units and MLP preferred units; PIPEs issued by MLPs; MLP debt securities; and other U.S. and non-U.S. equity and fixed income securities and derivative instruments that provide exposure to the MLP market, including pooled investment vehicles that primarily hold MLP interests and ETNs. The Combined Funds other energy investments may include equity and fixed income securities of U.S. and non-U.S. companies other than MLPs that (i) are classified by a third party as operating within the oil and gas storage, transportation, refining, marketing, drilling, exploration or production sub-industries or (ii) have at least 50% of their assets, income, sales or profits committed to, or derived from, the exploration, development, production, gathering, transportation (including marine), transmission, terminal operation, processing, storage, refining, distribution, mining or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, coal, electricity or other energy sources, energy-related equipment or services. The Combined Funds MLP and other energy investments may also include companies that engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel. The Combined Fund may invest in shares of IPOs, secondary market issuances and private transactions (including pre-acquisition and pre-IPO equity issuances and investments in private companies). The Combined Fund does not intend to invest more than 30% of its Managed Assets in other energy investments.
The Combined Fund may invest up to 20% of its Managed Assets in U.S. and non-U.S. equity and fixed income securities and derivative instruments that are not MLP or other energy investments. Such issuers may be treated as corporations for U.S. federal income tax purposes and, therefore, may not offer the tax benefits of MLP investments.
The Combined Fund currently expects to concentrate its investments in the energy sector, with an emphasis on midstream MLP investments. The Combined Fund will invest in investments across the energy value chain, including upstream, midstream and downstream investments. At various times, the Combined Fund may be more heavily invested in one segment of the energy value chain over another, and may not always be invested in all
35
three segments, depending on market conditions. Midstream MLP investments include companies that are engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude oil, refined products or coal. Midstream MLPs may also operate ancillary businesses including marketing of energy products and logistical services. Upstream MLP investments include companies that are engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. An upstream MLPs cash flow and distributions are driven by the amount of oil, natural gas, natural gas liquids and crude oil produced and the demand for and price of such commodities. Downstream MLP investments include companies that are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil, marketing and other end-customer distribution activities relating to refined energy sources. The Combined Funds MLP investments may be of any capitalization size.
MLPs formed as LPs or LLCs are generally treated as partnerships for U.S. federal income tax purposes. To be treated as a partnership for U.S. federal income tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain marketing of mineral or natural resources. MLPs are generally publicly traded, are regulated by the SEC and must make public filings like any publicly traded entity. The Combined Fund may also invest in privately placed securities of publicly traded MLPs.
Portfolio Securities and Techniques of the Combined Fund:
Master Limited Partnerships. A MLP is generally an entity receiving partnership taxation treatment under the Code, and whose interests or units are traded on securities exchanges like shares of corporate stock. A typical MLP consists of a general partner and limited partners; however, some entities receiving partnership taxation treatment under the Code are established as limited liability companies. The general partner manages the partnership; has an ownership stake in the partnership; and is typically eligible to receive an incentive distribution. The limited partners provide capital to the partnership, have a limited (if any) role in the operation and management of the partnership, and receive cash distributions. Due to their partnership structure, MLPs generally do not pay income taxes.
Holders of MLP units could potentially become subject to liability for all of the obligations of an MLP, if a court determines that the rights of the unitholders to take certain action under the limited partnership agreement would constitute control of the business of that MLP, or if a court or governmental agency determines that the MLP is conducting business in a state without complying with the limited partnership statute of that state. See Principal Risks of the Funds and the Combined FundMaster Limited Partnership Risk.
To be treated as a partnership for U.S. federal income tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain marketing of mineral or natural resources. Many of the MLPs in which the Fund may invest operate oil, gas or petroleum facilities, or other facilities within the energy sector.
MLPs Structured as Limited Liability Companies. Some energy companies in which the Fund may invest have been organized as MLP LLCs. Such MLP LLCs are generally treated in the same manner as MLPs organized as LPs for federal income tax purposes. Consistent with its investment objective and policies, the Fund may invest in common units or other securities of such MLP LLCs. MLP LLC common units represent an equity ownership interest in an MLP LLC, entitling the holders to a share of the MLP LLCs success through distributions and/or capital appreciation. Similar to MLPs, MLP LLCs typically do not pay federal income tax at the entity level and are required by their operating agreements to distribute a large percentage of their current operating earnings. MLP LLC common unitholders generally have first right to an MQD prior to distributions to subordinated unitholders and typically have arrearage rights if the MQD is not met. In the event of liquidation,
36
MLP LLC common unitholders have first right to the MLP LLCs remaining assets after bondholders, other debt holders and preferred unitholders, if any, have been paid in full. MLP LLC common units typically trade on a national securities exchange or OTC. In contrast to MLPs, MLP LLCs have no general partner and there are generally no incentives that entitle management or other unitholders to increased percentages of cash distributions as distributions reach higher target levels. In addition, MLP LLC common unitholders typically have voting rights with respect to the MLP LLC, whereas MLP common units have limited voting rights.
MLPs Taxed as C Corporations. Some MLPs are organized as LPs or LLCs but are taxed as C corporations that are subject to corporate income tax to the extent they recognize taxable income and are subject to U.S. federal income tax on their taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. Investments in units of MLPs that are taxed as C corporations may not offer the advantageous tax characteristics of investments in other MLPs.
MLP Affiliates and I-Units. The Fund may invest in equity and debt securities that represent an indirect interest in an MLP issued by affiliates of the MLP, including the general partners or managing members of MLPs and companies that own MLP general partner interests. Such issuers may be organized and/or taxed as C corporations and therefore may not offer the advantageous tax characteristics of MLP units. The Fund may purchase such other MLP equity securities through market transactions, but may also do so through direct placements.
I-Units. I-Units represent an indirect ownership interest in an MLP and are issued by an MLP affiliate. The MLP affiliate uses the proceeds from the sale of I-Units to purchase limited partnership interests in its affiliated MLP. Thus, I-Units represent an indirect interest in an MLP. I-Units have limited voting rights and are similar in that respect to MLP common units. I-Units differ from MLP common units primarily in that instead of receiving cash distributions, holders of I-Units will receive distributions of additional I-Units in an amount equal to the cash distributions received by common unit holders. I-Units are typically traded on the NYSE. Issuers of MLP I-Units are treated as corporations and not partnerships for tax purposes.
MLP General Partner or Managing Member Interests. The general partner or managing member interest in an MLP is typically retained by the original sponsors of an MLP, such as its founders, corporate partners and entities that sell assets to the MLP. The holder of the general partner or managing member interest can be liable in certain circumstances for amounts greater than the amount of the holders investment in the general partner or managing member. MLPs have liabilities, such as litigation, environmental liability, and regulatory proceedings related to their business operations or transactions. To the extent that actual outcomes differ from managements estimates, earnings would be affected. If recorded liabilities are not adequate, earnings would be reduced. To the extent that an MLP incurs liability for which there was an inadequate offsetting liability recorded, or if reserves or insurance are not available to satisfy an MLPs liabilities, the MLPs general partner would be liable for those amounts, which could be in excess of its investment in the MLP. However, MLP general partners typically are structured as limited partnerships or limited liability companies in order to limit their liability to the creditors of the MLP to the amount of capital the general partner has invested in the MLP. The Fund may also invest in MLP general partner interests that are structured as corporations.
General partner or managing member interests often confer direct board participation rights in, and in many cases control over the operations of, the MLP. General partner or managing member interests can be privately held or owned by publicly traded entities. General partner or managing member interests receive cash distributions, typically in an amount of up to 2% of available cash, which is contractually defined in the partnership or limited liability company agreement. In addition, holders of general partner or managing member interests typically receive IDRs, which provide them with an increasing share of the entitys aggregate cash distributions upon the payment of per common unit distributions that exceed specified threshold levels above the MQD. Incentive distributions to a general partner are designed to encourage the general partner, which controls and operates the partnership, to maximize the partnerships cash flow and increase distributions to the limited partners. Due to the IDRs, general partners of MLPs have higher distribution growth prospects than their
37
underlying MLPs, but quarterly incentive distribution payments would also decline at a greater rate than the decline rate in quarterly distributions to common and subordinated unit holders in the event of a reduction in the MLPs quarterly distribution. The ability of the limited partners or members to remove the general partner or managing member without cause is typically very limited. In addition, some MLPs permit the holder of IDRs to reset, under specified circumstances, the incentive distribution levels and receive compensation in exchange for the distribution rights given up in the reset.
MLP Equity Securities. Equity securities issued by MLPs generally consist of common units, subordinated units and preferred units, as described more fully below.
MLP Common Units. The common units of many MLPs are listed and traded on U.S. securities exchanges, including the NYSE and the National Association of Securities Dealers Automated Quotations System (NASDAQ). The Fund will purchase such common units through open market transactions and underwritten offerings, but may also acquire common units through direct placements and privately negotiated transactions or PIPEs. Holders of MLP common units typically have very limited control and voting rights. Holders of such common units are typically entitled to receive a MQD from the issuer, and typically have a right, to the extent that an MLP fails to make a previous MQD, to recover in future distributions the amount by which the MQD was short (arrearage rights). Generally, an MLP must pay (or set aside for payment) the MQD to holders of common units before any distributions may be paid to subordinated unit holders. In addition, incentive distributions are typically not paid to the general partner or managing member unless the quarterly distributions on the common units exceed specified threshold levels above the MQD. In the event of a liquidation, common unit holders are intended to have a preference with respect to the remaining assets of the issuer over holders of subordinated units. MLPs issue different classes of common units that may have different voting, trading, and distribution rights. The Fund may invest in different classes of common units.
MLP Subordinated Units. Subordinated units, which, like common units, represent limited partner or member interests, are not typically listed or traded on an exchange. The Fund may purchase outstanding subordinated units through negotiated transactions directly with holders of such units or newly issued subordinated units directly from the issuer. Holders of such subordinated units are generally entitled to receive a distribution only after the MQD and any arrearages from prior quarters have been paid to holders of common units. Holders of subordinated units typically have the right to receive distributions before any incentive distributions are payable to the general partner or managing member. Subordinated units generally do not provide arrearage rights. Most MLP subordinated units are convertible into common units after the passage of a specified period of time or upon the achievement by the issuer of specified financial goals. MLPs issue different classes of subordinated units that may have different voting, trading, and distribution rights. The Fund may invest in different classes of subordinated units.
MLP Convertible Subordinated Units. MLP convertible subordinated units are typically issued by MLPs to founders, corporate general partners of MLPs, entities that sell assets to MLPs, and institutional investors. Convertible subordinated units increase the likelihood that, during the subordination period, there will be available cash to be distributed to common unitholders. MLP convertible subordinated units generally are not entitled to distributions until holders of common units have received their specified MQD, plus any arrearages, and may receive less than common unitholders in distributions upon liquidation. Convertible subordinated unitholders generally are entitled to MQD prior to the payment of incentive distributions to the general partner, but are not entitled to arrearage rights. Therefore, MLP convertible subordinated units generally entail greater risk than MLP common units. Convertible subordinated units are generally convertible automatically into senior common units of the same issuer at a one-to-one ratio upon the passage of time or the satisfaction of certain financial tests. Convertible subordinated units do not trade on a national exchange or OTC, and there is no active market for them. The value of a convertible subordinated unit is a function of its worth if converted into the underlying common units. Convertible subordinated units generally have similar voting rights as do MLP common units. Distributions may be paid in cash or in-kind.
38
MLP Preferred Units. MLP preferred units are not typically listed or traded on an exchange. The Fund may purchase MLP preferred units through negotiated transactions directly with MLPs, affiliates of MLPs and institutional holders of such units. Holders of MLP preferred units can be entitled to a wide range of voting and other rights, depending on the structure of each separate security. In most cases, holders of preferred units are entitled to receive distributions before distributions are made to common unitholders that are either equal to the MQD, or set at a fixed rate that is above the MLPs current distribution. Preferred units are senior in the capital structure to common units, but are subordinate to debt holders.
C Corporations with Predominant Assets in MLP Interests. C corporations whose predominant assets are interests in MLPs must pay entity-level corporate taxes, and their shareholders are also subject to taxes on any dividends received. Investors in such C corporations have voting rights while, by contrast, unitholders of MLPs are limited partners and have no role in the organizations operations or management.
PIPEs. The Investment Adviser may elect to invest in PIPEs and other unregistered or otherwise restricted securities issued by public MLPs and similar entities, including unregistered MLP preferred units. The Investment Adviser expects most such private securities to be liquid within six to nine months of funding, but may also invest in other private securities with significantly longer or shorter restricted periods. PIPEs involve the direct placement of equity securities to a purchaser such as the Fund. Equity issued in this manner is often unregistered and therefore less liquid than equity issued through a public offering. Such private equity offerings provide issuers greater flexibility in structure and timing as compared to public offerings. The following highlights some of the reasons MLPs choose to issue equity through private placements:
Effective Acquisition Funding Vehicle. MLPs typically distribute all of their available cash at the end of each quarter, and therefore generally finance acquisitions through the issuance of additional equity and debt securities. PIPEs allow MLPs to structure the equity funding to close concurrently with an acquisition, thereby eliminating or reducing the equity funding risk. This avoids equity overhang issues (discussed below) and can ease rating agency concerns over interim excessive leverage associated with an acquisition.
Eliminates or Reduces Equity Overhang Issues. Generally an MLPs unit price declines when investors know the MLP will be issuing public equity in the near term. An example of this is when an MLP closes a sizeable acquisition funded under its credit facility or with another form of debt financing. In this situation, equity investors will typically wait for the public offering to provide additional liquidity, and therefore the demand for units is reduced, and the unit price falls. Issuing units through a PIPE in conjunction with the acquisition eliminates this equity overhang.
Broadens Investor Base. Public equity offerings for MLPs are typically allocated primarily to retail investors. Private placements allow issuers to access new pools of equity capital. In addition, institutional investors, such as the Fund, that participate in PIPEs are potential investors for future equity financings.
Greater Structural Flexibility. Certain acquisitions and organic development projects require a more structured form of equity. For example, organic projects that require significant capital expenditures that do not generate near-term cash flow may require a class of equity that does not pay a distribution for a certain period. The public equity market is generally not an efficient venue to raise this type of specialized equity. Given the significant number of organic projects that have been announced by MLPs, the private placement of PIPEs are believed by the Investment Adviser to be likely to remain an important funding component in the MLP sector.
Avoided Cost and Uncertainty of Public Equity Issuance. Some issuers prefer the certainty of a private placement at a specified fixed discount, compared to the uncertainty of a public offering. The underwriting costs of a public equity issuance in the MLP space can significantly reduce gross equity proceeds, and the unit price of the issuance can decline during the marketing of a public deal, resulting in increased cost to an issuer. The cost of a PIPE can be competitive with that of a public issuance while providing greater certainty of funding.
39
More Expedient Process with Limited Marketing Requirements. Unlike public equity offerings, private placements are typically more time efficient for management teams, with negotiations, due diligence and marketing required only for a small targeted group of sophisticated institutional investors.
Monetizations. Financial sponsors, founding partners and/or parent companies typically own significant stakes in MLPs in the form of subordinated units. As these units are not registered, monetization alternatives are limited. PIPEs provide liquidity in these situations.
Many MLPs rely on the private placement market as a source of equity capital. Given the limitations in raising equity from a predominantly retail investor base and the tax and administrative constraints to significant institutional participation, PIPEs have been a popular financing alternative with many MLPs.
MLP Debt Securities. Debt securities issued by MLPs may include those rated below investment grade (that is, rated Ba or lower by Moodys, BB+ or lower by S&P or comparably rated by another NRSRO, or, if unrated, determined by the Investment Adviser to be of comparable credit quality). These securities are commonly called high yield or junk bonds. The Fund may invest up to 20% of its Managed Assets in below investment grade debt securities. The Fund may invest in MLP debt securities without regard to credit quality or maturity. Investments in such securities may not offer the tax characteristics of equity securities of MLPs.
Non-MLP Equity Securities. The Fund may invest in equity securities, including common or ordinary stocks, ADRs, GGDRs, EDRs, preferred stock, convertible securities, investment companies (including other mutual funds or ETFs), and rights and warrants.
Non-MLP Debt Securities. The Fund may invest in debt securities of other issuers, including debt securities rated below investment grade (that is, rated Ba or lower by Moodys, BB+ or lower by S&P or comparably rated by another NRSRO, or, if unrated, determined by the Investment Adviser to be of comparable credit quality). These securities are commonly called high yield or junk bonds. The Fund may invest in debt securities without regard for their maturity.
Derivatives. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to individual debt or equity instruments, interest rates, currencies or currency exchange rates and related indexes. The Fund may invest up to 25% of its Managed Assets in derivative instruments including without limitation, options, futures, options on futures, forwards, swaps, options on swaps, structured securities and other derivatives for both hedging and nonhedging purposes (that is, to seek to increase total return), although suitable derivative instruments may not always be available to the Investment Adviser for these purposes for investment. To the extent that the security or index underlying the derivative or synthetic instrument is or is composed of MLP investments, the Fund will include such derivative and synthetic instruments for the purposes of the Funds 80% policy.
Greenfield Projects. Greenfield projects are energy-related projects built by private joint ventures formed by energy companies. Greenfield projects may include the creation of a new pipeline, processing plant or storage facility or other energy infrastructure asset that is integrated with the companys existing assets. The Fund may invest in the equity of greenfield projects and also may invest in the secured debt of greenfield projects. However, an investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends until construction is completed, at which time interest payments or dividends would be paid in cash. The Investment Adviser believes that this niche leverages the organizational and operating expertise of large, publicly traded companies and provides the Fund with the opportunity to earn higher returns. Greenfield projects involve less investment risk than typical private equity financing arrangements. The primary risk involved with greenfield projects is execution risk or construction risk. Changing project requirements, elevated costs for labor and materials, and unexpected construction hurdles all can increase construction costs. Financing risk exists should changes in construction costs or financial markets occur. Regulatory risk exists should changes in regulation occur during construction or the necessary permits are not secured prior to beginning construction.
40
Income Trusts. The Fund may invest in income trusts, including business trusts and royalty trusts. Income trusts are operating businesses that have been put into a trust. They pay out the bulk of their free cash flow to unit holders. The businesses that are sold into these trusts are usually mature and stable income-producing companies that lend themselves to fixed (monthly or quarterly) distributions. These trusts are regarded as equity investments with fixed-income attributes or high-yield debt with no fixed maturity date. These trusts typically offer regular income payments and a significant premium yield compared to other types of fixed income investments.
Business Trusts. A business trust is an income trust where the principal business of the underlying corporation or other entity is in the manufacturing, service or general industrial sectors. It is anticipated that the number of businesses constituted or reorganized as income trusts will increase significantly in the future. Conversion to the income trust structure is attractive to many existing mature businesses with relatively high, stable cash flows and low capital expenditure requirements, due to tax efficiency and investor demand for high-yielding equity securities. One of the primary attractions of business trusts, in addition to their relatively high yield, is their ability to enhance diversification in the portfolio as they cover a broad range of industries and geographies, including public refrigerated warehousing, mining, coal distribution, sugar distribution, forest products, retail sales, food sales and processing, chemical recovery and processing, data processing, gas marketing and check printing. Each business represented is typically characterized by long life assets or businesses that have exhibited a high degree of stability. Investments in business trusts are subject to various risks, including risks related to the underlying operating companies controlled by such trusts. These risks may include lack of or limited operating histories and increased susceptibility to interest rate risks.
Royalty Trusts. A royalty trust typically controls an operating company which purchases oil and gas properties using the trusts capital. The royalty trust then receives royalties and/or interest payments from its operating company, and distributes them as income to its unit holders. Units of the royalty trust represent an economic interest in the underlying assets of the trust. The Fund may invest in royalty trusts that are traded on stock exchanges. Royalty trusts are income trusts that own or control oil and gas operating companies. Royalty trusts pay out substantially all of the cash flow they receive from the production and sale of underlying crude oil and natural gas reserves to shareholders (unitholders) in the form of monthly dividends (distributions). As a result of distributing the bulk of their cash flow to unitholders, royalty trusts are effectively precluded from internally originating new oil and gas prospects. Therefore, these royalty trusts typically grow through acquisition of producing companies or those with proven reserves of oil and gas, funded through the issuance of additional equity or, where the trust is able, additional debt. Consequently, royalty trusts are considered less exposed to the uncertainties faced by a traditional exploration and production corporation. However, they are still exposed to commodity risk and reserve risk, as well as operating risk.
The operations and financial condition of royalty trusts, and the amount of distributions or dividends paid on their securities is dependent on oil and gas prices. Prices for commodities vary and are determined by supply and demand factors, including weather, and general economic and political conditions. A decline in oil or gas prices could have a substantial adverse effect on the operations and financial conditions of the trusts. Such trusts are also subject to the risk of an adverse change in the regulations of the natural resource industry and other operational risks relating to the energy sector. In addition, the underlying operating companies held or controlled by the trusts are usually involved in oil exploration; however, such companies may not be successful in holding, discovering, or exploiting adequate commercial quantities of oil, the failure of which will adversely affect their values. Even if successful, oil and gas prices have fluctuated widely during the most recent years and may continue to do so in the future. The Investment Adviser expects that the combination of global demand growth and depleting reserves, together with current geopolitical instability, will continue to support strong crude oil prices over the long term. However, recently, gas prices have been declining. Declining crude oil prices may cause the Fund to incur losses on its investments in royalty trusts. In addition, the demand in and supply to the developing markets could be affected by other factors such as restrictions on imports, increased taxation, and creation of government monopolies, as well as social, economic and political uncertainty and instability. Furthermore, there is no guarantee that non-conventional sources of natural gas will not be discovered which would adversely affect the oil industry.
41
Moreover, as the underlying oil and gas reserves are produced the remaining reserves attributable to the royalty trust are depleted. The ability of a royalty trust to replace reserves is therefore fundamental to its ability to maintain distribution levels and unit prices over time. Certain royalty trusts have demonstrated consistent positive reserve growth year-over-year and, as such, certain royalty trusts have been successful to date in this respect and are thus currently trading at unit prices significantly higher than those of five or ten years ago. Royalty trusts manage reserve depletion through reserve additions resulting from internal capital development activities and through acquisitions. When the Fund invests in foreign royalty trusts, it will also be subject to foreign securities risks.
Convertible Securities. The Fund may invest in convertible securities. Convertible securities are preferred stock or debt obligations that are convertible into common stock or other securities. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. Convertible securities in which the Fund invests are subject to the same rating criteria as its other investments in fixed income securities. Convertible securities have both equity and fixed income risk characteristics. Like all fixed income securities, the value of convertible securities is susceptible to the risk of market losses attributable to changes in interest rates. Generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. However, when the market price of the common stock or other security underlying a convertible security exceeds the conversion price of the convertible security, the convertible security tends to reflect the market price of the underlying common stock or other security. As the market price of the underlying common stock or other security declines, the convertible security, like a fixed income security, tends to trade increasingly on a yield basis, and thus may not decline in price to the same extent as the underlying common stock or other security.
Structured Securities. The Fund may invest in structured securities. Structured securities are securities whose value is determined by reference to changes in the value of specific currencies, securities, interest rates, commodities, indices or other financial indicators (the Reference) or the relative change in two or more References. Investments in structured securities may provide exposure to certain securities or markets in situations where regulatory or other restrictions prevent direct investments in such issuers or markets.
The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference, effectively leveraging the Funds investment so that small changes in the value of the Reference may result in disproportionate gains or losses to the Fund. Consequently, structured securities may present a greater degree of market risk than many types of securities and may be more volatile, less liquid and more difficult to price accurately than less complex securities. Structured securities are also subject to the risk that the issuer of the structured securities may fail to perform its contractual obligations. Certain issuers of structured products may be deemed to be investment companies as defined in the 1940 Act. As a result, the Funds investments in structured securities may be subject to the limits applicable to investments in other investment companies.
Structured securities include, but are not limited to, equity linked notes. An equity linked note is a note whose performance is tied to a single stock, a stock index or a basket of stocks. Equity linked notes combine the principal protection normally associated with fixed income investments with the potential for capital appreciation normally associated with equity investments. Upon the maturity of the note, the holder generally receives a return of principal based on the capital appreciation of the linked securities. Depending on the terms of the note, equity linked notes may also have a cap or floor on the maximum principal amount to be repaid to holders, irrespective of the performance of the underlying linked securities. For example, a note may guarantee the repayment of the original principal amount invested (even if the underlying linked securities have negative performance during the notes term), but may cap the maximum payment at maturity at a certain percentage of the issuance price or the return of the underlying linked securities. Alternatively, the note may not guarantee a full return on the original principal, but may offer a greater participation in any capital appreciation of the
42
underlying linked securities. The terms of an equity linked note may also provide for periodic interest payments to holders at either a fixed or floating rate. The secondary market for equity linked notes may be limited, and the lack of liquidity in the secondary market may make these securities difficult to dispose of and to value. Equity linked notes will be considered equity securities for purposes of the Funds investment objective and policies.
Foreign Securities. The Fund may invest up to 20% of its Managed Assets in securities of foreign issuers, including securities quoted or denominated in a currency other than U.S. dollars. Investments in foreign securities may offer potential benefits not available from investments solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits may include the opportunity to invest in foreign issuers that appear, in the opinion of the Investment Adviser, to offer the potential for better long term growth of capital and income than investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business cycles different from those of the United States and the opportunity to reduce fluctuations in portfolio value by taking advantage of foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign issuers also involves, however, certain special risks, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers. Many of these risks are more pronounced for investments in emerging economies.
With respect to investments in certain foreign countries, there exist certain economic, political and social risks, including the risk of adverse political developments, nationalization, military unrest, social instability, war and terrorism, confiscation without fair compensation, expropriation or confiscatory taxation, limitations on the movement of funds and other assets between different countries, or diplomatic developments, any of which could adversely affect the Funds investments in those countries. Governments in certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on market prices of securities and dividend payments.
Many countries throughout the world are dependent on a healthy U.S. economy and are adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily dependent on international trade and are adversely affected by protective trade barriers and economic conditions of their trading partners. Protectionist trade legislation enacted by those trading partners could have a significant adverse effect on the securities markets of those countries. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position.
Investments in foreign securities often involve currencies of foreign countries. Accordingly, the Fund may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and may incur costs in connection with conversions between various currencies. The Fund may be subject to currency exposure independent of its securities positions. To the extent that the Fund is invested in foreign securities while also maintaining net currency positions, it may be exposed to greater combined risk. Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also 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 in the United States or abroad.
Because foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than about a U.S. company. Volume and liquidity in most foreign securities markets are less than in the United States and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. The securities of foreign issuers may be listed on foreign securities exchanges or traded in foreign OTC markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted
43
companies than in the United States, and the legal remedies for investors may be more limited than the remedies available in the United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that apply with respect to securities transactions consummated in the United States.
Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when some of the Funds assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract to sell the securities, in possible liability to the purchaser.
The Fund may invest in foreign securities which take the form of sponsored and unsponsored ADRs, GDRs, EDRs or other similar instruments representing securities of foreign issuers (together, Depositary Receipts). ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded on domestic exchanges or in the U.S. OTC market and, generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security. To the extent the Fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of the security underlying the Depositary Receipts to issue and service such unsponsored Depositary Receipts, there is an increased possibility that the Fund will not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks inherent in investing in securities of non-U.S. issuers. The market value of Depositary Receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the underlying securities are quoted. However, by investing in Depositary Receipts, such as ADRs, which are quoted in U.S. dollars, the Fund may avoid currency risks during the settlement period for purchases and sales.
The Fund may invest in countries with emerging economies or securities markets. Political and economic structures in many of such countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of such countries have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. See Description of Investment Securities and PracticesInvesting in Emerging Countries in the Statement of Additional Information.
Private Company Investments. The Fund may invest a portion of its assets in investments in a limited number of private company investments that the Fund may need to hold for several years. The Fund may invest in equity securities or debt securities, including debt securities issued with warrants to purchase equity securities or that are convertible into equity securities, of private companies. The Funds private company investments may include investments in entities formed to own and operate particular energy infrastructure assets.
Pre-IPO Investments. The Fund may invest a portion of its assets in shares of companies that it believes are likely to issue securities in IPOs. Although there is a potential the pre-IPO securities that the Fund buys may increase in value if the company does issue securities in an IPO, IPOs are risky and volatile and may cause the value of the Funds investments to decrease significantly. Also, because securities of pre-IPO companies are generally not freely or publicly tradeable, the Fund may not have access to purchase securities in these companies in the amounts or at the prices the Fund desires. Securities issued by these privately-held companies have no trading history, and information about such companies may be available for very limited periods. The companies that the Fund anticipates holding successful IPOs may not ever issues shares in an IPO and a liquid market for their securities may
44
never develop, which may negatively affect the price at which the Fund can sell any such securities and make it more difficult to sell such securities, which could also adversely affect the Funds liquidity.
Initial Public Offerings. The Fund may invest a portion of its assets in shares of IPOs, if consistent with the Funds investment objective and policies. IPOs may have a magnified impact on the performance of a fund with a small asset base. The impact of IPOs on a funds performance likely will decrease as such funds asset size increases, which could reduce such funds returns. IPOs may not be consistently available to the Fund for investing. IPO shares frequently are volatile in price due to the absence of a prior public market, the small number of shares available for trading and limited information about the issuer. Therefore, the Fund may hold IPO shares for a very short period of time. This may increase turnover and may lead to increased expenses, such as commissions and transaction costs all of which will be borne indirectly by the common shareholder. In addition, IPO shares can experience an immediate drop in value if the demand for the securities does not continue to support the offering price.
Options on Securities and Securities Indices. A put option gives the purchaser of the option the right to sell, and the writer (seller) of the option the obligation to buy, the underlying instrument during the option period. A call option gives the purchaser of the option the right to buy, and the writer (seller) of the option the obligation to sell, the underlying instrument during the option period. The Fund may write (sell) covered call and put options and purchase put and call options on any securities in which the Fund may invest or on any securities index consisting of securities in which it may invest.
The writing and purchase of options is a highly specialized activity which involves special investment risks. Options may be used for either hedging or cross-hedging purposes, or to seek to increase total return (which presents additional risk). The successful use of options depends in part on the ability of the Investment Adviser to anticipate future price fluctuations and the degree of correlation between the options and securities markets. If the Investment Adviser is incorrect in its expectation of changes in market prices or determination of the correlation between the instruments or indices on which options are written and purchased and the instruments in the Funds investment portfolio, the Fund may incur losses that it would not otherwise incur. The use of options can also increase the Funds transaction costs. Options written or purchased by the Fund may be traded on either U.S. or foreign exchanges or OTC. Foreign and OTC options will present greater possibility of loss because of their greater illiquidity and credit risks.
In lieu of entering into protective put transactions, the Fund may engage in barrier options transactions as an alternative means to offset or hedge against a decline in the market value of the Funds securities. Barrier options are similar to standard options except that they become activated or are extinguished when the underlying asset reaches a predetermined level or barrier. Down and out barrier options are canceled or knocked out if the underlying asset falls to a pre-determined level. Down and in barrier options are activated or knocked in if the underlying asset falls to a pre-determined level. Up and out barrier options are extinguished or knocked out if the underlying asset rises to a predetermined level. Up and in barrier options are activated or knocked in if the underlying asset rises to a predetermined level. If the Investment Adviser sets too high or too low a barrier, and the option is either extinguished or knocked out or the options are never activated or knocked in, the benefits to the Fund of using a barrier option strategy may be limited and the costs associated with a barrier option strategy could be detrimental to the Funds performance. When writing an option, the Fund must set aside liquid assets, or engage in other appropriate measures to cover its obligation under the option contract.
Futures Contracts and Options and Swaps on Futures Contracts. Futures contracts are standardized, exchange-traded contracts that provide for the sale or purchase of a specified financial instrument or currency at a future time at a specified price. An option on a futures contract gives the purchaser the right (and the writer of the option the obligation) to assume a position in a futures contract at a specified exercise price within a specified period of time. A swap on a futures contract provides an investor with the ability to gain economic exposure to a particular futures market; however, unlike a futures contract that is exchange-traded, a swap on a futures contract is an OTC transaction. A futures contract may be based on particular securities, foreign currencies, securities indices and other financial instruments and indices. The Fund may engage in futures transactions on both U.S. and foreign exchanges.
45
The Fund may purchase and sell futures contracts, purchase and write call and put options on futures contracts and enter into swaps on futures contracts, in order to seek to increase total return or to hedge against changes in interest rates, securities prices or currency exchange rates, or to otherwise manage its term structure, sector selections and duration in accordance with its investment objective and policies. The Fund may also enter into closing purchase and sale transactions with respect to such contracts and options. The Investment Adviser has claimed an exclusion with respect to the Fund from the definition of the term commodity pool operator under the CEA and, therefore, is not currently subject to registration or regulation as a pool operator under that CEA with respect to the Fund.
Futures contracts and related options and swaps present the following risks:
|
While the Fund may benefit from the use of futures and options and swaps on futures, unanticipated changes in interest rates, securities prices or currency exchange rates may result in poorer overall performance than if the Fund had not entered into any futures contracts, options transactions or swaps. |
|
Because perfect correlation between a futures position and a portfolio position that is intended to be protected is impossible to achieve, the desired protection may not be obtained and the Fund may be exposed to additional risk of loss. |
|
The loss incurred by the Fund in entering into futures contracts and in writing call options and entering into swaps on futures is potentially unlimited and may exceed the amount of the premium received. |
|
Futures markets are highly volatile and the use of futures may increase the volatility of the Funds NAV. |
|
As a result of the low margin deposits normally required in futures trading, a relatively small price movement in a futures contract may result in substantial losses to the Fund. |
|
Futures contracts and options and swaps on futures may be illiquid, and exchanges may limit fluctuations in futures contract prices during a single day. |
|
Foreign exchanges may not provide the same protection as U.S. exchanges. |
Forward Contracts
Forward contracts involve the purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the current or spot price, with delivery and settlement at a specified future date.
Because it is a completed contract, a purchase forward contract can be a cover for the sale of a futures contract. The Fund may enter into forward contracts for hedging purposes and non-hedging purposes (i.e., to increase returns). Forward contracts may be used by the Fund for hedging purposes to protect against uncertainty in the level of future foreign currency exchange rates, such as when the Fund anticipates purchasing or selling a foreign security. For example, this technique would allow the Fund to lock in the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of the Funds existing holdings of foreign securities. There may be, however, an imperfect correlation between the Funds foreign securities holdings and the forward contracts entered into with respect to those holdings. Forward contracts may also be used for nonhedging purposes to pursue the Funds investment objective, such as when the Funds Investment Adviser anticipates that particular foreign currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the Funds portfolio. There is no requirement that the Fund hedge all or any portion of its exposure to foreign currency risks.
Forward contracts and options thereon, unlike futures contracts, are not traded on exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and cash trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can
46
experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can occur in any market traded by the Investment Adviser due to unusually high trading volume, political intervention or other factors. Arrangements to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if such arrangements were made with numerous counterparties. The imposition of controls by governmental authorities might also limit such forward (and futures) trading to less than that which the Investment Adviser would otherwise recommend, to the possible detriment of the Fund. Market illiquidity or disruption could result in major losses to the Fund. In addition, the Fund will be exposed to credit risks with regard to counterparties with which it trades as well as risks relating to settlement default. Such risks could result in substantial losses to the Fund.
Equity Swaps and Index Swaps
The Fund may invest in equity swaps and index swaps. Equity swaps allow the parties to a swap agreement to exchange the dividend income or other components of return on an equity investment (for example, a group of equity securities or an index) for another payment stream. An equity swap may be used by the Fund to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment may be restricted for legal reasons or is otherwise deemed impractical or disadvantageous. Index swaps allow the Fund to receive one or more payments based off of the return, performance or volatility of an index or of certain securities which comprise the index.
The value of swaps can be very volatile. To the extent that the Investment Adviser does not accurately analyze and predict the potential relative fluctuation of the components swapped with another party, or the creditworthiness of the counterparty, the Fund may suffer a loss, which may be substantial. The value of some components of a swap (such as the dividends on a common stock) may also be sensitive to changes in interest rates. Furthermore, swaps may be illiquid, and the Fund may be unable to terminate its obligations when desired.
Currently, certain standardized swap transactions are subject to mandatory central clearing. Although central clearing is expected to decrease counterparty risk and increase liquidity compared to bilaterally negotiated swaps, central clearing does not eliminate counterparty risk or illiquidity risk entirely.
In the case of swaps that do not cash settle, for example, the Fund must set aside liquid assets equal to the full notional amount of the swaps while the positions are open. With respect to swaps that are required to cash settle, however, the Fund may set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e. the Funds daily net liability) under the swaps, if any, rather than their full notional amount. The Fund reserves the right to modify its asset segregation policies in the future in its discretion. By setting aside assets equal to only its net obligations under cash settled swaps, the Fund will have the ability to employ leverage to a greater extent than if the Fund were required to segregate assets equal to the full notional amount of the swaps.
Interest Rate Swaps, Credit Swaps, Total Return Swaps, Options on Swaps and Interest Rate Caps, Floors and Collars
The Fund may enter into swap transactions and option agreements, including interest rate caps, floors and collars. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed-rate payments for floating rate payments. Credit swaps involve the receipt of floating or fixed rate payments in exchange for assuming potential credit losses on an underlying security. Credit swaps give one party to a transaction (the buyer of the credit swap) the right to dispose of or acquire an asset (or group of assets), or the right to receive a payment from the other party, upon the occurrence of specified credit events. Total return swaps give the Fund the right to receive the appreciation in the
47
value of a specified security, index or other instrument in return for a fee paid to the counterparty, which will typically be based on an agreed upon interest rate. If the underlying asset in a total return swap declines in value over the term of the swap, the Fund may also be required to pay the dollar value of that decline to the counterparty. The Fund may also purchase and write (sell) options contracts on swaps, commonly referred to as swaptions. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into an underlying swap or to modify the terms of an existing swap on agreed-upon terms.
The seller of a swaption, in exchange for the premium, becomes obligated (if the option is exercised) to enter into or modify an underlying swap on agreed-upon terms, which generally entails a greater risk of loss than the Fund incurs in buying a swaption.
The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates.
The Fund may enter into the transactions described above for hedging purposes or to seek to increase total return. As an example, when the Fund is the buyer of a credit default swap (commonly known as buying protection), it may make periodic payments to the seller of the credit default swap to obtain protection against a credit default on a specified underlying asset (or group of assets). If a default occurs, the seller of a credit default swap may be required to pay the Fund the notional value of the credit default swap on a specified security (or group of securities). On the other hand, when the Fund is a seller of a credit default swap (commonly known as selling protection), in addition to the credit exposure the Fund has on the other assets held in its portfolio, the Fund is also subject to the credit exposure on the notional amount of the swap since, in the event of a credit default, the Fund may be required to pay the notional value of the credit default swap on a specified security (or group of securities) to the buyer of the credit default swap.
The use of interest rate, credit and total return swaps, options on swaps, and interest rate caps, floors and collars is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Investment Adviser is incorrect in its forecasts of market values and interest rates, or in its evaluation of the creditworthiness of swap counterparties (with respect to bilateral swap transactions) and the issuers of the underlying assets, the investment performance of the Fund would be less favorable than it would have been if these investment techniques were not used.
Currently, certain standardized swap transactions are subject to mandatory central clearing. Although central clearing is expected to decrease counterparty risk and increase liquidity compared to bilaterally negotiated swaps, central clearing does not eliminate counterparty risk or illiquidity risk entirely.
The Fund may be required to set aside liquid assets, or engage in other SEC approved measures to cover open swap positions. In the case of futures contracts that do not cash settle, for example, the Fund must set aside liquid assets equal to the full notional amount of the futures contracts while the positions are open. With respect to futures contracts that do cash settle, however, the Fund may set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e., the Funds daily net liability) under the futures contracts, if any, rather than their full notional amount. In the case of swaps that do not cash settle, for example, the Fund must set aside liquid assets equal to the full notional amount of the swaps while the positions are open. With respect to swaps that are required to cash settle, however, the Fund may set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e., the Funds daily net liability) under the swaps, if any, rather than their full notional amount. The Fund reserves the right to modify its asset segregation policies in the future in its discretion. By setting aside assets equal to only its net obligations under cash settled swaps, the Fund
48
will have the ability to employ leverage to a greater extent than if the Fund were required to segregate assets equal to the full notional amount of the swaps.
When-Issued Securities and Forward Commitments
The Fund may purchase when-issued securities and make contracts to purchase or sell securities for a fixed price at a future date beyond customary settlement time. When-issued securities are securities that have been authorized, but not yet issued. When-issued securities are purchased in order to secure what is considered to be an advantageous price or yield to the Fund at the time of entering into the transaction. A forward commitment involves entering into a contract to purchase or sell securities for a fixed price at a future date beyond the customary settlement period.
The purchase of securities on a when-issued or forward commitment basis involves a risk of loss if the value of the security to be purchased declines before the settlement date. Conversely, the sale of securities on a forward commitment basis involves the risk that the value of the securities sold may increase before the settlement date.
Although the Fund will generally purchase securities on a when-issued or forward commitment basis with the intention of acquiring the securities for its portfolio, the Fund may dispose of when-issued securities or forward commitments prior to settlement if the Investment Adviser deems it appropriate. When purchasing a security on a when-issued basis or entering into a forward commitment, the Fund must identify on its books liquid assets, or engage in other appropriate measures to cover its obligations.
Repurchase Agreements
Repurchase agreements involve the purchase of securities subject to the sellers agreement to repurchase them at a mutually agreed upon date and price. The Fund may enter into repurchase agreements with eligible counterparties which furnish collateral at least equal in value or market price to the amount of their repurchase obligation. The collateral may consist of any type of security in which the Fund is eligible to invest directly. Repurchase agreements involving obligations other than U.S. Government Securities may be subject to special risks and may not have the benefit of certain protections in the event of the counterpartys insolvency.
If the other party or seller defaults, the Fund might suffer a loss to the extent that the proceeds from the sale of the underlying securities and other collateral held by the Fund are less than the repurchase price and the Funds costs associated with delay and enforcement of the repurchase agreement. In addition, in the event of bankruptcy of the seller, the Fund could suffer additional losses if a court determines that the Funds interest in the collateral is not enforceable.
The Fund, together with other registered investment companies having advisory agreements with the Investment Adviser or any of its affiliates, may transfer uninvested cash balances into a single joint account, the daily aggregate balance of which will be invested in one or more repurchase agreements.
Reverse Repurchase Agreements
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement by the Fund to repurchase the securities at a mutually agreed upon date and price (including interest). Reverse repurchase agreements may be entered into when the Investment Adviser expects that the return to be earned from the investment of the transaction proceeds will be greater than the related interest expense. Reverse repurchase agreements involve leveraging. If the securities held by the Fund decline in value while these transactions are outstanding, the NAV of the Funds outstanding shares will decline in value proportionately more than the decline in value of the securities. In addition, reverse repurchase agreements involve the risk that the investment return earned by the Fund (from the investment of the proceeds) will be less than the interest expense of the transaction, that the market value of the securities sold by the Fund will decline below the price the Fund is obligated to pay to repurchase the securities, and that the securities may not be returned to the Fund.
49
The Fund may set aside liquid assets, or engage in other appropriate measures to cover its obligations with respect to its transactions in reverse repurchase agreements. As a result of such segregation, the Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act and the Funds use of leverage through reverse repurchase agreements will not be limited by the 1940 Act. The Funds use of leverage through reverse repurchase agreements may be limited by the availability of cash or liquid securities to earmark or segregate in connection with such transactions.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Funds obligation to repurchase the securities, and the Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
With respect to any reverse repurchase agreement or similar transaction, the Funds Managed Assets shall include any proceeds from the sale of an asset of the Fund to a counterparty in such a transaction, in addition to the value of the underlying asset as of the relevant measuring date.
REITs
The Fund may invest in REITs. REITs are pooled investment vehicles that invest primarily in either real estate or real estate related loans. The value of a REIT is affected by changes in the value of the properties owned by the REIT or securing mortgage loans held by the REIT. REITs are dependent upon the ability of the REITs managers, and are subject to heavy cash flow dependency, default by borrowers and the qualification of the REITs under applicable regulatory requirements for favorable income tax treatment. REITs are also subject to risks generally associated with investments in real estate including possible declines in the value of real estate, general and local economic conditions, environmental problems and changes in interest rates. To the extent that assets underlying a REIT are concentrated geographically, by property type or in certain other respects, these risks may be heightened. The Fund will indirectly bear its proportionate share of any expenses, including management fees, paid by a REIT in which it invests.
Short Sales
The Fund may engage in short sales. Short sales are transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. There will also be other costs associated with short sales.
The Fund may use short sales, consistent with its investment objective, to gain exposure to the MLP market in various circumstances, including among others when the Investment Adviser determines that a specific MLP investment may be facing deteriorating fundamentals that could result in lower growth or the potential for lower distributions.
The Fund will incur a loss, which may be unlimited, as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Fund may be required to pay in connection with a short sale, and will be also decreased by any transaction or other costs.
50
Until the Fund replaces a borrowed security in connection with a short sale, the Fund will (a) segregate cash or liquid assets at such a level that the segregated assets plus any amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover its short position in accordance with applicable law.
There is no guarantee that the Fund will be able to close out a short position at any particular time or at an acceptable price. During the time that the Fund is short a security, it is subject to the risk that the lender of the security will terminate the loan at a time when the Fund is unable to borrow the same security from another lender. If that occurs, the Fund may be bought in at the price required to purchase the security needed to close out the short position, which may be a disadvantageous price.
Short Sales Against the Box
The Fund may engage in short sales against the box. As noted above, a short sale is made by selling a security the seller does not own. A short sale is against the box to the extent that the seller contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. The Fund may enter into a short sale against the box, for example, to lock in a sales price for a security the Fund does not wish to sell immediately. If the Fund sells securities short against the box, it may protect itself from loss if the price of the securities declines in the future, but will lose the opportunity to profit on such securities if the price rises. If the Fund effects a short sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize that gain as if it had actually sold the securities (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which the Fund may effect short sales.
Preferred Stock, Warrants and Stock Purchase Rights
The Fund may invest in preferred stock, warrants and stock purchase rights (or rights). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the issuers earnings and assets before common stock owners but after bond owners. Unlike debt securities, the obligations of an issuer of preferred stock, including dividend and other payment obligations, may not typically be accelerated by the holders of such preferred stock on the occurrence of an event of default or other non-compliance by the issuer of the preferred stock.
Other Investment Companies
The Fund may invest in securities of other investment companies, including ETFs, subject to statutory limitations prescribed by the 1940 Act. These limitations include in certain circumstances a prohibition on the Fund acquiring more than 3% of the voting shares of any other investment company, and a prohibition on investing more than 5% of the Funds total assets in securities of any one investment company or more than 10% of its total assets in securities of all investment companies. Many ETFs, however, have obtained exemptive relief from the SEC to permit unaffiliated funds to invest in the ETFs shares beyond these statutory limitations, subject to certain conditions and pursuant to a contractual arrangement between the ETFs and the investing funds. The Fund may rely on these exemptive orders to invest in unaffiliated ETFs.
The use of ETFs is intended to help the Fund match the total return of the particular market segments or indices represented by those ETFs, although that may not be the result. Most ETFs are passively-managed investment companies whose shares are purchased and sold on a securities exchange. An ETF represents a portfolio of securities designed to track a particular market segment or index. An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange-traded) that has the same investment objectives, strategies and policies. In addition, an ETF may fail to accurately track
51
the market segment or index that underlies its investment objective. The price of an ETF can fluctuate, and the Fund could lose money investing in an ETF. Moreover, ETFs are subject to the following risks that do not apply to conventional open- end funds: (i) the market price of the ETFs shares may trade at a premium or a discount to their NAV; (ii) an active trading market for an ETFs shares may not develop or be maintained; and (iii) there is no assurance that the requirements of the exchange necessary to maintain the listing of an ETF will continue to be met or remain unchanged.
Under an exemptive rule adopted by the SEC, the Fund may invest in certain other investment companies and money market funds beyond the statutory limits described above.
The Fund will indirectly bear its proportionate share of any management fees and other expenses paid by such other investment companies, in addition to the fees and expenses regularly borne by the Fund.
ETNs
ETNs are a type of senior, unsecured, unsubordinated debt security issued by financial institutions that combines both aspects of bonds and ETFs. An ETNs returns are based on the performance of a market index 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 ETNs maturity, at which time the issuer is obligated to pay a return linked to the performance of the market index to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments and principal is not protected. ETNs are subject to credit risk and the value of an ETN may drop due to a downgrade in the issuers credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in applicable interest rates, changes in the issuers credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When the Fund invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. The Funds decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN.
Unseasoned Companies
The Fund may invest in companies which (together with their predecessors) have operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in unseasoned companies are more speculative and entail greater risk than investments in companies with an established operating record.
Corporate Debt Obligations
Corporate debt obligations include bonds, notes, debentures, commercial paper and other obligations of corporations to pay interest and repay principal. The Fund may invest in corporate debt obligations issued by U.S. and certain non-U.S. issuers, which issue securities denominated in the U.S. dollar (including Yankee and Euro obligations as well as other non-U.S. dollar currencies). In addition to obligations of corporations, corporate debt obligations include securities issued by banks and other financial institutions and supranational entities (i.e., the World Bank, the International Monetary Fund, etc.).
Bank Obligations
The Fund may invest in obligations issued or guaranteed by U.S. or foreign banks. Bank obligations, including without limitation, time deposits, bankers acceptances and certificates of deposit, may be general obligations of the parent bank or may be limited to the issuing branch by the terms of the specific obligations or by government regulations. Banks are subject to extensive but different governmental regulations which may
52
limit both the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry.
U.S. Government Securities
The Fund may invest in U.S. Government Securities. U.S. Government Securities include U.S. Treasury obligations and obligations issued or guaranteed by U.S. government agencies, instrumentalities or sponsored enterprises. U.S. Government Securities may be supported by (i) the full faith and credit of the U.S. Treasury; (ii) the right of the issuer to borrow from the U.S. Treasury; (iii) the discretionary authority of the U.S. government to purchase certain obligations of the issuer; or (iv) only the credit of the issuer. U.S. Government Securities also include Treasury receipts, zero coupon bonds and other stripped U.S. Government Securities, where the interest and principal components are traded independently. U.S. Government Securities may also include Treasury inflation-protected securities whose principal value is periodically adjusted according to the rate of inflation.
U.S. Government Securities are deemed to include (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government, its agencies, authorities or instrumentalities; and (ii) participations in loans made to foreign governments or their agencies that are so guaranteed. Certain of these participations may be regarded as illiquid.
U.S. Government Securities have historically involved little risk of loss of principal if held to maturity. However, no assurance can be given that the U.S. government will be able or willing to repay the principal or interest when due, or will provide financial support to U.S. government agencies, authorities, instrumentalities or sponsored enterprises if it is not obligated to do so by law.
Custodial Receipts and Trust Certificates
The Fund may invest in custodial receipts and trust certificates representing interests in securities held by a custodian or trustee. The securities so held may include U.S. Government Securities or other types of securities in which the Fund may invest. The custodial receipts or trust certificates may evidence ownership of future interest payments, principal payments or both on the underlying securities, or, in some cases, the payment obligation of a third party that has entered into an interest rate swap or other arrangement with the custodian or trustee. For certain securities laws purposes, custodial receipts and trust certificates may not be considered obligations of the U.S. government or other issuer of the securities held by the custodian or trustee. If for tax purposes the Fund is not considered to be the owner of the underlying securities held in the custodial or trust account, the Fund may suffer adverse tax consequences. As a holder of custodial receipts and trust certificates, the Fund will bear its proportionate share of the fees and expenses charged to the custodial account or trust. The Fund may also invest in separately issued interests in custodial receipts and trust certificates.
Non-Investment Grade Securities
Non-investment grade securities and unrated securities of comparable credit quality (commonly referred to as junk bonds) are considered speculative. In some cases, these obligations may be highly speculative and have poor prospects for reaching investment grade standing. Non-investment grade securities are subject to the increased risk of an issuers inability to meet principal and interest obligations. These securities, also referred to as high yield securities, may be subject to greater price volatility due to such factors as specific corporate or municipal developments, interest rate sensitivity, negative perceptions of the junk bond markets generally and less secondary market liquidity.
Non-investment grade securities are often issued in connection with a corporate reorganization or restructuring or as part of a merger, acquisition, takeover or similar event. They are also issued by less
53
established companies seeking to expand. Such issuers are often highly leveraged and generally less able than more established or less leveraged entities to make scheduled payments of principal and interest in the event of adverse developments or business conditions. Non-investment grade securities are also issued by governmental bodies that may have difficulty in making all scheduled interest and principal payments.
The market value of non-investment grade securities tends to reflect individual corporate or municipal developments to a greater extent than that of higher rated securities which react primarily to fluctuations in the general level of interest rates. As a result, the Funds ability to achieve its investment objective may depend to a greater extent on the Investment Advisers judgment concerning the creditworthiness of issuers than funds which invest in higher-rated securities. Issuers of non-investment grade securities may not be able to make use of more traditional methods of financing and their ability to service debt obligations may be affected more adversely than issuers of higher-rated securities by economic downturns, specific corporate or financial developments or the issuers inability to meet specific projected business forecasts. Negative publicity about the junk bond market and investor perceptions regarding lower rated securities, whether or not based on fundamental analysis, may depress the prices for such securities.
A holders risk of loss from default is significantly greater for non-investment grade securities than is the case for holders of other debt securities because such non-investment grade securities are generally unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by the Fund in defaulted securities poses additional risk of loss should nonpayment of principal and interest continue in respect of such securities. Even if such securities are held to maturity, recovery by the Fund of its initial investment and any anticipated income or appreciation is uncertain.
The secondary market for non-investment grade securities is concentrated in relatively few market makers and is dominated by institutional investors, including mutual funds, insurance companies and other financial institutions. Accordingly, the secondary market for such securities is not as liquid as, and is more volatile than, the secondary market for higher-rated securities. In addition, market trading volume for high yield securities is generally lower and the secondary market for such securities could shrink or disappear suddenly and without warning as a result of adverse market or economic conditions, independent of any specific adverse changes in the condition of a particular issuer. The lack of sufficient market liquidity may cause the Fund to incur losses because it will be required to effect sales at a disadvantageous time and then only at a substantial drop in price. These factors may have an adverse effect on the market price and the Funds ability to dispose of particular portfolio investments. A less liquid secondary market also may make it more difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of non-investment grade securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the conditions of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality.
Restricted Securities
The Fund may purchase securities and other financial instruments that are not registered or that are offered in an exempt non-public offering (Restricted Securities) under the 1933 Act, including securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the 1933 Act.
The purchase price and subsequent valuation of Restricted Securities may reflect a discount from the price at which such securities trade when they are not restricted, because the restriction makes them less liquid. The amount of the discount from the prevailing market price is expected to vary depending upon the type of security, the character of the issuer, the party who will bear the expenses of registering the Restricted Securities and prevailing supply and demand conditions.
54
A summary comparison of the significant investment strategies used by the Funds is set forth in the table below.
GMZ Investment Objective |
GER Investment Objective |
Differences
Investment Objective |
||
The Funds investment objective is to seek a high level of total return with an emphasis on current distributions to shareholders. | The Funds investment objective is to seek a high level of total return with an emphasis on current distributions to shareholders. | Same. | ||
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
The Fund seeks to achieve its investment objective by investing primarily in MLPs. Under normal market conditions, the Fund will invest at least 80% of its Managed Assets in MLP investments. The Fund may invest up to 20% of its Managed Assets in non-MLP investments, including, without limitation, securities of corporations that operate in the energy sector or that hold energy assets. The Fund may also invest in securities and other instruments issued by income and royalty trusts and other issuers.
The Funds MLP investments may include, but are not limited to, MLPs structured as LPs or LLCs; MLPs that are organized as LPs or LLCs, but taxed as C corporations; equity securities that represent an indirect interest in an MLP issued by an MLP affiliate, including I-Units and MLP general partner or managing member interests; C corporations whose predominant assets are interests in MLPs; MLP equity securities, including MLP common units, MLP subordinated units, MLP convertible subordinated units and MLP preferred units; PIPEs issued by MLPs; MLP debt securities; and other U.S. and non-U.S. equity and fixed income securities and derivative instruments that provide exposure to the MLP market, including pooled investment vehicles that primarily hold MLP interests and ETNs. The Fund currently expects to |
Under normal market conditions, the Fund will invest at least 80% of its Managed Assets in MLPs and other energy investments. The Fund may also invest in securities and other instruments issued by income and royalty trusts and other issuers.
The Funds MLP investments may include, but are not limited to, MLPs structured as LPs or LLCs; MLPs that are organized as LPs or LLCs, but taxed as C corporations; equity securities that represent an indirect interest in an MLP issued by an MLP affiliate, including I-Units and MLP general partner or managing member interests; C corporations whose predominant assets are interests in MLPs; MLP equity securities, including MLP common units, MLP subordinated units, MLP convertible subordinated units and MLP preferred units; PIPEs issued by MLPs; MLP debt securities; and other U.S. and non-U.S. equity and fixed income securities and derivative instruments that provide exposure to the MLP market, including pooled investment vehicles that primarily hold MLP interests and ETNs. The Funds other energy investments may include equity and fixed income securities of U.S. and non-U.S. companies other than MLPs that (i) are |
The primary difference between
the Funds is that in seeking to achieve their respective investment objectives under normal market conditions, GMZ will invest at least 80% of its Managed Assets in MLP investments, while GER will invest at least 80% of its Managed Assets in MLP and other energy investments (as described under this section). Since the principal investment strategy of the Combined Fund will be similar to the principal investment strategy of GER the Combined Fund may hold a broader range of securities than GMZ. |
55
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
concentrate its investments in the energy sector, with an emphasis on midstream MLP investments, including companies that are engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude oil, refined products or coal. The Fund may also invest in upstream MLP investments, including companies that are engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids, and downstream MLP investments, including companies that are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil. The Fund may also invest in IPOs. The Funds MLP investments may be of any capitalization size.
MLPs formed as LPs or LLCs are generally treated as partnerships for U.S. federal income tax purposes. To be treated as a partnership for U.S. federal income tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain marketing of mineral or natural resources. MLPs are generally publicly traded, are regulated by the SEC and must make public filings like any publicly traded corporation. The Fund may also invest in privately placed securities of publicly traded MLPs.
Many of the MLPs in which the Fund may invest operate oil, gas or petroleum facilities, or other facilities within the energy sector. Midstream MLPs may also operate ancillary businesses including marketing of |
classified by a third party as operating within the oil and gas storage, transportation, refining, marketing, drilling, exploration or production sub-industries or (ii) have at least 50% of their assets, income, sales or profits committed to, or derived from, the exploration, development, production, gathering, transportation (including marine), transmission, terminal operation, processing, storage, refining, distribution, mining or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, coal, electricity or other energy sources, energy-related equipment or services. The Funds MLP and other energy investments may also include companies that engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel. The Fund may invest in shares of initial public offerings IPOs, secondary market issuances and private transactions (including pre-acquisition and pre-IPO equity issuances and investments in private companies). The Fund does not intend to invest more than 30% of its Managed Assets in other energy investments.
The Fund may invest up to 20% of its Managed Assets in U.S. and non-U.S. equity and fixed income securities and derivative instruments that are not MLP or other energy investments. Such issuers may be treated as corporations for U.S. federal income tax purposes and, therefore, may not offer the tax benefits of MLP investments.
The Fund currently expects to concentrate its investments in the |
56
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
energy products and logistical services. The Fund may also invest in upstream and downstream MLPs. Upstream MLPs are primarily engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. Downstream MLPs are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil. The MLPs in which the Fund invests may also engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel.
The Fund will be treated as a regular corporation, or a C corporation, for U.S. federal income tax purposes and, as a result, unlike most investment companies, is subject to corporate income tax to the extent the Fund recognizes taxable income. Given the Funds concentration in MLPs, the Fund is not eligible to be treated as a regulated investment company under the Code. The types of MLPs in which the Fund intends to invest historically have made cash distributions to limited partners or members that exceed the amount of taxable income allocable to limited partners or members, due to a variety of factors, including significant non-cash deductions such as depreciation and depletion. If the cash distributions exceed the taxable income reported in a particular tax year, the excess cash distributions would not be taxed as income to the Fund in that tax year but rather would be treated as a return of capital for federal income tax purposes to the extent of the Funds basis in its MLP units. Similarly, the Fund expects to distribute cash in excess of its earnings and profits (as computed for tax purposes) to its holders common shareholders, which may be treated |
energy sector, with an emphasis on midstream MLP investments. The Fund will invest in investments across the energy value chain, including upstream, midstream and downstream investments. At various times, the Fund may be more heavily invested in one segment of the energy value chain over another, and may not always be invested in all three segments, depending on market conditions. Midstream MLP investments include companies that are engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude oil, refined products or coal. Midstream MLPs may also operate ancillary businesses including marketing of energy products and logistical services. Upstream MLP investments include companies that are engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. An upstream MLPs cash flow and distributions are driven by the amount of oil, natural gas, natural gas liquids and crude oil produced and the demand for and price of such commodities. Downstream MLP investments include companies that are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil, marketing and other end-customer distribution activities relating to refined energy sources. The Funds MLP investments may be of any capitalization size.
MLPs formed as LPs or LLCs are generally treated as partnerships |
57
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
as a return of capital for tax purposes to the extent of the common shareholders bases in the Funds Common Shares. To the extent that distributions to common shareholders are treated as a return of capital, their basis in the Funds Common Shares will be reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale or redemption of such shares. However, there can be no assurance that the Funds expectations will be realized. If these expectations are not realized, the Fund will have more corporate income tax expense than expected, which will result in less cash available to distribute to its common shareholders. Additionally, a greater portion of distributions to the Funds common shareholders would be treated as a taxable dividend, as opposed to a return of capital for tax purposes. Unlike traditional closed-end funds, the Fund is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. |
for U.S. federal income tax purposes. To be treated as a partnership for U.S. federal income tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain marketing of mineral or natural resources. MLPs are generally publicly traded, are regulated by the SEC and must make public filings like any publicly traded entity. The Fund may also invest in privately placed securities of publicly traded MLPs.
Many of the MLPs in which the Fund may invest operate oil, gas or petroleum facilities, or other facilities within the energy sector. The Fund may also invest in upstream and downstream MLPs. Upstream MLPs are primarily engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. Downstream MLPs are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil. The MLPs in which the Fund invests may also engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel.
The Fund will be treated as a regular corporation, or a C corporation, for U.S. federal income tax purposes and, as a result, unlike most investment companies, is subject to corporate income tax to the extent the Fund recognizes taxable income. Given |
58
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
the Funds concentration in MLPs, the Fund is not eligible to be treated as a regulated investment company under the Code. The types of MLPs in which the Fund intends to invest historically have made cash distributions to limited partners or members that exceed the amount of taxable income allocable to limited partners or members, due to a variety of factors, including significant non-cash deductions such as depreciation and depletion. If the cash distributions exceed the taxable income reported in a particular tax year, the excess cash distributions would not be taxed as income to the Fund in that tax year but rather would be treated as a return of capital for federal income tax purposes to the extent of the Funds basis in its MLP units. Similarly, the Fund may distribute cash in excess of its earnings and profits (as computed for tax purposes) to its holders common shareholders, which may be treated as a return of capital for tax purposes to the extent of the common shareholders bases in the Funds Common Shares. To the extent that distributions to common shareholders are treated as a return of capital, their basis in the Funds Common Shares will be reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale or redemption of such shares. However, there can be no assurance that the Funds expectations will be realized. If these expectations are not realized, the Fund will have more corporate income tax expense than expected, which will result in less cash available to distribute to its common shareholders. Additionally, a greater portion of |
59
GMZ Principal Investment Strategy |
GER Principal Investment Strategy |
Differences
Principal Investment Strategy |
||
distributions to the Funds common shareholders would be treated as a taxable dividend, as opposed to a return of capital for tax purposes. Unlike traditional closed-end funds, the Fund is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. | ||||
GMZ Leverage |
GER Leverage |
Differences
Leverage |
||
The Fund intends to use leverage to seek to achieve its investment objective. The Funds use of leverage is subject to risks and will cause the Funds NAV to be more volatile than if leverage was not used. For example, a rise in short-term interest rates, which currently are near historically low levels, will cause the Funds NAV to decline more than if the Fund had not used leverage. A reduction in the Funds NAV may cause a reduction in the market price of its Common Shares. There is no assurance that the Funds leveraging strategies will be successful.
The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including through funds borrowed from banks or other financial institutions (i.e., a credit facility), margin facilities or notes issued by the Fund and the leverage attributable to similar transactions entered into by the Fund. Although it has no current intention to do so, the Fund may also issue preferred shares of beneficial interest (Preferred Shares) in an aggregate amount of up to 50% of the Funds Managed Assets immediately after such issuance. The Fund initially intends to leverage through a credit facility representing approximately 20% of |
The Fund intends to use leverage to seek to achieve its investment objective. The Funds use of leverage is subject to risks and will cause the Funds NAV to be more volatile than if leverage was not used. For example, a rise in short-term interest rates, which currently are near historically low levels, will cause the Funds NAV to decline more than if the Fund had not used leverage. A reduction in the Funds NAV and distributions may cause a reduction in the market price of its Common Shares. There is no assurance that the Funds leveraging strategies, if employed, will be successful.
The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including through funds borrowed from banks or other financial institutions (i.e., a credit facility), margin facilities or notes issued by the Fund and the leverage attributable to similar transactions entered into by the Fund. Although it has no current intention to do so, the Fund may also issue Preferred Shares in an aggregate amount of up to 50% of the Funds Managed Assets immediately after such issuance. |
GMZ and GER have
substantially similar policies with respect to leverage. The Combined Fund will have substantially similar policies with respect to leverage to those of GER. |
60
GMZ Leverage |
GER Leverage |
Differences
Leverage |
||
the Funds Managed Assets, but reserves the right to leverage to the extent permitted by the 1940 Act. If the Fund uses leverage, the amount of fees paid to the Investment Adviser for its services will be higher than if the Fund does not use leverage, because the fees paid are calculated based on Managed Assets, which includes assets purchased with leverage. Therefore, the Investment Adviser has a financial incentive to use leverage, which creates a conflict of interest between the Investment Adviser and common shareholders, as only the common shareholders would bear the fees and expenses incurred through the Funds use of leverage, including the issuance of Preferred Shares, if any. The Funds willingness to use leverage, and the extent to which leverage is used at any time, will depend on many factors.
In addition, the Fund may engage in investment management techniques other than those noted above that may have similar effects as leverage, including, among others, forward foreign currency exchange contracts, futures contracts, call and put options (including options on futures contracts, swaps, bonds, stocks and indexes), swaps (including credit default, index, basis, total return, volatility and currency swaps), forward contracts, loans of portfolio securities, short sales, when-issued, delayed delivery or forward commitment transactions and other derivative instruments. The Fund may use leverage opportunistically, though not at all times, and may choose to increase or decrease its leverage, or use different types or combinations of leveraging instruments, based on the Investment Advisers assessment of market conditions and the investment |
The Fund initially intends to incur leverage through a credit facility representing approximately 25-30% of the Funds Managed Assets, but reserves the right to incur leverage to the extent permitted by the 1940 Act. If the Fund uses leverage, the amount of fees paid to the Investment Adviser for its services will be higher than if the Fund does not use leverage, because the fees paid are calculated based on Managed Assets, which includes assets acquired with leverage. Therefore, the Investment Adviser has a financial incentive to use leverage, which creates a conflict of interest between the Investment Adviser and common shareholders, as only the common shareholders would bear the fees and expenses incurred through the Funds use of leverage, including the issuance of Preferred Shares, if any. The Funds willingness to use leverage, and the extent to which leverage is used at any time, will depend on many factors.
In addition, the Fund may engage in investment management techniques other than those noted above that may have similar effects as leverage, including, among others, forward foreign currency exchange contracts, futures contracts, call and put options (including options on futures contracts, swaps, bonds, stocks and indexes), swaps (including credit default, index, basis, total return, volatility and currency swaps), forward contracts, loans of portfolio securities, short sales, when-issued, delayed delivery or forward commitment transactions and other derivative instruments. The Fund may use leverage |
61
GMZ Leverage |
GER Leverage |
Differences
Leverage |
||
environment, and the costs that the Fund would incur as a result of such leverage. There is no assurance that the Fund will utilize any form or combination of leverage. | opportunistically, though not at all times, and may choose to increase or decrease its leverage, or use different types or combinations of leveraging instruments, based on the Investment Advisers assessment of market conditions and the investment environment, and the costs that the Fund would incur as a result of such leverage. There is no assurance that the Fund will utilize any form or combination of leverage. | |||
GMZ Hedging Transactions |
GER Hedging Transactions |
Differences
Hedging Transactions |
||
The Fund may employ a variety of hedging transactions, including interest rate and total rate of return swap transactions, interest rate caps and floors, futures, options on securities and futures, short sales, when-issued purchases and forward commitments. The hedging transactions expected to be employed by the Fund involve certain risks, and there can be no assurance that any such transaction used will succeed. | The Fund may employ a variety of hedging transactions, including interest rate and total rate of return swap transactions, interest rate caps and floors, futures, options on securities and futures, short sales, when-issued purchases and forward commitments. The hedging transactions expected to be employed by the Fund involve certain risks, and there can be no assurance that any such transaction used will succeed. |
GMZ and GER have
substantially similar policies with respect to hedging transactions. The Combined Fund will have substantially similar policies with respect to hedging transactions to those of GER. |
||
GMZ Diversification |
GER Diversification |
Differences
Diversification |
||
Non-Diversified | Non-Diversified | Same |
62
The Board
The business and affairs of each Fund, including supervision of the duties performed by the Funds Investment Adviser, are managed under the direction of the Board. The names and business addresses of the Trustees and officers of each Fund and their principal occupations and other affiliations during the past five years are set forth under Trustees and Officers in the Statement of Additional Information.
The Investment Adviser
GSAM serves as each Funds investment adviser. The principal executive offices of GSAM are at 200 West Street, New York, New York 10282. GSAM has been registered as an investment adviser with the SEC since 1990 and is an indirect, wholly-owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. Founded in 1869, The Goldman Sachs Group, Inc. is a publicly-held financial holding company and a leading global investment banking, securities and investment management firm. As of March 31, 2020, GSAM, including its investment advisory affiliates, had assets under management of $1.66 trillion. GSAM is part of Goldman Sachs Consumer and Investment Management Division, which offers a full range of equity, fixed income and money market mutual funds, private investment funds and separately managed accounts, and currently serves a wide range of clients including private and public pension funds, endowments, foundations, banks, insurance companies, corporations, private investors and family groups. GSAM has broad experience investing client assets across global markets. Subject to internal information barriers and related limitations, the Funds investment team has access to the research and perspectives of other GSAM personnel with specialized expertise in non-U.S. investments. Many of these individuals are based in the firms offices outside of the U.S. and thus have local knowledge of markets and industries.
The Investment Adviser provides day-to-day advice regarding each Funds portfolio transactions, manages the Funds portfolio and is responsible for the Funds business affairs and other administrative matters. The Investment Adviser makes the investment decisions for each Fund and places purchase and sale orders for each Funds portfolio transactions in U.S. and foreign markets. As permitted by applicable law, these orders may be directed to any executing brokers, dealers, futures commission merchants (FCMs) or other counterparties, including Goldman Sachs and its affiliates. While the Investment Adviser is ultimately responsible for the management of each Fund, it is able to draw upon the research and expertise of its asset management affiliates for portfolio decisions and management with respect to certain portfolio securities. In addition, the Investment Adviser has access to the research and certain proprietary technical models developed by Goldman Sachs (subject to legal, internal, regulatory and Chinese Wall restrictions), and will apply quantitative and qualitative analysis in determining the appropriate allocations among categories of issuers and types of securities.
The Investment Adviser also performs the following additional services for each Fund:
|
Supervises all non-advisory operations of each Fund; |
|
Provides personnel to perform necessary executive, administrative and clerical services to each Fund; |
|
Arranges for the preparation of all required tax returns, reports and notices to shareholders, prospectuses and statements of additional information and other reports filed with the SEC and other regulatory authorities; |
|
Maintains the records of each Fund; and |
|
Provides office space and all necessary office equipment and services. |
An investment in a Fund may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third-party service providers or trading
63
counterparties. The use of certain investment strategies that involve manual or additional processing, such as over-the-counter derivatives, increases these risks. Although each Fund attempts to minimize such failures through controls and oversight, it is not possible to identify all of the operational risks that may affect a Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. A Fund and its shareholders could be negatively impacted as a result.
Management Fees
Pursuant to the Funds Management Agreements (the Management Agreements), the Investment Adviser is entitled to receive a monthly management fee at an annual rate equal to 1.00% of the average daily value of each Funds Managed Assets.
The Investment Adviser may voluntarily waive a portion of its management fees from time to time, and may discontinue or modify any such voluntary limitations in the future at its discretion.
A discussion regarding the basis for the approval of the Management Agreements by the Board are available in the Funds annual report to shareholders for the period ended November 30, 2019, which is available at www.sec.gov or by visiting http://www.gsamfunds.com.
Fund Managers
Energy & Infrastructure Team
The individuals primarily responsible for the day-to-day management of the Funds are listed below. The Funds portfolio managers individual responsibilities may differ and may include, among other things, security selection, asset allocation, risk budgeting and general oversight of the management of the Funds portfolios.
Name and Title |
Fund Responsibility |
Years
|
Five Year Employment History |
|||
Kyri Loupis Managing Director |
Portfolio Manager Goldman Sachs MLP Income Opportunities Fund
Goldman Sachs MLP and Energy Renaissance Fund |
Since 2013
2014 |
Mr. Loupis joined the Investment Adviser in 2009 and is a portfolio manager and head of the Energy & Infrastructure Team. | |||
Ganesh V. Jois, CFA Managing Director |
Portfolio Manager Goldman Sachs MLP Income Opportunities Fund
Goldman Sachs MLP and Energy Renaissance Fund Sachs |
Since 2013
2014 |
Mr. Jois joined the Investment Adviser in 2009 and is a portfolio manager for the Energy & Infrastructure Team. | |||
Matthew Cooper Vice President |
Goldman Sachs MLP Income Opportunities Fund
Goldman Sachs MLP and Energy Renaissance Fund |
Since 2013
2014 |
Mr. Cooper joined the Investment Adviser in 2013 and is a portfolio manager for the Energy & Infrastructure Team. |
For information about the portfolio managers compensation, other accounts managed by the portfolio managers and portfolio managers ownership of securities in the Funds, see the Statement of Additional Information.
64
Activities of Goldman Sachs and Its Affiliates and Other Accounts Managed by Goldman Sachs
The involvement of the Investment Adviser, Goldman Sachs and their affiliates in the management of, or their interest in, other accounts and other activities of Goldman Sachs will present conflicts of interest with respect to a Fund and will, under certain circumstances, limit a Funds investment activities. Goldman Sachs is a worldwide, full service investment banking, broker dealer, asset management and financial services organization and a major participant in global financial markets that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. As such, it acts as an investor, investment banker, research provider, investment manager, financier, adviser, market maker, trader, prime broker, derivatives dealer, lender, counterparty, agent and principal. In those and other capacities, Goldman Sachs and its affiliates advise clients in all markets and transactions and purchase, sell, hold and recommend a broad array of investments, including securities, derivatives, loans, commodities, currencies, credit default swaps, indices, baskets and other financial instruments and products for their own accounts or for the accounts of their customers and have other direct and indirect interests in the global fixed income, currency, commodity, equities, bank loans and other markets and the securities and issuers in which a Fund may directly and indirectly invest. Thus, it is expected that each Fund will have multiple business relationships with and will invest in, engage in transactions with, make voting decisions with respect to, or obtain services from entities for which Goldman Sachs and its affiliates perform or seek to perform investment banking or other services. The Investment Adviser and/or certain of its affiliates are the managers of the Goldman Sachs Funds. The Investment Adviser and its affiliates earn fees from this and other relationships with the Funds. Although management fees paid by the Funds to the Investment Adviser and certain other fees paid to the Investment Advisers affiliates are based on asset levels, the fees are not directly contingent on Fund performance, and the Investment Adviser and its affiliates will still receive significant compensation from a Fund even if shareholders lose money. Goldman Sachs and its affiliates engage in proprietary trading and advise accounts and funds which have investment objectives similar to those of a Fund and/or which engage in and compete for transactions in the same types of securities, currencies and instruments as a Fund. Goldman Sachs and its affiliates will not have any obligation to make available any information regarding their proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the management of a Fund. The results of a Funds investment activities, therefore, will likely differ from those of Goldman Sachs, its affiliates, and other accounts managed by Goldman Sachs, and it is possible that a Fund could sustain losses during periods in which Goldman Sachs and its affiliates and other accounts achieve significant profits on their trading for Goldman Sachs or other accounts. In addition, a Fund may enter into transactions in which Goldman Sachs and its affiliates or their other clients have an adverse interest. For example, a Fund may take a long position in a security at the same time that Goldman Sachs and its affiliates or other accounts managed by the Funds investment adviser take a short position in the same security (or vice versa). These and other transactions undertaken by Goldman Sachs, its affiliates or Goldman Sachs-advised clients may, individually or in the aggregate, adversely impact a Fund. Transactions by one or more Goldman Sachs-advised clients or the Investment Adviser may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of a Fund. A Funds activities will, under certain circumstances, be limited because of regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or their internal policies designed to comply with such restrictions. As a global financial services firm, Goldman Sachs and its affiliates also provide a wide range of investment banking and financial services to issuers of securities and investors in securities. Goldman Sachs, its affiliates and others associated with it are expected to create markets or specialize in, have positions in and/or effect transactions in, securities of issuers held by a Fund, and will likely also perform or seek to perform investment banking and financial services for one or more of those issuers. Goldman Sachs and its affiliates are expected to have business relationships with and purchase or distribute or sell services or products from or to distributors, consultants or others who recommend a Fund or who engage in transactions with or for a Fund. For more information about conflicts of interest, see the section entitled Potential Conflicts of Interest in the Statement of Additional Information.
The Funds will, from time to time, make brokerage and other payments to Goldman Sachs and its affiliates in connection with the Funds portfolio investment transactions, in accordance with applicable law.
65
Other Service Providers
Fund Accounting Agent
State Street Bank and Trust Company (State Street) provides certain fund accounting services to the Funds pursuant to the Fund Accounting Agreements (the Fund Accounting Agreements). Pursuant to the Fund Accounting Agreements, State Street will provide the Funds with, among other things, customary fund accounting services, including computing the Funds NAV and maintaining books, records and other documents relating to the Funds financial and portfolio transactions, and customary fund administration services, including assisting the Funds with regulatory filings, tax compliance and other oversight activities.
Custodian
The custodian of the assets of the Funds (the Custodian) is State Street, whose principal business address is One Lincoln Street, Boston, Massachusetts 02111. The Custodian will be responsible for, among other things, receipt of and disbursement of funds from the Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Transfer and Plan Agent
Computershare Trust Company, N.A. and Computershare Inc. (Computershare), whose principal business address is 211 Quality Circle, Suite 210, College Station, TX 77845, serves as the Funds transfer agent, registrar and Dividend Reinvestment Plan Agent (the Plan Agent) with respect to the Common Shares.
Computershare will be responsible for, among other things, the issuance and cancellation of Fund shares; account maintenance, including the creation of new shareholder accounts and posting all transactions in Fund shares; shareholder communications, including responding to all shareholder inquiries and correspondence; disbursements; Automated Clearing House (ACH) services; the administration of the Funds Dividend Reinvestment Plan; annual meeting services, including preparation of stockholder lists, proxy cards, and tabulation of proxies; and other related services.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, whose principal business address is 101 Seaport Boulevard, Suite 500, Boston, Massachusetts 02210, is the independent registered public accounting firm of the Funds and is expected to render an opinion annually on the financial statements of the Funds.
Capitalization
The Board of each Fund may authorize separate classes of shares with such preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, and qualifications as may be determined from time to time by the Board of such Fund. The tables below set forth the capitalization of GMZ and GER as of June 30, 2020 and the pro forma capitalization of the Combined Fund as if the proposed Reorganization had been in effect on that date.
Capitalization as of June 30, 2020
GMZ | GER | Adjustments |
Pro forma
Combined Fund |
|||||||||||||
Net Assets |
$ | 77,352,486 | $ | 81,676,846 | | $ | 159,029,332 | |||||||||
Common Shares Outstanding |
6,388,560 | 8,858,050 | 2,001,691 | (1) | 17,248,301 | |||||||||||
Net Asset Value Per Share |
$ | 12.11 | $ | 9.22 | | $ | 9.22 |
(1) |
Reflects adjustments due to differences in NAV per share. |
66
ADDITIONAL INFORMATION ABOUT SHARES OF THE FUNDS
Common Shares
Each Fund is a statutory trust organized under the laws of Delaware pursuant to a Certificate of Trust dated as of July 7, 2014 (for GER) and June 18, 2013 (for GMZ) and a Declaration of Trust dated as of August 14, 2014 (for GER) and October 17, 2013 (for GMZ) (each a Declaration of Trust and together, the Declarations of Trust). Each Funds Declaration of Trust authorizes the issuance of an unlimited number of Common Shares, par value $0.001 per share. If and whenever Preferred Shares are outstanding, the holders of Common Shares will not be entitled to receive any distributions from a Fund unless all accrued dividends on Preferred Shares have been paid, unless asset coverage (as defined in the 1940 Act) with respect to Preferred Shares would be at least 200% after giving effect to the distributions and unless certain other requirements imposed by any rating agencies rating the Preferred Shares have been met. Subject to the rights of the holders of Preferred Shares, all Common Shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights.
Shareholders have no pre-emptive or conversion rights. Upon liquidation of a Fund, after paying or adequately providing for the payment of all liabilities of the Fund, including liquidation of Preferred Shares, if any, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining assets of the Fund among the common shareholders.
The Board may classify or reclassify any issued or unissued Shares of each Fund into shares of any class by redesignating such Shares or by setting or changing in any one or more respects, from time to time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of repurchase of such Shares. Any such classification or reclassification will comply with the provisions of the Declarations of Trust and the 1940 Act. Any additional offerings of shares, including Preferred Shares, will require approval by each Funds Board of Trustees. Any additional offering of Common Shares will be subject to the requirements of the 1940 Act, which provides that shares may not be issued at a price below the then current NAV, exclusive of sales load, except in connection with an offering to existing holders Common Shares or with the consent of a majority of the Funds outstanding voting securities.
The Funds are listed on the NYSE, under the symbol GER and GMZ, respectively.
Unlike open-end funds, closed-end funds like the Funds do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell shares already held, the shareholder may do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than NAV. Shares of closed-end investment companies like the Funds have during some periods traded at prices higher than NAV and during other periods have traded at prices lower than NAV. Because the market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), dividend stability, portfolio credit quality, NAV, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Funds, the Funds cannot assure you that Common Shares will trade at a price equal to or higher than NAV in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Funds as vehicles for trading purposes.
Preferred Shares
The Declarations of Trust provide that each Funds Board may authorize and issue Preferred Shares with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the holders of the Common Shares. Holders of Common Shares have no preemptive right to purchase any Preferred Shares that might be issued. Each Fund has no current intention to issue Preferred Shares.
67
The Funds may elect to issue Preferred Shares as part of its leverage strategy. The Funds currently have the ability to use leverage, which may include issuing Preferred Shares representing up to 50% of the Funds Managed Assets immediately after the leverage is issued. Although the terms of any Preferred Shares, including dividend rate, liquidation preference and redemption provisions, will be determined by the Board of Trustees, subject to applicable law and the Declarations of Trust, it is likely that the Preferred Shares will be structured to carry a relatively short-term dividend rate reflecting interest rates on short-term bonds, by providing for the periodic redetermination of the dividend rate at relatively short intervals through an auction, remarketing or other procedure. The Funds also believe that it is likely that the liquidation preference, voting rights and redemption provisions of the Preferred Shares will be similar to those stated below.
Distributions
Over the long term, the Funds intend to distribute substantially all of the Funds distributable cash flow received as cash distributions from MLPs, interest payments received on debt securities owned by a Fund and other payments on securities owned by a Fund, less Fund expenses. To permit the Funds to maintain more stable quarterly distributions, the distributions paid by the Funds for any particular quarterly period may be more or less than the amount of net investment income actually earned by the Funds during the period, and the Funds may have to sell a portion of its investment portfolio to make a distribution at a time when independent investment judgment might not dictate such action. Each Fund currently anticipates making distributions to its shareholders each fiscal quarter out of legally available funds.
Due to the tax treatment under current law of cash distributions made by MLPs in which the Funds invests, a Fund may distribute cash in excess of its earnings and profits (as computed for tax purposes) to its common shareholders, which may be treated as a return of capital for tax purposes to the extent of the common shareholders bases in each Funds Common Shares. To the extent that distributions to a common shareholder are treated as a return of capital, such shareholders basis in the Common Shares will be reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale of such shares. In some cases, all or a portion of a distribution that is treated as a return of capital for tax purposes could be a return of a shareholders investment from an economic perspective.
Pursuant to the requirements of the 1940 Act, in the event each Fund makes a quarterly distribution from sources other than income, a notice will accompany the quarterly distribution with respect to the estimated source of the distribution made. Such notices will describe the portion, if any, of the quarterly dividend which, in a Funds good faith judgment, constitutes long-term capital gain, short-term capital gain, investment income or a return of capital. The actual character of such dividend distributions for U.S. federal income tax purposes, however, will only be determined finally by a Fund at the close of its fiscal year, based on the Funds full year performance and its actual net income and net capital gains for the year, which may result in a recharacterization of amounts distributed during such fiscal year from the characterization in the quarterly estimates.
Various factors will affect the level of each Funds income, including the asset mix, the amount of leverage utilized by the Fund and the effects thereof and the Funds use of hedging. Each Fund reserves the right to change its distribution policy and the basis for establishing the rate of its quarterly distributions at any time and may do so without prior notice to common shareholders.
Shareholders will automatically have all dividends and distributions reinvested in Common Shares of a Fund purchased in the open market in accordance with the Funds Dividend Reinvestment Plan unless an election is made to receive cash.
Closed-End Fund Structure
Each Fund is a non-diversified, closed-end management investment company (commonly referred to as a closed-end fund). Closed-end funds differ from open-end funds (which are generally referred to as mutual funds)
68
in that closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. This means that if you wish to sell your shares of a closed-end fund you must trade them on the stock exchange like any other stock at the prevailing market price at that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the mutual fund will redeem or buy back the shares at NAV. Also, mutual funds generally offer new shares on a continuous basis to new investors, and closed-end funds generally do not. The continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the Funds investments. By comparison, closed-end funds are generally able to stay more fully invested in securities that are consistent with their investment objectives, and also have greater flexibility to make certain types of investments, and to use certain investment strategies, such as financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the recognition that any such discount may not be in the interest of shareholders, the Board of Trustees might consider from time to time engaging in open-market repurchases, tender offers for shares or other programs intended to reduce the discount. In addition, in order to increase transparency, the Funds have at times engaged in communication efforts with the public, shareholders and analysts, which could potentially have the effect of reducing trading discount. We cannot guarantee or assure, however, that the Funds will, or continue to, engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to NAV per share. The Board of Trustees might also consider converting each Fund to an open-end mutual fund, which would also require a vote of the shareholders of the Fund.
Repurchase of Common Shares
Shares of closed-end investment companies often trade at a discount to their NAV, and each Funds Common Shares may also trade at a discount to their NAV, although it is possible that they may trade at a premium above NAV. The market price of the Funds Common Shares will be determined by such factors as relative demand for and supply of such Common Shares in the market, the Funds NAV, general market and economic conditions and other factors beyond the control of the Fund. See Net Asset Value. Although each Funds common shareholders will not have the right to redeem their Common Shares, a Fund may take action to repurchase Common Shares in the open market or make tender offers for its Common Shares. This may have the effect of reducing any market discount from NAV.
There is no assurance that, if action is undertaken to repurchase or tender for Common Shares, such action will result in the Common Shares trading at a price which approximates their NAV. Although share repurchases and tenders could have a favorable effect on the market price of the Funds Common Shares, you should be aware that the acquisition of Common Shares by a Fund will decrease the capital of a Fund and, therefore, may have the effect of increasing the Funds expense ratio and decreasing the asset coverage with respect to any Preferred Shares outstanding. Any share repurchases or tender offers will be made in accordance with the requirements of the Securities Exchange Act of 1934, as amended, the 1940 Act and the NYSE or other principal stock exchange on which the Common Shares are traded.
Purchase and Sale
Purchase and sale procedures for the Common Shares of each Fund are identical. Investors typically purchase and sell Common Shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell Common Shares of the Funds through privately negotiated transactions with existing shareholders.
Share Price Data
The following tables set forth the high and low market prices for Common Shares of each Fund on the NYSE, for each full quarterly period within each Funds two most recent fiscal years and each full quarter since
69
the beginning of each Funds current fiscal year, along with the NAV and discount or premium to NAV for each market price quotation.
GMZ |
Market Price ($) | Net Asset Value ($) |
Premium/(Discount)
to Net Asset Value |
|||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||
June 30, 2020* |
$ | 12.34 | $ | 1.10 | $ | 14.75 | $ | 1.24 | (16.34 | )% | (11.29 | )% | ||||||||||||
March 31, 2020 |
6.58 | 0.83 | 6.85 | 0.98 | (3.94 | )% | (15.31 | )% | ||||||||||||||||
December 31, 2019 |
6.80 | 5.31 | 7.09 | 5.55 | (4.09 | )% | (4.32 | )% | ||||||||||||||||
September 30, 2019 |
8.04 | 6.60 | 8.61 | 6.51 | (6.62 | )% | 1.38 | % | ||||||||||||||||
June 30, 2019 |
8.23 | 7.48 | 8.87 | 7.89 | (7.22 | )% | (5.20 | )% | ||||||||||||||||
March 31, 2019 |
8.84 | 7.01 | 8.88 | 7.17 | (0.45 | )% | (2.23 | )% | ||||||||||||||||
December 31, 2018 |
9.40 | 6.08 | 10.17 | 6.41 | (7.57 | )% | (5.15 | )% | ||||||||||||||||
September 30, 2018 |
10.00 | 8.93 | 10.68 | 9.65 | (6.37 | )% | (7.46 | )% | ||||||||||||||||
June 30, 2018 |
9.54 | 7.69 | 9.53 | 8.14 | 0.10 | % | (5.53 | )% | ||||||||||||||||
March 31, 2018 |
10.25 | 7.62 | 10.96 | 8.08 | (6.48 | )% | (5.69 | )% | ||||||||||||||||
December 31, 2017 |
9.39 | 7.94 | 9.83 | 8.47 | (4.48 | )% | (6.26 | )% |
GER |
Market Price ($) | Net Asset Value ($) |
Premium/(Discount)
to Net Asset Value |
|||||||||||||||||||||
Period Ended |
High | Low | High | Low | High | Low | ||||||||||||||||||
June 30, 2020* |
$ | 9.49 | $ | 0.69 | $ | 11.25 | $ | 0.72 | (15.64 | )% | (3.90 | )% | ||||||||||||
March 31, 2020 |
4.58 | 0.65 | 4.98 | 0.66 | (8.03 | )% | (1.27 | )% | ||||||||||||||||
December 31, 2019 |
4.78 | 3.82 | 5.09 | 3.99 | (6.09 | )% | (4.26 | )% | ||||||||||||||||
September 30, 2019 |
5.56 | 4.49 | 6.15 | 4.64 | (9.59 | )% | (3.23 | )% | ||||||||||||||||
June 30, 2019 |
5.76 | 5.11 | 6.18 | 5.66 | (6.80 | )% | (9.72 | )% | ||||||||||||||||
March 31, 2019 |
5.87 | 4.52 | 6.41 | 4.91 | (8.42 | )% | (7.94 | )% | ||||||||||||||||
December 31, 2018 |
6.61 | 4.01 | 7.33 | 4.38 | (9.82 | )% | (8.45 | )% | ||||||||||||||||
September 30, 2018 |
7.02 | 6.07 | 7.66 | 6.34 | (8.36 | )% | (4.26 | )% | ||||||||||||||||
June 30, 2018 |
6.98 | 5.64 | 6.70 | 5.51 | 4.18 | % | 2.36 | % | ||||||||||||||||
March 31, 2018 |
7.23 | 5.55 | 7.61 | 5.48 | (4.99 | )% | 1.28 | % | ||||||||||||||||
December 31, 2017 |
7.01 | 5.36 | 7.05 | 5.73 | (0.57 | )% | (6.46 | )% |
* |
On April 13, 2020, GMZ effected a 7-for-1 reverse share split and GER effected a 9-for-1 reverse share split. The share price data for the quarter ended June 30, 2020 reflects the effects of the reverse share splits. |
As of June 30, 2020, the NAV per Common Share of GMZ was $12.11 and the market price per Common Share was $9.58, representing a discount to NAV of 21% and the NAV per Common Share of GER was $9.22 and the market price per Common Share was $7.58, representing a discount to NAV of 18%. Common Shares of each Fund have historically traded at both a premium and a discount to NAV.
Performance Information
The performance table below illustrates the past performance of an investment in Common Shares of each Fund by setting forth the average total returns for the Funds for the periods indicated. A Funds past performance does not necessarily indicate how its Common Shares will perform in the future.
70
The total returns above are calculated assuming purchase of a share at the market price or NAV on the first day and sale of a share at the market price or NAV on the last day of each period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under a Funds Dividend Reinvestment Plan. The total returns based on NAV and market price do not reflect brokerage commissions or sales charges in connection with the purchase or sale of Common Shares, which if included would lower the performance shown above. The NAV used in the total return calculation includes all management fees, interest expense (if any) and operating expenses incurred by a Fund. Operating expenses include custody, accounting and administrative services, professional fees, transfer agency fees, registration, printing and mailing costs and Trustee fees. Total returns for periods less than one full year are not annualized.
71
Over the long term, each Fund intends to distribute substantially all of the Funds distributable cash flow received as cash distributions from MLPs, interest payments received on debt securities owned by the Fund and other payments on securities owned by the Fund, less Fund expenses. To permit the Funds to maintain more stable quarterly distributions, the distributions paid by each Fund for any particular quarterly period may be more or less than the amount of net investment income actually earned by the Fund during the period, and the Fund may have to sell a portion of its investment portfolio to make a distribution at a time when independent investment judgment might not dictate such action. Each Fund currently anticipates making distributions to its shareholders each fiscal quarter out of legally available funds.
Due to the tax treatment under current law of cash distributions made by MLPs in which the Funds invest, each Fund expects to distribute cash in excess of its earnings and profits (as computed for tax purposes) to its shareholders, which may be treated as a return of capital for tax purposes depends on the shareholders bases in the Funds Common Shares. To the extent that distributions to a shareholder are treated as a return of capital, such shareholders basis in the Common Shares will be reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale of such Common Shares. As a result, it is possible that a shareholder could realize taxable gain upon the sale of a Funds Common Shares even though such Common Shares are sold at a loss. In some cases, all or a portion of a distribution that is treated as a return of capital for tax purposes could be a return of a shareholders investment from an economic perspective.
Pursuant to the requirements of the 1940 Act, in the event the Funds make distributions from sources other than income, a notice will accompany each quarterly distribution with respect to the estimated source of the distribution made. Such notices will describe the portion, if any, of the quarterly dividend which, in the Funds good faith judgment, constitutes long-term capital gain, short-term capital gain, investment income or a return of capital. The actual character of such dividend distributions for U.S. federal income tax purposes, however, will only be determined finally by each Fund at the close of its fiscal year, based on the Funds full year performance and its actual net income and net capital gains for the year, which may result in a recharacterization of amounts distributed during such fiscal year from the characterization in the quarterly estimates.
Each Fund reserves the right to change its distribution policy and the basis for establishing the rate of its quarterly distributions at any time and may do so without prior notice to shareholders. Payment of future distributions is subject to approval by the Board, as well as meeting the covenants under any credit facilities and the asset coverage requirements of the 1940 Act.
72
In accordance with procedures adopted by the Board of Trustees of each Fund, the NAV per Common Share of a Fund is calculated by subtracting the Funds liabilities (including accrued expenses, dividends payable and any borrowings of the Fund), and the liquidation value of any outstanding Preferred Shares of the Fund from the Funds total assets (the value of the securities the Fund holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of Common Shares of the Fund outstanding.
All securities are generally valued on each Business Day as of the close of regular trading on NYSE or NASDAQ market may officially close. The term Business Day means any day NYSE is open for trading, which is Monday through Friday except for holidays. NYSE is closed on the following observed holidays: New Years Day, Martin Luther King, Jr. Day, Washingtons Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas.
For the purpose of calculating the NAV per share of each Fund, investments are valued under valuation procedures established by the Board. Portfolio securities of a Fund for which accurate market quotations are readily available are generally valued as follows: (i) equity securities listed on any U.S. or foreign stock exchange or on NASDAQ will be valued at the last sale price or the official closing price on the exchange or system in which they are principally traded on the valuation date. If there is no sale or official closing price on the valuation date, equity securities may be valued at the closing bid price for long positions or the closing ask price for short positions at the time closest to, but no later than, the NAV calculation time. If the relevant exchange or system has not closed by the above-mentioned time for determining a Funds NAV, the securities will be valued at the last sale price or official closing price, or if not available at the bid price at the time the NAV is determined; (ii) equity securities for which no prices are obtained under sections (i), including those for which a pricing service supplies no exchange quotation or a quotation that is believed by the Investment Adviser to not represent fair value, will be valued through the use of broker quotes, if possible; (iii) over-the-counter equity securities not quoted on NASDAQ and fixed income securities will be valued via electronic feeds from independent pricing services to the administrator using evaluated prices provided by a recognized pricing service and dealer-supplied quotations (over-the-counter equity securities not quoted on NASDAQ or fixed income securities for which a pricing service either does not supply a quotation or supplies a quotation that is believed by the Investment Adviser to not represent fair value, will be valued through the use of broker quotes, if possible); (iv) over-the-counter equity securities not quoted on NASDAQ and fixed income securities for which accurate market quotations are not readily available will be valued by the Investment Adviser based on Board-approved fair valuation policies that incorporate matrix pricing or valuation models, which utilize certain inputs and assumptions, including, but not limited to, yield or price with respect to comparable fixed income securities and various other factors; (v) investments in open-end registered investment companies (excluding investments in ETFs) and investments in private funds are valued based on the NAV of those registered investment companies or private funds (which may use fair value pricing as discussed in their prospectuses of offering memoranda); (vi) spot foreign exchange rates will be valued using a pricing service at the time closest to, but no later than, the NAV calculation time, and forward foreign currency contracts will be valued by adding forward points provided by an independent pricing service to the spot foreign exchange rates and interpolating based upon maturity dates of each contract or by using outright forward rates, where available (if quotations are unavailable from a pricing service or, if the quotations by the Investment Adviser are believed to be inaccurate, the contracts will be valued by calculating the mean between the last bid and ask quotations supplied by at least one dealer in such contracts); (vii) exchange-traded futures contracts will be valued at the last published settlement price on the exchange where they are principally traded (or, if a sale occurs after the last published settlement price but before the NAV calculation time, at the last sale price at the time closest to, but no later than, the NAV calculation time); (viii) exchange-traded options contracts with settlement prices will be valued at the last published settlement price on the exchange where they are principally traded (or, if a sale occurs after the last published settlement price but before the NAV calculation time, at the last sale price at the time closest to, but no later than, the NAV calculation time); (ix) exchange-traded options contracts without settlement prices will be valued at the midpoint of the bid and ask prices on the exchange where they are principally traded (or, in the absence of two-way
73
trading, at the last bid price for long positions and the last ask price for short positions at the time closest to, but no later than, the NAV calculation time); (x) over-the-counter derivatives, including, but not limited to, interest rate swaps, credit default swaps, total return index swaps, put/call option combos, total return basket swaps, index volatility and FX variance swaps, will be valued at their fair market value as determined using counterparty supplied valuations, an independent pricing service or valuation models which use market data inputs supplied by an independent pricing service; and (xi) all other instruments, including those for which a pricing service supplies no exchange quotation/price or a quotation that is believed by the Investment Adviser to be inaccurate, will be valued in accordance with the valuation procedures approved by the Board. Securities may also be valued at fair value in accordance with procedures approved by the Board where the Funds fund accounting agent is unable for other reasons to facilitate pricing of individual securities or calculate the Funds NAV, or if the Investment Adviser believes that such quotations do not accurately reflect fair value. Fair values determined in accordance with the valuation procedures approved by the Board may be based on subjective judgments and it is possible that the prices resulting from such valuation procedures may differ materially from the value realized on a sale.
The value of all assets and liabilities expressed in foreign currencies will be converted into U.S. dollar values at current exchange rates of such currencies against U.S. dollars as of the close of regular trading on NYSE (normally, but not always, 4:00 p.m. Eastern time). If such quotations are not available, the rate of exchange will be determined in good faith by or under procedures established by the Board.
Each Fund is treated as a regular corporation, or C corporation, for U.S. federal income tax purposes. Accordingly, each Fund is subject to U.S. federal income tax on its taxable income at the corporate tax rate as well as state and local income taxes. In calculating each Funds NAV, the Fund will, among other things, account for its current taxes and deferred tax liability and/or asset balances. Each Fund may accrue a deferred income tax liability balance at the corporate tax rate, plus an estimated state and local income tax rate, for its future tax liability associated with the capital appreciation of its investments and the distributions received by a Fund on equity securities of MLPs considered to be return of capital and for any net operating gains. Any deferred tax liability balance will reduce a Funds NAV. Each Fund may also accrue a deferred tax asset balance, which reflects an estimate of the Funds future tax benefit associated with net operating losses and unrealized losses. Any deferred tax asset balance will increase the Funds NAV. To the extent a Fund has a deferred tax asset balance, consideration is given as to whether or not a valuation allowance, which would offset the value of some or all of the deferred tax asset balance, is required. Each Fund will rely to some extent on information provided by MLPs, which may not be provided to a Fund on a timely basis, to estimate a Funds current taxes and deferred tax liability and/or asset balances for purposes of financial statement reporting and determining its NAV. The daily estimate of each Funds current taxes and deferred tax liability and/or asset balances used to calculate the Funds NAV could vary dramatically from the Funds actual tax liability or benefit, and, as a result, the determination of the Funds actual tax liability or benefit may have a material impact on the Funds NAV. From time to time, each Fund may modify its estimates or assumptions regarding its current taxes and deferred tax liability and/or asset balances as new information becomes available, which modifications in estimates or assumptions may have a material impact on a Funds NAV.
74
The Dividend Reinvestment Plan (the Dividend Reinvestment Plan) of GER will be the Dividend Reinvestment Plan of the Combined Fund. The Dividend Reinvestment Plan of GMZ is the same as GERs Dividend Reinvestment Plan.
Under the Dividend Reinvestment Plan for each Fund, dividends and/or distributions to a holder of Common Shares will automatically be reinvested in additional Common Shares of the Fund. Each registered shareholder may elect to have dividends and distributions distributed in cash (i.e., opt-out) rather than participate in the Dividend Reinvestment Plan. For any registered shareholder that does not so elect (each, a Participant and collectively, Participants), dividends and/or distributions on such shareholders Common Shares will be reinvested by the Plan Agent, as agent for shareholders in administering the Dividend Reinvestment Plan, in additional Common Shares, as set forth below. Participation in the Dividend Reinvestment Plan is completely voluntary, and may be terminated or resumed at any time without penalty by Internet, telephone or written notice if received and processed by the Plan Agent prior to the dividend record rate; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Participants who hold their Common Shares through a broker or other nominee and who wish to elect to receive any dividends and distributions in cash must contact their broker or nominee.
The Plan Agent will open an account for each holder of Common Shares under the Dividend Reinvestment Plan in the same name in which such holder of Common Shares is registered. Whenever the Fund declares a dividend or other distribution (together, a Dividend) payable in cash, non-participants in the Dividend Reinvestment Plan will receive cash and Participants will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Agent for the Participants accounts, depending upon the circumstances described below, either through (i) receipt of additional unissued but authorized Common Shares from the Fund (Newly Issued Common Shares) or (ii) by purchase of outstanding Common Shares on the open market (Open-Market Purchases) on the NYSE or elsewhere.
If, on the payment date for any Dividend (the Dividend Payment Date), the NAV per Common Share is equal to or less than the closing market price plus estimated per share Common Share fees (which include any applicable brokerage commissions the Plan Agent is required to pay) (such condition often referred to as a premium), the Plan Agent will invest the Dividend amount in Newly Issued Common Shares on behalf of the Participants. The number of Newly Issued Common Shares to be credited to each Participants account will be determined by dividing the dollar amount of the Dividend by the NAV per Common Share on the Dividend Payment Date, provided that, if the NAV is less than or equal to 95% of the closing market price on the Dividend Payment Date, the dollar amount of the Dividend will be divided by 95% of the closing market price per Common Share on the Dividend Payment Date. If, on the Dividend Payment Date, the NAV per Common Share is greater than the closing market price per share plus per Common Share fees (such condition referred to as a market discount), the Plan Agent will invest the Dividend amount in Common Shares acquired on behalf of the Participants in Open-Market Purchases. During the Open Market Purchase Period (as defined below), the Plan Agent will purchase shares only if the market price of the Common Shares plus estimated per Common Share fees (which include any applicable brokerage commissions the Plan Agent is required to pay) is lower than the NAV per Common Share as of the previous business day. Such Open-Market Purchases shall continue on each successive business day until the entire Dividend amount has been invested pursuant to Open-Market Purchases; provided, however, that if (a) the market discount shifts to a market premium, or (b) the Open Market Purchases have not been completed by the Last Purchase Date (as defined below), the Plan Agent will cease making Open-Market Purchases and shall invest the entire uninvested portion of the Dividend amount in Newly Issued Common Shares in the manner contemplated above.
The term Last Purchase Date shall mean the last business day before the next date on which the Common Shares trade on an ex-dividend basis or 30 days after the Dividend Payment Date, whichever is sooner.
75
Open-market purchases may be made on any securities exchange where Common Shares are traded, in the over-the-counter market or in negotiated transactions, and may be on such terms as to price, delivery and otherwise as the Plan Agent shall determine. It is contemplated that the Fund will pay quarterly Dividends.
The Plan Agent maintains all Participants accounts in the Dividend Reinvestment Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Participants for tax records. Common Shares in the account of each Participant will be held by the Plan Agent on behalf of the Participant in book entry form in the Plan Agents name or the Plan Agents nominee. Each shareholder proxy will include those Common Shares purchased or received pursuant to the Dividend Reinvestment Plan. The Plan Agent will forward all proxy solicitation materials to Participants and vote proxies for Common Shares held under the Dividend Reinvestment Plan in accordance with the instructions of the Participants.
In the case of shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Agent will administer the Dividend Reinvestment Plan on the basis of the number of Common Shares certified from time to time by the record shareholder and held for the account of beneficial owners who participate in the Dividend Reinvestment Plan.
Any stock dividends or split of Common Shares distributed by the Fund on Common Shares held by the Plan Agent for Participants will be credited to their accounts. In the event that the Fund makes available to its shareholders rights to purchase additional Common Shares or other securities, the Common Shares held for each Participant under the Dividend Reinvestment Plan will be added to other Common Shares held by the Participant in calculating the number of rights to be issued to each Participant.
The Plan Agents fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. However, each Participant will pay a per Common Share (currently $0.05) fee incurred in connection with Open Market Purchases. If a Participant elects by telephone, Internet or written notice to the Plan Agent to have the Plan Agent sell all or a part of his or her Common Shares and remit the proceeds to the Participant, the Plan Agent is authorized to deduct a $15 sales transaction fee per trade and a per Common Share fee of $0.12 from such proceeds. All per Common Share fees include any applicable brokerage commissions the Plan Agent is required to pay.
If a Participant elects by telephone, Internet or written notice to the Plan Agent to have the Plan Agent sell all or a part of his or her Common Shares and remit the proceeds to the Participant, the Plan Agent will process all sale instructions received no later than five (5) business days after the date on which the order is received. Such sale will be made through the Plan Agents broker on the relevant market and the sale price will not be determined until such time as the broker completes the sale. In each case, the price to each Participant shall be the weighted average sale price obtained by the Plan Agents broker net of fees for each aggregate order placed by the Plan Agent and executed by the broker. To maximize cost savings, the Plan Agent will seek to sell Common Shares in round lot transactions. For this purpose, the Plan Agent may combine a Participants Common Shares with those of other selling Participants.
Each Participant may withdraw Common Shares or terminate his or her account under the Dividend Reinvestment Plan by so notifying the Plan Agent by telephone, through the Internet or in writing prior to the dividend record date (each such notification, a Termination Notice). Such Termination Notice will be effective immediately so long as the Plan Agent receives a Termination Notice prior to any dividend or distribution record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Upon any withdrawal or termination, the Plan Agent will cause to be delivered to each terminating Participant a statement of holdings for the appropriate number of the Funds whole book-entry Common Shares and a check for the cash adjustment of any fractional share at the market value per Common Share as of the close of business on the day the termination is effective less any applicable fee.
Upon receipt of a Dividend by a Participant, the Participant will be treated for federal income tax purposes as receiving a taxable distribution. As such, the automatic reinvestment of Dividends does not relieve
76
Participants of any taxes which may be payable (or required to be withheld) on Dividends, even though no cash is received by the Participants. Participants will receive tax information annually for their personal records and to help them prepare their federal income tax return. For further information as to tax consequences of participation in the Dividend Reinvestment Plan, Participants should consult with their own tax advisors.
The Fund reserves the right to amend or terminate the Dividend Reinvestment Plan upon notice in writing to each Participant at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund. There is no direct transaction fee to Participants with regard to purchases in the Dividend Reinvestment Plan; however, the Fund reserves the right to amend the Dividend Reinvestment Plan to include a transaction fee payable by the Participants. Notice will be sent to Participants of any amendments as soon as practicable after such action by the Fund.
All correspondence from a registered owner of Common Shares concerning the Dividend Reinvestment Plan should be directed to the Plan Agent at Computershare Trust Company, N.A, P.O. 505000, Louisville, KY 40233, with overnight correspondence being directed to the Plan Agent at Computershare Trust Company, N.A, 462 South 4th Street, Suite 1600, Louisville, KY 40202; by calling 855-807-2742; or through the Plan Agents website at www.computershare.com/investor. Participants who hold their Common Shares through a broker or other nominee should direct correspondence or questions concerning the Dividend Reinvestment Plan to their broker or nominee.
77
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
Each Funds Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of a Fund or to change the composition of the Board of Trustees. This could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control over the Fund. Such attempts could have the effect of increasing the expenses of each Fund and disrupting the normal operation of the Fund. The Board of Trustees is divided into three classes, with the terms of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board of Trustees. Any Trustee may be removed with or without cause at any time by a written instrument signed by at least a majority of the then Trustees, specifying the effective date of removal. Any Trustee may be removed at any meeting of the shareholders by a vote of at least two-thirds of the outstanding shares entitled to vote for the election of such Trustee.
In addition, each Funds Declaration of Trust requires the favorable vote of the majority of the entire Board of Trustees, and the holders of not less than seventy-five percent (75%) of Shares outstanding and entitled to vote thereon to approve, adopt or authorize certain transactions, including: a merger or consolidation or share exchange of a Fund with or into any person or company; the issuance or transfer by the a of a Funds shares to any Principal Shareholder (as defined below) for cash, securities or other property (or combination thereof) having an aggregate fair market value of $5,000,000 or more (except as may be made pursuant to a public offering, a Funds dividend reinvestment plan or upon exercise of any share subscription rights); a sale, lease, exchange, mortgage, pledge, transfer or other disposition of Fund assets to or with any Principal Shareholder, having an aggregate fair market value of $5,000,000 or more (except in the ordinary course of business or in connection with a credit facility); the dissolution, liquidation or termination of a Fund; the issuance of any securities of a Fund to any Principal Shareholder for cash (except as part of an offering in which the Principal Shareholder has no special right to participate as compared to other holders of the same class of shares, or investors at large); or any shareholder proposal regarding specific investment decisions made or to be made with respect to Fund assets. For purposes of these provisions, a Principal Shareholder refers to any corporation, person or other entity who, whether directly or indirectly and whether alone or together with its Affiliates and Associates (as defined in the Declarations of Trust), beneficially owns 5% or more of the outstanding shares of a Fund. Notwithstanding anything to the contrary, so long as each action is approved by both a majority of the entire Board of Trustees and seventy-five percent (75%) of the Continuing Trustees, and so long as all other conditions and requirements, if any, provided for in the Amended and Restated By-Laws of each Fund and applicable law have been satisfied, then except to the extent such shareholder vote or consent is required by the 1940 Act or other federal law or hereafter authorized by any agreement between a Fund and any national securities exchange, if any, no shareholder vote or consent shall be necessary or required to approve such transactions. Continuing Trustee shall mean any member of the Board of Trustees who either (a) has been a member of the Board of Trustees for a period of at least thirty-six months (or since the commencement of the Trusts operation, if less than thirty-six months) or (b) was nominated to serve as a member of the Board of Trustees by a majority of the Continuing Trustees then members of the Board of Trustees.
For the purposes of calculating a majority of the outstanding voting securities under each Funds Declaration of Trust, as defined in the 1940 Act, a majority of the outstanding voting securities of a Fund means the vote of (i) 67% or more of the shares of a Fund present at a meeting, if the holders of more than 50% of the outstanding shares of a Fund are present or represented by proxy, or (ii) more than 50% of the shares of a Fund, whichever is less.
The Board of Trustees has determined that provisions with respect to the Board of Trustees and the shareholder voting requirements described above, which voting requirements are generally greater than the minimum requirements under Delaware law or the 1940 Act, are in the best interests of shareholders generally. Reference should be made to the Declarations of Trust on file with the SEC for the full text of these provisions.
78
Each Funds Amended and Restated Bylaws generally require that advance notice be given to a Fund in the event a shareholder desires to nominate a person for election to the Board of Trustees or to transact any other business at an annual meeting of shareholders. Notice of any such nomination or business must be delivered to or received at the principal executive offices of a Fund not less than 120 calendar days nor more than 150 calendar days prior to the first anniversary date of the proxy statement for the preceding years annual meeting (subject to certain exceptions). Any notice by a shareholder must be accompanied by certain information as provided in the Amended and Restated Bylaws. Reference should be made to the Amended and Restated Bylaws on file with the SEC for the full text of these provisions.
79
Each Fund is organized as a Delaware statutory trust pursuant to its Declaration of Trust governed by the laws of the State of Delaware. GMZ was organized under the laws of the State of Delaware on October 17, 2013. GER was organized under the laws of the State of Delaware on August 14, 2014.
The Trustees may at any time propose conversion of a Fund to an open-end management investment company depending upon their judgment as to the advisability of such action in light of circumstances then prevailing. In considering whether to submit an open-ending proposal to shareholders, the Trustees might consider, among other factors, any differences in operating expenses between open-end and a closed-end fund like the Funds (due to the expenses of standing ready to effect redemptions), the potentially adverse tax consequences once a fund is open-ended (including the potential requirement to liquidate investments in MLPs to fund redemptions, which could result in the recognition of income to a Fund), the liquidity of a Funds portfolio and the impact of open-ending on portfolio management policies. Approval of conversion of a Fund to an open-end investment company requires the affirmative vote or consent of a majority of the entire Board of Trustees and the holders of not less than seventy-five percent (75%) of shares outstanding and entitled to vote thereon. Such approval is in addition to any vote or consent of the shareholders otherwise required by law. Notwithstanding anything to the contrary, so long as the conversion of a Fund to an open-end investment company is approved by both a majority of the entire Board of Trustees and seventy-five percent (75%) of the Continuing Trustees, and so long as all other conditions and requirements, if any, provided for in the Amended and Restated By-Laws and applicable law have been satisfied, then except to the extent such shareholder vote or consent is required by the 1940 Act or other federal law or hereafter authorized by any agreement between a Fund and any national securities exchange, if any, no shareholder vote or consent shall be necessary or required to approve the transaction.
Shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their next computed NAV less any redemption charge as might be in effect at the time of redemption. If a Fund is converted to an open-end management investment company, it could be required to liquidate portfolio securities to meet requests for redemption. A Fund may have to limit its holdings of illiquid securities and the inflows and outflows of open-end fund shares may alter the options strategies that the Fund may use. If a Fund were to experience significant redemptions as an open-end fund, the decrease in total assets could result in a higher expense ratio and inefficiencies in portfolio management. In this regard, each Fund could reserve the right to effect redemptions in-kind with portfolio securities, which would subject redeeming shareholders to transaction costs in liquidating those securities. Each may also impose a redemption fee.
Voting rights are identical for the shareholders of each Fund. The shareholders of each Fund are entitled to one vote for each Common Share held by them. The shareholders of each Fund do not have any preemptive or preferential right to purchase or subscribe to any shares of such Fund.
Common shareholders of GMZ and GER do not have appraisal rights.
80
The financial highlights tables are intended to help you understand the Funds financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PwC, whose report, along with the Funds financial statements, is included in the Funds most recent annual report (available upon request).
Goldman Sachs MLP and Energy Renaissance Fund
Year Ended November 30, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Per Share Data |
||||||||||||||||||||
Net asset value, beginning of year |
$ | 5.80 | $ | 6.05 | $ | 7.56 | $ | 7.45 | $ | 15.91 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net investment income (loss)(a) |
(0.12 | ) | (0.15 | ) | (0.21 | ) | (0.13 | ) | 0.09 | |||||||||||
Net realized and unrealized gain (loss) |
(0.92 | ) | 0.54 | (0.66 | ) | 0.88 | (7.22 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total from investment operations |
(1.04 | ) | 0.39 | (0.87 | ) | 0.75 | (7.13 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributions to shareholders from net investment income |
(0.02 | ) | (0.43 | ) | (0.35 | ) | | | ||||||||||||
Distributions to shareholders from return of capital |
(0.62 | ) | (0.21 | ) | (0.29 | ) | (0.64 | ) | (1.33 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total distributions |
(0.64 | ) | (0.64 | ) | (0.64 | ) | (0.64 | ) | (1.33 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net asset value, end of year |
4.12 | 5.80 | 6.05 | 7.56 | 7.45 | |||||||||||||||
Market price, end of year |
$ | 3.92 | $ | 5.31 | $ | 5.67 | $ | 7.09 | $ | 7.52 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total return based on net asset value(b) |
(18.85 | )% | 6.31 | % | (12.32 | )% | 12.13 | % | (46.86 | )% | ||||||||||
Total return based on market price(b) |
(15.66 | )% | 3.86 | % | (12.38 | )% | 4.20 | % | (50.18 | )% | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net assets, end of year (in 000s) |
$ | 327,684 | $ | 460,938 | $ | 479,443 | $ | 597,558 | $ | 587,452 | ||||||||||
Ratio of net expenses to average net assets after interest expense and tax benefit/(expenses)(c) |
2.78 | % | 3.46 | % | 2.79 | % | 3.29 | % | 2.25 | % | ||||||||||
Ratio of net expenses to average net assets after interest expense and before tax benefit/(expenses) |
3.48 | % | 2.88 | % | 3.03 | % | 3.01 | % | 2.31 | % | ||||||||||
Ratio of total expenses to average net assets before interest expense and tax benefit/(expenses) |
1.77 | % | 1.65 | % | 1.68 | % | 1.75 | % | 1.62 | % | ||||||||||
Ratio of net investment income (loss) to average net assets(d) |
(2.09 | )% | (2.28 | )% | (2.78 | )% | (2.01 | )% | 0.75 | % | ||||||||||
Portfolio turnover rate(e) |
69 | % | 61 | % | 31 | % | 64 | % | 113 | % | ||||||||||
Asset coverage, end of period per $1,000(f) |
$ | 2,618 | $ | 2,983 | $ | 2,998 | $ | 3,339 | $ | 3,076 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) |
Calculated based on the average shares outstanding methodology. |
(b) |
Total returns are calculated assuming purchase of a share at the market price or NAV on the first day and sale of a share at the market price or NAV on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Funds dividend reinvestment plan. Total return does not reflect brokerage commissions or sales charges in connection with the purchase or sale of Fund shares. |
(c) |
Current and deferred tax expense/benefit for the ratio calculation is derived from the net investment income (loss), and realized and unrealized gains (losses). |
(d) |
Current and deferred tax expense/benefit for the ratio calculation is derived from the net investment income (loss) only. |
(e) |
The Funds portfolio turnover rate is calculated in accordance with regulatory requirements, without regard to transactions involving short term investments. If such transactions were included, the Funds portfolio turnover rate may be higher. |
81
(f) |
Calculated by dividing the Funds Managed Assets by the amount of borrowings outstanding under the credit facility at period end. |
Goldman Sachs MLP Income Opportunities Fund
Year Ended November 30, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Per Share Data |
||||||||||||||||||||
Net asset value, beginning of year |
$ | 8.39 | $ | 8.80 | $ | 10.25 | $ | 10.33 | $ | 19.19 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net investment income (loss)(a) |
(0.17 | ) | (0.24 | ) | (0.17 | ) | (0.09 | ) | 0.03 | |||||||||||
Net realized and unrealized gain (loss) |
(1.65 | ) | 0.67 | (0.44 | ) | 0.85 | (7.52 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total from investment operations |
(1.82 | ) | 0.43 | (0.61 | ) | 0.76 | (7.49 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributions to shareholders from net investment income |
(0.07 | ) | (0.35 | ) | (0.84 | ) | | | ||||||||||||
Distributions to shareholders from return of capital |
(0.77 | ) | (0.49 | ) | | (0.84 | ) | (1.37 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total distributions |
(0.84 | ) | (0.84 | ) | (0.84 | ) | (0.84 | ) | (1.37 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net asset value, end of year |
5.73 | 8.39 | 8.80 | 10.25 | 10.33 | |||||||||||||||
Market price, end of year |
$ | 5.39 | $ | 7.96 | $ | 8.38 | $ | 9.61 | $ | 10.25 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total return based on net asset value(b) |
(22.81 | )% | 4.83 | % | (6.57 | )% | 9.26 | % | (40.43 | )% | ||||||||||
Total return based on market price(b) |
(23.47 | )% | 4.44 | % | (4.83 | )% | 2.95 | % | (39.47 | )% | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net assets, end of year (in 000s) |
$ | 255,207 | $ | 372,896 | $ | 391,029 | $ | 454,567 | $ | 458,092 | ||||||||||
Ratio of net expenses to average net assets after interest expense and tax benefit/(expenses)(c) |
3.22 | % | 2.38 | % | 3.16 | % | 3.00 | % | (2.49 | )% | ||||||||||
Ratio of net expenses to average net assets after interest expense and before tax benefit/(expenses) |
3.54 | % | 2.96 | % | 3.02 | % | 2.90 | % | 2.24 | % | ||||||||||
Ratio of total expenses to average net assets before interest expense and tax benefit/(expenses) |
1.83 | % | 1.69 | % | 1.71 | % | 1.80 | % | 1.62 | % | ||||||||||
Ratio of net investment income (loss) to average net assets(d) |
(2.17 | )% | (2.48 | )% | (1.53 | )% | (0.96 | )% | 0.17 | % | ||||||||||
Portfolio turnover rate(e) |
61 | % | 64 | % | 50 | % | 83 | % | 66 | % | ||||||||||
Asset coverage, end of period per $1,000(f) |
$ | 2,528 | $ | 2,983 | $ | 3,080 | $ | 3,349 | $ | 3,279 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) |
Calculated based on the average shares outstanding methodology. |
(b) |
Total returns are calculated assuming purchase of a share at the market price or NAV on the first day and sale of a share at the market price or NAV on the last day of the period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Funds dividend reinvestment plan. Total return does not reflect brokerage commissions or sales charges in connection with the purchase or sale of Fund shares. |
(c) |
Current and deferred tax expense/benefit for the ratio calculation is derived from the net investment income (loss), and realized and unrealized gains (losses). |
(d) |
Current and deferred tax expense/benefit for the ratio calculation is derived from the net investment income (loss) only. |
(e) |
The Funds portfolio turnover rate is calculated in accordance with regulatory requirements, without regard to transactions involving short term investments. If such transactions were included, the Funds portfolio turnover rate may be higher. |
(f) |
Calculated by dividing the Funds Managed Assets by the amount of borrowings outstanding under the credit facility at period end. |
82
INFORMATION ABOUT THE REORGANIZATION
General
Pursuant to the Plan of Reorganization (a form of which is attached as Appendix A to this Joint Proxy Statement/Prospectus), GMZ will transfer all of its assets to GER, and GER will assume all of GMZs liabilities, in exchange solely for newly issued GER Common Shares. GER Common Shares issued to GMZ shareholders will have an aggregate NAV equal to the aggregate NAV of GMZs Common Shares outstanding immediately prior to the Reorganization. Each shareholder of GMZ will receive the number of GER Common Shares corresponding to his or her proportionate interest in the Common Shares of GMZ. As soon as practicable after the Closing Date for the Reorganization, GMZ will deregister as an investment company under the 1940 Act and liquidate and terminate in accordance with its Declaration of Trust, Amended and Restated Bylaws, the 1940 Act and Delaware law.
The distribution of GER Common Shares to GMZs shareholders will be accomplished by opening new accounts on the books of GER in the names of the shareholders of GMZ and transferring to those shareholder accounts GER Common Shares. Each newly-opened account on the books of GER for the former shareholders of GMZ will represent the respective pro rata number of GER Common Shares due to such shareholder.
As a result of the Reorganization, each common shareholder of GMZ will own GER Common Shares that will have an aggregate NAV immediately after the Closing Date equal to the aggregate NAV of that shareholders GMZ Common Shares immediately prior to the Closing Date. Since GER Common Shares will be issued at NAV in exchange for the Common Shares of GMZ having a value equal to the aggregate NAV of those GER Common Shares, the NAV per Common Share of GER Common Shares should remain virtually unchanged by the Reorganization. Thus, the Reorganization will result in no dilution of the NAV of GER Common Shares. However, as a result of the Reorganization, a shareholder of either of the Funds will hold a reduced percentage of ownership in the Combined Fund than he or she did in GMZ or GER prior to the Reorganization. No sales charge or fee of any kind will be charged to shareholders of GMZ in connection with their receipt of GER Common Shares in the Reorganization.
83
TERMS OF THE PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Plan of Reorganization. This summary is qualified in its entirety by reference to the Form of Plan of Reorganization attached as Appendix A to the Joint Proxy Statement/Prospectus.
Valuation of Common Shares
The NAV of GMZ shall be the NAV computed as of the Valuation Time (as defined in the Plan of Reorganization), after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of GMZ. The NAV of GER shall be the NAV computed as of the Valuation Time, after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of GER. GMZ and GER have the same valuation procedures.
Conditions
Under the terms of the Plan of Reorganization, the Reorganization is conditioned upon, among other things, (a) approval by shareholders of GMZ under Proposal 1, (b) approval by shareholders of GER under Proposal 2, (c) the Funds receipt of an opinion to the effect that such Reorganization will qualify as a tax-free reorganization under the Code, and (d) each Funds receipt of certain routine certificates and legal opinions.
Termination
The Plan of Reorganization may be terminated by resolution of the Board of either Fund at any time prior to the Effective Date (as defined in the Plan of Reorganization), if circumstances should develop that, in the opinion of such Board of Trustees, make proceeding with the Reorganization inadvisable.
Expenses of the Reorganization
The expenses relating to the proposed Reorganization will be borne by GSAM, including, but not limited to, costs related to the preparation and distribution of materials distributed to each Funds Board, expenses incurred in connection with the preparation of the Plan of Reorganization and the registration statement on Form N-14, the printing and distribution of this Joint Proxy Statement/Prospectus and any other materials required to be distributed to shareholders, SEC and state securities commission filing fees and legal and audit fees in connection with the Reorganization, legal fees incurred preparing each Funds Board materials, attending each Funds Board meetings and preparing the minutes, auditing fees associated with each Funds financial statements, stock exchange fees, transfer agency fees, portfolio transfer taxes (if any) and any similar expenses incurred in connection with the Reorganization.
84
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Federal Income Tax Consequences of the Reorganization
The following is a summary of certain Federal income tax consequences of the Reorganization. The discussion is based upon the Code, Treasury regulations, court decisions, published positions of the Internal Revenue Service (IRS) and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). The discussion is limited to U.S. persons who hold Common Shares of GMZ as capital assets for Federal income tax purposes (generally, assets held for investment). This summary does not address all of the Federal income tax consequences that may be relevant to a particular shareholder or to shareholders who may be subject to special treatment under Federal income tax laws. No ruling has been or will be obtained from the IRS regarding any matter relating to the Reorganization. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects described below. This summary of Federal income tax consequences is for general information only. The Funds shareholders should consult their own tax advisers regarding the Federal income tax consequences of the Reorganization, as well as the effects of state, local and non-U.S. tax laws, including possible changes in tax law.
It is a condition to the closing of the Reorganization that GMZ and GER each receive an opinion from Dechert, dated as of the Closing Date, regarding the characterization of the Reorganization as a reorganization within the meaning of Section 368(a) of the Code. The opinion of Dechert will be based on Federal income tax law in effect on the Closing Date. In rendering its opinion, Dechert will also rely upon certain representations of the management of GMZ and GER and assume, among other things, that the Reorganization will be consummated in accordance with the Plan of Reorganization and other operative documents and as described herein. An opinion of counsel is not binding on the IRS or any court.
As a reorganization, the Federal income tax consequences of the Reorganization can be summarized as follows:
|
No gain or loss will be recognized by GMZ or GER by reason of the Reorganization. |
|
No gain or loss will be recognized by a shareholder of GMZ who exchanges all of their GMZ Common Shares solely for GER Common Shares pursuant to the Reorganization. |
|
The aggregate tax basis of GER Common Shares received by a shareholder of GMZ pursuant to the Reorganization will be the same as the aggregate tax basis of the shareholders GMZ Common Shares surrendered in exchange therefor. |
|
The holding period of GER Common Shares received by a shareholder of GMZ pursuant to the Reorganization will include the holding period of the shareholders GMZ Common Shares surrendered in exchange therefor. |
|
GERs tax basis in GMZs assets received by GER pursuant to the Reorganization will, in each instance, equal the tax basis of such assets in the hands of GMZ immediately prior to the Reorganization, and GERs holding period for such assets will, in each instance, include the period during which the assets were held by GMZ. |
Following the Reorganization, the Combined Fund intends to continue to be taxed under the rules currently applicable to each Fund and its shareholders.
To the extent that GMZs portfolio securities are sold in connection with the Reorganization prior to such Reorganization closing, GMZ may realize gains or losses, which may increase or decrease the income tax liabilities of GMZ and the Combined Fund. The Investment Adviser expects that such repositioning will create income growth potential and increase capital appreciation potential for the Combined Fund. However, it is not anticipated that it will be necessary to materially reposition the Funds portfolios outside the normal course of
85
trading in connection with the Reorganization. To the extent there are transaction costs associated with portfolio repositioning prior to the Reorganization, such costs will be borne by the respective Fund. To the extent there are transaction costs associated with portfolio repositioning after the Reorganization, such costs will be borne by the Combined Fund. Gain or loss generated by of any such sales (or deemed sales) prior to the Reorganization would be determined by the difference between the price at which such portfolio assets are sold and GMZs basis in such assets.
If a shareholder of GMZ receives cash instead of a fractional GER Common Share, the shareholder will be treated as having received the fractional GER Common Share pursuant to the Reorganization and then as having sold that fractional share of for cash. As a result, each such shareholder generally will recognize gain or loss equal to the difference between the amount of cash received and the tax basis in his, her or its fractional GER Common Share. This gain or loss generally will be a capital gain or loss and will be long-term capital gain or loss if the holding period for the shares (including the holding period of GMZ Common Shares surrendered therefor) is greater than one year. The deductibility of capital losses is subject to limitations. U.S. federal backup withholding tax may be imposed on any cash received instead of a fractional share interest.
GER will succeed to the net operating loss carryforwards (and unrealized built-in losses), if any, of GMZ, which will be subject to the limitations described below. As of November 30, 2019, GMZs net operating loss and capital loss carryforwards were estimated to be $24,426,369 and $292,846,231, respectively. If GMZ has net operating loss and capital loss carryforwards, they would, in the absence of the Reorganization, generally be available to offset income and net capital gains (with respect to the net operating loss carryforwards) and capital gains (with respect to the capital loss carryforwards). As a result of the Reorganization, however, GMZ will undergo an ownership change for Federal income tax purposes, and, accordingly, GERs use of GMZs net operating loss and capital loss carryforwards (and certain unrealized built-in losses) will be limited by the operation of the tax loss limitation rules of the Code. For a fund that undergoes an ownership change, the Code generally limits the amount of pre-ownership change losses that may be used to offset post-ownership change gains to a specific annual loss limitation amount (generally the product of (i) the fair market value of the Common Shares of such Fund, with certain adjustments, immediately prior to the Reorganization and (ii) the rate established by the IRS (for example, the rate is 1.47% for May 2020)). Any unused portion of these losses may be available in subsequent years. GERs net operating loss and capital loss carryforwards, if any, should not be limited solely by reason of the Reorganization.
Due to the operation of these tax loss limitation rules, it is possible that shareholders of GMZ would receive taxable distributions earlier than they would have in the absence of the Reorganization. Such taxable distributions will be treated as ordinary income favorably taxed as qualified dividend income. The actual effect of the loss limitation rules on a shareholder of a Fund would depend on many variables, including such Funds expected growth rate if the Reorganization were not to occur (i.e., whether, in the absence of the Reorganization, the Fund would generate capital gains against which to utilize its capital loss carryforwards (and certain realized built-in losses) in excess of what would be the annual loss limitation amount were the Reorganization to occur and the timing and amount of future capital gains that would be recognized by the Combined Fund if the Reorganization were to occur). Shareholders of all of the Funds should consult their own tax advisors in this regard.
In addition, for five years beginning on the Closing Date of the Reorganization, the Combined Fund will not be allowed to offset certain pre-Reorganization built-in gains attributable to one Fund that is a gain corporation with capital loss carryforwards (and certain built-in losses) attributable to the other Fund.
Federal Income Tax Consequences of an Investment in GER Common Shares
As with any investment, you should consider how an investment in Common Shares of GER will be taxed. The tax information below is provided as general information. You should consult your tax advisor about the federal, state, local or foreign tax consequences of an investment in GER. Except as otherwise noted, the tax information provided assumes that you are a U.S. Shareholder (as defined below).
86
Unless your investment is through an individual retirement account (IRA) or other tax-advantaged account, you should consider the possible tax consequence of Fund distributions and the sale of your GER Common Shares.
Certain U.S. Federal Income Tax Matters
The following is a general summary of certain U.S. federal income tax considerations affecting GER and investors in GER. This discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to you in light of your particular circumstances or to investors who are subject to special rules, such as banks, thrift institutions and certain other financial institutions, real estate investment trusts, regulated investment companies, insurance companies, brokers and dealers in securities or currencies, certain securities traders, S corporations, individual retirement accounts, certain tax-deferred accounts or foreign investors.
Unless otherwise noted, this discussion assumes that you are a U.S. Shareholder and that you hold GER Common Shares as capital assets. For purposes of this summary, a U.S. Shareholder means a beneficial owner of GER Common Shares that, for U.S. federal income tax purposes, is (i) an individual who is a citizen or resident of the U.S., (ii) a corporation or other entity taxable as a corporation created in or organized under the laws of the U.S. or any state of the U.S., (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source, or (iv) a trust if (A) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust or (B) the trust has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. If a partnership holds shares, the U.S. federal income tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold shares should consult their own tax advisors.
The following discussion is based upon the Code, Treasury Regulations, judicial authorities, published positions of the IRS and other applicable authorities, all as in effect on the date of this prospectus and all of which are subject to change or differing interpretations (possibly with retroactive effect). No ruling has been or will be sought from the IRS regarding any matter discussed in this prospectus. Counsel to GER has not rendered any legal opinion regarding any tax consequences relating to GER or your investment in GER. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax information set out below.
Tax matters are complicated, and the tax consequences of an investment in and holding of GER Common Shares will depend on the particular facts of each investors situation. You are advised to consult your own tax advisors with respect to the application to your own circumstances of the general federal income tax rules described below and with respect to other federal, state, local or foreign tax consequences to you before making an investment in GER Common Shares.
Federal Income Taxation of GER
Although the Code generally provides that a regulated investment company does not pay an entity-level income tax, provided that it distributes all or substantially all of its income, GER does not meet current tests for qualification as a regulated investment company under Subchapter M of the Code because of the fact that most or substantially all of GERs investments will consist of investments in certain MLPs intended to be treated as partnerships for federal income tax purposes. The regulated investment company tax rules therefore do not apply to GER or to its shareholders. As a result, GER is treated as a corporation for federal and state income tax purposes, and will pay federal and state income tax on its taxable income.
GER invests primarily in MLPs, which generally are intended to be treated as partnerships for federal income tax purposes. As a partner in the MLPs, GER must report its allocable share of the MLPs taxable income
87
or loss in computing GERs taxable income or loss, regardless of the extent (if any) to which the MLPs make distributions. Based upon a review of the historic results of the type of MLPs in which GER intends to invest, GER expects that the cash flow received by GER with respect to its MLP investments will generally exceed the taxable income allocated to GER (and this excess generally will not be currently taxable to GER but, rather, will result in a reduction of GERs adjusted tax basis in each MLP as described in the following paragraph). This is the result of a variety of factors, including significant non-cash deductions, such as accelerated depreciation. Past performance is not necessarily an indication of future results and there is no assurance that GERs expectation regarding the tax character of MLP distributions will be realized. If this expectation is not realized and cash distributions are less than the taxable income allocated to GER, there may be greater tax expense borne by GER and less cash available to distribute to shareholders or to pay to expenses.
GER will be subject to U.S. federal income tax at the regular corporate income tax rates on GERs share of any taxable income from the investment in MLPs or other securities (including taxable dividend income GER receives with respect to investments in entities classified as C corporations for U.S. federal income tax purposes) and on gain recognized by GER on the sale of any of its investments. As explained above, cash distributions from an MLP to GER that exceed GERs allocable share of such MLPs net taxable income will reduce GERs adjusted tax basis in the equity securities of the MLP. These reductions in GERs adjusted tax basis in the MLP equity securities will increase the amount of gain (or decrease the amount of loss) recognized by GER on a subsequent sale of the securities of an MLP.
Federal Income Taxation of Holders of GER Common SharesU.S. Shareholders
Receipt of Distributions
Distributions made to you by GER will generally constitute taxable dividends to the extent of your allocable share of GERs current or accumulated earnings and profits, as calculated for federal income tax purposes. Generally, a corporations earnings and profits are computed based upon taxable income, with certain specified adjustments. As explained above, based upon the historic performance of the types of MLPs in which GER intends to invest, GER anticipates that the distributed cash from the MLPs generally will exceed GERs share of the MLPs taxable income. Consequently, GER anticipates that only a portion of GERs distributions will be treated as dividend income to you. However, there can be no assurance that these expectations will be realized. If these expectations are not realized, a greater portion of distributions to holders of GER Common Shares would be treated as a taxable dividend, as opposed to a return of capital for tax purposes. To the extent that distributions to you exceed your allocable share of GERs current and accumulated earnings and profits, your basis in GER Common Shares with respect to which the distribution is made will be reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale or redemption of such Common Shares. To the extent you hold such Common Shares as a capital asset and have no further basis in the Common Shares to offset the distribution, you will report the excess as capital gain.
Because GER will invest a substantial portion of its assets in MLPs, special rules will apply to the calculation of GERs earnings and profits. For example, GERs earnings and profits will be calculated using the straight-line depreciation method rather than the accelerated depreciation method. This difference in treatment may, for example, result in GERs earnings and profits being higher than GERs taxable income in a particular year if the MLPs in which GER invests calculate their income using accelerated depreciation. Because of these differences, GER may make distributions in a particular year out of earnings and profits (treated as dividends) in excess of the amount of GERs taxable income for such year.
Distributions to you from GER treated as dividends under the foregoing rules generally will be taxable as ordinary income to you but are generally expected to be treated as qualified dividend income to eligible taxpayers. Qualified dividend income received by individuals and other noncorporate shareholders is taxed at long-term capital gain rates, which currently reach a maximum of 15%, or, for certain high income individuals, 20%. For a dividend to constitute qualified dividend income, the shareholder generally must hold the shares
88
paying the dividend for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, although a longer period may apply if the shareholder engages in certain risk reduction transactions with respect to the common stock.
In addition to constituting qualified dividend income to noncorporate investors, such dividends are expected to be eligible for the dividends received deduction available to corporate shareholders of GER under Section 243 of the Code. However, corporate shareholders of GER should be aware that certain limitations apply to the availability of the dividends received deduction, including rules which limit the deduction in cases where (i) certain holding period requirements are not met, (ii) a corporate shareholder of GER is obligated (e.g., pursuant to a short sale) to make related payments with respect to positions in substantially similar or related property, or (iii) the corporate shareholders investment in GER Common Shares is financed with indebtedness. Corporate shareholders of GER should consult their own tax advisors regarding the application of these limitations to their particular situations.
If you participate in GERs automatic Dividend Reinvestment Plan, upon GERs payment of a dividend to you, you will be treated for federal income tax purposes as receiving a taxable distribution from GER in an amount equal to (i) if newly issued Common Shares are issued under the Dividend Reinvestment Plan, the fair market value of the Common Shares issued to you under the plan or (ii) if reinvestment is made through open-market purchases under the Dividend Reinvestment Plan, the amount of cash allocated to the shareholder for the purchase of Common Shares on its behalf on the open market. The portion of such a distribution that is treated as dividend income will be determined under the rules described above.
Sales of Common Shares
Upon a sale of your Common Shares to a third party, you generally will recognize capital gain or loss equal to the difference between the cost of your Common Shares and the amount you receive when you sell them. Any such capital gain or loss will be a long-term capital gain or loss if you held the Common Shares for more than one year at the time of disposition. Long-term capital gains of noncorporate shareholders of GER (including individuals) are currently subject to U.S. federal income taxation at a maximum rate of 15%, or, for certain high income individuals, 20%. The deductibility of capital losses for both corporate and non-corporate shareholders of GER is subject to limitations under the Code.
Investment by Tax-Exempt Investors and Regulated Investment Companies
Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on their unrelated business taxable income, or UBTI. Because GER is a corporation for federal income tax purposes, an owner of GER Common Shares will not report on its federal income tax return any items of income, gain, loss and deduction that are allocated to GER from the MLPs in which GER invests. Moreover, dividend income from, and gain from the sale of, corporate stock generally does not constitute UBTI unless the corporate stock is debt-financed. Therefore, a tax-exempt investor will not have UBTI attributable to its ownership, sale, or the redemption of GER Common Shares unless its ownership is debt-financed. In general, Common Shares are considered to be debt-financed if the tax-exempt owner of the Common Shares incurred debt to acquire the Common Shares or otherwise incurred a debt that would not have been incurred if the Common Shares had not been acquired. Similarly, the income and gain realized from an investment in GER Common Shares by an investor that is a regulated investment company will constitute qualifying income for the regulated investment company.
Foreign, State and Local Taxes
It is possible that GER may be liable for foreign, state and local taxes payable in the country, state or locality in which it is a resident or doing business or in a country, state or locality in which an MLP in which GER invests conducts or is deemed to conduct business. In addition, GER may be subject to foreign taxes on its income (possibly including, in some cases, capital gains) from foreign securities. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases.
89
Medicare Tax
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends received from GER and net gains from redemptions or other taxable dispositions of GER Common Shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceed certain threshold amounts.
Cost Basis Reporting
Recent legislation requires reporting of adjusted cost basis information for covered securities, which generally include shares of a C corporation such as GER, to the Internal Revenue Service and to taxpayers. Shareholders should contact their financial intermediaries with respect to reporting of cost basis and available elections for their accounts.
You should consult your own tax advisor about federal, state and local tax consequences in light of your particular tax situation.
Federal Income Taxation of Holders of GER Common SharesNon-U.S. Shareholders
For purposes of this summary, the term Non-U.S. Shareholder means a beneficial owner of GER Common Shares that is not a U.S. Shareholder.
Dividends to Non-U.S. Shareholders generally will be subject to U.S. federal withholding tax at the rate of 30% unless the tax is reduced or eliminated pursuant to a tax treaty or the dividends are effectively connected with a U.S. trade or business of the shareholder.
Any capital gain realized by a Non-U.S. Shareholder upon a sale of Common Shares of GER will generally not be subject to U.S. federal income or withholding tax unless (i) the gain is effectively connected with the shareholders trade or business in the U.S., or in the case of a shareholder who is a nonresident alien individual, the shareholder is present in the U.S. for 183 days or more during the taxable year and certain other conditions are met or (ii) GER is or has been a U.S. real property holding corporation, as defined below, at any time within the five-year period preceding the date of disposition of GER Common Shares or, if shorter, within the period during which the Non-U.S. Shareholder has held the Common Shares. Generally, a corporation is a U.S. real property holding corporation if the fair market value of its U.S. real property interests, as defined in the Code and applicable regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. GER may be, or may prior to a Non-U.S. Shareholders disposition of Common Shares become, a U.S. real property holding corporation. If GER is or becomes a U.S. real property holding corporation, so long as GER Common Shares are regularly traded on an established securities market (such as the NYSE), only a Non-U.S. Shareholder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holders holding period) more than 5% (directly or indirectly as determined under applicable attribution rules of the Code) of GER Common Shares will be subject to United States federal income tax on the disposition of Common Shares.
Any Non-U.S. Shareholder who is described in one of the foregoing cases is urged to consult his, her or its own tax advisor regarding the U.S. federal income tax consequences of the redemption, sale, exchange or other disposition of shares of GER.
Non-U.S. shareholders of GER may also be subject to U.S. estate tax with respect to their Common Shares of GER.
GER will be required to withhold U.S. tax (at a 30% rate) on payments of dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to enable GER to determine whether withholding is required.
90
Each Non-U.S. Shareholder should consult his, her or its own tax advisor regarding the U.S. and non-U.S. tax consequences of ownership of GER Common Shares and receipt of distributions from GER.
Backup Withholding
Federal regulations generally require GER to withhold and remit to the U.S. Treasury a backup withholding tax with respect to dividends and the proceeds of any redemption paid to you if you fail to furnish GER or GERs paying agent with a properly completed and executed IRS Form W-9, W-8BEN, W-8BEN-E or other applicable form. Furthermore, the Service may notify GER to institute backup withholding if the Service determines that your TIN is incorrect or if you have failed to properly report taxable dividends or interest on a federal tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account and may be claimed as a credit on the record owners federal income tax return. The backup withholding rate is currently 24%.
91
TO RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS
EACH FUNDS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of each Fund (together, the Audit Committee) and the Board, including all of GMZs and GERs Independent Trustees, have selected PwC as the independent registered public accounting firm for each Fund for the fiscal year ending November 30, 2020 and are submitting the selection of PwC to the shareholders for ratification.
PwC has audited the financial statements of each of GMZ and GER since inception and has informed GMZ and GER that it has no direct or indirect material financial interest in GMZ or GER or in the Investment Adviser.
Independent Accounting Fees Billed by PwC
Audit Fees
The aggregate fees billed by PwC for professional services for the audit of the annual financial statements for GMZs fiscal years ended November 30, 2018 and November 30, 2019 was $56,000 and $63,500, respectively. The aggregate fees billed by PwC for professional services for the audit of the annual financial statements for GERs fiscal years ended November 30, 2018 and November 30, 2019 was $56,000 and $63,500, respectively.
Fees included in the audit fees category are those associated with the annual audits of financial statements and services that are normally provided in connection with statutory and regulatory filings.
Audit-Related Fees
No audit-related fees were billed by PwC to the Funds for the fiscal years ended November 30, 2018 and November 30, 2019.
Audit-related fees are for any services rendered to a Fund that are reasonably related to the performance of the audits of the financial statements (but not reported as audit fees above). These services include attestation services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.
The aggregate audit-related fees billed by PwC to GSAM and any entity controlling, controlled by, or under common control with GSAM, that provides ongoing services to the Funds, for engagements directly related to the operations and financial reporting of GMZ, for the fiscal years ended November 30, 2018 and November 30, 2019, was $1,356,035 and $1,356,035, respectively. These amounts represent fees PwC billed to GSAM for services related to the SSAE 16 report.
The aggregate audit-related fees billed by PwC to GSAM and any entity controlling, controlled by, or under common control with GSAM, that provides ongoing services to the Funds, for engagements directly related to the operations and financial reporting of GER, for the fiscal years ended November 30, 2018 and November 30, 2019, was $1,356,035 and $1,356,035, respectively. These amounts represent fees PwC billed to GSAM for services related to the SSAE 16 report.
Tax Fees
The aggregate fees billed by PwC to GMZ for services rendered to the Funds for tax compliance, tax advice and tax planning for the Funds fiscal years ended November 30, 2018 and November 30, 2019 were $142,300 and $213,338, respectively. The aggregate fees billed by PwC to GER for services rendered to the Funds for tax compliance, tax advice and tax planning for the Funds fiscal years ended November 30, 2018 and November 30, 2019 were $130,700 and $170,688, respectively.
92
Fees included in the tax fees category comprise all services performed by professional staff in the independent registered public accountants tax division except those services related to the audits. This category comprises fees for tax compliance services provided in connection with the preparation and review of the Funds tax returns.
All Other Fees
No fees were billed by PwC for products and services provided to the Funds, other than the services reported in Audit Fees, Audit Related Fees, and Tax Fees above, in the Funds fiscal years ended November 30, 2018 and November 30, 2019.
No other fees were billed by the Funds independent registered public accountant to GSAM, and any entity controlling, controlled by, or under common control with GSAM, that provides ongoing services to the Funds, for engagements directly related to the Funds operations and financial reporting, in the Funds fiscal years ended November 30, 2018 and November 30, 2019.
Aggregate Non-Audit Fees
The aggregate non-audit fees billed by PwC to GMZ in the Funds fiscal years ended November 30, 2018 and November 30, 2019 were $142,300 and $213,338, respectively. The aggregate non-audit fees billed by PwC to GER in the Funds fiscal years ended November 30, 2018 and November 30, 2019 were $130,700 and $170,688, respectively.
The aggregate non-audit fees billed to the Funds investment adviser and service affiliates by PwC for non-audit services for GMZs fiscal years ended November 30, 2018 and November 30, 2019 were $1,498,335 and $1,569,373, respectively. The aggregate non-audit fees billed to the Funds investment adviser and service affiliates by PwC for non-audit services for GERs fiscal years ended November 30, 2018 and November 30, 2019 were $1,486,735 and $1,526,723, respectively. This includes any non-audit services required to be pre-approved but excludes non-audit services that did not require pre-approval since they did not directly relate to the Funds operations or financial reporting.
For the Funds fiscal year ended November 30, 2019, non-audit fees represented 96% and 96% of the total fees pre-approved by the Audit Committee of GMZ and GER, respectively.
Pre-Approval of Audit and Non-Audit Services Provided to the Funds
The Audit and Non-Audit Services Pre-Approval Policy (the Policy) adopted by the Audit Committee and the Board sets forth the procedures and the conditions pursuant to which services performed by an independent auditor for the Funds may be pre-approved. Services may be pre-approved specifically by the Audit Committee as a whole or, in certain circumstances, by the Audit Committee Chairman or the person designated as the audit committee financial expert. In addition, subject to specified cost limitations, certain services may be pre-approved under the provisions of the Policy. The Policy provides that the Audit Committee will consider whether the services provided by an independent auditor are consistent with the Securities and Exchange Commissions rules on auditor independence. The Policy provides for periodic review and pre-approval by the Audit Committee of the services that may be provided by the independent auditor.
De Minimis Waiver. The pre-approval requirements of the Policy may be waived with respect to the provision of non-audit services that are permissible for an independent auditor to perform, provided (1) the aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues subject to pre-approval that was paid to the independent auditors during the fiscal year in which the services are provided; (2) such services were not recognized by the Funds at the time of the engagement to
93
be non-audit services; and (3) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee, pursuant to the pre-approval provisions of the Policy.
Pre-Approval of Non-Audit Services Provided to the Funds Investment Advisers. The Policy provides that, in addition to requiring pre-approval of audit and non-audit services provided to the Funds, the Audit Committee will pre-approve those non-audit services provided to the Funds investment adviser (and entities controlling, controlled by or under common control with the investment adviser that provide ongoing services to the Funds) where the engagement relates directly to the operations or financial reporting of the Funds.
The Audit Committee has considered these fees and the nature of the services rendered, and has concluded that they are compatible with maintaining the independence of PwC. The Audit Committee did not approve any of the audit-related, tax, or other non-audit fees described above pursuant to the de minimis exceptions set forth in Rule 2-01(c)(7)(i)(C) and Rule 2-01(c)(7)(ii) of Regulation S-X. PwC did not provide any audit-related services, tax services or other non-audit services to GSAM or any entity controlling, controlled by or under common control with GSAM that provides ongoing services to the Funds that the Audit Committee was required to approve pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit Committee considered whether the provision of non-audit services rendered to GSAM and any entity controlling, controlled by, or under common control with GSAM that provides ongoing services to the Funds that were not pre-approved by the Audit Committee because the engagement did not relate directly to the operations and financial reporting of the Funds is compatible with maintaining PwCs independence.
Audit Committee Report
The Audit Committee has: (a) reviewed and discussed the Funds audited financial statements with the management of the Fund; (b) discussed with the independent auditor the matters required to be discussed by the Public Company Accounting Oversight Board (PCAOB) Standard No. 16, as modified or supplemented; and (c) received the written disclosures and the letter from the independent auditor required by applicable requirements of the PCAOB Ethics and Independence Rule 3526 regarding the independent auditors communications with the Audit Committee concerning independence, and has discussed with the independent auditor the auditors independence.
The members of the Audit Committee are not, and do not represent themselves to be, professionally engaged in the practice of auditing or accounting and are not employed by the Fund for accounting, financial management or internal control purposes. Moreover, the Audit Committee relies on and makes no independent verification of the facts presented to it or representations made by management or the Funds independent auditor. Accordingly, the Audit Committees oversight does not provide an independent basis to determine that management has maintained appropriate accounting and/or financial reporting principles and policies, or internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committees considerations and discussions referred to above do not provide assurance that the audit of the Funds financial statements has been carried out in accordance with the standards of the PCAOB or that the financial statements are presented in accordance with generally accepted accounting principles.
Based on its consideration of the audited financial statements and the discussions referred to above with management and the Funds independent auditor, and subject to the limitations on the responsibilities and role of the Audit Committee set forth in the charter and those discussed above, the Audit Committee of each Fund recommended to the applicable Board that the Funds audited financial statements be included in the Funds Annual Report for the fiscal year ended November 30, 2019.
94
SUBMITTED BY THE AUDIT COMMITTEE OF EACH FUNDS BOARD OF TRUSTEES
Caroline Dorsa
Linda A. Lang
Michael Latham
Lawrence P. Stranghoener
The Board of GMZ recommends that shareholders of GMZ vote FOR the ratification of the selection of PwC as the independent registered public accounting firm. The approval of the proposal will require the affirmative vote of shareholders representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
The Board of GER recommends that shareholders of GER vote FOR the ratification of the selection of PwC as the independent registered public accounting firm. The approval of the proposal will require the affirmative vote of shareholders representing a majority of Common Shares outstanding, present and entitled to vote on the matter.
95
VOTING INFORMATION AND REQUIREMENTS
Record Date
The Funds have fixed the close of business on July 1, 2020 as the record date (the Record Date) for the determination of shareholders entitled to notice of, and to vote at, the Special Meeting or any postponement or adjournment thereof. Shareholders on the Record Date will be entitled to one vote for each Common Share held, with no Common Shares having cumulative voting rights.
The following table provides information about the outstanding securities of the Funds as of the Record Date:
Fund |
Title of Class |
Amount
Authorized |
Amount
Held by Fund for its Own Account |
Amount
Outstanding Exclusive of Amount Shown in Previous Column |
||||||||||
GMZ |
Common Share, par value
$0.001 per share |
Unlimited | None | 6,388,560 | ||||||||||
GER |
Common Share, par value
$0.001 per share |
Unlimited | None | 8,858,050 |
Proxies
Shareholders of record as of the Record Date may vote by virtually attending the Special Meeting, or may authorize a proxy to vote their Common Shares by returning the enclosed proxy card or by casting their vote via telephone or the Internet using the instructions provided on the enclosed proxy card and more fully described below. To vote by mail, sign, date and promptly return the enclosed proxy card or voting instruction form in the accompanying postage pre-paid envelope. To vote by Internet or telephone, please use the control number on your proxy card or voting instruction form and follow the instructions as described on your proxy card or voting instruction form. If you have any questions regarding the proxy materials, please contact your Fund at 1-866-963-5821. If the enclosed proxy card or voting instruction form is properly executed and received prior to the Special Meeting and has not been revoked, the Common Shares represented thereby will be voted in accordance with the instructions marked on the returned proxy card or voting instruction form or, if no instructions are marked on the returned proxy card or voting instruction form, the proxy card or voting instruction form will be voted FOR each Proposal on which such shareholder is entitled to vote as described in this Joint Proxy Statement/Prospectus, and in the discretion of the persons named as proxies in connection with any other matter that may properly come before the Special Meeting or any adjournment(s) or postponement(s) thereof.
Any person giving a proxy may revoke it at any time before it is exercised by submitting to the Secretary of the Funds, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306, a written notice of revocation or subsequently executed proxy or voting instruction form or by virtually attending and voting at the Special Meeting.
If (i) you are a member of a household in which multiple Shareholders of a Fund share the same address, (ii) your Common Shares are held in street name and (iii) your broker or bank has received consent to household material, then your broker or bank may have sent to your household only one copy of this Joint Proxy Statement/Prospectus, unless your broker or bank previously received contrary instructions from a Shareholder in your household. If you are part of a household that has received only one copy of this Joint Proxy Statement/Prospectus, your Fund will deliver promptly a separate copy of this Joint Proxy Statement/Prospectus to you upon written or oral request. To receive a separate copy of this Joint Proxy Statement/Prospectus, please contact your Fund by calling toll free at 1-866-963-5821 or by mail at such Fund, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306. If your Common Shares are held with certain banks, trust companies, brokers, dealers, investment advisers and other financial intermediaries (each, an Authorized Institution) and you would like to receive a separate copy of future proxy statements, prospectuses or annual reports or you are now receiving multiple copies of these documents and would like to receive a single copy in the future, please contact your Authorized Institution.
96
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE JOINT SPECIAL MEETING TO BE HELD ON SEPTEMBER 10, 2020
This Joint Proxy Statement/Prospectus, the Notice of Special Meeting, any accompanying materials, and any amendments or supplements to the foregoing material that are required to be furnished to shareholders (the Proxy Materials) are available to available online at www.proxy-direct.com/gld-31465 (please have the control number found on your proxy card or voting instruction form ready when you visit this website).
In addition, copies of each Funds most recent annual and semi-annual report, including financial statements, have previously been mailed to Shareholders. Each Fund will furnish to any Shareholder upon request, without charge, an additional copy of such Funds most recent annual report and semi-annual report to Shareholders. Annual reports and semi-annual reports to Shareholders may be obtained by writing to: the Fund, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306; or by telephone toll-free at 1-800-621-2550.
Quorum and Vote Requirements
Under the Amended and Restated Bylaws of each Fund, a quorum for the transaction of business at the Special Meeting is established by the presence, in person or by proxy, of holders representing a majority or more of all shares entitled to vote at the Special Meeting, but any lesser number will be sufficient to attain a quorum for the purpose of voting on adjournment. The inspectors of election, who may be employees of the Investment Adviser, will determine whether or not a quorum is present at the Special Meeting. Abstentions and broker non-votes will be counted as present for purposes of determining a quorum, subject to any applicable rules of the stock exchange on which a Funds Common Shares are listed. Broker non-votes occur when a beneficial owner of Common Shares held in street name does not give instructions to the broker holding the Common Shares as to how to vote on matters deemed non-routine. Generally, if Common Shares are held in street name, the beneficial owner of the Common Shares is entitled to give voting instructions to the broker holding the Common Shares. If the beneficial owner does not provide voting instructions, the broker can still vote the Common Shares with respect to matters that are considered to be routine, but cannot vote the Common Shares with respect to non-routine matters. The ratification of the selection of the independent registered public accounting firm is generally considered to be routine, and brokers generally have discretionary voting power with respect to such proposals. The approval of the Plan of Reorganization and the Issuance of GER Common Shares are considered non-routine, and so brokers will not have discretionary voting power with respect to those proposals.
If you hold your Common Shares directly (not through a broker-dealer, bank or other financial institution) and if you return a properly executed proxy card that does not specify how you wish to vote on a proposal, your Common Shares will be voted FOR each Proposal on which you are entitled to vote.
With respect to Proposals 1 and 2, broker non-votes will have no effect on such Proposals, but abstentions will have the same effect as a vote AGAINST.
With respect to Proposals 3 and 4, abstentions will have the same effect as a vote AGAINST.
Voting Requirements for Proposal 1 To Approve the Plan of Reorganization for Goldman Sachs MLP Income Opportunities Fund
Proposal |
Required Approval |
|
The common shareholders of GMZ are being asked to approve the Plan of Reorganization providing for the Reorganization of GMZ into GER. |
A majority of shares outstanding, present and entitled
to vote. |
97
Voting Requirements for Proposal 2 To Approve the Issuance of Common Shares by Goldman Sachs MLP and Energy Renaissance Fund
Proposal |
Required Approval |
|
The common shareholders of GER are being asked to approve the Issuance of GER Common Shares in connection with the Reorganization. |
A majority of shares outstanding, present and entitled
to vote. |
Voting Requirements for Proposal 3 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP Income Opportunities Fund
Proposal |
Required Approval |
|
The common shareholders of GMZ are being asked to ratify the selection of PwC as GMZs independent registered public accounting firm for the fiscal year ending November 30, 2020. |
A majority of shares outstanding, present and entitled
to vote. |
Voting Requirements for Proposal 4 To Ratify the Selection of Independent Registered Public Accounting Firm for Goldman Sachs MLP and Energy Renaissance Fund
Proposal |
Required Approval |
|
The common shareholders of GER are being asked to ratify the selection of PwC as GERs independent registered public accounting firm for the fiscal year ending November 30, 2020. |
A majority of shares outstanding, present and entitled
to vote. |
98
As of the Record Date, no single shareholder or group (as that term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended) beneficially owned more than 5% of a Funds outstanding Common Shares, except as described in the following tables. A control person is one who owns, either directly or indirectly, more than 25% of the voting securities of a Fund or acknowledges the existence of control. A party that controls a Fund may be able to significantly affect the outcome of any item presented to shareholders for approval. This information is based on publicly available Schedule 13D and 13G disclosures filed with the SEC.
Title of Class |
Name and Address of Beneficial
|
Amount and Nature of Beneficial Ownership |
Percent
of Class |
|||||
GMZCommon Shares |
First Trust Portfolios L.P. First Trust Advisors L.P. The Charger Corporation 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 |
3,155,428 shares with shared dispositive power (1) | 7.14 | % | ||||
GMZCommon Shares |
Bank of America Corporation Bank of America Corporate Center 100 North Tryon Street, Charlotte, NC 28255 |
22,600 shares with shared voting power; 2,355,704 shares with shared dispositive power (2) | 5.30 | % | ||||
GERCommon Shares |
First Trust Portfolios L.P. First Trust Advisors L.P. The Charger Corporation 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 |
4,117,787 shares with shared dispositive power (3) | 5.21 | % |
1 |
Based on a Schedule 13G/A filed with the SEC on January 27, 2020. |
2 |
Based on a Schedule 13G/A filed with the SEC on February 14, 2020. |
3 |
Based on a Schedule 13G/A filed with the SEC on January 17, 2020. |
99
Any shareholder who wishes to submit proposals for inclusion in a Funds proxy materials for a subsequent shareholder meeting should give notice in writing to the Secretary of the Funds, and such proposed business must be a proper matter for action by the Funds shareholders. For such proposals to be timely for a Funds 2021 annual meeting, a shareholders notice must be received by the Secretary at such Fund, c/o Goldman Sachs Asset Management, L.P., 200 West Street, New York, New York, 10282, no earlier than September 22, 2020 and no later than 5:00 p.m., Eastern Time, on October 22, 2020; provided, however, that in the event that the date of such Funds 2020 annual meeting of shareholders is advanced or delayed by more than 30 days from the date of the preceding years annual meeting, notice by the shareholder to be timely must be delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made.
Shareholder proposals that are submitted in a timely manner will not necessarily be included in a Funds proxy materials or be able to be presented at the 2021 annual meeting of shareholders. Inclusion of such proposals is subject to limitations under the federal securities laws and informational and other requirements of such Funds current Amended and Restated By-Laws, as in effect from time to time.
GMZ will not hold an annual meeting of shareholders in 2021 if the Reorganization is completed. However, if the Reorganization is terminated for any reason, GMZ expects to hold an annual meeting of shareholders in 2021.
100
Solicitation of proxies is being made primarily by the mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures on or about August 10, 2020. Shareholders of the Funds whose Common Shares are held by nominees such as brokers can vote their proxies by contacting their respective nominee. In addition to the solicitation of proxies by mail, employees of the Investment Adviser and its affiliates as well as dealers or their representatives may solicit proxies in person or by mail, telephone, telegraph, facsimile or oral communication. The Funds and the Investment Adviser have retained Computershare Fund Services (CFS), a proxy solicitation firm, to assist the solicitation and tabulation of proxies. The cost of CFSs services in connection with the proxy is approximately $26,330 for GER and $33,460 for GMZ. In addition, Donnelley Financial Solutions (DFIN) will assist the Funds in the printing of the proxy materials and Broadridge Financial Solutions (Broadridge) will assist with the distribution of proxy materials and the tabulation of proxies. The cost of DFINs and Broadridges services in connection with the proxy is approximately $49,282 for GER and $65,929 for GMZ.
The Proxy Materials are available to available online at www.proxy-direct.com/gld-31465 (please have the control number found on your proxy card or voting instruction form ready when you visit this website).
101
Certain legal matters in connection with the Common Shares will be passed upon for the Funds by Dechert LLP.
A representative of the Independent Registered Public Accounting Firm may virtually attend the Special Meeting and will have the opportunity to make a statement if he or she desires to do so and will be available to answer appropriate questions.
Under Delaware law and each Funds Amended and Restated Bylaws, the only matters that may be acted on at a Special Meeting of shareholders are those stated specifically in the notice of the Special Meeting. Accordingly, other than procedural matters relating to the proposals, no other business may properly come before the Special Meeting or any postponement or adjournment thereof. If any such procedural matter requiring a vote of shareholders should arise, the persons named as proxies will vote on such procedural matter in accordance with their discretion.
If at the time the Special Meeting is called to order a quorum is not present in person or by proxy, or if a quorum is present but sufficient votes in favor of a Proposal have not been received, the Special Meeting may be adjourned to a later date by the chairman of the meeting, or by a vote of shareholders. In the event of a shareholder vote on adjournment, any such adjournment will require the affirmative vote of a majority of the shares of a Fund present in person or by proxy at the session of the Special Meeting to be adjourned. The persons named as proxies will vote those proxies which they are entitled to vote in favor of such Proposal in favor of such an adjournment, and will vote those proxies required to be voted against such Proposal against any such adjournment. Abstentions effectively will be a vote against adjournment. Subject to the foregoing, the Special Meeting may be adjourned and re-adjourned without further notice to shareholders. However, if, after adjournment, a new record date is fixed for the adjourned meeting, the Secretary or an Assistant Secretary shall give notice of the adjourned meeting to Shareholders of record entitled to vote at such meeting.
Shareholders who want to communicate with the Board or any individual Trustee should write the Funds to the attention of the Secretary, c/o Goldman Sachs Asset Management, L.P., 200 West Street, New York, New York, 10282. The communication should indicate that you are a Fund shareholder. If the communication is intended for a specific Trustee and so indicates, it will be sent only to that Trustee. If a communication does not indicate a specific Trustee, it will be sent to the Chair of the Nominating and Governance Committee and the outside counsel to the Independent Trustees for further distribution as deemed appropriate by such persons.
Additionally, shareholders with complaints or concerns regarding accounting matters may address letters to the Funds Chief Compliance Officer, c/o Goldman Sachs Asset Management, L.P., 200 West Street, New York, New York, 10282. Shareholders who are uncomfortable submitting complaints to the Chief Compliance Officer may address letters directly to the Chair of the Audit Committee of the Board. Such letters may be submitted on an anonymous basis.
102
If you will not be present at the Special Meeting, we urge you to sign, date and promptly return the enclosed proxy card or voting instruction form in the envelope provided, which is addressed for your convenience and needs no postage if mailed in the United States. You may also vote easily and quickly by Internet or by telephone. In order to avoid the additional expense to the Funds of further solicitation, we ask your cooperation in returning your proxy promptly.
By Order of the Boards of Trustees
of Goldman Sachs MLP Income
Opportunities Fund and Goldman Sachs
MLP and Energy Renaissance Fund
Caroline L. Kraus
Secretary
103
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (Agreement) is made as of , 2020, by and between Goldman Sachs MLP Income Opportunities Fund, a Delaware statutory trust (Acquired Fund), and Goldman Sachs MLP and Energy Renaissance Fund, a Delaware statutory trust (the Acquiring Fund and, together with the Acquired Fund, the Funds).
This Agreement is intended to be and is adopted as a plan of reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the Code). The reorganization will consist of the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for common shares of beneficial interest (Common Shares), par value $0.001 per Common Share, of the Acquiring Fund (the Acquiring Fund Common Shares), the assumption by the Acquiring Fund of all liabilities of the Acquired Fund, and the distribution of the Acquiring Fund Common Shares to the shareholders of the Acquired Fund in complete liquidation of the Acquired Fund, all upon the terms and conditions hereinafter set forth in this Agreement (the Reorganization).
WHEREAS, the Acquired Fund is a non-diversified, closed-end management investment company, and the Acquiring Fund is a non-diversified, closed-end management investment company, and the Acquired Fund owns securities which are assets of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized to issue their Common Shares;
WHEREAS, the Board of Trustees of the Acquired Fund has determined that (1) participation in the Reorganization is in the best interests of the Acquired Fund and its shareholders, and (2) the interests of the existing shareholders of the Acquired Fund would not be diluted as a result of the Reorganization; and
WHEREAS, the Board of Trustees of the Acquiring Fund has determined that (1) participation in the Reorganization is in the best interests of the Acquiring Fund and its shareholders, and (2) the interests of the existing shareholders of the Acquiring Fund would not be diluted as a result of the Reorganization.
NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows:
ARTICLE I
THE REORGANIZATION AND FUND TRANSACTIONS
1.1 The Reorganization. Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, at the Effective Time (as defined in paragraph 3.1), the Acquired Fund shall assign, deliver and otherwise transfer its Assets (as defined in paragraph 1.2) to the Acquiring Fund, and the Acquiring Fund shall assume the Liabilities (as defined in paragraph 1.3) of the Acquired Fund. In consideration of the foregoing, at the Effective Time, the Acquiring Fund shall deliver to the Acquired Fund full Acquiring Fund Common Shares as provided in this Agreement. The number of Acquiring Fund Common Shares to be delivered shall be determined as set forth in paragraph 2.3.
1.2 Assets of the Acquired Fund. The assets of the Acquired Fund to be acquired by the Acquiring Fund shall consist of all assets and property, including, without limitation, all cash, cash equivalents, securities, receivables (including securities, interests and dividends receivable), commodities and futures interests, rights to register shares under applicable securities laws, any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund at the Valuation Time, books and records of the Acquired Fund, and any other property owned by the Acquired Fund at the Valuation Time (collectively, the Assets).
A-1
1.3 Liabilities of the Acquired Fund. The Acquired Fund will use commercially reasonable efforts to discharge all of its known liabilities and obligations prior to the Valuation Time consistent with its obligation to continue to pursue its investment objective and strategies in accordance with the terms of its prospectus. The Acquiring Fund will assume all of the Acquired Funds liabilities and obligations of any kind whatsoever, whether known or unknown, absolute, accrued, contingent or otherwise, in existence on the Closing Date (as defined in paragraph 3.1) (collectively, the Liabilities).
1.4 Distribution of Acquiring Fund Common Shares. At the Effective Time (or as soon thereafter as is reasonably practicable), the Acquired Fund will distribute the Acquiring Fund Common Shares received from the Acquiring Fund pursuant to paragraph 1.1 to the record holders of the Common Shares of the Acquired Fund determined as of the Effective Time (the Acquired Fund Record Shareholders) in complete liquidation of the Acquired Fund. Such distribution and liquidation will be accomplished by the transfer of the Acquiring Fund Common Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Record Shareholders. The aggregate net asset value of the Acquiring Fund Common Shares to be so credited to Acquired Fund Record Shareholders shall be equal to the aggregate net asset value of the then outstanding Common Shares of the Acquired Fund (the Acquired Fund Common Shares) owned by Acquired Fund Record Shareholders at the Effective Time. The Acquiring Fund shall not issue certificates representing the Acquiring Fund Common Shares in connection with such exchange. No fractional shares of Acquiring Fund Common Shares will be issued to Acquired Fund Record Shareholders. Acquired Fund Record Shareholders who would otherwise have been entitled to receive fractional shares of Acquiring Fund Common Shares will receive a cash payment in lieu thereof (Cash Payment). Following the distribution of the Acquiring Fund Common Shares in complete liquidation of the Fund, the Acquired Fund shall be terminated in accordance with the Delaware Statutory Trust Act (the Delaware Act) and terminate its registration under the Investment Company Act of 1940, as amended (the 1940 Act).
1.5 Recorded Ownership of Acquiring Fund Common Shares. Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring Funds Transfer Agent (as defined in paragraph 3.3).
1.6 Filing Responsibilities of Acquired Fund. Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (Commission), any state securities commission, and any Federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Fund.
ARTICLE II
VALUATION
2.1 Net Asset Value of the Acquired Fund. The net asset value of the Acquired Fund Common Shares shall be the net asset value computed as of the Valuation Time, after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of the Acquired Fund (which are the same as those of the Acquiring Fund).
2.2 Net Asset Value of the Acquiring Fund. The net asset value of the Acquiring Fund Common Shares shall be the net asset value computed as of the Valuation Time, after the declaration and payment of any dividends and/or other distributions on that date, using the valuation procedures of the Acquiring Fund (which are the same as those of the Acquired Fund).
A-2
2.3 Calculation of Number of Acquiring Fund Common Shares. The number of Acquiring Fund Common Shares to be issued in connection with the Reorganization shall be determined by dividing the value of the net asset value per Common Share of the Acquired Fund Common Shares participating therein, determined in accordance with the valuation procedures referred to in paragraph 2.1 by the net asset value per Common Share of the Acquiring Fund determined in accordance with the valuation procedures referred to in paragraph 2.2. The parties agreed that the intent of this calculation is to ensure that the aggregate net asset value of the Acquiring Fund Common Shares to be so credited to Acquired Fund Record Shareholders shall be equal to the aggregate net asset value of the then outstanding Common Shares, par value $0.001 per Common Share, of the Acquired Fund Common Shares owned by Acquired Fund Record Shareholders at the Effective Time.
2.4 Determination of Value. All computations of value hereunder shall be made in accordance with each Funds regular practice and the requirements of the 1940 Act, and shall be subject to confirmation by each Funds respective independent registered public accounting firm upon reasonable request of the other Fund. The Acquiring Fund and Acquired Fund agree to use all commercially reasonable efforts to resolve prior to the Valuation Time any material pricing differences for prices of portfolio securities of the Acquired Fund which are also held by the Acquiring Fund.
2.5 Valuation Time. The Valuation Time shall be the time at which the Funds calculate their net asset values as set forth in their respective prospectuses (normally the close of regular trading on the New York Stock Exchange (NYSE)) on the business day immediately preceding the Closing Date or such other time as agreed to in writing by the Funds (the Valuation Time).
ARTICLE III
CLOSING
3.1 Closing. The Reorganization, together with related actions necessary to consummate the same (Closing), shall occur at the principal office of Goldman Sachs Asset Management, L.P. on or about September 25, 2020, or at such other place and/or on such other date as to which the parties may agree (the Closing Date). On the Closing Date, the Funds shall cause the Reorganization to be consummated by filing with the Secretary of State of the State of Delaware in accordance with the Delaware Act. The Merger shall become effective at such time as such filing is duly filed with the Secretary of State of the State of Delaware, or at such subsequent date or time as the Funds shall agree and specify in the filing (the Effective Time). All acts taking place at the Closing shall be deemed to take place immediately prior to the Effective Time unless otherwise provided herein. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the Delaware Act. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise provided herein, all the Assets, rights, privileges, powers and franchises of the Acquired Fund shall vest in the Acquiring Fund, and all Liabilities, restrictions, disabilities and duties of the Acquired Fund shall become the Liabilities, obligations, restrictions, disabilities and duties of the Acquiring Fund.
3.2 Transfer and Delivery of Assets. The Acquired Fund shall direct State Street Bank and Trust Company (State Street), as custodian for the Acquired Fund, to deliver, at the Closing, a certificate of an authorized officer stating that (i) the Assets were delivered in proper form to the Acquiring Fund at the Effective Time, and (ii) all necessary taxes in connection with the delivery of the Assets, including all applicable Federal and state stock transfer stamps, if any, have been paid or provision for payment has been made. The Acquired Funds portfolio securities represented by a certificate or other written instrument shall be presented by State Street, on behalf of the Acquired Fund, to State Street, as custodian for the Acquiring Fund. Such presentation shall be made for examination no later than five (5) business days preceding the Effective Time and shall be transferred and delivered by the Acquired Fund as of the Effective Time for the account of the Acquiring Fund duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof. State Street, on behalf of the Acquired Fund, shall deliver to State Street, as custodian of the Acquiring Fund, as of the Effective
A-3
Time by book entry, in accordance with the customary practices of State Street and of each securities depository, as defined in Rule 17f-4 under the 1940 Act, in which the Acquired Funds Assets are deposited, the Acquired Funds Assets deposited with such depositories. The cash to be transferred by the Acquired Fund shall be delivered by wire transfer of Federal funds at the Effective Time. To the extent that any Assets of the Acquired Fund, for any reason, are not transferable at the Closing, the Acquired Fund shall cause such Assets of the Acquired Fund to be transferred to the Acquiring Funds account with State Street at the earliest practicable date thereafter.
3.3 Share Records. The Acquired Fund shall direct Computershare Trust Company, N.A., in its capacity as transfer agent for the Acquired Fund (the Transfer Agent), to deliver at the Closing a certificate of an authorized officer stating that its records contain the names and addresses of the Acquired Fund Record Shareholders and the number and percentage ownership of outstanding Acquired Fund Shares owned by each such Acquired Fund Record Shareholder immediately prior to the Closing. The Acquiring Fund shall issue and deliver to the Secretary of the Acquired Fund prior to the Effective Time a confirmation evidencing that the appropriate number of Acquiring Fund Common Shares will be credited to the Acquired Fund at the Effective Time, or provide other evidence satisfactory to the Acquired Fund as of the Effective Time that such Acquiring Fund Common Shares have been credited to the Acquired Funds accounts on the books of the Acquiring Fund.
3.4 Postponement of Valuation Time. In the event that at the Valuation Time NYSE or another primary trading market for portfolio securities of the Acquiring Fund or the Acquired Fund (each, an Exchange) shall be closed to trading or trading thereupon shall be restricted, or trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that, in the judgment of the Board of Trustees of the Funds, accurate appraisal of the value of the net assets of the Acquired Fund or the Acquiring Fund, respectively, is impracticable, the Valuation Time shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of the Acquired Fund. Except as has been fully disclosed to the Acquiring Fund in a written instrument executed by an officer of The Acquired Fund, the Acquired Fund represents and warrants to the Acquiring Fund as follows:
(a) The Acquired Fund is a Delaware statutory trust duly organized, validly existing and in good standing under the laws of the State of Delaware, with power under its Declaration of Trust and Amended and Restated Bylaws, as amended from time to time, to own all of its properties and assets and to carry on its business as it is presently conducted.
(b) The Acquired Fund is registered with the Commission as a closed-end management investment company under the 1940 Act, and the registration of the Acquired Fund Common Shares under the Securities Act of 1933, as amended (the 1933 Act), is in full force and effect.
(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated herein, except such as have been obtained under the Delaware Act, the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940 Act, and such as may be required under state securities laws.
(d) At the Effective Time, the Acquired Fund will have good and marketable title to the Assets and full right, power, and authority to sell, assign, transfer and deliver such Assets hereunder free of any liens or other encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof other than such restrictions as might arise under the 1933 Act.
A-4
(e) The Acquired Fund is not engaged currently, and the execution, delivery and performance of this Agreement will not result, in (i) a violation of Delaware law or a material violation of its Declaration of Trust and Amended and Restated Bylaws, or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Fund is a party or by which it is bound, or (ii) the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquired Fund is a party or by which it is bound.
(f) All material contracts or other commitments of the Acquired Fund (other than this Agreement and certain investment contracts, including options, futures, forward contracts and other similar instruments) will terminate without liability or obligation to the Acquired Fund on or prior to the Effective Time.
(g) Except as otherwise disclosed to and accepted by the Acquiring Fund in writing, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against the Acquired Fund or any of its properties or assets that, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business. The Acquired Fund knows of no facts which might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects its business or its ability to consummate the transactions herein contemplated.
(h) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets, Statement of Cash Flows and Schedule of Investments of the Acquired Fund at November 30, 2019 have been audited by PricewaterhouseCoopers LLP (PwC), independent registered public accounting firm, and are in accordance with accounting principles generally accepted in the United States of America (GAAP) consistently applied, and such statements (copies of which have been furnished to the Acquiring Fund) present fairly, in all material respects, the financial condition of the Acquired Fund as of such date in accordance with GAAP, and there are no known contingent liabilities of the Acquired Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein.
(i) Since November 30, 2019 until the Effective Time, there has not been any material adverse change in the Acquired Funds financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquired Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Acquiring Fund in writing. For the purposes of this subparagraph (i), a decline in net asset value per Common Share of Acquired Fund Common Shares due to declines in market values of securities held by the Acquired Fund, or the discharge of the Acquired Funds liabilities shall not constitute a material adverse change.
(j) At the Effective Time, all material Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquired Fund required by law to have been filed by such date (including any extensions, if any) shall have been filed and are or will be correct in all material respects, and all material Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof and no such return is currently under audit or examination and no assessment has been asserted with respect to such returns.
(k) All of the issued and outstanding Common Shares of the Acquired Fund will, at the time of Closing, be held by the persons and in the amounts set forth in the records of the Transfer Agent, on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Acquired Fund Common Shares, nor is there outstanding any security convertible into any of the Acquired Fund Common Shares.
(l) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Effective Time by all necessary action, if any, on the part of the Board of Trustees of the Acquired Fund, and, subject to the approval of the shareholders of the Acquired Fund, this Agreement will constitute a valid and
A-5
binding obligation of the Acquired Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles.
(m) The information to be furnished by the Acquired Fund for use in registration statements, proxy materials and other documents filed or to be filed with any Federal, state or local regulatory authority (including the Financial Industry Regulatory Authority (FINRA)), which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with Federal securities and other laws and regulations thereunder applicable thereto.
(n) The Joint Proxy Statement/Prospectus (as defined in paragraph 5.6), insofar as it relates to the Acquired Fund, will, through the date of the meeting of the shareholders of the Acquired Fund contemplated therein and at the Effective Time (i) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading, and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder; provided, however, that the representations and warranties of this subparagraph (n) shall not apply to statements in or omissions from the Joint Proxy Statement/Prospectus made in reliance upon and in conformity with information that was furnished by the Acquiring Fund for use therein.
4.2 Representations and Warranties of the Acquiring Fund. Except as has been fully disclosed to the Acquired Fund in a written instrument executed by an officer of the Acquiring Fund, the Acquiring Fund represents and warrants to the Acquired Fund as follows:
(a) The Acquiring Fund is a Delaware statutory trust duly organized, validly existing, and in good standing under the laws of the State of Delaware with power under its Declaration of Trust and Amended and Restated Bylaws, as amended from time to time, to own all of its properties and assets and to carry on its business as it is presently conducted.
(b) At the Effective Time, the Acquiring Fund will be registered with the Commission as a closed-end management investment company under the 1940 Act, and the registration of the Acquiring Fund Common Shares under the 1933 Act will be in full force and effect.
(c) No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws.
(d) Joint Proxy Statement/Prospectus of the Acquiring Fund filed with the Commission on July 28, 2020 on Form N-14 which will become effective prior to the Closing Date, conforms and, as of its effective date and the Closing Date, will conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and does not and, as of its effective date and the Closing Date, will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not materially misleading.
(e) At the Effective Time, the Acquiring Fund will have good and marketable title to the Acquiring Funds assets, free of any liens or other encumbrances.
(f) The Acquiring Fund is not engaged currently, and the execution, delivery and performance of this Agreement will not result, in (i) a violation of Delaware law or a material violation of its Declaration of Trust and Amended and Restated Bylaws or of any agreement, indenture, instrument, contract, lease or other
A-6
undertaking to which the Acquiring Fund is a party or by which it is bound, or (ii) the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which the Acquiring Fund is a party or by which it is bound.
(g) Except as otherwise disclosed to and accepted by the Acquired Fund in writing, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to the Acquiring Funds knowledge, threatened against the Acquiring Fund, or any of the Acquiring Funds properties or assets that, if adversely determined, would materially and adversely affect the Acquiring Funds financial condition or the conduct of its business. The Acquiring Fund knows of no facts which might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects the Acquiring Funds business or its ability to consummate the transactions herein contemplated.
(h) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets, Statement of Cash Flows and Schedule of Investments of the Acquiring Fund at November 30, 2019 have been audited by PwC, independent registered public accounting firm, and are in accordance with GAAP consistently applied, and such statements (copies of which have been furnished to the Acquired Fund) present fairly, in all material respects, the financial condition of the Acquiring Fund as of such date in accordance with GAAP, and there are no known contingent liabilities of the Acquiring Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein.
(i) Since November 30, 2019 until the Effective Time, there has not been any material adverse change in the Acquiring Funds financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquiring Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Acquired Fund in writing. For the purposes of this subparagraph (i), a decline in net asset value per Common Share of Acquiring Fund Common Shares due to declines in market values of securities held by the Acquiring Fund, or the discharge of the Acquiring Funds liabilities, shall not constitute a material adverse change.
(j) At the Effective Time, all material Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (including any extensions, if any) shall have been filed and are or will be correct in all material respects, and all material Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof to the best of the knowledge of the Acquiring Fund, and no such return is currently under audit or examination and no assessment has been asserted with respect to such returns.
(k) The execution, delivery and performance of this Agreement will have been duly authorized prior to the Effective Time by all necessary action, if any, on the part of the Board of Trustees of the Acquiring Fund, and this Agreement will constitute a valid and binding obligation of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles.
(l) The Acquiring Fund Common Shares to be issued and delivered to the Acquired Fund, for the account of the Acquired Fund Record Shareholders, pursuant to the terms of this Agreement, will at the Effective Time have been duly authorized and, when so issued and delivered, will be duly and validly issued Acquiring Fund Common Shares, will be fully paid and non-assessable by the Acquiring Fund and will have been issued in every jurisdiction in compliance in all material respects with applicable registration requirements and applicable securities laws. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of the Acquiring Fund Common Shares, nor is there outstanding any security convertible into any of the Acquiring Fund Common Shares.
A-7
(m) The information to be furnished by the Acquiring Fund for use in the registration statements, proxy materials and other documents filed or to be filed with any Federal, state or local regulatory authority (including FINRA) that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with Federal securities and other laws and regulations applicable thereto.
(n) The Joint Proxy Statement/Prospectus, insofar as it relates to the Acquiring Fund and the Acquiring Fund Common Shares, will, through the date of the meeting of shareholders of the Acquired Fund contemplated therein and at the Effective Time (i) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading, and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder; provided, however, that the representations and warranties of this subparagraph (n) shall not apply to statements in or omissions from the Joint Proxy Statement/Prospectus made in reliance upon and in conformity with information that was furnished by the Acquired Fund for use therein.
ARTICLE V
COVENANTS AND AGREEMENTS
5.1 Conduct of Business. The Acquiring Fund and the Acquired Fund each will operate its business in the ordinary course consistent with its practice between the date hereof and the Effective Time, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and distributions, and any other distribution that may be advisable.
5.2 Meeting of Shareholders. The Acquired Fund will call a meeting of the shareholders of the Acquired Fund to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein.
5.3 No Distribution of Acquiring Fund Common Shares. The Acquired Fund covenants that the Acquiring Fund Common Shares to be issued hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms of this Agreement.
5.4 Information. The Acquired Fund will assist the Acquiring Fund in obtaining such information as the Acquiring Fund reasonably requests concerning the beneficial ownership of the Acquired Fund Common Shares.
5.5 Other Necessary Action. Subject to the provisions of this Agreement, the Acquiring Fund and the Acquired Fund will each take, or cause to be taken, all action, and do or cause to be done all things, reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.
5.6 Joint Proxy Statement/Prospectus. The Acquired Fund will provide the Acquiring Fund with information regarding the Acquired Fund, and the Acquiring Fund will provide the Acquired Fund with information regarding the Acquiring Fund, reasonably necessary for the preparation of a joint proxy statement/prospectus on Form N-14 (the Joint Proxy Statement/Prospectus), in compliance with the 1934 Act and the 1940 Act in connection with the meeting of the shareholders Acquired Fund to consider approval of the Agreement and the transactions contemplated herein.
5.7 Liquidating Distribution. As soon as is reasonably practicable after the Closing, the Acquired Fund will make a liquidating distribution to the Acquired Fund Record Shareholders consisting of the Acquiring Fund Common Shares received at the Closing and the necessary filings for its termination pursuant to the Delaware Act.
A-8
5.8 Best Efforts. The Acquiring Fund and the Acquired Fund shall each use their reasonable best efforts to fulfill or obtain the fulfillment of the conditions precedent set forth in Article VI to effect the transactions contemplated by this Agreement as promptly as practicable.
5.9 Other Instruments. The Acquired Fund and the Acquiring Fund, each covenant that it will, from time to time, execute and deliver or cause to be executed and delivered all such assignments and other instruments, and will take or cause to be taken such further action as the other party may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Fund, title to and possession of the Acquiring Fund Common Shares to be delivered hereunder, and (b) the Acquiring Fund, title to and possession of all the Assets and otherwise to carry out the intent and purpose of this Agreement.
5.10 Regulatory Approvals. The Acquiring Fund will use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state blue sky or securities laws as may be necessary in order to continue its operations after the Effective Time.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent to Obligations of Acquired Fund. The obligations of the Acquired Fund, to consummate the transactions provided for herein shall be subject to the following conditions:
(a) All representations and warranties of the Acquiring Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Effective Time, with the same force and effect as if made on and as of the Effective Time.
(b) The Acquiring Fund shall have delivered to the Acquired Fund a certificate executed in the name of the Acquiring Fund by its President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquired Fund, and dated as of the Effective Time, to the effect that the representations and warranties of the Acquiring Fund, made in this Agreement are true and correct at and as of the Effective Time, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Acquired Fund shall reasonably request.
(c) The Acquiring Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquiring Fund, on or before the Effective Time.
(d) The Acquired Fund and the Acquiring Fund shall have agreed on the number of full Acquiring Fund Common Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 2.3.
6.2 Conditions Precedent to Obligations of Acquiring Fund. The obligations of the Acquiring Fund to complete the transactions provided for herein shall be subject to the following conditions:
(a) All representations and warranties of the Acquired Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Effective Time, with the same force and effect as if made on and as of the Effective Time.
(b) The Acquired Fund shall have delivered to the Acquiring Fund a statement of the Acquired Funds Assets and Liabilities, as of the Effective Time, which is prepared in accordance with GAAP and certified by the Treasurer of the Acquired Fund.
A-9
(c) The Acquired Fund, shall have delivered to the Acquiring Fund a certificate executed in the name of the Acquired Fund by its President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquiring Fund and dated as of the Effective Time, to the effect that the representations and warranties of the Acquired Fund, made in this Agreement are true and correct at and as of the Effective Time, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Acquiring Fund shall reasonably request.
(d) The Acquired Fund, shall have performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by the Acquired Fund, on or before the Effective Time.
(e) The Acquired Fund and the Acquiring Fund shall have agreed on the number of full Acquiring Fund Common Shares to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 2.3.
6.3 Other Conditions Precedent. If any of the conditions set forth in this paragraph 6.3 have not been satisfied on or before the Effective Time, the Acquired Fund or the Acquiring Fund shall, at its option, not be required to consummate the transactions contemplated by this Agreement.
(a) The Agreement and the transactions contemplated herein shall have been approved by the requisite rate of the holder of outstanding Common Shares of the Acquired Fund in accordance with the Acquired Funds Declaration of Trust and Amended and Restated Bylaws, applicable Delaware law and the 1940 Act and certified copies of the resolutions evidencing such approval shall have been delivered to the Acquiring Fund. Notwithstanding anything herein to the contrary, neither the Acquired Fund nor the Acquiring Fund, respectively, may not waive the conditions set forth in this paragraph 6.3(a).
(b) At the Effective Time, no action, suit or other proceeding shall be pending or, to the knowledge of either Fund, threatened before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein.
(c) All consents of other parties and all other consents, orders and permits of Federal, state and local regulatory authorities deemed necessary by either Fund to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Acquired Fund, provided that either party hereto may for itself waive any of such conditions.
(d) The Funds shall have received an opinion of Dechert LLP, special counsel to the Acquired Fund and the Acquiring Fund, as to U.S. federal income tax matters substantially to the effect that, based on the facts, representations, assumptions stated therein and conditioned on consummation of the Reorganization in accordance with this Agreement, for federal income tax purposes:
1. The Reorganization will constitute a tax-free reorganization within the meaning of Section 368(a) of the Code, and the Acquiring Fund and the Acquired Fund will each be a party to a reorganization within the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by the Acquired Fund upon the transfer of the Assets of the Acquired Fund to the Acquiring Fund in exchange solely for the assumption by the Acquiring Fund of the Acquired Funds Liabilities, cash in lieu of fractional shares and the Acquiring Fund Common Shares or upon the distribution (whether actual or constructive) of Acquiring Fund Shares to Acquired Fund Record Shareholders in exchange for their Acquired Fund Common Shares, except for any gain or loss that may be required to be recognized solely as a result of the close of the Acquired Funds taxable year due to the Reorganization or as a result of the transfer of any stock in a passive foreign investment company as defined in Section 1297(a) of the Code;
A-10
3. No gain or loss will be recognized by the Acquiring Fund upon the receipt of the Assets in exchange solely for the assumption by the Acquiring Fund of the Liabilities;
4. The adjusted tax basis of the Assets received by the Acquiring Fund will be the same as the adjusted tax basis of such Assets to the Acquired Fund immediately prior to the Reorganization, except for any Assets which may be marked to market for U.S. federal income tax purposes on the termination of the Acquired Funds taxable year or on which gain was recognized upon the transfer to the Acquiring Fund;
5. The holding period of the Assets received by the Acquiring Fund will include the holding period of those Assets in the hands of the Acquired Fund immediately prior to the Reorganization (except to the extent that the investment activities of the Acquiring Fund reduce or eliminate such holding period and except for any assets on which gain is recognized on the transfer to the Acquiring Fund);
6. No gain or loss will be recognized by any Acquired Fund Record Shareholder upon the exchange of its Acquired Fund shares solely for Acquiring Fund Shares (except with respect to cash received in lieu of fractional shares) pursuant to the Reorganization;
7. Immediately after the Reorganization, the aggregate tax basis of the Acquiring Fund Common Shares received by the Acquired Fund Record Shareholders pursuant to the Reorganization will be the same as the aggregate tax basis of the Acquired Fund Common Shares actually or constructively held by such Acquired Fund Record Shareholder immediately prior to the Reorganization (as adjusted for amounts allocable to cash received in lieu of any fractional shares; and
8. The holding period of the Acquiring Fund Shares received by each Acquired Fund Shareholder will include the period during which the Acquired Fund Common Shares exchanged therefor were held by such Acquired Fund Shareholder, provided the Acquired Fund Common Shares are held as capital assets at the time of the Reorganization.
No opinion will be expressed as to the effect of the Reorganization on (i) the taxable year of any Acquired Fund Record Shareholders, (ii) the Acquired Fund or the Acquiring Fund with respect to any asset as to which a mark-to-market system of accounting, the passive foreign investment company rules under Section 1297(a) of the Code, the personal holding company rules under Section 542 of the Code, or Section 1256 of the Code applies, or (iii) any Common Shares held as a result of or attributable to compensation for services by any person.
Such opinion shall be based on customary assumptions, limitations and such representations as Dechert LLP may reasonably request, and the Acquired Fund and Acquiring Fund will cooperate to make and certify the accuracy of such representations. Such opinion may contain such assumptions and limitations as shall be in the opinion of such counsel appropriate to render the opinions expressed therein. Notwithstanding anything herein to the contrary, neither party may waive the condition set forth in this paragraph 6.3(d).
(e) State Street shall have delivered such certificates or other documents as set forth in paragraph 3.2.
(f) The Transfer Agent shall have delivered to the Acquiring Fund a certificate of its authorized officer as set forth in paragraph 3.3.
(g) The Acquiring Fund shall have issued and delivered to the Secretary of the Acquired Fund the confirmation as set forth in paragraph 3.3.
(h) Each party shall have delivered to the other such bills of sale, checks, assignments, receipts or other documents as reasonably requested by such other party or its counsel.
A-11
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification by the Acquiring Fund. The Acquiring Fund agrees to indemnify and hold harmless the Acquired Fund, and their trustees, officers, employees and agents (the Acquired Fund Indemnified Parties) from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquired Fund Indemnified Parties may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquiring Fund of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Acquiring Fund or the members of the Acquiring Funds Board or its officers prior to the Closing Date, provided that this indemnification shall not apply to the extent such loss, claim, damage, liability or expense (or actions with respect thereto) shall be due to any negligent, intentional or fraudulent act, omission or error of the Acquired Fund or its respective trustees, officers or agents.
7.2 Indemnification by the Acquired Fund. The Acquired Fund agrees to indemnify and hold harmless the Acquiring Fund, and their trustees, officers, employees and agents (the Acquiring Fund Indemnified Parties) from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the Acquiring Fund Indemnified Parties may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Acquired Fund of any of its representations, warranties, covenants or agreements set forth in this Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to he committed by the Acquired Fund or the members of the Acquired Funds Board or its officers prior to the Closing Date, provided that this indemnification shall not apply to the extent such loss, claim, damage, liability or expense (or actions with respect thereto) shall be due to any negligent, intentional or fraudulent act, omission or error of the Acquiring Fund or its respective trustees, officers or agents.
7.3 Liability of the Acquired Fund. The Acquiring Fund understands and agrees that the obligations of the Acquired Fund under this Agreement shall not be binding upon any trustee, shareholder, nominee, officer, agent or employee of the Acquired Fund on behalf of the Acquired Fund personally, but bind only the Acquired Fund and the Acquired Funds property. Moreover, all persons shall look only to the assets of the Acquired Fund to satisfy the obligations of the Acquired Fund hereunder. The Acquiring Fund represents that it has notice of the provisions of the Declaration of Trust of the Acquired Fund disclaiming such shareholder and trustee liability for acts or obligations of the Acquired Fund.
7.4 Liability of the Acquiring Fund. The Acquired Fund understands and agrees that the obligations of the Acquiring Fund under this Agreement shall not be binding upon any trustee, shareholder, nominee, officer, agent or employee of the Acquiring Fund personally, but bind only the Acquiring Fund and the Acquiring Funds property. Moreover, all persons shall look only to the assets of the Acquiring Fund to satisfy the obligations of the Acquiring Fund thereunder. The Acquired Fund represents that it has notice of the provisions of the Declaration of Trust of the Acquiring Fund disclaiming such shareholder and trustee liability for acts or obligations of the Acquiring Fund.
ARTICLE VIII
BROKERAGE FEES AND EXPENSES
8.1 No Broker or Finder Fees. The Acquiring Fund and the Acquired Fund represent and warrant to each other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein.
A-12
ARTICLE IX
AMENDMENTS AND TERMINATION
9.1 Amendments. This Agreement may be amended, modified or supplemented in such manner as may be deemed necessary or advisable by the authorized officers of either the Acquired Fund or the Acquiring Fund, respectively; provided, however, that following the approval of this Agreement by the Board of Trustees of the Acquired Fund pursuant to paragraph 6.3(a) of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of Acquiring Fund Common Shares to be issued to the Acquired Fund Record Shareholders under this Agreement to the detriment of such shareholders without the Board of Trustees further approval.
9.2 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by resolution of the Board of Trustees of the Acquired Fund or the Acquiring Fund, respectively, at any time prior to the Effective Time, if circumstances should develop that, in the opinion of such Board of Trustees, make proceeding with the Agreement inadvisable.
ARTICLE X
NOTICES
Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by facsimile, electronic delivery (i.e., e-mail) personal service or prepaid or certified mail addressed as follows:
If to Goldman Sachs MLP Income Opportunities Fund:
200 West Street
New York, New York 10282
Attention: Caroline L. Kraus, Secretary
If to Goldman Sachs MLP and Energy Renaissance Fund:
200 West Street
New York, New York 10282
Attention: Caroline L. Kraus, Secretary
ARTICLE XI
MISCELLANEOUS
11.1 Entire Agreement. Each Fund agrees that it has not made any representation, warranty or covenant, not set forth herein, and that this Agreement constitutes the entire agreement between the parties.
11.2 Survival. The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith, and the obligations with respect to indemnification of the Acquired Fund and Acquiring Fund contained in paragraphs 7.1 and 7.2, shall survive the Closing.
11.3 Headings. The Article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
A-13
11.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its principles of conflicts of laws.
11.5 Assignment. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.
11.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all taken together shall constitute one agreement.
A-14
MLPCEFSPCLPROXY2020
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE REORGANIZATION OF
GOLDMAN SACHS MLP INCOME OPPORTUNITIES FUND INTO
GOLDMAN SACHS MLP AND ENERGY RENAISSANCE FUND
Dated July 28, 2020
This Statement of Additional Information is available to the shareholders of Goldman Sachs MLP Income Opportunities Fund (GMZ) and Goldman Sachs MLP and Energy Renaissance Fund (GER, or the Combined Fund) (each, a Fund and together, the Funds) in connection with the proposed reorganization (the Reorganization) whereby GMZ will transfer all of its assets to GER in exchange for common shares of beneficial interest (Common Shares) of GER, which will be distributed by GMZ to its shareholders in the form of a liquidating distribution, and the assumption by GER of all of the liabilities of GMZ. GMZ will liquidate and terminate its existence pursuant to its Declaration of Trust, Amended and Restated Bylaws, the Investment Company Act of 1940, as amended (the 1940 Act), and Delaware law. The aggregate net asset value of GER Common Shares received by the common shareholders of GMZ in the Reorganization will equal the aggregate net asset value (NAV) of GMZ Common Shares held by such shareholders immediately prior to the Reorganization. Unless otherwise defined herein, capitalized terms have the meanings given to them in the Joint Proxy Statement/Prospectus.
This Statement of Additional Information is not a prospectus and should be read in conjunction with the Joint Proxy Statement/Prospectus dated July 28, 2020 relating to the proposed Reorganization of GMZ into GER. A copy of the Joint Proxy Statement/Prospectus may be obtained, without charge, by writing to the Funds at: c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306; or by telephone toll-free at 1-800-621-2550.
GER will provide, without charge, upon the written or oral request of any person to whom this Statement of Additional Information is delivered, a copy of any and all documents that have been incorporated by reference in the registration statement of which this Statement of Additional Information is a part.
S-1 | ||||
S-35 | ||||
S-49 | ||||
S-57 | ||||
S-73 | ||||
S-74 | ||||
S-75 | ||||
A-1 |
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The following information supplements the discussion of the Funds investment objectives, policies and techniques that are described in the Joint Proxy Statement/Prospectus.
Descriptions of Investment Securities and Practices
For the purpose of this section, the Fund or a Fund refers to each of GMZ and GER, as applicable.
Master Limited Partnerships (GER and GMZ)
A MLP is an entity generally receiving partnership taxation treatment under the Code, and whose interests or units are traded on securities exchanges like shares of corporate stock. A typical MLP consists of a general partner and limited partners; however, some entities receiving partnership taxation treatment under the Code are established as limited liability companies. The general partner manages the partnership; has an ownership stake in the partnership; and is typically eligible to receive an incentive distribution. The limited partners provide capital to the partnership, have a limited (if any) role in the operation and management of the partnership, and receive cash distributions. Due to their partnership structure, MLPs generally do not pay income taxes.
Holders of MLP units could potentially become subject to liability for all of the obligations of an MLP, if a court determines that the rights of the unitholders to take certain action under the limited partnership agreement would constitute control of the business of that MLP, or if a court or governmental agency determines that the MLP is conducting business in a state without complying with the limited partnership statute of that state.
To be treated as a partnership for U.S. federal income tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain marketing of mineral or natural resources. Many of the MLPs in which the Fund invests operate oil, gas or petroleum facilities, or other facilities within the energy sector.
The Fund intends to concentrate its investments in the energy sector, with a focus on midstream MLPs. Midstream MLPs are generally engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude oil, refined products or coal. Midstream MLPs may also operate ancillary businesses including marketing of energy products and logistical services. The Fund may also invest in upstream and downstream MLPs. Upstream MLPs are primarily engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. Downstream MLPs are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil. The MLPs in which the Fund invests may also engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel.
MLPs Structured as Limited Liability Companies (GER and GMZ)
Some energy companies in which the Fund may invest have been organized as limited liability companies (MLP LLCs). Such MLP LLCs are treated in the same manner as MLPs organized as LPs for federal income tax purposes. Consistent with its investment objective and policies, the Fund may invest in common units or other securities of such MLP LLCs. MLP LLC common units represent an equity ownership interest in an MLP LLC, entitling the holders to a share of the MLP LLCs success through distributions and/or capital appreciation. Similar to MLPs, MLP LLCs typically do not pay federal income tax at the entity level and are required by their operating agreements to distribute a large percentage of their current operating earnings. MLP LLC common unitholders generally have first right to a minimum quarterly distribution (MQD) prior to distributions to subordinated unitholders and typically have arrearage rights if the MQD is not met. In the event of liquidation, MLP LLC common unitholders have first right to the MLP LLCs remaining assets after bondholders, other debt
S-1
holders and preferred unitholders, if any, have been paid in full. MLP LLC common units trade on a national securities exchange or OTC. In contrast to MLPs, MLP LLCs have no general partner and there are generally no incentives that entitle management or other unitholders to increased percentages of cash distributions as distributions reach higher target levels. In addition, MLP LLC common unitholders typically have voting rights with respect to the MLP LLC, whereas MLP common units have limited voting rights.
MLPs Taxed as C Corporations (GER and GMZ)
Some MLPs are organized as LPs or LLCs, but are taxed as C corporations that are subject to corporate income tax to the extent they recognize taxable income and are subject to U.S. federal income tax on their taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. Investments in MLPs that are taxed as C corporations may not offer the advantageous tax characteristics of investments in other MLP units.
MLP Affiliates and I-Units (GER and GMZ)
The Fund may invest in equity and debt securities issued by affiliates of MLPs, including the general partners or managing members of MLPs and companies that own MLP general partner interests and are energy companies. Such issuers may be organized and/or taxed as corporations and therefore may not offer the advantageous tax characteristics of MLP units. The Fund may purchase such other MLP equity securities through market transactions, but may also do so through direct placements.
I-Units. I-Units represent an indirect ownership interest in an MLP and are issued by an MLP affiliate. The MLP affiliate uses the proceeds from the sale of I-Units to purchase limited partnership interests in its affiliated MLP. Thus, I-Units represent an indirect interest in an MLP. I-Units have limited voting rights and are similar in that respect to MLP common units. I-Units differ from MLP common units primarily in that instead of receiving cash distributions, holders of I-Units will receive distributions of additional I-Units in an amount equal to the cash distributions received by common unit holders. I-Units are traded on NYSE. Issuers of MLP I-Units are treated as corporations and not partnerships for tax purposes.
MLP General Partner or Managing Member Interests. The general partner or managing member interest in an MLP is typically retained by the original sponsors of an MLP, such as its founders, corporate partners and entities that sell assets to the MLP. The holder of the general partner or managing member interest can be liable in certain circumstances for amounts greater than the amount of the holders investment in the general partner or managing member. General partner or managing member interests often confer direct board participation rights in, and in many cases control over the operations of, the MLP. General partner or managing member interests can be privately held or owned by publicly traded entities. General partner or managing member interests receive cash distributions, typically in an amount of up to 2% of available cash, which is contractually defined in the partnership or limited liability company agreement. In addition, holders of general partner or managing member interests typically receive incentive distribution rights (IDRs), which provide them with an increasing share of the entitys aggregate cash distributions upon the payment of per common unit distributions that exceed specified threshold levels above the MQD. Incentive distributions to a general partner are designed to encourage the general partner, which controls and operates the partnership, to maximize the partnerships cash flow and increase distributions to the limited partners. Due to the IDRs, general partners of MLPs have higher distribution growth prospects than their underlying MLPs, but quarterly incentive distribution payments would also decline at a greater rate than the decline rate in quarterly distributions to common and subordinated unit holders in the event of a reduction in the MLPs quarterly distribution. The ability of the limited partners or members to remove the general partner or managing member without cause is typically very limited. In addition, some MLPs permit the holder of IDRs to reset, under specified circumstances, the incentive distribution levels and receive compensation in exchange for the distribution rights given up in the reset.
S-2
MLP Equity Securities (GER and GMZ)
Equity securities issued by MLPs generally consist of common units, subordinated units and preferred units, as described more fully below.
MLP Common Units. The common units of many MLPs are listed and traded on U.S. securities exchanges, including the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers Automated Quotations System (NASDAQ). The Fund will purchase such common units through open market transactions and underwritten offerings, but may also acquire common units through direct placements and privately negotiated transactions or PIPEs. Holders of MLP common units typically have very limited control and voting rights. Holders of such common units are typically entitled to receive a MQD from the issuer, and typically have a right, to the extent that an MLP fails to make a previous MQD, to recover in future distributions the amount by which the MQD was short (arrearage rights). Generally, an MLP must pay (or set aside for payment) the MQD to holders of common units before any distributions may be paid to subordinated unit holders. In addition, incentive distributions are typically not paid to the general partner or managing member unless the quarterly distributions on the common units exceed specified threshold levels above the MQD. In the event of a liquidation, common unit holders are intended to have a preference with respect to the remaining assets of the issuer over holders of subordinated units. MLPs issue different classes of common units that may have different voting, trading, and distribution rights. The Fund may invest in different classes of common units.
MLP Subordinated Units. Subordinated units, which, like common units, represent limited partner or member interests, are not typically listed or traded on an exchange. The Fund may purchase outstanding subordinated units through negotiated transactions directly with holders of such units or newly issued subordinated units directly from the issuer. Holders of such subordinated units are generally entitled to receive a distribution only after the MQD and any arrearages from prior quarters have been paid to holders of common units. Holders of subordinated units typically have the right to receive distributions before any incentive distributions are payable to the general partner or managing member. Subordinated units generally do not provide arrearage rights. Most MLP subordinated units are convertible into common units after the passage of a specified period of time or upon the achievement by the issuer of specified financial goals. MLPs issue different classes of subordinated units that may have different voting, trading, and distribution rights. The Fund may invest in different classes of subordinated units.
MLP Convertible Subordinated Units. MLP convertible subordinated units are typically issued by MLPs to founders, corporate general partners of MLPs, entities that sell assets to MLPs, and institutional investors. Convertible subordinated units increase the likelihood that, during the subordination period, there will be available cash to be distributed to common unitholders. MLP convertible subordinated units generally are not entitled to distributions until holders of common units have received their specified MQD, plus any arrearages, and may receive less than common unitholders in distributions upon liquidation. Convertible subordinated unitholders generally are entitled to the MQD prior to the payment of incentive distributions to the general partner, but are not entitled to arrearage rights. Therefore, MLP convertible subordinated units generally entail greater risk than MLP common units. Convertible subordinated units are generally convertible automatically into senior common units of the same issuer at a one-to-one ratio upon the passage of time or the satisfaction of certain financial tests. Convertible subordinated units do not trade on a national exchange or over-the-counter (OTC), and there is no active market for them. The value of a convertible subordinated unit is a function of its worth if converted into the underlying common units. Convertible subordinated units generally have similar voting rights as do MLP common units. Distributions may be paid in cash or in-kind.
MLP Preferred Units. MLP preferred units are not typically listed or traded on an exchange. The Fund may purchase MLP preferred units through negotiated transactions directly with MLPs, affiliates of MLPs and institutional holders of such units. Holders of MLP preferred units can be entitled to a wide range of voting and other rights, depending on the structure of each separate security. In most cases, holders of preferred units are entitled to receive distributions before distributions are made to common unitholders that are either equal to the
S-3
MQD, or set at a fixed rate that is above the MLPs current distribution. Preferred units are senior in the capital structure to common units, but are subordinate to debt holders.
MLP Debt Securities (GER and GMZ)
Debt securities issued by MLPs may include those rated below investment grade (that is, rated Ba or lower by Moodys Investors Service, Inc. (Moodys), BB+ or lower by Standard & Poors Ratings Group (S&P) or comparably rated by another nationally recognized statistical rating organization (NRSRO), or, if unrated, determined by the Investment Adviser to be of comparable credit quality). These securities are commonly called high yield or junk bonds. The Fund may invest up to 20% of its Managed Assets in below investment grade debt securities. The Fund may invest in MLP debt securities without regard to credit quality or maturity. Investments in such securities may not offer the tax characteristics of equity securities of MLPs.
C Corporations with Predominant Assets in MLP Interests (GER)
C corporations whose predominant assets are interests in MLPs must pay entity-level corporate taxes, and their shareholders are also subject to taxes on any dividends received. Investors in such C corporations have voting rights while, by contrast, unitholders of MLPs are limited partners and have no role in the organizations operations or management.
Non-MLP Equity Securities (GER and GMZ)
The Fund may invest in equity securities, including common or ordinary stocks, American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), preferred stock, convertible securities, investment companies (including other mutual funds or exchange-traded funds (ETFs)), and rights and warrants.
Non-MLP Debt Securities (GER and GMZ)
The Fund may invest in debt securities of other issuers, including debt securities rated below investment grade (that is, rated Ba or lower by Moodys, BB+ or lower by S&P or comparably rated by another NRSRO, or, if unrated, determined by the Investment Adviser to be of comparable credit quality). These securities are commonly called high yield or junk bonds. The Fund may invest in debt securities without regard for their maturity.
Greenfield Projects (GER and GMZ)
Greenfield projects are energy-related projects built by private joint ventures formed by energy companies. Greenfield projects may include the creation of a new pipeline, processing plant or storage facility or other energy infrastructure asset that is integrated with the companys existing assets. The Fund may invest in the equity of greenfield projects and also may invest in the secured debt of greenfield projects. However, an investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends until construction is completed, at which time interest payments or dividends would be paid in cash. The Investment Adviser believes that this niche leverages the organizational and operating expertise of large, publicly traded companies and provides the Fund with the opportunity to earn higher returns. Greenfield projects involve less investment risk than typical private equity financing arrangements. The primary risk involved with greenfield projects is execution risk or construction risk. Changing project requirements, elevated costs for labor and materials, and unexpected construction hurdles all can increase construction costs. Financing risk exists should changes in construction costs or financial markets occur. Regulatory risk exists should changes in regulation occur during construction or the necessary permits are not secured prior to beginning construction.
S-4
Income Trusts (GER and GMZ)
The Fund may invest in income trusts, including business trusts and royalty trusts. Income trusts are operating businesses that have been put into a trust. They pay out the bulk of their free cash flow to unit holders. The businesses that are sold into these trusts are usually mature and stable income-producing companies that lend themselves to fixed (monthly or quarterly) distributions. These trusts are regarded as equity investments with fixed-income attributes or high-yield debt with no fixed maturity date. These trusts typically offer regular income payments and a significant premium yield compared to other types of fixed income investments.
Business Trusts. A business trust is an income trust where the principal business of the underlying corporation or other entity is in the manufacturing, service or general industrial sectors. It is anticipated that the number of businesses constituted or reorganized as business trusts will increase significantly in the future. Conversion to the income trust structure is attractive to many existing mature businesses with relatively high, stable cash flows and low capital expenditure requirements, due to tax efficiency and investor demand for high-yielding equity securities. One of the primary attractions of business trusts, in addition to their relatively high yield, is their ability to enhance diversification in the portfolio as they cover a broad range of industries and geographies, including public refrigerated warehousing, mining, coal distribution, sugar distribution, forest products, retail sales, food sales and processing, chemical recovery and processing, data processing, gas marketing and check printing. Each business represented is typically characterized by long life assets or businesses that have exhibited a high degree of stability. Investments in business trusts are subject to various risks, including risks related to the underlying operating companies controlled by such trusts. These risks may include lack of or limited operating histories and increased susceptibility to interest rate risks.
Royalty Trusts. A royalty trust typically controls an operating company which purchases oil and gas properties using the trusts capital. The royalty trust then receives royalties and/or interest payments from its operating company, and distributes them as income to its unit holders. Units of the royalty trust represent an economic interest in the underlying assets of the trust.
The Fund may invest in royalty trusts that are traded on stock exchanges. Royalty trusts are income trusts that own or control oil and gas operating companies. Royalty trusts pay out substantially all of the cash flow they receive from the production and sale of underlying crude oil and natural gas reserves to shareholders (unitholders) in the form of monthly dividends (distributions). As a result of distributing the bulk of their cash flow to unitholders, royalty trusts are effectively precluded from internally originating new oil and gas prospects. Therefore, these royalty trusts typically grow through acquisition of producing companies or those with proven reserves of oil and gas, funded through the issuance of additional equity or, where the trust is able, additional debt. Consequently, royalty trusts are considered less exposed to the uncertainties faced by a traditional exploration and production corporation. However, they are still exposed to commodity risk and reserve risk, as well as operating risk.
The operations and financial condition of royalty trusts, and the amount of distributions or dividends paid on their securities, is dependent on oil prices. Prices for commodities vary and are determined by supply and demand factors, including weather, and general economic and political conditions. A decline in oil prices could have a substantial adverse effect on the operations and financial conditions of the trusts. Such trusts are also subject to the risk of an adverse change in the regulations of the natural resource industry and other operational risks relating to the energy sector. In addition, the underlying operating companies held or controlled by the trusts are usually involved in oil exploration; however, such companies may not be successful in holding, discovering, or exploiting adequate commercial quantities of oil, the failure of which will adversely affect their values. Even if successful, oil and gas prices have fluctuated widely during the most recent years and may continue to do so in the future. The Investment Adviser expects that the combination of global demand growth and depleting reserves, together with current geopolitical instability, will continue to support strong crude oil prices over the long term. However, there is no guarantee that these prices will not decline. Declining crude oil prices may cause the Fund to incur losses on its investments. In addition, the demand in and supply to the
S-5
developing markets could be affected by other factors such as restrictions on imports, increased taxation, and creation of government monopolies, as well as social, economic and political uncertainty and instability. Furthermore, there is no guarantee that non-conventional sources of natural gas will not be discovered which would adversely affect the oil industry.
Moreover, as the underlying oil and gas reserves are produced the remaining reserves attributable to the royalty trust are depleted. The ability of a royalty trust to replace reserves is therefore fundamental to its ability to maintain distribution levels and unit prices over time. Certain royalty trusts have demonstrated consistent positive reserve growth year-over-year and, as such, certain royalty trusts have been successful to date in this respect and are thus currently trading at unit prices significantly higher than those of five or ten years ago. Royalty trusts manage reserve depletion through reserve additions resulting from internal capital development activities and through acquisitions. When the Fund invests in foreign royalty trusts, it will also be subject to foreign securities risks.
Corporate Debt Obligations (GER and GMZ)
The Fund may, under normal market conditions, invest in corporate debt obligations, including obligations of industrial, utility and financial issuers. Corporate debt obligations include bonds, notes, debentures and other obligations of corporations to pay interest and repay principal. Corporate debt obligations are subject to the risk of an issuers inability to meet principal and interest payments on the obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Corporate debt obligations rated BBB or Baa are considered medium grade obligations with speculative characteristics, and adverse economic conditions or changing circumstances may weaken their issuers capacity to pay interest and repay principal. Medium to lower rated and comparable non-rated securities tend to offer higher yields than higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. The price of corporate debt obligations will generally fluctuate in response to fluctuations in supply and demand for similarly rated securities. In addition, the price of corporate debt obligations will generally fluctuate in response to interest rate levels. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Funds NAV.
Because medium to lower rated securities generally involve greater risks of loss of income and principal than higher rated securities, investors should consider carefully the relative risks associated with investment in securities which carry medium to lower ratings and in comparable unrated securities. In addition to the risk of default, there are the related costs of recovery on defaulted issues. The Investment Adviser will attempt to reduce these risks through portfolio diversification and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends and corporate developments.
The Investment Adviser employs its own credit research and analysis, which includes a study of an issuers existing debt, capital structure, ability to service debt and pay dividends, sensitivity to economic conditions, operating history and current earnings trend. The Investment Adviser continually monitors the investments in the Funds portfolio and evaluates whether to dispose of or to retain corporate debt obligations whose credit ratings or credit quality may have changed. If after its purchase, a portfolio security is assigned a lower rating or ceases to be rated, the Fund may continue to hold the security if the Investment Adviser believes it is in the best interest of the Fund and its shareholders.
Commercial Paper and Other Short-Term Corporate Obligations (GER and GMZ)
The Fund may invest in commercial paper and other short-term obligations issued or guaranteed by U.S. corporations, non-U.S. corporations or other entities. Commercial paper represents short-term unsecured
S-6
promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies.
U.S. Government Securities (GER and GMZ)
The Fund may invest in securities issued or guaranteed by the U.S. government, its agencies, instrumentalities or sponsored enterprises (U.S. Government Securities). Some U.S. Government Securities (such as Treasury bills, notes and bonds, which differ only in their interest rates, maturities and times of issuance) are supported by the full faith and credit of the United States. Others, such as obligations issued or guaranteed by U.S. government agencies, instrumentalities or sponsored enterprises, are supported either by (i) the right of the issuer to borrow from the U.S. Treasury, (ii) the discretionary authority of the U.S. government to purchase certain obligations of the issuer or (iii) only the credit of the issuer. The U.S. government is under no legal obligation, in general, to purchase the obligations of its agencies, instrumentalities or sponsored enterprises. No assurance can be given that the U.S. government will provide financial support to U.S. government agencies, instrumentalities or sponsored enterprises in the future, and the U.S. Government may be unable to pay debts when due.
U.S. Government Securities include (to the extent consistent with the 1940 Act) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government, or its agencies, instrumentalities or sponsored enterprises. U.S. Government Securities may also include (to the extent consistent with the 1940 Act) participations in loans made to foreign governments or their agencies that are guaranteed as to principal and interest by the U.S. government or its agencies, instrumentalities or sponsored enterprises. The secondary market for certain of these participations is extremely limited. In the absence of a suitable secondary market, such participations are regarded as illiquid.
The Fund may also purchase U.S. Government Securities in private placements and may also invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury that are traded independently under the separate trading of registered interest and principal of securities program (STRIPS). The Fund may also invest in zero coupon U.S. Treasury securities and in zero coupon securities issued by financial institutions which represent a proportionate interest in underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and its value consists of the difference between its face value at maturity and its cost. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically.
Bank Obligations (GER and GMZ)
The Fund may invest in obligations issued or guaranteed by U.S. or foreign banks. Bank obligations, including without limitation, time deposits, bankers acceptances and certificates of deposit, may be general obligations of the parent bank or may be limited to the issuing branch by the terms of the specific obligations or by government regulation. Banks are subject to extensive but different governmental regulations which may limit both the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry.
Certificates of deposit are certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time at a specified rate. Certificates of deposit are negotiable instruments and are similar to saving deposits but have a definite maturity and are evidenced by a certificate instead of a passbook entry. Banks are required to keep reserves against all certificates of deposit. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market
S-7
conditions and the remaining maturity of the obligation. The Fund may invest in deposits in U.S. and European banks satisfying the standards set forth above.
Variable and Floating Rate Securities (GER and GMZ)
The interest rates payable on certain debt securities in which the Fund may invest are not fixed and may fluctuate based upon changes in market rates. Variable and floating rate obligations are debt instruments issued by companies or other entities with interest rates that reset periodically (typically, daily, monthly, quarterly, or semi-annually) in response to changes in the market rate of interest on which the interest rate is based. Moreover, such obligations may fluctuate in value in response to interest rate changes if there is a delay between changes in market interest rates and the interest reset date for the obligation, or for other reasons. The value of these obligations is generally more stable than that of a fixed rate obligation in response to changes in interest rate levels, but they may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline.
Custodial Receipts and Trust Certificates (GER and GMZ)
The Fund may invest in custodial receipts and trust certificates, which may be underwritten by securities dealers or banks, representing interests in securities held by a custodian or trustee. The securities so held may include U.S. Government Securities, municipal securities or other types of securities in which the Fund may invest. The custodial receipts or trust certificates are underwritten by securities dealers or banks and may evidence ownership of future interest payments, principal payments or both on the underlying securities, or, in some cases, the payment obligation of a third party that has entered into an interest rate swap or other arrangement with the custodian or trustee. For certain securities law purposes, custodial receipts and trust certificates may not be considered obligations of the U.S. government or other issuer of the securities held by the custodian or trustee. As a holder of custodial receipts and trust certificates, the Fund will bear its proportionate share of the fees and expenses charged to the custodial account or trust. The Fund may also invest in separately issued interests in custodial receipts and trust certificates.
Although under the terms of a custodial receipt or trust certificate the Fund would typically be authorized to assert its rights directly against the issuer of the underlying obligation, the Fund could be required to assert through the custodian bank or trustee those rights as may exist against the underlying issuers. Thus, in the event an underlying issuer fails to pay principal and/or interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, in the event that the trust or custodial account in which the underlying securities have been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying securities would be reduced in recognition of any taxes paid.
Certain custodial receipts and trust certificates may be synthetic or derivative instruments that have interest rates that reset inversely to changing short-term rates and/or have embedded interest rate floors and caps that require the issuer to pay an adjusted interest rate if market rates fall below or rise above a specified rate. Because some of these instruments represent relatively recent innovations, and the trading market for these instruments is less developed than the markets for traditional types of instruments, it is uncertain how these instruments will perform under different economic and interest-rate scenarios. Also, because these instruments may be leveraged, their market values may be more volatile than other types of fixed income instruments and may present greater potential for capital gain or loss. The possibility of default by an issuer or the issuers credit provider may be greater for these derivative instruments than for other types of instruments. In some cases, it may be difficult to determine the fair value of a derivative instrument because of a lack of reliable objective information and an established secondary market for some instruments may not exist. In many cases, the Internal Revenue Service (the IRS) has not ruled on the tax treatment of the interest or payments received on the derivative instruments and, accordingly, purchases of such instruments are based on the opinion of counsel to the sponsors of the instruments.
S-8
Non-Investment Grade (High Yield or Junk Bond) Securities (GER and GMZ)
The Fund may invest in bonds rated BB+ or below by S&P or Ba1 or below by Moodys or comparable rated and unrated securities. These bonds are commonly referred to as junk bonds and are considered speculative. The ability of issuers of non-investment grade securities to make principal and interest payments may be questionable because such issuers are often less creditworthy companies or are highly leveraged and generally less able than more established or less leveraged entities to make scheduled payments of principal and interest. Non-investment grade securities are also issued by governmental issuers that may have difficulty in making all scheduled interest and principal payments. In some cases, non-investment grade securities may be highly speculative, have poor prospects for reaching investment grade standing and be in default. As a result, investment in such bonds will entail greater risks than those associated with investment in investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard & Poors or Aaa, Aa, A or Baa by Moodys). Analysis of the creditworthiness of issuers of non-investment grade securities may be more complex than for issuers of higher quality debt securities, and the ability of the Fund to achieve its investment objective may, to the extent of its investments in non-investment grade securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher quality securities.
The market values of non-investment grade securities tend to reflect individual corporate or municipal developments to a greater extent than do those of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Issuers of non-investment grade securities that are highly leveraged may not be able to make use of more traditional methods of financing. Their ability to service debt obligations may be more adversely affected by economic downturns or their inability to meet specific projected business forecasts than would be the case for issuers of higher-rated securities. Negative publicity about the junk bond market and investor perceptions regarding lower-rated securities, whether or not based on fundamental analysis, may depress the prices for non-investment grade securities. In the lower quality segments of the fixed income securities market, changes in perceptions of issuers creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed income securities market, resulting in greater yield and price volatility. Another factor which causes fluctuations in the prices of non-investment grade securities is the supply and demand for similarly rated securities. In addition, the prices of investments fluctuate in response to the general level of interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Funds NAV.
The risk of loss from default for the holders of non-investment grade securities is significantly greater than is the case for holders of other debt securities because non-investment grade securities are generally unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by the Fund in already defaulted securities poses an additional risk of loss should nonpayment of principal and interest continue in respect of such securities. Even if such securities are held to maturity, recovery by the Fund of its initial investment and any anticipated income or appreciation is uncertain. In addition, the Fund may incur additional expenses to the extent that it is required to seek recovery relating to the default in the payment of principal or interest on such securities or otherwise protect its interests. The Fund may be required to liquidate other portfolio securities to satisfy annual distribution obligations of the Fund in respect of accrued interest income on securities which are subsequently written off, even though the Fund has not received any cash payments of such interest.
The secondary market for non-investment grade securities is concentrated in relatively few markets and is dominated by institutional investors, including mutual funds, insurance companies and other financial institutions. Accordingly, the secondary market for such securities may not be as liquid as and may be more volatile than the secondary market for higher-rated securities. In addition, the trading volume for non-investment grade securities is generally lower than that of higher rated securities. The secondary market for non-investment grade securities could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on the ability of the
S-9
Fund to dispose of particular portfolio investments when needed to meet redemption requests or other liquidity needs. The Investment Adviser could find it difficult to sell these investments or may be able to sell the investments only at prices lower than if such investments were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the NAV of the Fund. A less liquid secondary market also may make it more difficult for the Fund to obtain precise valuations of the non-investment grade securities in its portfolio.
The adoption of new legislation could adversely affect the secondary market for non-investment grade securities and the financial condition of issuers of these securities. The form of any future legislation, and the probability of such legislation being enacted, is uncertain.
Non-investment grade securities also present risks based on payment expectations. Non-investment grade securities frequently contain call or buy-back features which permit the issuer to call or repurchase the security from its holder. If an issuer exercises such a call option and redeems the security, the Fund may have to replace such security with a lower-yielding security, resulting in a decreased return for investors. In addition, if the Fund experiences net redemptions of its shares, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of its portfolio and increasing its exposure to the risks of non-investment grade securities.
Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of non-investment grade securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the conditions of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Investments in non-investment grade and comparable unrated obligations will be more dependent on the Investment Advisers credit analysis than would be the case with investments in investment-grade debt obligations. The Investment Adviser employs its own credit research and analysis, which includes a study of an issuers existing debt, capital structure, ability to service debt and to pay dividends, sensitivity to economic conditions, operating history and current earnings trend. The Investment Adviser continually monitors the investments in the Funds portfolio and evaluates whether to dispose of or to retain non-investment grade and comparable unrated securities whose credit ratings or credit quality may have changed. If after its purchase, a portfolio security is assigned a lower rating or ceases to be rated, the Fund may continue to hold the security if the Investment Adviser believes it is in the best interest of the Fund and its shareholders.
An economic downturn could severely affect the ability of highly leveraged issuers of junk bond investments to service their debt obligations or to repay their obligations upon maturity. Factors having an adverse impact on the market value of junk bonds will have an adverse effect on the Funds NAV to the extent it invests in such investments. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings.
Futures Contracts and Options on Futures Contracts (GER and GMZ)
The Fund may purchase and sell futures contracts and may also purchase and write call and put options on futures contracts. The futures contracts may be based on various securities, securities indices, foreign currencies and other financial instruments and indices.
The Fund may engage in futures and related options transactions in order to seek to increase total return or to hedge against changes in interest rates or securities prices, or to otherwise manage its term structure, sector selection and duration of its fixed income securities holdings in accordance with its investment objective and policies. The Fund may also enter into closing purchase and sale transactions with respect to such contracts and options.
S-10
Futures contracts utilized by mutual funds and closed-end funds have historically been traded on U.S. exchanges or boards of trade that are licensed and regulated by the Commodity Futures Trading Commission (the CFTC) or on foreign exchanges. More recently, certain futures may also be traded either OTC or on trading facilities such as derivatives transaction execution facilities, exempt boards of trade or electronic trading facilities that are licensed and/or regulated to varying degrees by the CFTC. Also, certain single stock futures and narrow based security index futures may be traded either OTC or on trading facilities such as contract markets, derivatives transaction execution facilities and electronic trading facilities that are licensed and/or regulated to varying degrees by both the CFTC and the SEC, or on foreign exchanges.
Neither the CFTC, National Futures Association (NFA), SEC nor any domestic exchange regulates activities of any foreign exchange or boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign exchange or board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, the Funds investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States exchanges. In particular, persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, as amended, the CFTCs regulations and the rules of the NFA and any domestic exchange, including the right to use reparations proceedings before the CFTC and arbitration proceedings provided by the NFA or any domestic futures exchange. Similarly, those persons may not have the protection of the U.S. securities laws.
Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund can seek through the sale of futures contracts to offset a decline in the value of its current portfolio securities. When interest rates are falling or securities prices are rising, the Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases.
Positions taken in the futures market are not normally held to maturity, but are instead liquidated through offsetting transactions which may result in a profit or a loss. While the Fund will usually liquidate futures contracts on securities in this manner, the Fund may instead make or take delivery of the underlying securities whenever it appears economically advantageous for the Fund to do so. A clearing corporation associated with the exchange on which futures are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies Using Futures Contracts. When the Fund uses futures for hedging purposes, the Fund often seeks to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities (or securities that the Fund proposes to acquire) or the exchange rate of currencies in which portfolio securities are quoted or denominated. The Fund may, for example, take a short position in the futures market by selling futures contracts to seek to hedge against an anticipated rise in interest rates or a decline in market prices that would adversely affect the dollar value of the Funds portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by the Fund or securities with characteristics similar to those of the Funds portfolio securities. If, in the opinion of the Investment Adviser, there is a sufficient degree of correlation between price trends for the Funds portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of a hedging strategy. Although under some circumstances prices of securities in the Funds portfolio may be more or less volatile than prices of such futures contracts, the Investment Adviser
S-11
will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any such differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Funds portfolio securities. When hedging of this character is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Funds portfolio securities would be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a long position by purchasing such futures contracts. This may be done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices then available in the applicable market to be less favorable than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call options on futures contracts will give the Fund the right (but not the obligation), for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Funds assets. By writing a call option, the Fund becomes obligated, in exchange for the premium, to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. The writing of a put option on a futures contract generates a premium, which may partially offset an increase in the price of securities that the Fund intends to purchase. However, the Fund becomes obligated (upon the exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. Thus, the loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option on the same financial instrument. There is no guarantee that such closing transactions can be effected. The Funds ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market.
Other Considerations. The Fund may engage in transactions in futures contracts and related options transactions. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in certain cases, require the Fund to identify on its books cash or liquid assets to cover the positions.
While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates or securities prices may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. When futures contracts and options are used for hedging purposes, perfect correlation between the Funds futures positions and portfolio positions may be impossible to achieve, particularly where futures contracts based on individual equity or corporate fixed income securities are currently not available. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. The profitability of the Funds trading in futures depends upon the ability of the Investment Adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices (GER and GMZ)
Writing Options. The Fund may write (sell) call and put options on any securities in which it may invest or any securities index consisting of securities in which it may invest. The Fund may write such options on
S-12
securities that are listed on national domestic securities exchanges or foreign securities exchanges or traded in the OTC market. A call option written by the Fund obligates that Fund to sell specified securities to the holder of the option at a specified price if the option is exercised on or before the expiration date. Depending upon the type of call option, the purchaser of a call option either (i) has the right to any appreciation in the value of the security over a fixed price (the exercise price) on a certain date in the future (the expiration date) or (ii) has the right to any appreciation in the value of the security over the exercise price at any time prior to the expiration of the option. If the purchaser exercises the option, the Fund pays the purchaser the difference between the price of the security and the exercise price of the option. The premium, the exercise price and the market value of the security determine the gain or loss realized by the Fund as the seller of the call option. The Fund can also repurchase the call option prior to the expiration date, ending its obligation. In this case, the cost of entering into closing purchase transactions will determine the gain or loss realized by the Fund. All call options written by the Fund are covered, which means that the Fund will own the securities subject to the option as long as the option is outstanding or the Fund will use the other methods described below. The Funds purpose in writing covered call options is to realize greater income than would be realized on portfolio securities transactions alone. However, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
A put option written by the Fund would obligate the Fund to purchase specified securities from the option holder at a specified price if, depending upon the type of put option, either (i) the option is exercised at any time on or before the expiration date or (ii) the option is exercised on the expiration date. All put options written by the Fund would be covered, which means that the Fund will identify on its books cash or liquid assets with a value at least equal to the exercise price of the put option (less any margin on deposit) or will use the other methods described below. The purpose of writing such options is to generate additional income for the Fund. However, in return for the option premium, the Fund accepts the risk that it may be required to purchase the underlying securities at a price in excess of the securities market value at the time of purchase. For more information about these practices, see Asset Segregation.
In the case of a call option, the option is covered if the Fund owns the instrument underlying the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are segregated) upon conversion or exchange of other instruments held by it. A call option is also covered if the Fund holds a call on the same instrument as the option written where the exercise price of the option held is (i) equal to or less than the exercise price of the option written, or (ii) greater than the exercise price of the option written provided the Fund segregates liquid assets in the amount of the difference. A put option is also covered if the Fund holds a put on the same instrument as the option written where the exercise price of the option held is (i) equal to or higher than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the Fund segregates liquid assets in the amount of the difference. The Fund may also cover options on securities by segregating cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit, that is equal to the market value of the securities in the case of a call option. Segregated cash or liquid assets may be quoted or denominated in any currency.
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index, or by having an absolute and immediate right to acquire such securities without additional cash consideration (or for additional consideration which has been identified by the Fund on its books) upon conversion or exchange of other securities in its portfolio. The Fund may also cover call and put options on a securities index by identifying cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit, that is equal to the market value of the underlying securities in the case of a call option, or the exercise price in the case of a put option, or by owning offsetting options as described above.
S-13
The Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under OTC options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as closing purchase transactions.
Purchasing Options. The Fund may purchase put and call options on any securities in which it may invest or any securities index comprised of securities in which it may invest. The Fund may also enter into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
The Fund may purchase call options in anticipation of an increase, or put options in anticipation of a decrease, in the market value of securities or other instruments of the type in which it may invest (protective puts). The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities or other instruments at a specified price during the option period. The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified securities or other instruments at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Funds securities or other instruments. Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities or other instruments which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities or other instruments decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of the underlying portfolio securities or other instruments.
The Fund would purchase put and call options on securities indices for the same purposes as it would purchase options on individual securities. For a description of options on securities indices, see Writing Options above.
Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on an options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to options it has written, the Fund will not be able to sell the underlying securities or dispose of the assets identified on its books to cover the positions until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it will have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
There can be no assurance that higher trading activity, order flow or other unforeseen events will not, at times, render certain of the facilities of the Options Clearing Corporation or various exchanges inadequate. Such events have, in the past, resulted in the institution by an exchange of special procedures, such as trading rotations,
S-14
restrictions on certain types of order or trading halts or suspensions with respect to one or more options. These special procedures may limit liquidity.
The Fund may purchase and sell both options that are traded on U.S. and foreign exchanges and options traded OTC with broker-dealers who make markets in these options. The ability to terminate OTC options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded governing the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facility or are held in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of options to seek to increase total return involves the risk of loss if the Investment Adviser is incorrect in its expectation of fluctuations in securities prices or interest rates. The successful use of options for hedging purposes also depends in part on the ability of the Investment Adviser to manage future price fluctuations and the degree of correlation between the options and securities markets. If the Investment Adviser is incorrect in its expectation of changes in securities prices or determination of the correlation between the securities or securities indices on which options are written and purchased and the securities in the Funds investment portfolio, the Fund may incur losses that it would not otherwise incur. The writing of options could increase the Funds portfolio turnover rate and, therefore, associated brokerage commissions or spreads.
Real Estate Investment Trusts (GER and GMZ)
The Fund may invest in shares of real estate investment trusts (REITs). REITs are pooled investment vehicles which invest primarily in real estate or real estate related loans. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Code. The Fund will indirectly bear its proportionate share of any expenses paid by REITs in which it invests in addition to the expenses paid by the Fund.
Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks.
Preferred Stock, Warrants and Stock Purchase Rights (GER and GMZ)
The Fund may invest in preferred stock, warrants and stock purchase rights (or rights). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the issuers earnings and
S-15
assets before common stock owners but after bond owners. Unlike debt securities, the obligations of an issuer of preferred stock, including dividend and other payment obligations, may not typically be accelerated by the holders of such preferred stock on the occurrence of an event of default (such as a covenant default or filing of a bankruptcy petition) or other non-compliance by the issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event of default or non-compliance by the issuer, preferred stockholders will be entitled to gain representation on the issuers board of directors or increase their existing board representation. In addition, preferred stockholders may be granted voting rights with respect to certain issues on the occurrence of any event of default.
Warrants and rights are options that entitle the holder to buy equity securities at a specific price for a specific period of time. The Fund will invest in warrants and rights only if such equity securities are deemed appropriate by the Investment Adviser for investment by the Fund. Warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer.
Foreign Securities (GER and GMZ)
The Fund may invest up to 20% of its Managed Assets in securities of foreign issuers, including securities quoted or denominated in a currency other than U.S. dollars. Investments in foreign securities may offer potential benefits not available from investments solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits may include the opportunity to invest in foreign issuers that appear, in the opinion of the Investment Adviser, to offer the potential for better long term growth of capital and income than investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business cycles different from those of the United States and the opportunity to reduce fluctuations in portfolio value by taking advantage of foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign issuers also involves, however, certain special risks, including those discussed in the Funds Joint Proxy Statement/Prospectus and those set forth below, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers. Many of these risks are more pronounced for investments in emerging countries.
With respect to investments in certain foreign countries, there exist certain economic, political and social risks, including the risk of adverse political developments, nationalization, military unrest, social instability, war and terrorism, confiscation without fair compensation, expropriation or confiscatory taxation, limitations on the movement of funds and other assets between different countries, or diplomatic developments, any of which could adversely affect the Funds investments in those countries. Governments in certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on market prices of securities and dividend payments.
Many countries throughout the world are dependent on a healthy U.S. economy and are adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily dependent on international trade and are adversely affected by protective trade barriers and economic conditions of their trading partners. Protectionist trade legislation enacted by those trading partners could have a significant adverse effect on the securities markets of those countries. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position.
Investments in foreign securities often involve currencies of foreign countries. Accordingly, the Fund may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and may incur costs in connection with conversions between various currencies. The Fund may be subject to currency exposure independent of its securities positions. To the extent that the Fund is fully invested in foreign securities while also maintaining net currency positions, it may be exposed to greater combined risk. Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries,
S-16
actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also 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 in the United States or abroad. To the extent that a portion of the Funds total assets, adjusted to reflect the Funds net position after giving effect to currency transactions, is denominated or quoted in the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political developments within those countries. The Funds net currency positions may expose it to risks independent of its securities positions.
The Fund may hold foreign securities and cash with foreign banks, agents and securities depositories appointed by the Funds custodian (each a Foreign Custodian). Some Foreign Custodians may be recently organized or new to the foreign custody business. In some countries, Foreign Custodians may be subject to little or no regulatory oversight over or independent evaluation of their operations. Further, the laws of certain countries may place limitations on the Funds ability to recover its assets if a Foreign Custodian enters bankruptcy.
Because foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than about a comparable U.S. company. Volume and liquidity in most foreign securities markets are less than in the United States markets and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. The securities of foreign issuers may be listed on foreign securities exchanges or traded in foreign OTC markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign securities markets and exchanges, brokers, dealers and listed and unlisted companies than in the United States, and the legal remedies for investors may be more limited than the remedies available in the United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that apply with respect to securities transactions consummated in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlement of portfolio transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when some of the Funds assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract to sell the securities, could result in possible liability to the purchaser.
The Fund may invest in foreign securities which take the form of sponsored and unsponsored ADRs, GDRs, EDRs or other similar instruments representing securities of foreign issuers (together, Depositary Receipts). ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded on domestic exchanges or in the U.S. OTC market and, generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security. To the extent the Fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of the security underlying the Depositary Receipts to issue and service such unsponsored Depositary Receipts, there may be an increased possibility that the Fund would not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks inherent in
S-17
investing in securities of non-U.S. issuers. The market value of Depositary Receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the underlying securities are quoted. However, by investing in Depositary Receipts, such as ADRs, which are quoted in U.S. dollars, the Fund may avoid currency risks during the settlement period for purchases and sales.
As described more fully below, the Fund may invest in countries with emerging economies or securities markets. Political and economic structures in many of such countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of such countries have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. See Investing in Emerging Countries below.
Investing in Europe. The Fund may operate in euros and/ or may hold euros and/or euro-denominated bonds and other obligations. The euro requires participation of multiple sovereign states forming the Euro zone and is therefore sensitive to the credit, general economic and political position of each such state, including each states actual and intended ongoing engagement with and/or support for the other sovereign states then forming the European Union, in particular those within the Euro zone. Changes in these factors might materially adversely impact the value of securities that the Fund has invested in.
European countries can be significantly affected by the tight fiscal and monetary controls that the European Economic and Monetary Union (EMU) imposes for membership. Europes economies are diverse, its governments are decentralized, and its cultures vary widely. Several EU countries, including Greece, Ireland, Italy, Spain and Portugal have faced, and continue to face, budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among EMU member countries. Member countries are required to maintain tight control over inflation, public debt, and budget deficit to qualify for membership in the EMU. These requirements can severely limit the ability of EMU member countries to implement monetary policy to address regional economic conditions.
Investing in Canada. The Fund may invest in issuers located in Canada or that have significant exposure to the Canadian economy. The Canadian market is relatively concentrated in issuers involved in the production and distribution of natural resources, and therefore the Canadian economy is very dependent on the supply and demand for natural resources. There is a risk that any changes in these sectors could have an adverse impact on the Canadian economy. The Canadian economy is dependent on the economy of the United States as the United States is Canadas largest trading partner and foreign investor. Reduction in spending on Canadian products and services or changes in the U.S. economy may cause an impact in the Canadian economy. Past periodic demands by the Province of Quebec for sovereignty have also significantly affected equity valuations and foreign currency movements in the Canadian market.
Investing in Emerging Countries. The securities markets of emerging countries are less liquid and subject to greater price volatility, and have a smaller market capitalization, than the U.S. securities markets. In certain countries, there may be fewer publicly traded securities and the market may be dominated by a few issues or sectors. Issuers and securities markets in such countries are not subject to as extensive and frequent accounting, financial and other reporting requirements or as comprehensive government regulations as are issuers and securities markets in the U.S. In particular, the assets and profits appearing on the financial statements of emerging country issuers may not reflect their financial position or results of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available about emerging country issuers than is available about issuers in the United States.
Emerging country securities markets are typically marked by a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high
S-18
concentration of ownership of such securities by a limited number of investors. The markets for securities in certain emerging countries are in the earliest stages of their development. Even the markets for relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or trades of a size customarily undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that affect the soundness and competitiveness of the securities issuers. For example, prices may be unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in such markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging country securities may also affect the Funds ability to accurately value its portfolio securities or to acquire or dispose of securities at the price and time it wishes to do so or in order to meet redemption requests.
With respect to investments in certain emerging market countries, antiquated legal systems may have an adverse impact on the Fund. For example, while the potential liability of a shareholder of a U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholders investment, the notion of limited liability is less clear in certain emerging market countries. Similarly, the rights of investors in emerging market companies may be more limited than those of shareholders of U.S. corporations.
Transaction costs, including brokerage commissions or dealer mark-ups, in emerging countries may be higher than in the United States and other developed securities markets. In addition, existing laws and regulations are often inconsistently applied. As legal systems in emerging countries develop, foreign investors may be adversely affected by new or amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement of the law.
Custodial and/or settlement systems in emerging markets countries may not be fully developed. To the extent the Fund invests in emerging markets, Fund assets that are traded in such markets and which have been entrusted to such sub-custodians in those markets may be exposed to risks for which the sub-custodian will have no liability.
Foreign investment in the securities markets of certain emerging countries is restricted or controlled to varying degrees. These restrictions may limit the Funds investment in certain emerging countries and may increase the expenses of the Fund. Certain emerging countries require governmental approval prior to investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuers outstanding securities or a specific class of securities which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. In addition, the repatriation of both investment income and capital from emerging countries may be subject to restrictions which require governmental consents or prohibit repatriation entirely for a period of time. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operation of the Fund. The Fund may be required to establish special custodial or other arrangements before investing in certain emerging countries.
Emerging countries may be subject to a substantially greater degree of economic, political and social instability and disruption than is the case in the United States, Japan and most Western European countries. This instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making, including changes or attempted changes in governments through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; (v) ethnic, religious and racial disaffection or conflict; and (vi) the absence of developed legal structures governing foreign private investments and private property. Such economic, political and social instability could disrupt the principal financial markets in which the Fund may invest and adversely affect the value of the Funds assets. The Funds investments can also be adversely affected by any increase in taxes or by political, economic or diplomatic developments.
S-19
The Fund may seek investment opportunities within former Eastern bloc countries. Most of these countries had a centrally planned, socialist economy for a substantial period of time. The governments of many of these countries have more recently been implementing reforms directed at political and economic liberalization, including efforts to decentralize the economic decision-making process and move towards a market economy. However, business entities in many of these countries do not have an extended history of operating in a market-oriented economy, and the ultimate impact of these countries attempts to move toward more market-oriented economies is currently unclear. In addition, any change in the leadership or policies of these countries may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities.
The economies of emerging countries may differ unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments. Many emerging countries have experienced in the past, and continue to experience, high rates of inflation. In certain countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative interest rate environment and sharply eroding the value of outstanding financial assets in those countries. Other emerging countries, on the other hand, have recently experienced deflationary pressures and are in economic recessions. The economies of many emerging countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners. In addition, the economies of some emerging countries are vulnerable to weakness in world prices for their commodity exports.
The Funds income and, in some cases, capital gains from foreign stocks and securities will be subject to applicable taxation in certain of the countries in which it invests, and treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates.
From time to time, certain of the companies in which the Fund may invest may operate in, or have dealings with, countries subject to sanctions or embargos imposed by the U.S. Government and the United Nations and/or countries identified by the U.S. Government as state sponsors of terrorism. For example, the United Nations Security Council has imposed certain sanctions relating to Iran and Sudan and both countries are embargoed countries by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury.
In addition, from time to time, certain of the companies in which a Fund may invest may engage in, or have dealings with countries or companies that engage in, activities that may not be considered socially and/or environmentally responsible. Such activities may relate to human rights issues (such as patterns of human rights abuses or violations, persecution or discrimination), impacts on local communities in which companies operate and environmental sustainability. For a description of the Investment Advisers approach to responsible and sustainable investing, please see GSAMs Statement on Responsible and Sustainable Investing at https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/miscellaneous/GSAM_statement_on_respon_sustainable_investing .pdf.
As a result, a company may suffer damage to its reputation if it is identified as a company which engages in, or has dealings with countries or companies that engage in, the above referenced activities. As an investor in such companies, a Fund would be indirectly subject to those risks.
The Investment Adviser is committed to complying fully with sanctions in effect as of the date of this Statement of Additional Information and any other applicable sanctions that may be enacted in the future with respect to Iran, Sudan or any other country.
Index Swaps, Interest Rate Swaps, Credit Swaps, Total Return Swaps, Options on Swaps and Interest Rate Caps, Floors and Collars (GER and GMZ)
The Fund may enter into index, interest rate, credit and total return swaps for both hedging purposes and to seek to increase total return. As examples, the Fund may enter into swap transactions for the purpose of
S-20
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, as a duration management technique, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, or to gain exposure to certain markets in an economical way. The Fund may also enter into interest rate caps, floors and collars. The Fund may also purchase and write (sell) options contracts on swaps, commonly referred to as swaptions.
In a standard swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. 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 increase in value of a particular dollar amount invested at a particular interest rate, in a particular security, or in a basket of securities representing a particular index. Bilateral swap agreements are two party contracts entered into primarily by institutional investors. Cleared swaps are transacted through futures commission merchants (FCMs) that are members of central clearinghouses with the clearinghouse serving as a central counterparty similar to transactions in futures contracts. The Fund posts initial and variation margin by making payments to its clearing member FCMs.
Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Index swaps involve the exchange by the Fund with another party of the respective amounts payable with respect to a notional principal amount at interest rates equal to two specified indices. Credit swaps involve the exchange of a floating or fixed rate payment in return for assuming potential credit losses of an underlying security, or pool of securities. Total return swaps are contracts that obligate a party to pay or receive interest in exchange for payment by the other party of the total return generated by a security, a basket of securities, an index or an index component.
A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into an underlying swap or to modify the terms of an existing swap on agreed-upon terms. The seller of a swaption, in exchange for the premium, becomes obligated (if the option is exercised) to enter into or modify an underlying swap on agreed-upon terms, which generally entails a greater risk of loss than incurred in buying a swaption. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates.
A great deal of flexibility may be possible in the way swap transactions are structured. However, generally the Fund will enter into interest rate, total return, credit and index swaps on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Interest rate, total return, credit and index swaps do not normally involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate, total return, credit and index swaps is normally limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to a bilateral swap agreement defaults, the Funds risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive.
As a result of new rules adopted by the CFTC and SEC in 2012, certain standardized swaps are currently subject to mandatory central clearing. Central clearing is expected to decrease counterparty risk and increase liquidity compared to bilateral swaps because central clearing interposes the central clearinghouse as the counterparty to each participants swap. However, central clearing does not eliminate counterparty risk or illiquidity risk entirely. In addition, depending on the size of the Fund and other factors, the margin required under the rules of a clearinghouse and by a clearing member may be in excess of the collateral required to be
S-21
posted by the Fund to support its obligations under a similar bilateral swap. However, regulators are expected to adopt rules imposing certain margin requirements, including minimums, on uncleared swaps in the near future, which could change this comparison.
A credit swap may have as reference obligations one or more securities that may, or may not, be currently held by the Fund. The protection buyer in a credit swap is generally obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the swap provided that no 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. The Fund may be either the protection buyer or seller in the transaction. If the 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, the Fund generally receives an upfront payment or a rate of income throughout the term of the swap provided that there is no credit event. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. If a credit event occurs, the value of any deliverable obligation received by the Fund as 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 Fund.
To the extent that the Funds exposure in a transaction involving a swap, a swaption or an interest rate floor, cap or collar is covered by identifying on its books cash or liquid assets or is covered by other means in accordance with SEC guidance, the Fund and the Investment Adviser believe that the transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter into bilateral transactions involving swaps, caps, floors or collars unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto (with respect to bilateral swap transactions) is considered to be investment grade by the Investment Adviser. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction.
The use of swaps, swaptions and interest rate caps, floors and collars is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. If the Investment Adviser is incorrect in its forecasts of market values, credit quality and interest rates, the investment performance of the Fund would be less favorable than it would have been if these investment techniques were not used.
In addition, these transactions can involve greater risks than if the Fund had invested in the reference obligation directly because, in addition to general market risks, swaps are subject to illiquidity risk, counterparty risk, credit risk and pricing risk. Regulators also may impose limits on an entitys or group of entities positions in certain swaps. However, certain risks are reduced (but not eliminated) if the Fund invests in cleared swaps. Because bilateral swap agreements are two party contracts and because they may have terms of greater than seven days, these swaps may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Many swaps are complex and often valued subjectively. Swaps and other derivatives may also be subject to pricing or basis risk, which exists when the price of a particular derivative diverges from the price of corresponding cash market instruments. Under certain market conditions it may not be economically feasible to imitate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. If a swap
S-22
transaction is particularly large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market. The Investment Adviser, under the supervision of the Board, is responsible for determining and monitoring the liquidity of the Funds transactions in swaps, swaptions, caps, floors and collars.
Regulators are in the process of developing rules that would require trading and execution of most liquid swaps on trading facilities. Moving trading to an exchange-type system may increase market transparency and liquidity but may require the Fund to incur increased expenses to access the same types of swaps.
Rules adopted in 2012 also require centralized reporting of detailed information about many types of cleared and uncleared swaps. This information is available to regulators and, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data may result in greater market transparency, which may be beneficial to funds that use swaps to implement trading strategies. However, these rules place potential additional administrative obligations on these funds, and the safeguards established to protect anonymity may not function as expected.
Convertible Securities (GER and GMZ)
The Fund may invest in convertible securities. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for a specified amount of common stock (or other securities) of the same or different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest that is generally paid or accrued on debt or a dividend that is paid or accrued on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment characteristics, in that they generally (i) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying common stock due to their fixed income characteristics and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its investment value (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its conversion value (the securitys worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value normally declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors may also have an effect on the convertible securitys investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible securitys governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required to convert the security into the underlying common stock, sell it to a third party or permit the issuer to redeem the security. Any of these actions could have an adverse effect on the Funds ability to achieve its investment objective, which, in turn, could result in losses to the Fund. To the extent that the Fund holds a convertible security, or a security that is otherwise converted or exchanged for common stock (e.g., as a
S-23
result of a restructuring), the Fund may, consistent with its investment objective, hold such common stock in its portfolio.
In evaluating a convertible security, the Investment Adviser will give primary emphasis to the attractiveness of the underlying common stock. Convertible debt securities are equity investments for purposes of the Funds investment policies.
Forward Contracts (GER and GMZ)
Forward contracts involve the purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the current or spot price, with delivery and settlement at a specified future date. Because it is a completed contract, a purchase forward contract can be a cover for the sale of a futures contract. The Fund may enter into forward contracts for hedging purposes and non-hedging purposes (i.e., to increase returns). Forward contracts may be used by the Fund for hedging purposes to protect against uncertainty in the level of future foreign currency exchange rates, such as when the Fund anticipates purchasing or selling a foreign security. For example, this technique would allow the Fund to lock in the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of the Funds existing holdings of foreign securities. There may be, however, an imperfect correlation between the Funds foreign securities holdings and the forward contracts entered into with respect to those holdings. Forward contracts may also be used for nonhedging purposes to pursue the Funds investment objective, such as when the Funds Investment Adviser anticipates that particular foreign currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the Funds portfolio. There is no requirement that the Fund hedge all or any portion of its exposure to foreign currency risks.
Forward contracts and options thereon, unlike futures contracts, are not traded on exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and cash trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can occur in any market traded by the Investment Adviser due to unusually high trading volume, political intervention or other factors. Arrangements to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if such arrangements were made with numerous counterparties. The imposition of controls by governmental authorities might also limit such forward (and futures) trading to less than that which the Investment Adviser would otherwise recommend, to the possible detriment of the Fund. Market illiquidity or disruption could result in major losses to the Fund. In addition, the Fund will be exposed to credit risks with regard to counterparties with whom they trade as well as risks relating to settlement default. Such risks could result in substantial losses to the Fund.
Equity Swaps (GER and GMZ)
The Fund may enter into equity swap contracts to invest in a market without owning or taking physical custody of securities in various circumstances, including circumstances where direct investment in the securities is restricted for legal reasons or is otherwise impracticable. Equity swaps may also be used for hedging purposes or to seek to increase total return. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. Equity swap contracts may be structured in different ways. For example, a counterparty may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap contract would have increased in value had it been invested in particular stocks (or an index of stocks), plus the dividends that would have been received on those stocks. In these cases, the Fund may agree to
S-24
pay to the counterparty a floating rate of interest on the notional amount of the equity swap contract plus the amount, if any, by which that notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on the equity swap contract should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. In other cases, the counterparty and the Fund may each agree to pay the other the difference between the relative investment performances that would have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or indices of stocks).
The Fund will generally enter into equity swaps on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of an equity swap contract or periodically during its term. Equity swaps normally do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to equity swaps is normally limited to the net amount of payments that the Fund is contractually obligated to make. If the other party to an equity swap defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. Inasmuch as these transactions are entered into for hedging purposes or are offset by cash or liquid assets identified on the Funds books to cover the Funds exposure, the Fund and the Investment Adviser believe that such transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter into swap transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto is considered to be investment grade by the Investment Adviser. The Funds ability to enter into certain swap transactions may be limited by tax considerations.
When-Issued Securities and Forward Commitments (GER and GMZ)
The Fund may purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis beyond the customary settlement time. These transactions involve a commitment by the Fund to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such commitments are not traded on exchanges. The Fund will generally purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or negotiate a commitment after entering into it. The Fund may also sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. The Fund may realize capital gains or losses in connection with these transactions. For purposes of determining the Funds duration, the maturity of when-issued or forward commitment securities for fixed-rate obligations will be calculated from the commitment date. The Fund is generally required to identify on its books, until three days prior to settlement date, cash and liquid assets in an amount sufficient to meet the purchase price unless the Funds obligations are otherwise covered. Alternatively, the Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date.
Investment in Unseasoned Companies (GER and GMZ)
The Fund may invest in companies (including predecessors) which have operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in unseasoned companies are more speculative and entail greater risk than do investments in companies with an established operating record.
S-25
Pooled Investment Vehicles (GER and GMZ)
The Fund may invest in securities of pooled investment vehicles, including other investment companies, ETFs and ETNs. The Fund will indirectly bear its proportionate share of any management fees and other expenses paid by pooled investment vehicles in which it invests, in addition to the management fees (and other expenses) paid by the Fund. The Funds investments in pooled investment vehicles are subject to statutory limitations prescribed by the 1940 Act, including in certain circumstances a prohibition on the Fund acquiring more than 3% of the voting shares of any other investment company, and a prohibition on investing more than 5% of the Funds total assets in securities of any one investment company or more than 10% of its total assets in the securities of all investment companies. Many ETFs, however, have obtained exemptive relief from the SEC to permit unaffiliated funds (such as the Fund) to invest in their shares beyond these statutory limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. The Fund may rely on these exemptive orders in investing in ETFs.
The Fund may purchase shares of investment companies investing primarily in foreign securities, including country funds. Country funds have portfolios consisting primarily of securities of issuers located in specified foreign countries or regions. ETFs are pooled investment vehicles issuing shares which are traded like traditional equity securities on a stock exchange. An ETF represents a portfolio of securities or other assets, which is often designed to track a particular market segment or index. An investment in an ETF, like one in any pooled investment vehicle, carries the risks of its underlying securities or other assets. An ETF may fail to accurately track the returns of the market segment or index that it is designed to track, and the price of an ETFs shares may fluctuate or lose money. In addition, because they, unlike other pooled investment vehicles, are traded on an exchange, ETFs are subject to the following risks: (i) the market price of the ETFs shares may trade at a premium or discount to the ETFs NAV; (ii) an active trading market for an ETF may not develop or be maintained; and (iii) there is no assurance that the requirements of the exchange necessary to maintain the listing of the ETF will continue to be met or remain unchanged. In the event substantial market or other disruptions affecting ETFs should occur in the future, the liquidity and value of the Funds Common Shares could also be substantially and adversely affected.
ETNs (GER and GMZ)
ETNs are a type of senior, unsecured, unsubordinated debt security issued by financial institutions that combines both aspects of bonds and ETFs. An ETNs returns are based on the performance of a market index 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 ETNs maturity, at which time the issuer is obligated to pay a return linked to the performance of the market index to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments and principal is not protected. ETNs are subject to credit risk and the value of an ETN may drop due to a downgrade in the issuers credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in applicable interest rates, changes in the issuers credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When the Fund invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. The Funds decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN.
Repurchase Agreements (GER and GMZ)
The Fund may enter into repurchase agreements with banks, brokers and dealers which furnish collateral at least equal in value or market price to the amount of its repurchase obligations. These repurchase agreements may involve foreign government securities. Repurchase agreements involving obligations other than U.S. Government Securities may be subject to special risks and may not have the benefit of certain protections in the
S-26
event of the counterpartys insolvency. A repurchase agreement is an arrangement under which the Fund purchases securities and the seller agrees to repurchase the securities within a particular time and at a specified price for the duration of the agreement. Custody of the securities is maintained by the Funds custodian (or sub-custodian). The repurchase price may be higher than the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Fund together with the repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest rate on the security subject to the repurchase agreement.
For purposes of the 1940 Act, and generally for tax purposes, a repurchase agreement is deemed to be a loan from the Fund to the seller of the security. For other purposes, it is not always clear whether a court would consider the security purchased by the Fund subject to a repurchase agreement as being owned by the Fund or as being collateral for a loan by the Fund to the seller. In the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the security before repurchase of the security under a repurchase agreement, the Fund may encounter delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in value of the security. If the court characterizes the transaction as a loan and the Fund has not perfected a security interest in the security, the Fund may be required to return the security to the sellers estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would be at risk of losing some or all of the principal and interest involved in the transaction.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the seller may fail to repurchase the security. However, if the market value of the security subject to the repurchase agreement becomes less than the repurchase price (including accrued interest), the Fund will direct the seller of the security to deliver additional securities so that the market value of all securities subject to the repurchase agreement equals or exceeds the repurchase price. Certain repurchase agreements which provide for settlement in more than seven days can be liquidated before the nominal fixed term on seven days or less notice. Such repurchase agreements will be regarded as liquid instruments.
The Fund, together with other registered investment companies having management agreements with the Investment Adviser or its affiliates, may transfer uninvested cash balances into a single joint account, the daily aggregate balance of which will be invested in one or more repurchase agreements.
Reverse Repurchase Agreements (GER and GMZ)
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement by the Fund to repurchase the securities at an agreed upon price, date and interest payment. At the time the Fund enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Fund establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Fund; however, under certain circumstances in which the Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Funds limitation on borrowings. Reverse repurchase agreements involve leveraging. If the securities held by the Fund decline in value while these transactions are outstanding, the NAV of the Funds outstanding shares will decline in value by proportionately more than the decline in value of the securities. In addition, reverse repurchase agreements involve the risk that the investment return earned by the Fund (from the investment of the proceeds) will be less than the interest expense of the transaction, that the market value of the securities sold by the Fund will decline below the price the Fund is obligated to pay to repurchase the securities, and that the securities may not be returned to the Fund.
The Fund must set aside liquid assets, or engage in other appropriate measures to cover its obligations with respect to its transactions in reverse repurchase agreements. As a result of such segregation, the Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act and the Funds use of leverage through reverse repurchase agreements will not be
S-27
limited by the 1940 Act. However, the Funds use of leverage through reverse repurchase agreements will be considered to be financial leverage for purposes of determining compliance with the Funds maximum overall leverage levels approved by the Board. The Funds use of leverage through reverse repurchase agreements may be further limited by the availability of cash or liquid securities to earmark or segregate in connection with such transactions.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Funds obligation to repurchase the securities, and the Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
With respect to any reverse repurchase agreement or similar transaction, the Funds Managed Assets shall include any proceeds from the sale of an asset of the Fund to a counterparty in such a transaction, in addition to the value of the underlying asset as of the relevant measuring date.
Short Sales (GER and GMZ)
The Fund may engage in short sales. Short sales are transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. There will also be other costs associated with short sales.
The Fund may use short sales, consistent with its investment objective, to gain exposure to the MLP market in various circumstances, including among others when the Investment Adviser determines that a specific MLP investment may be facing deteriorating fundamentals that could result in lower growth or the potential for lower distributions.
The Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Fund may be required to pay in connection with a short sale, and will be also decreased by any transaction or other costs.
Until the Fund replaces a borrowed security in connection with a short sale, the Fund will (a) identify on its books cash or liquid assets at such a level that the identified assets plus any amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover its short position in accordance with applicable law.
There is no guarantee that the Fund will be able to close out a short position at any particular time or at an acceptable price. During the time that the Fund is short a security, it is subject to the risk that the lender of the security will terminate the loan at a time when the Fund is unable to borrow the same security from another lender. If that occurs, the Fund may be bought in at the price required to purchase the security needed to close out the short position, which may be a disadvantageous price.
Short Sales Against the Box. The Fund may engage in short sales against the box. As noted above, a short sale is made by selling a security the seller does not own. A short sale is against the box to the extent that the
S-28
seller contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. The Fund may enter into a short sale against the box, for example, to lock in a sales price for a security the Fund does not wish to sell immediately. If the Fund sells securities short against the box, it may protect itself from loss if the price of the securities declines in the future, but will lose the opportunity to profit on such securities if the price rises. If the Fund effects a short sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize that gain as if it had actually sold the securities (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which the Fund may effect short sales.
Restricted Securities (GER and GMZ)
The Fund may purchase securities and other financial instruments that are not registered or that are offered in an exempt non-public offering (Restricted Securities) under the Securities Act of 1933, as amended (the 1933 Act), including securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the 1933 Act.
The purchase price and subsequent valuation of Restricted Securities may reflect a discount from the price at which such securities trade when they are not restricted, because the restriction makes them less liquid. The amount of the discount from the prevailing market price is expected to vary depending upon the type of security, the character of the issuer, the party who will bear the expenses of registering the Restricted Securities and prevailing supply and demand conditions.
Asset Segregation (GER and GMZ)
As an investment company registered with the SEC, the Fund must identify on its books (often referred to as asset segregation) liquid assets, or engage in other SEC- or SEC staff-approved or other appropriate measures, to cover open positions with respect to certain kinds of derivative instruments. In the case of swaps, futures contracts, options, forward contracts and other derivative instruments that do not cash settle, for example, the Fund must identify on its books liquid assets equal to the full notional amount of the instrument while the positions are open, to the extent there is not an offsetting position. However, with respect to certain swaps, futures contracts, options, forward contracts and other derivative instruments that are required to cash settle, the Fund may identify liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e., the Funds daily net liability) under the instrument, if any, rather than its full notional amount. The Fund reserves the right to modify its asset segregation policies in the future in its discretion, consistent with the 1940 Act and SEC or SEC staff guidance. By identifying assets equal to only its net obligations under certain instruments, the Fund will have the ability to engage in the use of derivative instruments that may have the effect of leverage to a greater extent than if the Fund were required to identify assets equal to the full notional amount of the instruments.
Non-Diversified Status (GER and GMZ)
The Fund is non-diversified, meaning that it is permitted to invest a larger percentage of its assets in fewer issuers than diversified funds. Thus, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio, and may be more susceptible to greater losses because of these developments. Because the Fund does not intend to be taxed as a regulated investment company under Subchapter M of the Code, the Fund will not be subject to the diversification requirements applicable to regulated investment companies.
Temporary Investments (GER and GMZ)
The Fund may, for temporary defensive purposes (and to the extent it is permitted to invest in the following), invest up to 100% of its total assets in: U.S. Government Securities; commercial paper rated at least
S-29
A-2 by Standard & Poors , P-2 by Moodys or having a comparable rating by another NRSRO (or, if unrated, determined by the Investment Adviser to be of comparable credit quality); certificates of deposit; bankers acceptances; repurchase agreements; non-convertible preferred stocks and non-convertible corporate bonds with a remaining maturity of less than one year; ETFs and other investment companies; cash items; or any other than fixed income securities that the Investment Adviser considers consistent with this strategy. When the Funds assets are invested in such instruments, the Fund may not be achieving its investment objective.
Portfolio Turnover (GER and GMZ)
The Fund may engage in active short-term trading to benefit from price disparities among different issues of securities or among the markets for equity securities, or for other reasons. As a result of active management, it is anticipated that the portfolio turnover rate may vary greatly from year to year as well as within a particular year, and may be affected by changes in the holdings of specific issuers, changes in country and currency weightings and cash requirements for redemption of shares. High portfolio turnover may result in the Funds recognition of gains (losses) that will increase (decrease) the Funds tax liability and thereby impact the amount of the Funds after-tax distributions. In addition, high portfolio turnover may increase the Funds current and accumulated earnings and profits, resulting in a greater portion of the Funds distributions being treated as taxable dividends for federal income tax purposes. The Fund is not restricted by policy with regard to portfolio turnover and will make changes in its investment portfolio from time to time as business and economic conditions as well as market prices may dictate.
Special Note Regarding Regulatory Changes and Other Market Events (GER and GMZ)
Federal, state, and foreign governments, regulatory agencies, and self-regulatory organizations may take actions that affect the regulation of the Fund or the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Future legislation or regulation or other governmental actions could limit or preclude the Funds ability to achieve its investment objective or otherwise adversely impact an investment in the Fund. Furthermore, worsened market conditions, including as a result of U.S. government shutdowns or the perceived creditworthiness of the United States, could have a negative impact on securities markets.
The Funds investments, payment obligations and financing terms may be based on floating rates, such as LIBOR, 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 the Funds investments, performance or financial condition. Until then, the Fund 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 seek to 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 marketwide protocols, fallback contractual provisions, bespoke negotiations or amendments or otherwise. Nonetheless, the termination of certain Reference Rates presents risks to the Fund. 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 United Kingdom or elsewhere. The elimination of a Reference Rate or any other changes or reforms to the determination or supervision of Reference Rates may affect the value, liquidity or return on certain Fund investments and may result in costs incurred in connection with closing out positions and entering into new
S-30
trades, adversely impacting the Funds overall financial condition or results of operations. The impact of any successor or substitute Reference Rate, if any, will vary on an investment-by-investment basis, and any differences may be material and/or create material economic mismatches, especially if investments are used for hedging or similar purposes. In addition, although certain Fund investments may provide for a successor or substitute Reference Rate (or terms governing how to determine a successor or substitute Reference Rate) if the Reference Rate becomes unavailable, certain Fund investments may not provide such a successor or substitute Reference Rate (or terms governing how to determine a successor or substitute Reference Rate). Accordingly, there may be disputes as to: (i) any successor or substitute Reference Rate; or (ii) the enforceability of any Fund investment that does not provide such a successor or substitute Reference Rate (or terms governing how to determine a successor or substitute Reference Rate). The Investment Adviser, Goldman Sachs and/or their affiliates may have discretion to determine a successor or substitute Reference Rate, including any price or other adjustments to account for differences between the successor or substitute Reference Rate and the previous rate. The successor or substitute Reference Rate and any adjustments selected may negatively impact a Funds investments, performance or financial condition, including in ways unforeseen by the Investment Adviser, Goldman Sachs and/or their affiliates. In addition, any successor or substitute Reference Rate and any pricing adjustments imposed by a regulator or by counterparties or otherwise may adversely affect the Funds performance and/or NAV, and may expose the Fund to additional tax, accounting and regulatory risks.
In the aftermath of the 2007-2008 financial crisis, the financial sector experienced reduced liquidity in credit and other fixed income markets, and an unusually high degree of volatility, both domestically and internationally. While entire markets were impacted, issuers that had exposure to the real estate, mortgage and credit markets were particularly affected. The instability in the financial markets led the U.S. government to take a number of unprecedented actions designed to support certain financial institutions and certain segments of the financial markets. For example, the Dodd-Frank Act provides for broad regulation of financial institutions, consumer financial products and services, broker-dealers, over-the-counter derivatives, investment advisers, credit rating agencies and mortgage lending.
Governments or their agencies may also acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such ownership or disposition may have positive or negative effects on the liquidity, valuation and performance of the Funds portfolio holdings.
In addition, global economies and financial markets are becoming increasingly interconnected, and political, economic and other conditions and events (including, but not limited to, natural disasters, pandemics, epidemics, and social unrest) in one country, region, or financial market may adversely impact issuers in a different country, region or financial market. Furthermore, the occurrence of, among other events, natural or man-made disasters, severe weather or geological events, fires, floods, earthquakes, outbreaks of disease (such as COVID-19, avian influenza or H1N1/09), epidemics, pandemics, malicious acts, cyber-attacks, terrorist acts or the occurrence of climate change, may also adversely impact the performance of the Fund. Such events may result in, among other things, closing borders, exchange closures, health screenings, healthcare service delays, quarantines, cancellations, supply chain disruptions, lower consumer demand, market volatility and general uncertainty. Such events could adversely impact issuers, markets and economies over the short- and long-term, including in ways that cannot necessarily be foreseen. The Fund could be negatively impacted if the value of a portfolio holding were harmed by such political or economic conditions or events. Moreover, such negative political and economic conditions and events could disrupt the processes necessary for the Funds operations. See Special Note Regarding Operational, Cyber Security and Litigation Risks for additional information on operational risks.
Special Note Regarding Operational, Cyber Security and Litigation Risks (GER and GMZ)
An investment in the Fund may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third-party service providers or trading
S-31
counterparties. The use of certain investment strategies that involve manual or additional processing, such as over-the-counter derivatives, increases these risks. Although the Fund attempts to minimize such failures through controls and oversight, it is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures.
The Fund and its shareholders could be negatively impacted as a result. The Fund is also susceptible to operational and information security risks resulting from cyber-attacks. In general, cyber-attacks result from deliberate attacks, but other events may have effects similar to those caused by cyber-attacks. Cyber-attacks include, among others, stealing or corrupting confidential information and other data that is maintained online or digitally for financial gain, denial-of-service attacks on websites causing operational disruption, and the unauthorized release of confidential information and other data. Cyber-attacks affecting the Fund or its investment adviser, sub-adviser, custodian, transfer agent, intermediary or other third-party service provider may adversely impact the Fund and its shareholders. These cyber-attacks have the ability to cause significant disruptions and impact business operations; to result in financial losses; to prevent shareholders from transacting business; to interfere with the Funds calculation of NAV and to lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs and/or additional compliance costs. Similar to operational risk in general, the Fund and its service providers, including GSAM, have instituted risk management systems designed to minimize the risks associated with cyber security. However, there is a risk that these systems will not succeed (or that any remediation efforts will not be successful), especially because the Fund does not directly control the risk management systems of the service providers to the Fund, its trading counterparties or the issuers in which the Fund may invest. Moreover, there is a risk that cyber-attacks will not be detected.
The Fund may be subject to third-party litigation, which could give rise to legal liability. These matters involving the Fund may arise from its activities and investments and could have a materially adverse effect on the Fund, including the expense of defending against claims and paying any amounts pursuant to settlements or judgments. There can be no guarantee that these matters will not arise in the normal course of business. If the Fund was to be found liable in any suit or proceeding, any associated damages and/or penalties could have a materially adverse effect on the Funds finances, in addition to being materially damaging to its reputation.
Investment Restrictions
The Funds have identical investment limitations. A comparison of the Funds investment limitations (both fundamental and non-fundamental) is set forth below. Fundamental investment limitations may not be changed without the approval of the holders of a majority of a Funds outstanding voting securities (which for this purpose and under the 1940 Act means the lesser of the vote of (i) 67% or more of the shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the shares of the Fund. The investment restrictions of the Combined Fund will be those of GER.
For purposes of the following limitations (except for the asset coverage requirement with respect to borrowings), any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of, or borrowings by, each Fund. In applying fundamental investment restriction number (1) below to derivative transactions or instruments, including, without limitation, futures, swaps, forwards, options and structured notes, each Fund will look to the industry of the reference asset(s) and not to the counterparty or issuer. With respect to each Funds fundamental investment restriction number (2) below, asset coverage of at least 300% (as defined in the 1940 Act), inclusive of any amounts borrowed, must be maintained at all times.
S-32
GMZ Investment Restrictions
As a matter of fundamental policy, the Fund may not:
(1) |
Invest 25% or more of its Managed Assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S. Government or any of its agencies or instrumentalities); except that the Fund will invest more than 25% of its Managed Assets in companies conducting their principal business in industries within the energy sector; |
(2) |
Borrow money, except as permitted by the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction; |
The following interpretation applies to, but is not part of, this fundamental policy:
In determining whether a particular investment in portfolio instruments or participation in portfolio transactions is subject to this borrowing policy, the accounting treatment of such instrument or participation shall be considered, but shall not by itself be determinative. Whether a particular instrument or transaction constitutes a borrowing shall be determined by the Board, after consideration of all of the relevant circumstances.
(3) |
Make loans, except through (a) the purchase of debt obligations in accordance with the Funds investment objective and policies, (b) repurchase agreements with banks, brokers, dealers and other financial institutions, (c) loans of securities as permitted by applicable law, and (d) loans to affiliates of the Fund to the extent permitted by law; |
(4) |
Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Fund may be deemed to be an underwriting; |
(5) |
Purchase, hold or deal in real estate, although the Fund may purchase and sell securities or instruments that are secured by real estate or interests therein or that reflect the return of an index of real estate values, securities of real estate investment trusts and mortgage-related securities, and may hold and sell real estate acquired by the Fund as a result of the ownership of securities; |
(6) |
Invest in physical commodities, except that the Fund may invest in currency and financial instruments and contracts in accordance with its investment objective and policies, including, without limitation, structured notes, futures contracts, swaps, options on commodities, currencies, swaps and futures, ETFs, investment pools and other instruments, regardless of whether such instrument is considered to be a commodity; |
(7) |
Issue senior securities to the extent such issuance would violate applicable law. |
In addition to the fundamental policies mentioned above, the Trustees have adopted the following non-fundamental policies which can be changed or amended by action of the Trustees without approval of shareholders. Again, for purposes of the following limitations, any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition of securities by the Fund.
The Fund may not invest in companies for the purpose of exercising control or management.
For purposes of the Funds industry concentration policy, the Investment Adviser may analyze the characteristics of a particular issuer and instrument and may assign an industry classification consistent with those characteristics. The Investment Adviser may, but need not, consider industry classifications provided by third parties, and the classifications applied to Fund investments will be informed by applicable law.
S-33
GER Investment Restrictions
As a matter of fundamental policy, the Fund may not:
(1) |
Invest 25% or more of its Managed Assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S. Government or any of its agencies or instrumentalities); except that the Fund will invest more than 25% of its Managed Assets in companies conducting their principal business in industries within the energy sector; |
(2) |
Borrow money, except as permitted by the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction; |
The following interpretation applies to, but is not part of, this fundamental policy:
In determining whether a particular investment in portfolio instruments or participation in portfolio transactions is subject to this borrowing policy, the accounting treatment of such instrument or participation shall be considered, but shall not by itself be determinative. Whether a particular instrument or transaction constitutes a borrowing shall be determined by the Board, after consideration of all of the relevant circumstances.
(3) |
Make loans, except through (a) the purchase of debt obligations in accordance with the Funds investment objective and policies, (b) repurchase agreements with banks, brokers, dealers and other financial institutions, (c) loans of securities as permitted by applicable law, and (d) loans to affiliates of the Fund to the extent permitted by law; |
(4) |
Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Fund may be deemed to be an underwriting; |
(5) |
Purchase, hold or deal in real estate, although the Fund may purchase and sell securities or instruments that are secured by real estate or interests therein or that reflect the return of an index of real estate values, securities of real estate investment trusts and mortgage-related securities, and may hold and sell real estate acquired by the Fund as a result of the ownership of securities; |
(6) |
Invest in physical commodities, except that the Fund may invest in currency and financial instruments and contracts in accordance with its investment objective and policies, including, without limitation, structured notes, futures contracts, swaps, options on commodities, currencies, swaps and futures, ETFs, investment pools and other instruments, regardless of whether such instrument is considered to be a commodity; |
(7) |
Issue senior securities to the extent such issuance would violate applicable law. |
In addition to the fundamental policies mentioned above, the Trustees have adopted the following non-fundamental policies which can be changed or amended by action of the Trustees without approval of shareholders. Again, for purposes of the following limitations, any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition of securities by the Fund.
The Fund may not invest in companies for the purpose of exercising control or management.
For purposes of the Funds industry concentration policy, the Investment Adviser may analyze the characteristics of a particular issuer and instrument and may assign an industry classification consistent with those characteristics. The Investment Adviser may, but need not, consider industry classifications provided by third parties, and the classifications applied to Fund investments will be informed by applicable law.
S-34
The Funds Leadership Structure
The business and affairs of the Funds are managed under the direction of the Board of Trustees of each Fund (together, the Board), subject to the laws of the State of Delaware and each Funds Declaration of Trust. The Trustees are responsible for deciding matters of overall policy and reviewing the actions of the Funds service providers. The officers of the Funds conduct and supervise the Funds daily business operations. Trustees who are not deemed to be interested persons of the Funds as defined in the Act are referred to as Independent Trustees. Trustees who are deemed to be interested persons of the Funds are referred to as Interested Trustees. The Board is currently composed of four Independent Trustees and one Interested Trustee. The Board has selected an Independent Trustee to act as Chairman, whose duties include presiding at meetings of the Board and acting as a focal point to address significant issues that may arise between regularly scheduled Board and Committee meetings. In the performance of the Chairmans duties, the Chairman will consult with the other Independent Trustees and the Funds officers and legal counsel, as appropriate. The Chairman may perform other functions as requested by the Board from time to time.
The Board meets as often as necessary to discharge its responsibilities. Currently, the Board conducts regular, in-person meetings at least four times a year, and holds special in-person or telephonic meetings as necessary to address specific issues that require attention prior to the next regularly scheduled meeting. In addition, the Independent Trustees meet at least annually to review, among other things, investment management agreements, transfer agency agreements and certain other service provider agreements, and to consider such other matters as they deem appropriate.
The Board has established five standing committees Audit, Governance and Nominating, Compliance, Contract Review and Valuation Committees. The Board may establish other committees, or nominate one or more Trustees to examine particular issues related to the Boards oversight responsibilities, from time to time. Each Committee meets periodically to perform its delegated oversight functions and reports its findings and recommendations to the Board. For more information on the Committees, see the section STANDING BOARD COMMITTEES, below.
The Trustees have determined that the Funds leadership structure is appropriate because it allows the Trustees to effectively perform their oversight responsibilities.
S-35
Trustees of the Funds
Information pertaining to the Trustees of the Funds as of July 28, 2020 is set forth below.
Name, Address and Age1 |
Position(s)
the Funds |
Term of Office
|
Principal Occupation(s) During Past 5 Years |
Number of
|
Other
Held by Trustee4 |
|||||
Lawrence W. Stranghoener Age: 66 |
Chairman of the Board of Trustees | Trustee since 2015, Chairman since 2017 |
Mr. Stranghoener is retired. He is Chairman, Kennametal, Inc. (a global manufacturer and distributor of tooling and industrial materials) (2003-Present); and was formerly Director, Aleris Corporation and Aleris International, Inc. (a producer of aluminum rolled products) (2011-2020); Interim Chief Executive Officer (2014) and Executive Vice President and Chief Financial Officer (20042014), Mosaic Company (a fertilizer manufacturing company).
Chairman of the Board of TrusteesGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
46 | Kennametal Inc. (a global manufacturer and distributor of tooling and industrial materials) | |||||
Caroline Dorsa Age: 61 |
Trustee | Since 2016 | Ms. Dorsa is retired. She is Director, Biogen Inc. (a biotechnology company) (2010Present); Director, Intellia Therapeutics Inc. (a gene-editing company) (2015Present); and Director, Illumina, Inc. (a life sciences company) (2017Present). She was formerly Executive Vice President and Chief Financial Officer, Public Service Enterprise Group, Inc. (a generation and energy services company) (20092015); Senior Vice President, Merck & Co, Inc. (a pharmaceutical company) (2008-2009 and 19872007); Senior Vice President and Chief | 46 | Biogen Inc. (a biotechnology company); Intellia Therapeutics Inc. (a gene-editing company); Illumina, Inc. (a life sciences company) |
S-36
Name, Address and Age1 |
Position(s)
the Funds |
Term of Office
|
Principal Occupation(s) During Past 5 Years |
Number of
|
Other
Held by Trustee4 |
|||||
Financial Officer, Gilead Sciences, Inc. (a pharmaceutical company) (2007-2008); and Senior Vice President and Chief Financial Officer, Avaya, Inc. (a technology company) (2007).
TrusteeGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
||||||||||
Linda A. Lang Age: 62 |
Trustee | Since 2016 |
Ms. Lang is retired. She was formerly Chair of the Board of Directors, (20162019) and Member of the Board of Directors, WD-40 Company (a global consumer products company) (20042019); Chairman and Chief Executive Officer (20052014); and Director, President and Chief Operating Officer, Jack in the Box, Inc. (a restaurant company) (20032005). Previously, Ms. Lang served as an Advisory Board Member of Goldman Sachs MLP Income Opportunities Fund and Goldman Sachs MLP and Energy Renaissance Fund (February 2016March 2016).
TrusteeGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
46 | None |
S-37
Name, Address and Age1 |
Position(s)
the Funds |
Term of Office
|
Principal Occupation(s) During Past 5 Years |
Number of
|
Other
Held by Trustee4 |
|||||
Michael Latham Age: 54 |
Trustee | Since 2015 |
Mr. Latham is retired. Formerly, he held senior management positions with the iShares exchange-traded fund business, including Chairman (20112014); Global Head (20102011); U.S. Head (20072010); and Chief Operating Officer (20032007).
TrusteeGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
46 | None | |||||
Interested Trustee |
||||||||||
James A. McNamara* Age: 57 |
President and Trustee | Since 2014 |
Advisory Director, Goldman Sachs (January 2018Present); Managing Director, Goldman Sachs (January 2000December 2017); Director of Institutional Fund Sales, GSAM (April 1998December 2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993April 1998).
President and Trustee Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
168 | None |
* |
Mr. McNamara is considered to be an Interested Trustee because he holds positions with Goldman Sachs and owns securities issued by The Goldman Sachs Group, Inc. Mr. McNamara holds comparable positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor. |
S-38
1 |
Each Trustee may be contacted by writing to the Trustee, c/o Goldman Sachs, 200 West Street, New York, New York, 10282, Attn: Caroline Kraus. |
2 |
After a Trustees initial term, each Trustee is eligible to serve for successive three-year terms concurrent with the class of Trustees in which he or she serves, subject to such policies as may be adopted by the Board from time-to-time. |
|
Class I Trustee currently serves a three-year term ending in 2021 for GMZ and 2022 for GER. |
|
Class II Trustees currently serve a three-year term ending in 2022 for GMZ and 2023 for GER. |
|
Class III Trustees currently serve a three-year term ending in 2023 for GMZ and 2021 for GER. |
The Board has adopted polices which provide that (a) no Trustee shall hold office for more than 15 years and (b) a Trustee shall retire as of December 31st of the calendar year in which he or she reaches his or her 74th birthday, unless a waiver of such requirement shall have been adopted by a majority of the other Trustees. These policies may be changed by the Trustees without shareholder vote
3 |
The Goldman Sachs Fund Complex includes certain other companies listed above for each respective Trustee. As of July 28, 2020, Goldman Sachs MLP and Energy Renaissance Fund, Goldman Sachs MLP Income Opportunities Fund, Goldman Sachs Credit Income Fund and Goldman Sachs Real Estate Diversified Income Fund each consisted of one portfolio; Goldman Sachs Trust consisted of 90 portfolios (89 of which offered shares to the public); Goldman Sachs Variable Insurance Trust consisted of 13 portfolios; Goldman Sachs Trust II consisted of 19 portfolios (17 of which offered shares to the public); and Goldman Sachs ETF Trust consisted of 42 portfolios (25 of which offered shares to the public). Goldman Sachs Credit Income Fund did not offer shares to the public. |
4 |
This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e., public companies) or other investment companies registered under the Act. |
The significance or relevance of a Trustees particular experience, qualifications, attributes and/or skills is considered by the Board on an individual basis. Experience, qualifications, attributes and/or skills common to all Trustees include the ability to critically review, evaluate and discuss information provided to them and to interact effectively with the other Trustees and with representatives of the Investment Adviser and its affiliates, other service providers, legal counsel and the Funds independent registered public accounting firm, the capacity to address financial and legal issues and exercise reasonable business judgment, and a commitment to the representation of the interests of the Funds and their shareholders. The Governance and Nominating Committees charter contains certain other factors that are considered by the Governance and Nominating Committee in identifying and evaluating potential nominees to serve as Independent Trustees. Based on each Trustees experience, qualifications, attributes and/or skills, considered individually and with respect to the experience, qualifications, attributes and/or skills of other Trustees, the Board has concluded that each Trustee should serve as a Trustee. Below is a brief discussion of the experience, qualifications, attributes and/or skills of each individual Trustee as of July 28, 2020 that led the Board to conclude that such individual should serve as a Trustee.
Lawrence W. Stranghoener. Mr. Stranghoener has served as a Class III Trustee of each of GMZ and GER since 2015 and Chairman of the Board of Trustees since 2017. Mr. Stranghoener is retired. Mr. Stranghoener is Chairman of the Board of Directors of Kennametal, Inc., a global manufacturer and distributor of tooling and industrial materials. Previously, he was a member of the Board of Directors of Aleris Corporation and Aleris International, Inc., which provided aluminum rolled products and extrusions, aluminum recycling, and specification alloy production, where he served as Chair of the Audit Committee and also served on the Compensation Committee. Mr. Stranghoener also held several senior management positions at Mosaic Company, a fertilizer manufacturing company, where he worked for 10 years, most recently as Interim Chief Executive Officer, Executive Vice President and Chief Financial Officer. As Executive Vice President and Chief Financial Officer at Mosaic Company, Mr. Stranghoener implemented public company processes, policies and performance standards to transition the company from private to public ownership and oversaw the companys controller, treasury, tax, investor relations, strategy and business development, and internal audit functions. He
S-39
also led the integration of Mosaic Company with IMC Global, Inc. during their merger. Previously, Mr. Stranghoener served for three years as Executive Vice President and Chief Financial Officer for Thrivent Financial, a non-profit, financial services organization and Techies.com, an internet-based professional services company. Mr. Stranghoener also held several senior management positions at Honeywell International, Inc. where he worked for 17 years, most recently as Vice President and Chief Financial Officer. Based on the foregoing, Mr. Stranghoener is experienced with financial and investment matters.
Caroline Dorsa. Ms. Dorsa has served as a Class III Trustee of each of GMZ and GER since 2016. Ms. Dorsa is retired. Ms. Dorsa has been designated as the Boards audit committee financial expert given her extensive accounting and finance experience. Ms. Dorsa is a member of the Board of Directors of Biogen Inc., a biotechnology company, where she chairs the Audit Committee and also serves on the Risk Committee. In addition, Ms. Dorsa also serves as a member of the Board of Directors of Intellia Therapeutics Inc., a gene-editing company, where she chairs the Audit Committee and serves on the Compensation Committee and Nominating and Corporate Governance Committee. Furthermore, Ms. Dorsa serves as a member of the Board of Directors of Illumina, Inc., a life sciences company, where she serves on the Audit Committee. Previously, she served as Executive Vice President and Chief Financial Officer of Public Service Enterprise Group, Inc. (PSEG), a generation and energy services company. As Executive Vice President and Chief Financial Officer, Ms. Dorsa was responsible for finance, accounting and internal audit, risk management and investor relations. Prior to becoming Chief Financial Officer, she was a member of PSEGs Board of Directors and a member of its Audit, Corporate Governance and Finance committees for six years. Prior to joining PSEG, Ms. Dorsa held various management positions at Merck & Co, Inc., where she worked for over 20 years, most recently in the position of Senior Vice President of Global Human Health Strategy and Integration. As Vice President and Treasurer of Merck from 1994 through 2006, her responsibilities also included the global tax function, transfer pricing, global entity management and financial planning for both the research and manufacturing divisions. Based on the foregoing, Ms. Dorsa is experienced with financial and investment matters.
Linda A. Lang. Ms. Lang has served as a Class II Trustee of each of GMZ and GER since 2016. Ms. Lang is retired. Ms. Lang was formerly Chair of the Board of Directors of WD-40 Company, a global consumer products company, where she served on the Compensation and Finance Committees. Ms. Lang also previously held several senior management positions at Jack in the Box, Inc., a restaurant company listed on The NASDAQ Stock Market, where she worked for 30 years, most recently as Chairman and Chief Executive Officer. Over that time, she was involved in the areas of strategic planning, capital structure and deployment, and enterprise risk management. Based on the foregoing, Ms. Lang is experienced with financial and investment matters.
Michael Latham. Mr. Latham has served as a Class I Trustee of each of GMZ and GER since 2015. Mr. Latham is retired. Previously, he held several senior management positions for 15 years with the iShares exchange-traded fund business owned by BlackRock, Inc. and previously owned by Barclays Global Investors, most recently as Chairman and Global Head of the business. In that capacity he was one of the lead executives responsible for the growth of the business. He was also involved in governance of the iShares funds, serving initially as Principal Financial Officer and later as President and Principal Executive Officer and a member of the Board of Directors. Mr. Latham is a certified public accountant, and before joining Barclays Global Investors, he worked at Ernst and Young for over five years. Based on the foregoing, Mr. Latham is experienced with accounting, financial and investment matters.
James A. McNamara. Mr. McNamara has served as a Class II Trustee and President of GMZ since 2013 and GER since 2014. He has also served as a Trustee and President of the Goldman Sachs Fund Complex since 2007 and has served as an officer of the Goldman Sachs Fund Complex since 2001. Mr. McNamara is an Advisory Director to Goldman Sachs. Prior to retiring as Managing Director at Goldman Sachs in 2017, Mr. McNamara was head of Global Third Party Distribution at GSAM and was previously head of U.S. Third Party Distribution. Prior to that role, Mr. McNamara served as Director of Institutional Fund Sales. Prior to joining Goldman Sachs, Mr. McNamara was Vice President and Manager at Dreyfus Institutional Service Corporation. Based on the foregoing, Mr. McNamara is experienced with financial and investment matters.
S-40
Officers of the Funds
Information pertaining to the officers of the Funds as of July 28, 2020 is set forth below.
Name, Age and Address |
Position(s) Held
|
Term of Office and
|
Principal Occupation(s) During Past 5 Years |
|||
James A. McNamara 200 West Street New York, NY 10282 Age: 57 |
Trustee and President |
Since 2013 (GMZ), 2014 (GER) |
Advisory Director, Goldman Sachs (January 2018Present); Managing Director, Goldman Sachs (January 2000December 2017); Director of Institutional Fund Sales, GSAM (April 1998December 2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993April 1998).
President and TrusteeGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Joseph F. DiMaria 30 Hudson Street Jersey City, NJ 07302 Age: 51 |
Treasurer, Principal Financial Officer and Principal Accounting Officer | Since 2017 (Treasurer and Principal Financial Officer since 2019) |
Managing Director, Goldman Sachs (November 2015Present) and Vice PresidentMutual Fund Administration, Columbia Management Investment Advisers, LLC (May 2010October 2015).
Treasurer, Principal Financial Officer and Principal Accounting OfficerGoldman Sachs MLP and Energy Renaissance Fund (previously Assistant Treasurer (2017)); Goldman Sachs Trust (previously Assistant Treasurer (2016)); Goldman Sachs Variable Insurance Trust (previously Assistant Treasurer (2016)); Goldman Sachs Trust II (previously Assistant Treasurer (2017)); Goldman Sachs MLP Income Opportunities Fund (previously Assistant Treasurer (2017)); Goldman Sachs ETF Trust (previously Assistant Treasurer (2017)); Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Julien Yoo 200 West Street New York, NY 10282 Age: 49 |
Chief Compliance Officer | Since 2016 |
Managing Director, Goldman Sachs (January 2020Present); Vice President, Goldman Sachs (December 2014December 2019); and Vice President, Morgan Stanley Investment Management (20052010).
Chief Compliance OfficerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
S-41
Name, Age and Address |
Position(s) Held
|
Term of Office and
|
Principal Occupation(s) During Past 5 Years |
|||
Peter W. Fortner 30 Hudson Street Jersey City, NJ 07302 Age: 62 |
Assistant Treasurer | Since 2013 (GMZ), 2014 (GER) |
Vice President, Goldman Sachs (July 2000Present); Principal Accounting Officer, Commerce Bank Mutual Fund Complex (2008Present); and Treasurer of Goldman Sachs Philanthropy Fund (2019Present).
Assistant TreasurerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Tyler Hanks 222 S. Main St Salt Lake City, UT 84101 Age: 38 |
Assistant Treasurer | Since 2019 |
Vice President, Goldman Sachs (January 2016Present); and Associate, Goldman Sachs (January 2014January 2016).
Assistant TreasurerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Kirsten Frivold Imohiosen 200 West Street New York, NY 10282 Age: 50 |
Assistant Treasurer |
Since 2019 |
Managing Director, Goldman Sachs (January 2018Present); and Vice President, Goldman Sachs (May 1999December 2017).
Assistant TreasurerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Steven Z. Indich 30 Hudson Street Jersey City, NJ 07302 Age: 51 |
Assistant Treasurer |
Since 2019 |
Vice President, Goldman Sachs (February 2010Present).
Assistant TreasurerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
S-42
Name, Age and Address |
Position(s) Held
|
Term of Office and
|
Principal Occupation(s) During Past 5 Years |
|||
Carol Liu 30 Hudson Street Jersey City, NJ 07302 Age: 45 |
Assistant Treasurer |
Since 2019 |
Vice President, Goldman Sachs (October 2017Present); Tax Director, The Raine Group LLC (August 2015October 2017); and Tax Director, Icon Investments LLC (January 2012August 2015).
Assistant TreasurerGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Christopher Bradford 30 Hudson Street Jersey City, NJ 07302 Age: 38 |
Vice President | Since 2020 |
Vice President, Goldman Sachs (January 2014Present).
Vice PresidentGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Patrick Hyland 200 West Street New York, NY 10282 Age: 46 |
Vice President | Since 2019 |
Vice President, Goldman Sachs (2010Present).
Vice PresidentGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Emily Stecher 200 West Street New York, NY 10282 Age: 32 |
Vice President | Since 2020 |
Managing Director, Goldman Sachs (January 2020Present); Vice President, Goldman Sachs (January 2015December 2019).
Vice PresidentGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Michael Twohig 200 West Street New York, NY 10282 Age: 54 |
Vice President | Since 2019 |
Vice President, Goldman Sachs (2014Present).
Vice PresidentGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
S-43
Name, Age and Address |
Position(s) Held
|
Term of Office and
|
Principal Occupation(s) During Past 5 Years |
|||
Caroline L. Kraus 200 West Street New York, NY 10282 Age: 43 |
Secretary | Since 2013 (GMZ), 2014 (GER) |
Managing Director, Goldman Sachs (January 2016Present); Vice President, Goldman Sachs (August 2006December 2015); Senior Counsel, Goldman Sachs (January 2020Present); Associate General Counsel, Goldman Sachs (2012December 2019); Assistant General Counsel, Goldman Sachs (August 2006December 2011); and Associate, Weil, Gotshal & Manges, LLP (20022006).
SecretaryGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust (previously Assistant Secretary (2012)); Goldman Sachs Variable Insurance Trust (previously Assistant Secretary (2012)); Goldman Sachs Trust II; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
|||
Robert Griffith 200 West Street New York, NY 10282 Age: 45 |
Assistant Secretary | Since 2013 (GMZ), 2014 (GER) |
Vice President, Goldman Sachs (August 2011Present); Associate General Counsel, Goldman Sachs (December 2014Present); Assistant General Counsel, Goldman Sachs (August 2011December 2014); Vice President and Counsel, Nomura Holding America, Inc. (20102011); and Associate, Simpson Thacher & Bartlett LLP (20052010).
Assistant SecretaryGoldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs ETF Trust; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund. |
Standing Board Committees
The Trustees held five meetings during the fiscal year ended November 30, 2019. No Trustee attended fewer than seventy-five percent of the meetings held by the Board or by any committee of which he or she was a member while he or she was a Trustee during such year. None of the Trustees attended the 2018 Annual Meeting of Shareholders.
Each Board has established five standing committees in connection with their governance of its Fund Audit, Governance and Nominating, Compliance, Contract Review and Valuation.
Audit Committee
Each Audit Committee oversees the audit process and provides assistance to its Board in fulfilling its responsibilities in overseeing financial reporting. Each Audit Committee also assists its Board with the oversight
S-44
of the Funds compliance with regulatory requirements that relate to the Funds accounting and financial reporting, internal control over financial reporting and independent audits. Each Committee has been established by and among the Trustees for the purpose of, among other things, assisting the applicable Board with oversight of (1) the integrity of the Funds financial statements, (2) the Funds compliance with legal and regulatory requirements, (3) the independent auditors qualifications and independence (in connection with evaluation and selection of the independent auditor), (4) the performance of the Funds internal audit function and independent auditor, and (5) preparation of the Audit Committee report required to be included in the Funds proxy statement. All of the Independent Trustees serve on each Audit Committee. None of the members of the Audit Committees has any relationship to the Funds that may interfere with the exercise of his or her independence from management or the Funds, and each is independent as defined under the listing standards of NYSE applicable to closed-end funds. Caroline Dorsa has been designated as each Boards audit committee financial expert. Ms. Dorsa simultaneously serves on the audit committees of more than three public companies and the Board has determined that her simultaneous service on the audit committees of other public companies does not impair her ability to effectively serve on each Audit Committee. Each Audit Committee held four meetings during the fiscal year ended November 30, 2019.
Governance and Nominating Committee
Each Governance and Nominating Committee has been established to: (i) assist the applicable Board in matters involving fund governance and industry best practices; (ii) with respect to the selection and nomination of Independent Trustees, satisfying certain regulatory requirements adopted by the SEC; and (iii) advise the applicable Board from time to time on ways to improve its effectiveness. All of the Independent Trustees serve on each Governance and Nominating Committee. Each Governance and Nominating Committee held two meetings during the fiscal year ended November 30, 2019.
In connection with the selection and nomination of candidates to each Board, each Governance and Nominating Committee evaluates the qualifications of candidates for Board membership and their independence from the Funds investment adviser and other principal service providers. Persons selected as Independent Trustee candidates must be independent under the provisions of the 1940 Act. In this regard, with respect to the Independent Trustee Nominee, each Governance and Nominating Committee considers the effect of any relationships beyond those delineated in the 1940 Act that might impair independence (for example, business, financial or family relationships with the investment adviser or other service providers). Without limiting the foregoing, each Governance and Nominating Committee considers, among other criteria, a candidates: (i) experience in business, financial or investment matters or in other fields of endeavor; (ii) financial literacy and/or whether he or she is an audit committee financial expert as defined in Item 3 of Form N-CSR; (iii) reputation; (iv) ability to attend scheduled Board and committee meetings; (v) general availability to attend to Board business on short notice; (vi) actual or potential business, family or other conflicts bearing on either the candidates independence or the business of the Fund; (vii) length of potential service; (viii) commitment to the representation of the interests of the Funds and their shareholders; (ix) commitment to maintaining and improving Trustee skills and education; and (x) experience in corporate governance and best business practices. Each Governance and Nominating Committee will also consider the diversity of the applicable Boards composition as part of the selection and nomination process. In considering the selection and nomination of the Independent Trustee candidate, it is expected that each Governance and Nominating Committee will consult with the Interested Trustee of the Fund and such other persons as the Governance and Nominating Committee deems appropriate.
While each Governance and Nominating Committee is solely responsible for the selection and nomination of the applicable Funds Trustees, each Governance and Nominating Committee shall review and consider nominations for the office of Trustee made by management and by Fund shareholders who have sent nominations (which includes the information required by the Funds Amended and Restated By-Laws) to the Secretary of the Funds, as the Trustees deem appropriate. Nominee recommendations should be submitted to the Fund at its mailing address stated in the Funds prospectus and should be directed to the attention of such Funds
S-45
Governance and Nominating Committee. Each Fund will furnish, without charge, a copy of its Amended and Restated By-Laws to any Shareholder requesting such Amended and Restated By-Laws. Requests for the Funds Amended and Restated By-Laws should be made in writing to the Fund, c/o Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606-6306.
Compliance Committee
Each Compliance Committee has been established for the purpose of overseeing the compliance processes: (i) of the applicable Fund; and (ii) insofar as they relate to services provided to the applicable Fund, of the Funds investment adviser, principal underwriter, administrator (if any), and transfer agent, except that compliance processes relating to the accounting and financial reporting processes, and certain related matters, are overseen by such Funds Audit Committee. In addition, each Compliance Committee provides assistance to the full Board with respect to compliance matters. All of the Independent Trustees serve on the Compliance Committees. Each Compliance Committee met three times during the fiscal year ended November 30, 2019.
Contract Review Committee
Each Contract Review Committee has been established for the purpose of overseeing the processes of the applicable Board for reviewing and monitoring performance under such Funds investment management, transfer agency, and certain other agreements with the Funds Investment Adviser and its affiliates. Each Contract Review Committee is also responsible for overseeing such Boards processes for considering and reviewing performance under the operation of the Funds service, shareholder administration and other plans, and any agreements related to the plans. Each Contract Review Committee also provides appropriate assistance to such Board in connection with the Boards approval, oversight and review of the Funds other service providers including, without limitation, the Funds custodian/accounting agent, sub-transfer agents, professional (legal and accounting) firms and printing firms. All of the Independent Trustees serve on the Contract Review Committee. The Contract Review Committee met one time during the fiscal year ended November 30, 2019.
Valuation Committee
Each Valuation Committee is authorized to act for its respective Board in connection with the valuation of portfolio securities held by each Fund in accordance with the Funds Valuation Procedures. Mr. McNamara and Joseph F. DiMaria serve on the Valuation Committee. The Valuation Committee met twelve times during the fiscal year ended November 30, 2019.
Risk Oversight
The Board is responsible for the oversight of the activities of the Funds, including oversight of risk management. Day-to-day risk management with respect to the Funds is the responsibility of GSAM, or other service providers (depending on the nature of the risk) subject to supervision by GSAM. The risks of the Funds include, but are not limited to, investment risk, compliance risk, operational risk, reputational risk, credit risk and counterparty risk. Each of GSAM and the other service providers have their own independent interest in risk management and their policies and methods of risk management may differ from the Funds and each others in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result, the Board recognizes that it is not possible to identify all of the risks that may affect the Funds or to develop processes and controls to eliminate or mitigate their occurrence or effects, and that some risks are simply beyond the control of the Fund or GSAM, its affiliates or other service providers.
Each Board effectuates its oversight role primarily through regular and special meetings of the Board and Board committees. In certain cases, risk management issues are specifically addressed in presentations and discussions. For example, GSAM has an independent dedicated Market Risk Group that assists GSAM in managing investment risk. Representatives from the Market Risk Group regularly meet with the Board to discuss
S-46
their analysis and methodologies. In addition, investment risk is discussed in the context of regular presentations to each Board on Fund strategy and performance. Other types of risk are addressed as part of presentations on related topics (e.g. compliance policies) or in the context of presentations focused specifically on one or more risks. Each Board also receives reports from GSAM management on operational risks, reputational risks and counterparty risks relating to the Funds.
Board oversight of risk management is also performed by various Board committees. For example, each Audit Committee meets with both the applicable Funds independent registered public accounting firm and GSAMs internal audit group to review risk controls in place that support the Fund as well as test results, and each Compliance Committee meets with the Chief Compliance Officer and representatives of GSAMs compliance group to review testing results of the Funds compliance policies and procedures and other compliance issues. Board oversight of risk is also performed as needed between meetings through communications between GSAM and the Board. Each Board may, at any time and in its discretion, change the manner in which it conducts risk oversight. Each Boards oversight role does not make the Board a guarantor of such Funds investments or activities.
Trustee Ownership of Fund Shares
The following table shows the dollar range of Common Shares beneficially owned by each Trustee in the investment portfolios of the Funds and the Goldman Sachs Fund Complex as of December 31, 2019:
Name of Trustee |
Dollar Range of Equity
Securities in the Funds (1) |
Aggregate Dollar
Range of Equity Securities in All Portfolios in Fund Complex Overseen By Trustee |
||||||
Independent Trustees | ||||||||
Lawrence P. Stranghoener |
|
GMZ: None
GER: Over $100,000 |
|
Over $ | 100,000 | |||
Caroline Dorsa |
|
GMZ: None
GER: None |
|
Over $ | 100,000 | |||
Linda A. Lang |
|
GMZ: Over $100,000
GER: Over $100,000 |
|
Over $ | 100,000 | |||
Michael Latham |
|
GMZ: $50,001 100,000
GER: None |
|
Over $ | 100,000 | |||
Interested Trustee | ||||||||
James A. McNamara |
|
GMZ: $10,001 50,000
GER: $10,001 50,000 |
|
Over $ | 100,000 |
(1) |
Includes the value of Common Shares beneficially owned by each Trustee in the Funds. |
As of May 31, 2020, the Trustees and Officers of each Fund as a group owned less than 1% of the outstanding shares of beneficial interest of such Fund.
Board Compensation
Each Independent Trustee is compensated with an annual fee for his or her services as a Trustee of a Fund and as a member of such Funds Governance and Nominating Committee, Compliance Committee, Contract Review Committee and Audit Committee. The Chairman and audit committee financial expert receive additional compensation for their services. The Independent Trustees are also reimbursed for travel expenses incurred in connection with attending meetings. Each Fund may also pay the incidental costs of a Trustee to attend training or other types of conferences relating to the investment company industry.
S-47
The following table sets forth certain information with respect to the compensation of each Trustee of the Funds for the fiscal year ended November 30, 2019:
Name of Trustee |
Goldman Sachs
MLP Income Opportunities Fund |
Goldman
Sachs MLP and Energy Renaissance Fund |
Pension or
Retirement Benefits Accrued as Part of the Funds Expenses |
Total Compensation
From Fund Complex (including the Funds)(4)(5) |
||||||||||||
Lawrence P. Stranghoener(1) |
$ | 50,000 | $ | 50,000 | None | $ | 231,964 | |||||||||
Caroline Dorsa(2) |
$ | 40,000 | $ | 40,000 | None | $ | 190,408 | |||||||||
Linda A. Lang |
$ | 35,000 | $ | 35,000 | None | $ | 184,618 | |||||||||
Michael Latham |
$ | 35,000 | $ | 35,000 | None | $ | 183,571 | |||||||||
James A. McNamara(3) |
| | None | |
1 |
Includes compensation as Board Chairman. |
2 |
Includes compensation as audit committee financial expert, as defined in Item 3 of Form N-CSR. |
3 |
Mr. McNamara is an Interested Trustee, and as such, receives no compensation from the Funds or the Goldman Sachs Fund Complex. |
4 |
The Goldman Sachs Fund Complex includes certain other companies listed above for each respective Trustee. As of July 28, 2020, Goldman Sachs MLP and Energy Renaissance Fund, Goldman Sachs MLP Income Opportunities Fund, Goldman Sachs Credit Income Fund and Goldman Sachs Real Estate Diversified Income Fund each consisted of one portfolio; Goldman Sachs Trust consisted of 90 portfolios (89 of which offered shares to the public); Goldman Sachs Variable Insurance Trust consisted of 13 portfolios; Goldman Sachs Trust II consisted of 19 portfolios (17 of which offered shares to the public); and Goldman Sachs ETF Trust consisted of 42 portfolios (25 of which offered shares to the public). Goldman Sachs Credit Income Fund did not offer shares to the public. |
5 |
Includes fees paid with respect to Goldman Sachs Private Markets Fund 2018 LLC, Goldman Sachs Private Markets Fund 2018 (A) LLC and Goldman Sachs Private Markets Fund (B) LLC. |
S-48
Management Agreements
As stated in the Funds Joint Proxy Statement/Prospectus, GSAM, 200 West Street, New York, New York 10282 serves as Investment Adviser to the Funds. GSAM is an indirect, wholly-owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. See Management of the Funds in the Funds Joint Proxy Statement/Prospectus for a description of the Investment Advisers duties to the Funds.
Founded in 1869, The Goldman Sachs Group, Inc. is a publicly-held financial holding company and a leading global investment banking, securities and investment management firm. Goldman Sachs is a leader in developing portfolio strategies and in many fields of investing and financing, participating in financial markets worldwide and serving individuals, institutions, corporations and governments. Goldman Sachs is also among the principal market sources for current and thorough information on companies, industrial sectors, markets, economies and currencies, and trades and makes markets in a wide range of equity and debt securities 24 hours a day. The firm is headquartered in New York with offices in countries throughout the world. It has trading professionals throughout the United States, as well as in London, Frankfurt, Tokyo, Seoul, Sao Paulo and other major financial centers around the world. The active participation of Goldman Sachs in the worlds financial markets enhances its ability to identify attractive investments. Goldman Sachs has agreed to permit the Funds to use the name Goldman Sachs or a derivative thereof as part of the Funds names for as long as the Funds Management Agreements (each, a Management Agreement and together, the Management Agreements) are in effect.
The Investment Adviser is able to draw on the substantial research and market expertise of Goldman Sachs, whose investment research effort is one of the largest in the industry. The Global Investment Research division provides original fundamental insights and analysis for clients in the equity, fixed income and currency and commodities markets. The group covers areas such as economics, portfolio strategy, derivatives and equity and credit securities in more than 25 stock markets and 50 economies and regions around the world. The in depth information and analyses generated by Goldman Sachs research analysts are available to the Investment Adviser subject to Chinese Wall restrictions.
In addition, many of Goldman Sachs economists, securities analysts, portfolio strategists and credit analysts have consistently been highly ranked in respected industry surveys conducted in the United States and abroad. Goldman Sachs is also among the leading investment firms using quantitative analytics (now used by a growing number of investors) to structure and evaluate portfolios. For example, Goldman Sachs options evaluation model analyzes a securitys term, coupon and call option, providing an overall analysis of the securitys value relative to its interest risk.
In managing the Funds, the Investment Adviser has access to Goldman Sachs economics research. The Economics Research Department based in London, conducts economic, financial and currency markets research which analyzes economic trends and interest and exchange rate movements worldwide. The Economics Research Department tracks factors such as inflation and money supply figures, balance of trade figures, economic growth, commodity prices, monetary and fiscal policies, and political events that can influence interest rates and currency trends. The success of Goldman Sachs international research team has brought wide recognition to its members. The team has earned top rankings in various external surveys such as Pensions and Investments, Forbes and Dalbar. These rankings acknowledge the achievements of the firms economists, strategists and equity analysts.
In allocating assets among foreign countries and currencies for the Funds, the Investment Adviser will have access to the Global Asset Allocation Model. The model is based on the observation that the prices of all financial assets, including foreign currencies, will adjust until investors globally are comfortable holding the pool of outstanding assets. Using the model, the Investment Adviser will estimate the total returns from each currency sector which are consistent with the average investor holding a portfolio equal to the market capitalization of the financial assets among those currency sectors. These estimated equilibrium returns are then combined with the
S-49
expectations of Goldman Sachs research professionals to produce an optimal currency and asset allocation for the level of risk suitable for the Funds given their investment objectives and criteria.
The fixed income research capabilities of Goldman Sachs available to the Investment Adviser include the Goldman Sachs Fixed Income Research Department and the Credit Department. The Fixed Income Research Department monitors developments in U.S. and foreign fixed income markets, assesses the outlooks for various sectors of the markets and provides relative value comparisons, as well as analyzes trading opportunities within and across market sectors. The Fixed Income Research Department is at the forefront in developing and using computer-based tools for analyzing fixed income securities and markets, developing new fixed income products and structuring portfolio strategies for investment policy and tactical asset allocation decisions. The Credit Department tracks specific governments, regions and industries and from time to time may review the credit quality of the Funds investments.
Each Management Agreement provides that GSAM, in its capacity as Investment Adviser, may render similar services to others so long as the services under the Management Agreements are not impaired thereby. The Funds Management Agreements were most recently approved by the Trustees of the Trust, including a majority of the Trustees of the Trust who are not parties to such agreement or interested persons (as such term is defined in the Act) of any party thereto (the non-interested Trustees), on September 17-18, 2019. A discussion regarding the Board of Trustees basis for approving a Management Agreement with respect to each Fund is available in the Funds annual report for the fiscal year ended November 30, 2019. A discussion regarding the Board of Trustees basis for approving a Management Agreement with respect to each Fund in September 2020 will be available in the Funds annual report for the fiscal year ended November 30, 2020.
Each Management Agreements will remain in effect for two years from its effective date so long as approved in accordance with the 1940 Act and, unless sooner terminated, will continue in effect with respect to the applicable Fund from year to year thereafter provided such continuance is specifically approved at least annually by (i) the vote of a majority of the Funds outstanding voting securities or a majority of the Trustees of the Fund, and (ii) the vote of a majority of the non-interested Trustees of the Fund, cast in person at a meeting called for the purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as defined in the 1940 Act). A Management Agreement is also terminable at any time without penalty, on 60 days written notice to the other party, by the Trustees of the applicable Fund, by a vote of a majority of the outstanding voting securities of the Fund or by the Investment Adviser.
Pursuant to each Management Agreement, the Investment Adviser is entitled to receive a monthly management fee at an annual rate equal to 1.00% of the average daily value of the applicable Funds Managed Assets. Managed Assets means the total assets of a Fund (including any assets attributable to borrowings for investment purposes) minus the sum of the Funds accrued liabilities (other than liabilities representing borrowings for investment purposes).
The Funds invest in Institutional Shares of the Goldman Sachs Financial Square Government Fund, which is an affiliated underlying fund. GSAM has agreed to waive a portion of its management fee payable by each Fund in an amount equal to the management fee it earns as investment adviser to the Goldman Sachs Financial Square Government Fund in which the Funds invest.
S-50
For the fiscal years ended November 30, 2017, November 30, 2018 and November 30, 2019, the amounts of the fees incurred by each Fund under the Management Agreements were as follows (with and without the fee waiver that was then in effect):
Fund |
Fiscal Year ended
November 30, 2019 |
Fiscal Year ended
November 30, 2018 |
Fiscal Year ended
November 30, 2017 |
|||||||||||||||||||||
With Fee
Waiver |
Without Fee
Waiver |
With Fee
Waiver |
Without Fee
Waiver |
With Fee
Waiver |
Without Fee
Waiver |
|||||||||||||||||||
Goldman Sachs MLP and Energy Renaissance Fund |
$ | 6,717,065 | $ | 6,719,916 | $ | 7,546,453 | $ | 7,548,460 | $ | 8,842,393 | $ | 8,848,821 | ||||||||||||
Goldman Sachs MLP Income Opportunities Fund |
$ | 5,344,338 | $ | 5,353,181 | $ | 6,068,704 | $ | 6,073,770 | $ | 6,743,821 | $ | 6,755,559 |
In addition, the Investment Adviser performs administrative services for the Funds under the Management Agreements. Such administrative services include, subject to the general supervision of the Trustees of the Funds, (i) supervises all non-advisory operations of the Funds; (ii) provides personnel to perform such executive, administrative and clerical services as are reasonably necessary to provide effective administration of the Funds; (iii) arranges for at the Funds expense: (a) the preparation of all required tax returns, (b) the preparation and submission of reports to existing shareholders, (c) the preparation and submission of the Funds prospectus and statement of additional information and all other documents necessary to fulfill regulatory requirements and maintain registration and qualification of the Funds with the SEC and other regulatory authorities; and (d) the preparation of press releases for announcing the declaration of dividends and other material events as may be required by law; (iv) maintain all of the Funds records; and (v) provides adequate office space and all necessary office equipment and services including telephone service, heat, utilities, stationery supplies and similar items.
Investment Team Information
The following tables disclose other accounts within each type of category listed below for which the members of the investment team are jointly and primarily responsible for day to day portfolio management, as of November 30, 2019, unless otherwise noted.
For each member of the investment team listed below, the total number of accounts managed is a reflection of accounts within the strategy they oversee or manage, as well as accounts which participate in the sector in which the manage. There are multiple members of the investment team involved with each account.
Kyri Loupis
Number of
Accounts |
Assets
Managed |
Number of
Accounts Subject to a Performance Fee |
Assets Subject to a
Performance Fee |
|||||||||||||
Registered Investment Companies |
5 | $ | 2,772 | | | |||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies |
4 | $ | 198 | | | |||||||||||
Other Accounts |
2157 | $ | 2,831 | | |
S-51
Ganesh V. Jois
Number of
Accounts |
Assets
Managed |
Number of
Accounts Subject to a Performance Fee |
Assets Subject to a
Performance Fee |
|||||||||||||
Registered Investment Companies |
4 | $ | 2,677 | | | |||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies |
3 | $ | 193 | | | |||||||||||
Other Accounts |
2154 | $ | 2,755 | | |
Matthew Cooper
Number of
Accounts |
Assets
Managed |
Number of
Accounts Subject to a Performance Fee |
Assets Subject to a
Performance Fee |
|||||||||||||
Registered Investment Companies |
5 | $ | 2,772 | | | |||||||||||
Pooled Investment Vehicles Other Than Registered Investment Companies |
4 | $ | 198 | | | |||||||||||
Other Accounts |
2157 | $ | 2,831 | | |
Assets are preliminary, in millions of USD, as of November 30, 2019.
Conflicts of Interest. The Investment Advisers investment team is often responsible for managing the Funds as well as one or more funds and other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the Funds and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades.
The Investment Adviser has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. The Investment Adviser seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end, the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, the Investment Adviser and the Funds have adopted policies limiting the circumstances under which cross-trades may be effected between the Funds and another client account. The Investment Adviser conducts periodic reviews of trades for consistency with these policies. For more information about conflicts of interests that may arise in connection with the investment teams management of the Funds investments and the investments of other accounts, see Potential Conflicts of Interest.
The Funds Portfolio Manager Compensation
Compensation for portfolio managers of the Investment Adviser is comprised of a base salary and year-end discretionary variable compensation. The base salary is fixed from year to year. Year-end discretionary variable compensation is primarily a function of each portfolio managers individual performance and his or her contribution to overall team performance; the performance of the Investment Adviser and Goldman Sachs; the teams net revenues for the past year which in part is derived from advisory fees, and for certain accounts, performance-based fees; and anticipated compensation levels among competitor firms. Portfolio managers are rewarded, in part, for their delivery of investment performance, which is reasonably expected to meet or exceed the expectations of clients and fund shareholders in terms of: excess return over an applicable benchmark, peer
S-52
group ranking, risk management and factors specific to certain funds such as yield or regional focus. Performance is judged over 1-, 3- and 5-year time horizons.
For compensation purposes, each Funds benchmark is the Alerian MLP Index Total Return.
The discretionary variable compensation for portfolio managers is also significantly influenced by various factors, including: (1) effective participation in team research discussions and process; and (2) management of risk in alignment with the targeted risk parameter and investment objective of the Fund. Other factors may also be considered including: (1) general client/shareholder orientation and (2) teamwork and leadership. Portfolio managers may receive equity-based awards as part of their discretionary variable compensation.
Other Compensation. In addition to base salary and year-end discretionary variable compensation, the Investment Adviser has a number of additional benefits in place including (1) a 401(k) program that enables employees to direct a percentage of their base salary and bonus income into a tax-qualified retirement plan; and (2) investment opportunity programs in which certain professionals may participate subject to certain eligibility requirements.
Portfolio Managers Portfolio Managers Ownership of Securities in the Funds
GMZ as of November 30, 2019:
Dollar
Range of Securities Owned |
||||
Kyri Loupis |
None | |||
Ganesh V. Jois, CFA |
None | |||
Matthew Cooper |
None |
GER as of November 30, 2019:
Dollar
Range of Securities Owned |
||||
Kyri Loupis |
None | |||
Ganesh V. Jois, CFA |
None | |||
Matthew Cooper |
None |
Expenses
Each Fund is responsible for the payment of certain of its expenses, including without limitation: (i) the fees payable to the Investment Adviser; (ii) fees and expenses incurred by the Fund in connection with membership in investment company organizations; (iii) brokers commissions and any issue or transfer taxes chargeable to the Fund in connection with its securities transactions; (iv) payment for portfolio pricing services to a pricing agent, if any; (v) legal, auditing or accounting expenses (vi) loan commitment fees; distribution fees; interest; taxes or governmental fees; (vii) the fees and expenses of the administrator, transfer and dividend disbursing agent of the Fund; (viii) the cost of preparing stock certificates or any other expenses, including clerical expenses of issue, sale or repurchase of Shares of the Fund, including expenses of conducting tender or repurchase offers for purposes of repurchasing Shares; (ix) the cost of fidelity, Trustees and officers and errors and omissions insurance; (x) the expenses of and fees for registering or qualifying Shares for sale and of maintaining the registration of the Fund and registering the Fund as a broker or a dealer; (xi) the fees and expenses of Trustees of the Fund who are not affiliated with you; (xii) communications expenses with respect to investor services and all expenses of shareholder and Trustees meetings and of preparing and distributing prospectuses and statements of additional information, proxy statements, reports and notices to shareholders, the SEC and other regulatory
S-53
authorities; (xiii) the fees or disbursements of custodians of the Funds assets, including expenses incurred in the performance of any obligations enumerated by the Declaration of Trust or Amended and Restated By-Laws of the Fund insofar as they govern agreements with any such custodian; (xiv) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Funds business; (xv) if you are deemed to be a commodity pool operator with respect to the Fund, the out-of-pocket costs incurred by you in connection with your preparation or revision of the Funds disclosure documents and periodic reports to shareholders in order to comply with the CEA and/or the rules adopted by the CFTC thereunder; (xvi) costs of stationery; (xvii) website costs; or (xviii) the fees and expenses involved in listing on any exchange where the capital stock will trade.
Fees and expenses borne by each Fund relating to legal counsel, registering shares of the Fund, holding meetings and communicating with shareholders may include an allocable portion of the cost of maintaining an internal legal and compliance department. Each Fund may also bear an allocable portion of the Investment Advisers costs of performing certain accounting services not being provided by the Funds custodian.
The imposition of the Investment Advisers fees, as well as other operating expenses, will have the effect of reducing the total return to investors. From time to time, the Investment Adviser may waive receipt of fees and/or assume certain expenses of a Fund, which would have the effect of lowering a Funds overall expense ratio and increasing total return to investors at the time such amounts are waived or assumed, as the case may be.
Such reductions or limits, if any, are calculated monthly on a cumulative basis during each Funds fiscal year.
Fund Accounting Agent
State Street will provide certain fund accounting services to each Fund pursuant to a Fund Accounting Agreement (the Fund Accounting Agreements). Pursuant to the Fund Accounting Agreements, State Street will provide each Fund with, among other things, customary fund accounting services, including computing the Funds NAV and maintaining books, records and other documents relating to the Funds financial and portfolio transactions, and customary fund administration services, including assisting the Fund with regulatory filings, tax compliance and other oversight activities.
Transfer and Plan Agent
Computershare, 211 Quality Circle, Suite 210, College Station, TX 77845, serves as each Funds Transfer and Plan Agent with respect to the Common Shares.
Custodian and Sub-Custodians
State Street, One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian of each Funds portfolio securities and cash. State Street also maintains each Funds accounting records. State Street may appoint domestic and foreign sub-custodians and use depositories from time to time to hold certain securities and other instruments purchased by a Fund in foreign countries and to hold cash and currencies for a Fund.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, Massachusetts, 02210, has been appointed as each Funds independent registered public accounting firm. In addition to audit services, PricewaterhouseCoopers LLP provides assistance on certain non-audit matters.
Portfolio Transactions and Brokerage Allocation
The Investment Adviser is responsible for decisions to buy and sell securities for each Fund, the selection of brokers and dealers to effect the transactions and the negotiation of brokerage commissions, if any. Purchases
S-54
and sales of securities on a securities exchange are effected through brokers who charge a negotiated commission for their services. Increasingly, securities traded OTC also involve the payment of negotiated brokerage commissions. Orders may be directed to any broker including, to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the OTC market, most securities have historically traded on a net basis with dealers acting as principal for their own accounts without a stated commission, although the price of a security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
In placing orders for portfolio securities of each Fund, the Investment Adviser is generally required to give primary consideration to obtaining the most favorable execution and net price available. This means that the Investment Adviser will seek to execute each transaction at a price and commission, if any, which provides the most favorable total cost or proceeds reasonably attainable in the circumstances. As permitted by Section 28(e) of the Exchange Act (Section 28(e)), a Fund may pay a broker which provides brokerage and research services to the Fund an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. Such practice is subject to a good faith determination that such commission is reasonable in light of the services provided and to such policies as the Trustees may adopt from time to time. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, a Fund will not necessarily be paying the lowest spread or commission available. Within the framework of this policy, the Investment Adviser will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of each Fund, the Investment Adviser and its affiliates, or their other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include research reports on particular industries and companies; economic surveys and analyses; recommendations as to specific securities; research products including quotation equipment and computer related programs; advice concerning the value of securities, the advisability of investing in, purchasing or selling securities and the availability of securities or the purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and performance of accounts; services relating to effecting securities transactions and functions incidental thereto (such as clearance and settlement); and other lawful and appropriate assistance to the Investment Adviser in the performance of its decision-making responsibilities.
Such services are used by the Investment Adviser in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for a Fund may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate assets may be larger than those of a Fund, and the services furnished by such brokers may be used by the Investment Adviser in providing management services for a Fund. The Investment Adviser may also participate in so-called commission sharing arrangements and client commission arrangements under which the Investment Adviser may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Investment Adviser. The Investment Adviser excludes from use under these arrangements those products and services that are not fully eligible under applicable law and regulatory interpretationseven as to the portion that would be eligible if accounted for separately.
The research services received as part of commission sharing and client commission arrangements will comply with Section 28(e) and may be subject to different legal requirements in the jurisdictions in which the Investment Adviser does business. Participating in commission sharing and client commission arrangements may enable the Investment Adviser to consolidate payments for research through one or more channels using accumulated client commissions or credits from transactions executed through a particular broker-dealer to obtain research provided by other firms. Such arrangements also help to ensure the continued receipt of research
S-55
services while facilitating best execution in the trading process. The Investment Adviser believes such research services are useful in its investment decision-making process by, among other things, ensuring access to a variety of high quality research, access to individual analysts and availability of resources that the Investment Adviser might not be provided access to absent such arrangements.
On occasions when the Investment Adviser deems the purchase or sale of a security to be in the best interest of a Fund as well as its other customers (including any other fund or other investment company or advisory account for which the Investment Adviser acts as investment adviser or sub-investment adviser), the Investment Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased for such other customers in order to obtain the best net price and most favorable execution under the circumstances. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be equitable and consistent with its fiduciary obligations to a Fund and such other customers. In some instances, this procedure may adversely affect the price and size of the position obtainable for a Fund.
Each Fund may participate in a commission recapture program. Under the program, participating broker-dealers rebate a percentage of commissions earned on Fund portfolio transactions to the Fund from which the commissions were generated. The rebated commissions are expected to be treated as realized capital gains of a Fund.
Subject to the above considerations, the Investment Adviser may use Goldman Sachs or an affiliate as a broker for a Fund. In order for Goldman Sachs or an affiliate, acting as agent, to effect any portfolio transactions for a Fund, the commissions, fees or other remuneration received by Goldman Sachs or an affiliate must be reasonable and fair compared to the commissions, fees or other remuneration received by other brokers in connection with comparable transactions involving similar securities or futures contracts. Furthermore, the Trustees, including a majority of the Independent Trustees, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Goldman Sachs are consistent with the foregoing standard. Brokerage transactions with Goldman Sachs are also subject to such fiduciary standards as may be imposed upon Goldman Sachs by applicable law.
Commission rates in the U.S. are established pursuant to negotiations with the broker based on the quality and quantity of execution services provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees. The amount of brokerage commissions paid by each Fund may vary substantially from year to year because of differences in shareholder purchase and redemption activity, portfolio turnover rates and other factors.
GMZ | ||||
Brokerage Commissions |
Aggregate
Brokerage Commissions Paid |
|||
For the Fiscal Year |
||||
November 30, 2017 |
$ | 445,288 | ||
November 30, 2018 |
$ | 1,025,731 | ||
November 30, 2019 |
$ | 1,392,377 | ||
GER | ||||
Brokerage Commissions |
Aggregate
Brokerage Commissions Paid |
|||
For the Fiscal Year |
||||
November 30, 2017 |
$ | 573,153 | ||
November 30, 2018 |
$ | 698,629 | ||
November 30, 2019 |
$ | 834,110 |
S-56
POTENTIAL CONFLICTS OF INTEREST
General Categories of Conflicts Associated with the Funds
Goldman Sachs (which, for purposes of this POTENTIAL CONFLICTS OF INTEREST section, shall mean, collectively, The Goldman Sachs Group, Inc., the Investment Adviser and their affiliates, directors, partners, trustees, managers, members, officers and employees) is a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization and a major participant in global financial markets. As such, it provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. Goldman Sachs acts as an investment banker, research provider, investment adviser, financier, adviser, market maker, prime broker, derivatives dealer, lender, counterparty, agent, principal and investor. In those and other capacities, Goldman Sachs advises clients in all markets and transactions and purchases, sells, holds and recommends a broad array of investments, including securities, derivatives, loans, commodities, currencies, credit default swaps, indices, baskets and other financial instruments and products, for its own account and for the accounts of clients and of its personnel, through client accounts and the relationships and products it sponsors, manages and advises. Goldman Sachs has direct and indirect interests in the global fixed income, currency, commodity, equities, bank loan and other markets, and the securities and issuers, in which the Funds may directly and indirectly invest. As a result, Goldman Sachs activities and dealings may affect the Funds in ways that may disadvantage or restrict the Funds and/or benefit Goldman Sachs or other Accounts. For purposes of this POTENTIAL CONFLICTS OF INTEREST section, Funds shall mean, collectively, the Funds and any of the other Goldman Sachs Funds, and Accounts shall mean Goldman Sachs own accounts, accounts in which personnel of Goldman Sachs have an interest, accounts of Goldman Sachs clients, including separately managed accounts (or separate accounts), and investment vehicles that Goldman Sachs sponsors, manages or advises, including the Funds.
The following are descriptions of certain conflicts of interest and potential conflicts of interest that may be associated with the financial or other interests that the Investment Adviser and Goldman Sachs may have in transactions effected by, with, or on behalf of the Funds. In addition, the Investment Advisers activities on behalf of certain other entities that are not investment advisory clients of the Investment Adviser may create conflicts of interest between such entities, on the one hand, and Accounts (including the Funds), on the other hand, that are the same as or similar to the conflicts that arise between the Funds and other Accounts, as described herein. The conflicts herein do not purport to be a complete list or explanation of the conflicts associated with the financial or other interests the Investment Adviser or Goldman Sachs may have now or in the future. Additional information about potential conflicts of interest regarding the Investment Adviser and Goldman Sachs is set forth in the Investment Advisers Form ADV. A copy of Part 1 and Part 2A of the Investment Advisers Form ADV is available on the SECs website (www.adviserinfo.sec.gov).
The Sale of Fund Shares and the Allocation of Investment Opportunities
Sales Incentives and Related Conflicts Arising from Goldman Sachs Financial and Other Relationships with Intermediaries
Goldman Sachs and its personnel, including employees of the Investment Adviser, may receive benefits and earn fees and compensation for services provided to Accounts (including the Funds) and in connection with the distribution of the Funds. Any such fees and compensation may be paid directly or indirectly out of the fees payable to the Investment Adviser in connection with the management of such Accounts (including the Funds). Moreover, Goldman Sachs and its personnel, including employees of the Investment Adviser, may have relationships (both involving and not involving the Funds, and including without limitation placement, brokerage, advisory and board relationships) with distributors, consultants and others who recommend, or engage in transactions with or for, the Funds. Such distributors, consultants and other parties may receive compensation from Goldman Sachs or the Funds in connection with such relationships. As a result of these relationships, distributors, consultants and other parties may have conflicts that create incentives for them to promote the Funds.
S-57
To the extent permitted by applicable law, Goldman Sachs and the Funds may make payments to authorized dealers and other financial intermediaries and to salespersons to promote the Funds. These payments may be made out of Goldman Sachs assets or amounts payable to Goldman Sachs. These payments may create an incentive for such persons to highlight, feature or recommend the Funds.
Allocation of Investment Opportunities Among the Funds and Other Accounts
The Investment Adviser may manage or advise multiple Accounts (including Accounts in which Goldman Sachs and its personnel have an interest) that have investment objectives that are the same or similar to the Funds and that may seek to make or sell investments in the same securities or other instruments, sectors or strategies as the Funds. This creates potential conflicts, particularly in circumstances where the availability or liquidity of such investment opportunities is limited (e.g., in local and emerging markets, high yield securities, fixed income securities, regulated industries, small capitalization, direct or indirect investments in private investment funds, investments in master limited partnerships in the oil and gas industry and initial public offerings/new issues).
The Investment Adviser does not receive performance-based compensation in respect of its investment management activities on behalf of the Funds, but may simultaneously manage Accounts for which the Investment Adviser receives greater fees or other compensation (including performance-based fees or allocations) than it receives in respect of the Funds. The simultaneous management of Accounts that pay greater fees or other compensation and the Funds creates a conflict of interest as the Investment Adviser has an incentive to favor Accounts with the potential to receive greater fees when allocating resources, services, functions or investment opportunities among Accounts. For instance, the Investment Adviser may be faced with a conflict of interest when allocating scarce investment opportunities given the possibly greater fees from Accounts that pay performance-based fees. To address these types of conflicts, the Investment Adviser has adopted policies and procedures under which it will allocate investment opportunities in a manner that it believes is consistent with its obligations and fiduciary duties as an investment adviser. However, the availability, amount, timing, structuring or terms of an investment by the Funds may differ from, and performance may be lower than, the investments and performance of other Accounts.
To address these potential conflicts, the Investment Adviser has developed allocation policies and procedures that provide that the Investment Advisers personnel making portfolio decisions for Accounts will make investment decisions for, and allocate investment opportunities among, such Accounts consistent with the Investment Advisers fiduciary obligations. These policies and procedures may result in the pro rata allocation (on a basis determined by the Investment Adviser) of limited opportunities across eligible Accounts managed by a particular portfolio management team, but in other cases such allocation may not be pro rata.
Allocation-related decisions for the Funds and other Accounts may be made by reference to one or more factors. Factors may include: the Accounts portfolio and its investment horizons, objectives, guidelines and restrictions (including legal and regulatory restrictions affecting certain Accounts or affecting holdings across Accounts); client instructions; strategic fit and other portfolio management considerations, including different desired levels of exposure to certain strategies; the expected future capacity of the Funds and the applicable Accounts; limits on the Investment Advisers brokerage discretion; cash and liquidity needs and other considerations; the availability of other appropriate or substantially similar investment opportunities; and differences in benchmark factors and hedging strategies among Accounts. Suitability considerations, reputational matters and other considerations may also be considered.
In a case in which one or more Accounts are intended to be the Investment Advisers primary investment vehicles focused on, or to receive priority with respect to, a particular trading strategy, other Accounts (including the Funds) may not have access to such strategy or may have more limited access than would otherwise be the case. To the extent that such Accounts are managed by areas of Goldman Sachs other than the Investment Adviser, such Accounts will not be subject to the Investment Advisers allocation policies. Investments by such Accounts may reduce or eliminate the availability of investment opportunities to, or otherwise adversely affect,
S-58
the Fund. Furthermore, in cases in which one or more Accounts are intended to be the Investment Advisers primary investment vehicles focused on, or receive priority with respect to, a particular trading strategy or type of investment, such Accounts may have specific policies or guidelines with respect to Accounts or other persons receiving the opportunity to invest alongside such Accounts with respect to one or more investments (Co-Investment Opportunities). As a result, certain Accounts or other persons will receive allocations to, or rights to invest in, Co-Investment Opportunities that are not available generally to the Funds.
In addition, in some cases the Investment Adviser may make investment recommendations to Accounts that make investment decisions independently of the Investment Adviser. In circumstances in which there is limited availability of an investment opportunity, if such Accounts invest in the investment opportunity at the same time as, or prior to, a Fund, the availability of the investment opportunity for the Fund will be reduced irrespective of the Investment Advisers policies regarding allocations of investments.
The Investment Adviser may, from time to time, develop and implement new trading strategies or seek to participate in new trading strategies and investment opportunities. These strategies and opportunities may not be employed in all Accounts or employed pro rata among Accounts where they are used, even if the strategy or opportunity is consistent with the objectives of such Accounts. Further, a trading strategy employed for a Fund that is similar to, or the same as, that of another Account may be implemented differently, sometimes to a material extent. For example, a Fund may invest in different securities or other assets, or invest in the same securities and other assets but in different proportions, than another Account with the same or similar trading strategy. The implementation of the Funds trading strategy will depend on a variety of factors, including the portfolio managers involved in managing the trading strategy for the Account, the time difference associated with the location of different portfolio management teams, and the factors described above and in Item 6 (PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management of Advisory Accounts; Allocation of Opportunities) of the Investment Advisers Form ADV.
During periods of unusual market conditions, the Investment Adviser may deviate from its normal trade allocation practices. For example, this may occur with respect to the management of unlevered and/or long-only Accounts that are typically managed on a side-by-side basis with levered and/or long-short Accounts.
The Investment Adviser and the Funds may receive notice of, or offers to participate in, investment opportunities from third parties for various reasons. The Investment Adviser in its sole discretion will determine whether a Fund will participate in any such investment opportunities and investors should not expect that the Fund will participate in any such investment opportunities unless the opportunities are received pursuant to contractual requirements, such as preemptive rights or rights offerings, under the terms of the Funds investments. Moreover, Goldman Sachs businesses outside of the Investment Adviser are under no obligation or other duty to provide investment opportunities to the Funds, and generally are not expected to do so. Further, opportunities sourced within particular portfolio management teams within the Investment Adviser may not be allocated to Accounts (including the Funds) managed by such teams or by other teams. Opportunities not allocated (or not fully allocated) to the Funds or other Accounts managed by the Investment Adviser may be undertaken by Goldman Sachs (including the Investment Adviser), including for Goldman Sachs Accounts, or made available to other Accounts or third parties, and the Funds will not receive any compensation related to such opportunities. Additional information about the Investment Advisers allocation policies is set forth in Item 6 (PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management of Advisory Accounts; Allocation of Opportunities) of the Investment Advisers Form ADV.
As a result of the various considerations above, there will be cases in which certain Accounts (including Accounts in which Goldman Sachs and personnel of Goldman Sachs have an interest) receive an allocation of an investment opportunity at times that the Funds do not, or when the Funds receive an allocation of such opportunities but on different terms than other Accounts (which may be less favorable). The application of these considerations may cause differences in the performance of different Accounts that employ strategies the same or similar to those of the Funds.
S-59
Multiple Accounts (including the Funds) may participate in a particular investment or incur expenses applicable in connection with the operation or management of the Accounts, or otherwise may be subject to costs or expenses that are allocable to more than one Account (which may include, without limitation, research expenses, technology expenses, expenses relating to participation in bondholder groups, restructurings, class actions and other litigation, and insurance premiums). The Investment Adviser may allocate investment-related and other expenses on a pro rata or different basis.
Accounts will generally incur expenses with respect to the consideration and pursuit of transactions that are not ultimately consummated (broken-deal expenses). Examples of broken-deal expenses include (i) research costs, (ii) fees and expenses of legal, financial, accounting, consulting or other advisers (including the Investment Adviser or its affiliates) in connection with conducting due diligence or otherwise pursuing a particular non-consummated transaction, (iii) fees and expenses in connection with arranging financing for a particular non-consummated transaction, (iv) travel and entertainment costs, (v) deposits or down payments that are forfeited in connection with, or amounts paid as a penalty for, a particular non-consummated transaction and (vi) other expenses incurred in connection with activities related to a particular non-consummated transaction.
The Investment Adviser has adopted a policy relating to the allocation of broken-deal expenses among Accounts (including the Funds) and other potential investors. Pursuant to the policy, broken-deal expenses generally will be allocated among Accounts in the manner that the Investment Adviser determines to be fair and equitable, which may be pro rata or on a different basis.
Goldman Sachs Financial and Other Interests May Incentivize Goldman Sachs to Promote the Sale of Fund Shares
Goldman Sachs and its personnel have interests in promoting sales of Fund shares, and the compensation from such sales may be greater than the compensation relating to sales of interests in other Accounts. Therefore, Goldman Sachs and its personnel may have a financial interest in promoting Fund shares over interests in other Accounts.
Management of the Funds by the Investment Adviser
Considerations Relating to Information Held by Goldman Sachs
Goldman Sachs has established certain information barriers and other policies to address the sharing of information between different businesses within Goldman Sachs. As a result of information barriers, the Investment Adviser generally will not have access, or will have limited access, to certain information and personnel in other areas of Goldman Sachs relating to business transactions for clients (including transactions in investing, banking, prime brokerage and certain other areas), and generally will not manage the Funds with the benefit of information held by such other areas. Goldman Sachs, due to its access to and knowledge of funds, markets and securities based on its prime brokerage and other businesses, may make decisions based on information or take (or refrain from taking) actions with respect to interests in investments of the kind held (directly or indirectly) by the Funds in a manner that may be adverse to the Funds, and will not have any obligation or other duty to share information with the Investment Adviser.
In limited circumstances, however, including for purposes of managing business and reputational risk, and subject to policies and procedures, personnel on one side of an information barrier may have access to information and personnel on the other side of the information barrier through wall crossings. The Investment Adviser faces conflicts of interest in determining whether to engage in such wall crossings. Information obtained in connection with such wall crossings may limit or restrict the ability of the Investment Adviser to engage in or otherwise effect transactions on behalf of the Funds (including purchasing or selling securities that the Investment Adviser may otherwise have purchased or sold for an Account in the absence of a wall crossing). In managing conflicts of interest that may arise as a result of the foregoing, the Investment Adviser generally will be subject to fiduciary requirements.
S-60
Information barriers also exist between certain businesses within the Investment Adviser, and the conflicts described herein with respect to information barriers and otherwise with respect to Goldman Sachs and the Investment Adviser will also apply to the businesses within the Investment Adviser. There may also be circumstances in which, as a result of information held by certain portfolio management teams in the Investment Adviser, the Investment Adviser limits an activity or transaction for a Fund, including if the Fund is managed by a portfolio management team other than the team holding such information.
In addition, regardless of the existence of information barriers, Goldman Sachs will not have any obligation or other duty to make available for the benefit of the Funds any information regarding Goldman Sachs trading activities, strategies or views, or the activities, strategies or views used for other Accounts. Furthermore, to the extent that the Investment Adviser has access to fundamental analysis and proprietary technical models or other information developed by Goldman Sachs and its personnel, or other parts of the Investment Adviser, the Investment Adviser will not be under any obligation or other duty to effect transactions on behalf of Accounts (including the Funds) in accordance with such analysis and models. In the event Goldman Sachs elects not to share certain information with the Investment Adviser or personnel involved in decision-making for Accounts (including the Funds), the Funds may make investment decisions that differ from those they would have made if Goldman Sachs had provided such information, which may be disadvantageous to the Funds.
Different areas of the Investment Adviser and Goldman Sachs may take views, and make decisions or recommendations, that are different than other areas of the Investment Adviser and Goldman Sachs. Different portfolio management teams within the Investment Adviser may make decisions based on information or take (or refrain from taking) actions with respect to Accounts they advise in a manner that may be different than or adverse to the Funds. Such teams may not share information with the Funds portfolio management teams, including as a result of certain information barriers and other policies, and will not have any obligation or other duty to do so.
Goldman Sachs operates a business known as Goldman Sachs Securities Services (GSS), which provides prime brokerage, administrative and other services to clients which may involve investment funds (including pooled investment vehicles and private funds) in which one or more Accounts invest (Underlying Funds) or markets and securities in which Accounts invest. GSS and other parts of Goldman Sachs have broad access to information regarding the current status of certain markets, investments and funds and detailed information about fund operators that is not available to the Investment Adviser. In addition, Goldman Sachs may act as a prime broker to one or more Underlying Funds, in which case Goldman Sachs will have information concerning the investments and transactions of such Underlying Funds that is not available to the Investment Adviser. As a result of these and other activities, parts of Goldman Sachs may be in possession of information in respect of markets, investments, investment advisers that are affiliated or unaffiliated with Goldman Sachs and Underlying Funds, which, if known to the Investment Adviser, might cause the Investment Adviser to seek to dispose of, retain or increase interests in investments held by Accounts or acquire certain positions on behalf of Accounts, or take other actions. Goldman Sachs will be under no obligation or other duty to make any such information available to the Investment Adviser or personnel involved in decision-making for Accounts (including the Funds).
Valuation of the Funds Investments
The Investment Adviser, while not the primary valuation agent of the Funds, performs certain valuation services related to securities and assets held in the Funds. The Investment Adviser performs such valuation services in accordance with its valuation policies. The Investment Adviser may value an identical asset differently than another division or unit within Goldman Sachs values the asset, including because such other division or unit has information or uses valuation techniques and models that it does not share with, or that are different than those of, the Investment Adviser. This is particularly the case in respect of difficult-to-value assets. The Investment Adviser may also value an identical asset differently in different Accounts, including because different Accounts are subject to different valuation guidelines pursuant to their respective governing agreements
S-61
(e.g., in connection with certain regulatory restrictions applicable to different Accounts), different third -party vendors are hired to perform valuation functions for the Accounts, the Accounts are managed or advised by different portfolio management teams within the Investment Adviser that employ different valuation policies or procedures, or otherwise. The Investment Adviser will face a conflict with respect to valuations generally because of their effect on the Investment Advisers fees and other compensation. Furthermore, the application of particular valuation policies with respect to the Funds may result in improved performance of the Funds.
Goldman Sachs and the Investment Advisers Activities on Behalf of Other Accounts
Goldman Sachs engages in a variety of activities in the global financial markets. The extent of Goldman Sachs activities in the global financial markets, including without limitation in its capacity as an investment banker, research provider, investment adviser, financier, adviser, market maker, prime broker, derivatives dealer, lender, counterparty, agent, principal and investor, as well as in other capacities, may have potential adverse effects on the Funds.
The Investment Adviser provides advisory services to the Funds. The Investment Advisers decisions and actions on behalf of the Funds may differ from those on behalf of other Accounts. Advice given to, or investment or voting decisions made for, one or more Accounts may compete with, affect, differ from, conflict with, or involve timing different from, advice given to or investment decisions made for the Funds. Goldman Sachs (including the Investment Adviser), the clients it advises, and its personnel have interests in and advise Accounts that have investment objectives or portfolios similar to, related to or opposed to those of the Funds. Goldman Sachs may receive greater fees or other compensation (including performance-based fees) from such Accounts than it does from the Funds. In addition, Goldman Sachs (including the Investment Adviser), the clients it advises, and its personnel may engage (or consider engaging) in commercial arrangements or transactions with Accounts, and/or may compete for commercial arrangements or transactions in the same types of companies, assets securities and other instruments, as the Funds. Decisions and actions of the Investment Adviser on behalf of the Funds may differ from those by Goldman Sachs (including the Investment Adviser) on behalf of other Accounts, including Accounts sponsored, managed or advised by the Investment Adviser. Advice given to, or investment or voting decisions made for, the Funds may compete with, affect, differ from, conflict with, or involve timing different from, advice given to, or investment or voting decisions made for, other Accounts, including Accounts sponsored, managed or advised by the Investment Adviser. Additionally, as described below, the Investment Adviser faces conflicts of interest arising out of Goldman Sachs relationships and business dealings in connection with decisions to take or refrain from taking certain actions on behalf of Accounts when doing so would be adverse to Goldman Sachs relationships or other business dealings with such parties.
Transactions by, advice to and activities of Accounts (including with respect to investment decisions, voting and the enforcement of rights) may involve the same or related companies, securities or other assets or instruments as those in which the Funds invest, and such Accounts may engage in a strategy while a Fund is undertaking the same or a differing strategy, any of which could directly or indirectly disadvantage the Fund (including its ability to engage in a transaction or other activities) or the prices or terms at which the Funds transactions or other activities may be effected.
For example, Goldman Sachs may be engaged to provide advice to an Account that is considering entering into a transaction with a Fund, and Goldman Sachs may advise the Account not to pursue the transaction with the Fund, or otherwise in connection with a potential transaction provide advice to the Account that would be adverse to the Fund. Additionally, a Fund may buy a security and an Account may establish a short position in that same security or in similar securities. This short position may result in the impairment of the price of the security that the Fund holds or may be designed to profit from a decline in the price of the security. A Fund could similarly be adversely impacted if it establishes a short position, following which an Account takes a long position in the same security or in similar securities. In addition, Goldman Sachs (including the Investment Adviser) may make filings in connection with a shareholder class action lawsuit or similar matter involving a particular security on behalf of an Account (including a Fund), but not on behalf of a different Account
S-62
(including a Fund) that holds or held the same security, or that is invested in or has extended credit to different parts of the capital structure of the same issuer.
To the extent a Fund engages in transactions in the same or similar types of securities or other investments as other Accounts, the Fund and other Accounts may compete for such transactions or investments, and transactions or investments by such other Accounts may negatively affect the transactions of the Fund (including the ability of the Fund to engage in such a transaction or investment or other activities), or the price or terms at which the Funds transactions or investments or other activities may be effected. In some cases, such adverse impacts may result from differences in the timing of transactions by Accounts relative to when a Fund executes transactions in the same securities. Moreover, a Fund, on the one hand, and Goldman Sachs or other Accounts, on the other hand, may vote differently on or take or refrain from taking different actions with respect to the same security, which may be disadvantageous to the Fund. Accounts may also have different rights in respect of an investment with the same issuer, or invest in different classes of the same issuer that have different rights, including, without limitation, with respect to liquidity. The determination to exercise such rights by the Investment Adviser on behalf of such other Accounts may have an adverse effect on the Funds.
Goldman Sachs (including, as applicable, the Investment Adviser) and its personnel, when acting as an investment banker, research provider, investment adviser, financier, adviser, market maker, prime broker, derivatives dealer, lender, counterparty or investor, or in other capacities, may advise on transactions, make investment decisions or recommendations, provide differing investment views or have views with respect to research or valuations that are inconsistent with, or adverse to, the interests and activities of the Funds. Shareholders may be offered access to advisory services through several different Goldman Sachs advisory businesses (including Goldman Sachs & Co. LLC and the Investment Adviser). Different advisory businesses within Goldman Sachs manage Accounts according to different strategies and may also apply different criteria to the same or similar strategies and may have differing investment views in respect of an issuer or a security or other investment. Similarly, within the Investment Adviser, certain investment teams or portfolio managers may have differing or opposite investment views in respect of an issuer or a security, and the positions a Funds investment team or portfolio managers take in respect of the Fund may be inconsistent with, or adversely affected by, the interests and activities of the Accounts advised by other investment teams or portfolio managers of the Investment Adviser. Research, analyses or viewpoints may be available to clients or potential clients at different times. Goldman Sachs will not have any obligation or other duty to make available to the Funds any research or analysis prior to its public dissemination. The Investment Adviser is responsible for making investment decisions on behalf of the Funds, and such investment decisions can differ from investment decisions or recommendations by Goldman Sachs on behalf of other Accounts. Goldman Sachs, on behalf of one or more Accounts, may implement an investment decision or strategy ahead of, or contemporaneously with, or behind similar investment decisions or strategies made for the Funds (whether or not the investment decisions emanate from the same research analysis or other information). The relative timing for the implementation of investment decisions or strategies for Accounts (including Accounts sponsored, managed or advised by the Investment Adviser), on the one hand, and the Funds, on the other hand, may disadvantage the Funds. Certain factors, for example, market impact, liquidity constraints, or other circumstances, could result in the Funds receiving less favorable investment or trading results or incurring increased costs associated with implementing such investment decisions or strategies, or being otherwise disadvantaged.
Subject to applicable law, the Investment Adviser may cause the Funds to invest in securities, bank loans or other obligations of companies affiliated with or advised by Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions that may result in other Accounts being relieved of obligations or otherwise divested of investments, which may enhance the profitability of Goldman Sachs or other Accounts investment in and activities with respect to such companies. Goldman Sachs may, in its discretion, recommend that the Funds have ongoing business dealings, arrangements or agreements with persons who are (i) former employees of Goldman Sachs, (ii) affiliates or other portfolio companies of Goldman Sachs or other Accounts, (iii) Goldman Sachs employees family members and/or relatives and/or certain of their portfolio companies or (iv) persons otherwise associated with an investor in an
S-63
Account or a portfolio company or service provider of Goldman Sachs or an Account. The Funds may bear, directly or indirectly, the costs of such dealings, arrangements or agreements. These recommendations, and recommendations relating to continuing any such dealings, arrangements or agreements, may pose conflicts of interest and may be based on differing incentives due to Goldman Sachs relationships with such persons. In particular, when acting on behalf of, and making decisions for, Accounts, the Investment Adviser may take into account Goldman Sachs interests in maintaining its relationships and business dealings with such persons. As a result, the Investment Adviser faces conflicts of interest arising out of Goldman Sachs relationships and business dealings in connection with decisions to take or refrain from taking certain actions on behalf of Accounts when doing so would be adverse to Goldman Sachs relationships or other business dealings with such parties.
When the Investment Adviser wishes to place an order for different types of Accounts (including the Funds) for which aggregation is not practicable, the Investment Adviser may use a trade sequencing and rotation policy to determine which type of Account is to be traded first. Under this policy, each portfolio management team may determine the length of its trade rotation period and the sequencing schedule for different categories of clients within this period provided that the trading periods and these sequencing schedules are designed to be fair and equitable over time. The portfolio management teams currently base their trading periods and rotation schedules on the relative amounts of assets managed for different client categories (e.g., unconstrained client accounts, wrap program accounts, etc.) and, as a result, the Funds may trade behind other Accounts. Within a given trading period, the sequencing schedule establishes when and how frequently a given client category will trade first in the order of rotation. The Investment Adviser may deviate from the predetermined sequencing schedule under certain circumstances, and the Investment Advisers trade sequencing and rotation policy may be amended, modified or supplemented at any time without prior notice to clients.
Potential Conflicts Relating to Follow-On Investments
From time to time, the Investment Adviser may provide opportunities to Accounts (including potentially the Funds) to make investments in companies in which certain Accounts have already invested. Such follow-on investments can create conflicts of interest, such as the determination of the terms of the new investment and the allocation of such opportunities among Accounts (including the Funds). Follow-on investment opportunities may be available to the Funds notwithstanding that the Funds have no existing investment in the issuer, resulting in the assets of the Funds potentially providing value to, or otherwise supporting the investments of, other Accounts. Accounts (including the Funds) may also participate in releveraging, recapitalization, and similar transactions involving companies in which other Accounts have invested or will invest. Conflicts of interest in these and other transactions may arise between Accounts (including the Funds) with existing investments in a company and Accounts making subsequent investments in the company, which may have opposing interests regarding pricing and other terms. The subsequent investments may dilute or otherwise adversely affect the interests of the previously-invested Accounts (including the Funds).
Diverse Interests of Shareholders
The various types of investors in and beneficiaries of the Funds, including to the extent applicable the Investment Adviser and its affiliates, may have conflicting investment, tax and other interests with respect to their interests in the Funds. When considering a potential investment for a Fund, the Investment Adviser will generally consider the investment objectives of the Fund, not the investment objectives of any particular investor or beneficiary. The Investment Adviser may make decisions, including with respect to tax matters, from time to time that may be more beneficial to one type of investor or beneficiary than another, or to the Investment Adviser and its affiliates than to investors or beneficiaries unaffiliated with the Investment Adviser. In addition, Goldman Sachs may face certain tax risks based on positions taken by the Funds, including as a withholding agent. Goldman Sachs reserves the right on behalf of itself and its affiliates to take actions adverse to the Funds or other Accounts in these circumstances, including withholding amounts to cover actual or potential tax liabilities.
S-64
Selection of Service Providers
The Funds expect to engage service providers (including attorneys and consultants) that may also provide services to Goldman Sachs and other Accounts. In addition, certain service providers to the Investment Adviser or Funds may also be portfolio companies or other affiliates of the Investment Adviser or Accounts (for example, a portfolio company of an Account may retain a portfolio company of another Account). To the extent it is involved in such selection, the Investment Adviser intends to select these service providers based on a number of factors, including expertise and experience, knowledge of related or similar products, quality of service, reputation in the marketplace, relationships with the Investment Adviser, Goldman Sachs or others, and price. These service providers may have business, financial, or other relationships with Goldman Sachs (including its personnel), which may influence the Investment Advisers selection of these service providers for the Funds. In such circumstances, there may be a conflict of interest between Goldman Sachs (acting on behalf of the Funds) and the Funds or between Funds if the Funds determine not to engage or continue to engage these service providers.
The Investment Adviser may, in its sole discretion, determine to provide, or engage or recommend an affiliate of the Investment Adviser to provide, certain services to the Funds, instead of engaging or recommending one or more third parties to provide such services. Subject to the governance requirements of a particular Fund and applicable law, the Investment Adviser or its affiliates, as applicable, will receive compensation in connection with the provision of such services. As a result, the Investment Adviser faces a conflict of interest when selecting service providers for the Funds. Notwithstanding the foregoing, the selection of service providers for the Funds will be conducted in accordance with the Investment Advisers fiduciary obligations to the Funds. The service providers selected by the Investment Adviser may charge different rates to different recipients based on the specific services provided, the personnel providing the services, the complexity of the services provided or other factors. As a result, the rates paid with respect to these service providers by a Fund, on the one hand, may be more or less favorable than the rates paid by Goldman Sachs, including the Investment Adviser, on the other hand. In addition, the rates paid by the Investment Adviser or the Funds, on the one hand, may be more or less favorable than the rates paid by other parts of Goldman Sachs or Accounts managed by other parts of Goldman Sachs, on the other hand. Goldman Sachs (including the Investment Adviser), its personnel, and/or Accounts may hold investments in companies that provide services to entities in which the Funds invest generally, and, subject to applicable law, the Investment Adviser may refer or introduce such companies services to entities that have issued securities held by the Funds.
Investments in Goldman Sachs Funds
To the extent permitted by applicable law, the Funds may invest in money market and other funds sponsored, managed or advised by Goldman Sachs. In connection with any such investments, a Fund, to the extent permitted by the Act, will pay all advisory, administrative or Rule 12b-1 fees applicable to the investment, and certain Funds that invest in other funds sponsored, managed or advised by Goldman Sachs pay advisory fees to the Investment Adviser that are not reduced by any fees payable by such other funds to Goldman Sachs as manager of such other funds (i.e., there will be double fees involved in making any such investment, which would not arise in connection with the direct allocation of assets by investors in the Funds to such Funds), other than in certain specified cases, including as may be required by applicable law. In such circumstances, as well as in all other circumstances in which Goldman Sachs receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Funds will be required.
Goldman Sachs May In-Source or Outsource
Subject to applicable law, Goldman Sachs, including the Investment Adviser, may from time to time and without notice to investors in-source or outsource certain processes or functions in connection with a variety of services that it provides to the Funds in its administrative or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
S-65
Distributions of Assets Other Than Cash
With respect to redemptions from the Funds, the Funds may, in certain circumstances, have discretion to decide whether to permit or limit redemptions and whether to make distributions in connection with redemptions in the form of securities or other assets, and in such case, the composition of such distributions. In making such decisions, the Investment Adviser may have a potentially conflicting division of loyalties and responsibilities to redeeming investors and remaining investors.
Goldman Sachs May Act in a Capacity Other Than Investment Adviser to the Funds
Investments in Different Parts of an Issuers Capital Structure
Goldman Sachs (including the Investment Adviser) or Accounts, on the one hand, and the Funds, on the other hand, may invest in or extend credit to different parts of the capital structure of a single issuer. As a result, Goldman Sachs (including the Investment Adviser) or Accounts may take actions that adversely affect the Funds. In addition, Goldman Sachs (including the Investment Adviser) may advise Accounts with respect to different parts of the capital structure of the same issuer, or classes of securities that are subordinate or senior to securities, in which the Funds invest. Goldman Sachs (including the Investment Adviser) may pursue rights, provide advice or engage in other activities, or refrain from pursuing rights, providing advice or engaging in other activities, on behalf of itself or other Accounts with respect to an issuer in which the Funds have invested, and such actions (or refraining from action) may have a material adverse effect on the Funds.
For example, in the event that Goldman Sachs (including the Investment Adviser) or an Account holds loans, securities or other positions in the capital structure of an issuer that ranks senior in preference to the holdings of a Fund in the same issuer, and the issuer experiences financial or operational challenges, Goldman Sachs (including the Investment Adviser), acting on behalf of itself or the Account, may seek a liquidation, reorganization or restructuring of the issuer, or terms in connection with the foregoing, that may have an adverse effect on or otherwise conflict with the interests of the Funds holdings in the issuer. In connection with any such liquidation, reorganization or restructuring, the Funds holdings in the issuer may be extinguished or substantially diluted, while Goldman Sachs (including the Investment Adviser) or another Account may receive a recovery of some or all of the amounts due to them. In addition, in connection with any lending arrangements involving the issuer in which Goldman Sachs (including the Investment Adviser) or an Account participates, Goldman Sachs (including the Investment Adviser) or the Account may seek to exercise its rights under the applicable loan agreement or other document, which may be detrimental to the Fund. In situations in which Goldman Sachs (including the Investment Adviser) holds positions in multiple parts of the capital structure of an issuer across Accounts (including the Funds), the Investment Adviser may not pursue actions or remedies that may be available to the Fund, as a result of legal and regulatory requirements or otherwise.
These potential issues are examples of conflicts that Goldman Sachs (including the Investment Adviser) will face in situations in which the Funds, and Goldman Sachs (including the Investment Adviser) or other Accounts, invest in or extend credit to different parts of the capital structure of a single issuer. Goldman Sachs (including the Investment Adviser) addresses these issues based on the circumstances of particular situations. For example, Goldman Sachs (including the Investment Adviser) may determine to rely on information barriers between different Goldman Sachs (including the Investment Adviser) business units or portfolio management teams. Goldman Sachs (including the Investment Adviser) may determine to rely on the actions of similarly situated holders of loans or securities rather than, or in connection with, taking such actions itself on behalf of the Funds.
As a result of the various conflicts and related issues described above and the fact that conflicts will not necessarily be resolved in favor of the interests of the Funds, the Funds could sustain losses during periods in which Goldman Sachs (including the Investment Adviser) and other Accounts (including Accounts sponsored, managed or advised by the Investment Adviser) achieve profits generally or with respect to particular holdings in the same issuer, or could achieve lower profits or higher losses than would have been the case had the conflicts described above not existed. The negative effects described above may be more pronounced in connection with transactions in, or the Funds use of, small capitalization, emerging market, distressed or less liquid strategies.
S-66
Principal and Cross Transactions
When permitted by applicable law and the Investment Advisers policies, the Investment Adviser, acting on behalf of the Funds, may enter into transactions in securities and other instruments with or through Goldman Sachs or in Accounts managed by the Investment Adviser or its affiliates, and may (but is under no obligation or other duty to) cause the Funds to engage in transactions in which the Investment Adviser acts as principal on its own behalf (principal transactions), advises both sides of a transaction (cross transactions) and acts as broker for, and receives a commission from, the Funds on one side of a transaction and a brokerage account on the other side of the transaction (agency cross transactions). There may be potential conflicts of interest, regulatory issues or restrictions contained in the Investment Advisers internal policies relating to these transactions which could limit the Investment Advisers determination to engage in these transactions for Accounts (including the Funds). In certain circumstances such as when Goldman Sachs is the only or one of a few participants in a particular market or is one of the largest such participants, such limitations may eliminate or reduce the availability of certain investment opportunities to Accounts (including the Funds) or impact the price or terms on which transactions relating to such investment opportunities may be effected.
Goldman Sachs will have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions. The Investment Adviser has developed policies and procedures in relation to such transactions and conflicts. Cross transactions may disproportionately benefit some Accounts relative to other Accounts, including the Funds, due to the relative amount of market savings obtained by the Accounts. Principal, cross or agency cross transactions will be effected in accordance with fiduciary requirements and applicable law (which may include disclosure and consent).
Goldman Sachs May Act in Multiple Commercial Capacities
To the extent permitted by applicable law, Goldman Sachs may act as broker, dealer, agent, counterparty, lender or advisor or in other commercial capacities for the Funds or issuers of securities held by the Funds. Goldman Sachs may be entitled to compensation in connection with the provision of such services and the Funds will not be entitled to any such compensation. Goldman Sachs will have an interest in obtaining fees and other compensation in connection with such services that are favorable to Goldman Sachs, and in connection with providing such services may take commercial steps in its own interest, or may advise the parties to which it is providing services, or take other actions, any of which may have an adverse effect on the Funds. For example, Goldman Sachs may require repayment of all or part of a loan from a company in which an Account (including a Fund) holds an interest, which could cause the company to default or be required to liquidate its assets more rapidly, which could adversely affect the value of the company and the value of the Funds invested therein. Goldman Sachs may also advise such a company to make changes to its capital structure the result of which would be a reduction in the value or priority of a security held (directly or indirectly) by one or more Funds. Actions taken or advised to be taken by Goldman Sachs in connection with other types of transactions may also result in adverse consequences for the Funds. Goldman Sachs may also provide various services to companies in which the Funds have an interest, or to the Funds, which may result in fees, compensation and remuneration as well as other benefits, to Goldman Sachs. Such fees, compensation and remuneration may be substantial. Providing services to the Funds and companies (or their personnel) in which the Funds invest may enhance Goldman Sachs relationships with various parties, facilitate additional business development and enable Goldman Sachs to obtain additional business and generate additional revenue.
Goldman Sachs activities on behalf of its clients may also restrict investment opportunities that may be available to the Funds. For example, Goldman Sachs is often engaged by companies as a financial advisor, or to provide financing or other services, in connection with commercial transactions that may be potential investment opportunities for the Funds. There may be circumstances in which the Funds are precluded from participating in such transactions as a result of Goldman Sachs engagement by such companies. Goldman Sachs reserves the right to act for these companies in such circumstances, notwithstanding the potential adverse effect on the Funds. Goldman Sachs may also represent creditor or debtor companies in proceedings under Chapter 11 of the U.S.
S-67
Bankruptcy Code (and equivalent non-U.S. bankruptcy laws) or prior to these filings. From time to time, Goldman Sachs may serve on creditor or equity committees. These actions, for which Goldman Sachs may be compensated, may limit or preclude the flexibility that the Funds may otherwise have to buy or sell securities issued by those companies, as well as certain other assets. Please also see Management of the Funds by the Investment AdviserConsiderations Relating to Information Held by Goldman Sachs above and Potential Limitations and Restrictions on Investment Opportunities and Activities of Goldman Sachs and the Funds below.
Subject to applicable law, the Investment Adviser may cause the Funds to invest in securities, bank loans or other obligations of companies affiliated with or advised by Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions that may result in Goldman Sachs or other Accounts being relieved of obligations or otherwise divested of investments. For example, subject to applicable law a Fund may acquire securities or indebtedness of a company affiliated with Goldman Sachs directly or indirectly through syndicate or secondary market purchases, or may make a loan to, or purchase securities from, a company that uses the proceeds to repay loans made by Goldman Sachs. These activities by a Fund may enhance the profitability of Goldman Sachs or other Accounts with respect to their investment in and activities relating to such companies. The Fund will not be entitled to compensation as a result of this enhanced profitability.
To the extent permitted by applicable law, Goldman Sachs (including the Investment Adviser) may create, write, sell, issue, invest in or act as placement agent or distributor of derivative instruments related to the Funds, or with respect to underlying securities or assets of the Funds, or which may be otherwise based on or seek to replicate or hedge the performance of the Funds. Such derivative transactions, and any associated hedging activity, may differ from and be adverse to the interests of the Funds.
Goldman Sachs may make loans to, or enter into margin, asset-based or other credit facilities or similar transactions with, clients, companies or individuals that may (or may not) be secured by publicly or privately held securities or other assets, including a clients Fund shares as described above. Some of these borrowers may be public or private companies, or founders, officers or shareholders in companies in which the Funds (directly or indirectly) invest, and such loans may be secured by securities of such companies, which may be the same as, pari passu with, or more senior or junior to, interests held (directly or indirectly) by the Funds. In connection with its rights as lender, Goldman Sachs may act to protect its own commercial interest and may take actions that adversely affect the borrower, including by liquidating or causing the liquidation of securities on behalf of a borrower or foreclosing and liquidating such securities in Goldman Sachs own name. Such actions may adversely affect the Funds (e.g., if a large position in a security is liquidated, among the other potential adverse consequences, the value of such security may decline rapidly and the Funds may in turn decline in value or may be unable to liquidate their positions in such security at an advantageous price or at all). In addition, Goldman Sachs may make loans to shareholders or enter into similar transactions that are secured by a pledge of, or mortgage over, a shareholders Fund shares, which would provide Goldman Sachs with the right to redeem such Fund shares in the event that such shareholder defaults on its obligations. These transactions and related redemptions may be significant and may be made without notice to the shareholders.
Code of Ethics and Personal Trading
Each of the Funds and Goldman Sachs, as each Funds Investment Adviser and Distributor, has adopted a Code of Ethics (the Code of Ethics) in compliance with Section 17(j) of the Act designed to provide that personnel of the Investment Adviser, and certain additional Goldman Sachs personnel who support the Investment Adviser, comply with applicable federal securities laws and place the interests of clients first in conducting personal securities transactions. The Code of Ethics imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts of interest. Subject to the limitations of the Code of Ethics, covered persons may buy and sell securities or other investments for their personal accounts, including investments in the Funds, and may also take positions that are the same as, different
S-68
from, or made at different times than, positions taken (directly or indirectly) by the Funds. The Codes of Ethics are available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. Copies may also be obtained after paying a duplicating fee by electronic request to publicinfo@sec.gov. Additionally, all Goldman Sachs personnel, including personnel of the Investment Adviser, are subject to firm-wide policies and procedures regarding confidential and proprietary information, information barriers, private investments, outside business activities and personal trading.
Proxy Voting by the Investment Adviser
The Investment Adviser has implemented processes designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including the Funds, and to help ensure that such decisions are made in accordance with its fiduciary obligations to its clients. Notwithstanding such proxy voting processes, proxy voting decisions made by the Investment Adviser in respect of securities held by the Funds may benefit the interests of Goldman Sachs and/or Accounts other than the Funds. For a more detailed discussion of these policies and procedures, see the section of this Statement of Additional Information entitled Appendix A GSAM Proxy Voting Guidelines Summary.
Potential Limitations and Restrictions on Investment Opportunities and Activities of Goldman Sachs and the Funds
The Investment Adviser may restrict its investment decisions and activities on behalf of the Funds in various circumstances, including as a result of applicable regulatory requirements, information held by the Investment Adviser or Goldman Sachs, Goldman Sachs roles in connection with other clients and in the capital markets (including in connection with advice it may give to such clients or commercial arrangements or transactions that may be undertaken by such clients or by Goldman Sachs), Goldman Sachs internal policies and/or potential reputational risk in connection with Accounts (including the Funds). The Investment Adviser might not engage in transactions or other activities for, or enforce certain rights in favor of, one or more Funds due to Goldman Sachs activities outside the Funds (e.g., the Investment Adviser may refrain from making investments for the Funds that would cause Goldman Sachs to exceed position limits or cause Goldman Sachs to have additional disclosure obligations and may limit purchases or sales of securities in respect of which Goldman Sachs is engaged in an underwriting or other distribution) and regulatory requirements, policies and reputational risk assessments.
In addition, the Investment Adviser may restrict, limit or reduce the amount of a Funds investment, or restrict the type of governance or voting rights it acquires or exercises, where the Fund (potentially together with Goldman Sachs and other Accounts) exceeds a certain ownership interest, or possesses certain degrees of voting or control or has other interests. For example, such limitations may exist if a position or transaction could require a filing or license or other regulatory or corporate consent, which could, among other things, result in additional costs and disclosure obligations for, or impose regulatory restrictions on, Goldman Sachs, including the Investment Adviser, or on other Accounts, or where exceeding a threshold is prohibited or may result in regulatory or other restrictions. In certain cases, restrictions and limitations will be applied to avoid approaching such threshold. Circumstances in which such restrictions or limitations may arise include, without limitation: (i) a prohibition against owning more than a certain percentage of an issuers securities; (ii) a poison pill that could have a dilutive impact on the holdings of the Fund should a threshold be exceeded; (iii) provisions that would cause Goldman Sachs to be considered an interested shareholder of an issuer; (iv) provisions that may cause Goldman Sachs to be considered an affiliate or control person of the issuer; and (v) the imposition by an issuer (through Declaration of Trust amendment, contract or otherwise) or governmental, regulatory or self-regulatory organization (through law, rule, regulation, interpretation or other guidance) of other restrictions or limitations.
When faced with the foregoing limitations, Goldman Sachs may avoid exceeding the threshold because exceeding the threshold could have an adverse impact on the ability of the Investment Adviser or Goldman Sachs
S-69
to conduct its business activities. The Investment Adviser may also reduce a Funds interest in, or restrict a Fund from participating in, an investment opportunity that has limited availability or where Goldman Sachs has determined to cap its aggregate investment in consideration of certain regulatory or other requirements so that other Accounts that pursue similar investment strategies may be able to acquire an interest in the investment opportunity. The Investment Adviser may determine not to engage in certain transactions or activities which may be beneficial to the Funds because engaging in such transactions or activities in compliance with applicable law would result in significant cost to, or administrative burden on, the Investment Adviser or create the potential risk of trade or other errors.
The Investment Adviser generally is not permitted to use material non-public information in effecting purchases and sales in transactions for the Funds that involve public securities. The Investment Adviser may limit an activity or transaction (such as a purchase or sale transaction) which might otherwise be engaged in by the Funds, including as a result of information held by Goldman Sachs (including the Investment Adviser or its personnel). For example, trustees, officers and employees of Goldman Sachs may take seats on the boards of trustees of, or have board of trustees observer rights with respect to, companies in which Goldman Sachs invests on behalf of the Funds. To the extent a trustee, officer or employee of Goldman Sachs were to take a seat on the board of trustees of, or have board of trustees observer rights with respect to, a public company, the Investment Adviser (or certain of its investment teams) may be limited and/or restricted in its or their ability to trade in the securities of the company. In addition, any such trustee, officer or employee of Goldman Sachs that is a member of the board of trustees of a portfolio company may have duties in his or her capacity as a trustee that conflict with the Investment Advisers duties to Accounts, and may act in a manner that may disadvantage or otherwise harm a Fund and/or Goldman Sachs.
Different areas of Goldman Sachs may come into possession of material non-public information regarding an issuer of securities held by an Underlying Fund in which an Account invests. In the absence of information barriers between such different areas of Goldman Sachs, the Account may be prohibited, including by internal policies, from redeeming from such Underlying Fund during the period such material non-public information is held by such other part of Goldman Sachs, which period may be substantial. As a result, the Account may not be permitted to redeem from an Underlying Fund in whole or in part during periods when it otherwise would have been able to do so, which could adversely affect the Account. Other investors in the Underlying Fund that are not subject to such restrictions may be able to redeem from the Underlying Fund during such periods.
In addition, the Investment Advisers clients may partially or fully fund a new Account with in-kind securities in which the Investment Adviser may be restricted. In such circumstances, the Investment Adviser may sell any such securities at the next available trading window, subject to operational and technological limitations (unless such securities are subject to another express arrangement). As a result, such Accounts may be required to dispose of investments at an earlier or later date and/or at a less favorable price than would otherwise have been the case had the Investment Adviser not been so restricted. Accounts will be responsible for all tax liabilities that result from any such sale transactions.
The Investment Adviser operates a program reasonably designed to ensure compliance generally with economic and trade sanctions-related obligations applicable directly to its activities (although such obligations are not necessarily the same obligations that the Funds may be subject to). Such economic and trade sanctions may prohibit, among other things, transactions with and the provision of services to, directly or indirectly, certain countries, territories, entities and individuals. These economic and trade sanctions, and the application by the Investment Adviser of its compliance program in respect thereof, may restrict or limit the Funds investment activities.
The Investment Adviser may determine to limit or not engage at all in transactions and activities on behalf of the Funds for reputational or other reasons. Examples of when such determinations may be made include, but are not limited to, where Goldman Sachs is providing (or may provide) advice or services to an entity involved in such activity or transaction, where Goldman Sachs or an Account is or may be engaged in the same or a related activity or transaction to that being considered on behalf of the Funds, where Goldman Sachs or an Account has
S-70
an interest in an entity involved in such activity or transaction, where there are political, public relations, or other reputational considerations relating to counterparties or other participants in such activity or transaction or where such activity or transaction on behalf of or in respect of the Funds could affect in tangible or intangible ways Goldman Sachs, the Investment Adviser, an Account or their activities.
In order to engage in certain transactions on behalf of a Fund, the Investment Adviser will also be subject to (or cause the Fund to become subject to) the rules, terms and/or conditions of any venues through which it trades securities, derivatives or other instruments. This includes, but is not limited to, where the Investment Adviser and/or the Fund may be required to comply with the rules of certain exchanges, execution platforms, trading facilities, clearinghouses and other venues, or may be required to consent to the jurisdiction of any such venues. The rules, terms and/or conditions of any such venue may result in the Investment Adviser and/or the Fund being subject to, among other things, margin requirements, additional fees and other charges, disciplinary procedures, reporting and recordkeeping, position limits and other restrictions on trading, settlement risks and other related conditions on trading set out by such venues.
From time to time, a Fund, the Investment Adviser or its affiliates and/or their service providers or agents may be required, or may determine that it is advisable, to disclose certain information about the Fund, including, but not limited to, investments held by the Fund, and the names and percentage interest of beneficial owners thereof (and the underlying beneficial owners of such beneficial owners), to third parties, including local governmental authorities, regulatory organizations, taxing authorities, markets, exchanges, clearing facilities, custodians, brokers and trading counterparties of, or service providers to, the Investment Adviser or the Fund. The Investment Adviser generally expects to comply with requests to disclose such information as it so determines including through electronic delivery platforms; however, the Investment Adviser may determine to cause the sale of certain assets for the Fund rather than make certain required disclosures, and such sale may be at a time that is inopportune from a pricing or other standpoint. In addition, the Investment Adviser may provide third parties with aggregated data regarding the activities of, or certain performance or other metrics associated with the Accounts, and the Investment Adviser may receive compensation from such third parties for providing them such information.
Goldman Sachs may become subject to additional restrictions on its business activities that could have an impact on the Funds activities. In addition, the Investment Adviser may restrict its investment decisions and activities on behalf of the Funds and not other Accounts, including Accounts sponsored, managed or advised by the Investment Adviser.
Brokerage Transactions
The Investment Adviser often selects U.S. and non-U.S. broker-dealers (including affiliates of the Investment Adviser) that furnish the Investment Adviser, the Funds, Investment Adviser affiliates and other Goldman Sachs personnel with proprietary or third party brokerage and research services (collectively, brokerage and research services) that provide, in the Investment Advisers view, appropriate assistance to the Investment Adviser in the investment decision-making process. These brokerage and research services may be bundled with the trade execution, clearing or settlement services provided by a particular broker-dealer and, subject to applicable law, the Investment Adviser may pay for such brokerage and research services with client commissions (or soft dollars). There may be instances or situations in which such practices are subject to restrictions under applicable law. For example, the EUs Markets in Financial Instruments Directive II (MiFID II) restricts EU domiciled investment advisers from receiving research and other materials that do not qualify as acceptable minor non-monetary benefits from broker-dealers unless the research or materials are paid for by the investment advisers from their own resources or from research payment accounts funded by and with the agreement of their clients.
Accounts may differ with regard to whether and to what extent they pay for brokerage and research services through commissions and, subject to applicable law, brokerage and research services may be used to service the Funds and any or all other Accounts throughout the Investment Adviser, including Accounts that do not pay
S-71
commissions to the broker-dealer relating to the brokerage and research service arrangements. As a result, brokerage and research services (including soft dollar benefits) may disproportionately benefit other Accounts relative to the Funds based on the relative amount of commissions paid by the Funds and in particular those Accounts that do not pay for brokerage and research services or do so to a lesser extent, including in connection with the establishment of maximum budgets for research costs (and switching to execution-only pricing when maximums are met). The Investment Adviser does not attempt to allocate soft dollar benefits proportionately among clients or to track the benefits of brokerage and research services to the commissions associated with a particular Account or group of Accounts.
Aggregation of Orders by the Investment Adviser
The Investment Adviser follows policies and procedures pursuant to which it may (but is not required to) combine or aggregate purchase or sale orders for the same security or other instrument for multiple Accounts (including Accounts in which Goldman Sachs or personnel of Goldman Sachs have an interest) (sometimes referred to as bunching), so that the orders can be executed at the same time and block trade treatment of any such orders can be elected when available. The Investment Adviser aggregates orders when the Investment Adviser considers doing so to be operationally feasible and appropriate and in the interests of its clients and may elect block trade treatment when available. In addition, under certain circumstances orders for the Funds may be aggregated with orders for Accounts that contain Goldman Sachs assets.
When a bunched order or block trade is completely filled, or if the order is only partially filled, at the end of the day, the Investment Adviser generally will allocate the securities or other instruments purchased or the proceeds of any sale pro rata among the participating Accounts, based on the Funds relative sizes. If an order is filled at several different prices, through multiple trades (whether at a particular broker-dealer or among multiple broker-dealers), generally all participating Accounts will receive the average price and pay the average commission, however, this may not always be the case (due to, e.g., odd lots, rounding, market practice or constraints applicable to particular Accounts).
Although it may do so in certain circumstances, the Investment Adviser does not always bunch or aggregate orders for different Funds, elect block trade treatment or net buy and sell orders for the same Fund, if portfolio management decisions relating to the orders are made by different portfolio management teams or if different portfolio management processes are used for different account types, if bunching, aggregating, electing block trade treatment or netting is not appropriate or practicable from the Investment Advisers operational or other perspective, or if doing so would not be appropriate in light of applicable regulatory considerations. For example, time zone differences, trading instructions, cash flows, separate trading desks or portfolio management processes may, among other factors, result in separate, non-aggregated, non-netted executions, with orders in the same instrument being entered for different Accounts at different times or, in the case of netting, buy and sell trades for the same instrument being entered for the same Account. The Investment Adviser may be able to negotiate a better price and lower commission rate on aggregated orders than on orders for Funds that are not aggregated, and incur lower transaction costs on netted orders than orders that are not netted. The Investment Adviser is under no obligation or other duty to aggregate or net for particular orders. Where orders for a Fund are not aggregated with other orders, or not netted against orders for the Fund or other Accounts, the Fund will not benefit from a better price and lower commission rate or lower transaction cost that might have been available had the orders been aggregated or netted. Aggregation and netting of orders may disproportionately benefit some Accounts relative to other Accounts, including a Fund, due to the relative amount of market savings obtained by the Accounts. The Investment Adviser may aggregate orders of Accounts that are subject to MiFID II (MiFID II Advisory Accounts) with orders of Accounts not subject to MiFID II, including those that generate soft dollar commissions (including the Funds) and those that restrict the use of soft dollars. All Accounts included in an aggregated order with MiFID II Advisory Accounts pay (or receive) the same average price for the security and the same execution costs (measured by rate). However, MiFID II Advisory Accounts included in an aggregated order may pay commissions at execution-only rates below the total commission rates paid by Accounts included in the aggregated order that are not subject to MiFID II.
S-72
Code of Ethics and Personal Trading
The Funds and the Investment Adviser have adopted a Code of Ethics (the Code of Ethics) in compliance with Section 17(j) of the Act designed to provide that personnel of the Investment Adviser, and certain additional Goldman Sachs personnel who support the Investment Adviser, comply with applicable federal securities laws and place the interests of clients first in conducting personal securities transactions. The Code of Ethics imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts of interest. Subject to the limitations of the Code of Ethics, covered persons may buy and sell securities or other investments for their personal accounts, including investments in the Funds, and may also take positions that are the same as, different from, or made at different times than, positions taken (directly or indirectly) by the Funds. The Codes of Ethics are available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. Copies may also be obtained after paying a duplicating fee by electronic request to publicinfo@sec.gov. Additionally, all Goldman Sachs personnel, including personnel of the Investment Adviser, are subject to firm-wide policies and procedures regarding confidential and proprietary information, information barriers, private investments, outside business activities and personal trading.
Proxy Voting Policy
A description of the policies and procedures that the Funds use, as applicable, to determine how to vote proxies relating to portfolio securities is attached as Appendix A.
S-73
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Funds performs an annual audit of each Funds financial statements. The Board has appointed PricewaterhouseCoopers LLP to be each Funds independent registered public accounting firm.
S-74
The audited financial statements and related report of PricewaterhouseCoopers LLP, independent registered public accounting firm for the Funds, contained in the Funds November 30, 2019 Annual Report are hereby incorporated by reference. The financial statements in the Funds Annual Report have been incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. No other parts of any Annual Report are incorporated by reference herein.
S-75
GSAM PROXY VOTING GUIDELINES SUMMARY
Effective March 2020
The following is a summary of the material GSAM Proxy Voting Guidelines (the Guidelines), which form the substantive basis of GSAMs Policy and Procedures on Proxy Voting for Investment Advisory Clients (the Policy). As described in the main body of the Policy, one or more GSAM Portfolio Management Teams may diverge from the Guidelines and a related Recommendation on any particular proxy vote or in connection with any individual investment decision in accordance with the Policy.
A. |
U.S. proxy items: | |||||
1. |
Operational Items |
page A-2 | ||||
2. |
Board of Directors |
page A-2 | ||||
3. |
Executive Compensation |
page A-5 | ||||
4. |
Director Nominees and Proxy Access |
page A-7 | ||||
5. |
Shareholders Rights and Defenses |
page A-8 | ||||
6. |
Mergers and Corporate Restructurings |
page A-9 | ||||
7. |
State of Incorporation |
page A-9 | ||||
8. |
Capital Structure |
page A-10 | ||||
9. |
Environmental, Social, Governance (ESG) Issues |
page A-10 | ||||
B. |
Non-U.S. proxy items: | |||||
1. |
Operational Items |
page A-14 | ||||
2. |
Board of Directors |
page A-15 | ||||
3. |
Compensation |
page A-18 | ||||
4. |
Board Structure |
page A-18 | ||||
5. |
Capital Structure |
page A-18 | ||||
6. |
Mergers and Corporate Restructurings & Other |
page A-20 | ||||
7. |
Environmental, Social, Governance (ESG) Issues |
page A-21 | ||||
C. |
Japan proxy items: | |||||
1. |
Operational Items |
page A-22 | ||||
2. |
Board of Directors |
page A-23 | ||||
3. |
Compensation |
page A-26 | ||||
4. |
Board Structure |
page A-26 | ||||
5. |
Capital Structure |
page A-27 | ||||
6. |
Mergers and Corporate Restructurings & Other |
page A-28 | ||||
7. |
Environmental, Social, Governance (ESG) Issues |
page A-29 |
A-1
A. U.S. Proxy Items
The following section is a summary of the Guidelines, which form the substantive basis of the Policy with respect to U.S. public equity investments.
1. Operational Items
Auditor Ratification
Vote FOR proposals to ratify auditors, unless any of the following apply within the last year:
|
An auditor has a financial interest in or association with the company, and is therefore not independent; |
|
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the companys financial position; |
|
Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; or material weaknesses identified in Section 404 disclosures; or |
|
Fees for non-audit services are excessive (generally over 50% or more of the audit fees). |
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services or asking for audit firm rotation.
2. Board of Directors
The board of directors should promote the interests of shareholders by acting in an oversight and/or advisory role; the board should consist of a majority of independent directors and should be held accountable for actions and results related to their responsibilities.
When evaluating board composition, GSAM believes a diversity of ethnicity, gender and experience is an important consideration.
Classification of Directors
Where applicable, the New York Stock Exchange or NASDAQ Listing Standards definition is to be used to classify directors as inside directors, affiliated outside directors, or independent outside directors.
Additionally, GSAM will consider compensation committee interlocking directors to be affiliated (defined as CEOs who sit on each others compensation committees).
Voting on Director Nominees in Uncontested Elections
Vote on director nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD from individual directors who:
|
Attend less than 75% of the board and committee meetings without a disclosed valid excuse; |
|
Sit on more than five public operating and/or holding company boards; |
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their ownwithhold only at their outside boards. |
Other items considered for an AGAINST vote include specific concerns about the individual or the company, such as criminal wrongdoing or breach of fiduciary responsibilities, sanctions from government or authority, violations of laws and regulations, the presence of inappropriate related party transactions, or other issues related to improper business practices.
A-2
Vote AGAINST or WITHHOLD from the Nominating Committee if:
|
The board does not have at least one woman director |
Vote AGAINST or WITHHOLD from inside directors and affiliated outside directors (per the Classification of Directors above) in the case of operating and/or holding companies when:
|
The inside director or affiliated outside director serves on the Audit, Compensation or Nominating Committees; and |
|
The company lacks an Audit, Compensation or Nominating Committee so that the full board functions as such committees and inside directors or affiliated outside directors are participating in voting on matters that independent committees should be voting on. |
Vote AGAINST or WITHHOLD from members of the appropriate committee (or only the independent chairman or lead director as may be appropriate in situations such as where there is a classified board and members of the appropriate committee are not up for re-election or the appropriate committee is comprised of the entire board ) for the below reasons. Extreme cases may warrant a vote against the entire board.
|
Material failures of governance, stewardship, or fiduciary responsibilities at the company; |
|
Egregious actions related to the director(s) service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company; |
|
At the previous board election, any director received more than 50% withhold/against votes of the shares cast and the company has failed to address the underlying issue(s) that caused the high withhold/against vote (members of the Nominating or Governance Committees); |
|
The board failed to act on a shareholder proposal that received approval of the majority of shares cast for the previous two consecutive years (a management proposal with other than a FOR recommendation by management will not be considered as sufficient action taken); an adopted proposal that is substantially similar to the original shareholder proposal will be deemed sufficient; (vote against members of the committee of the board that is responsible for the issue under consideration). If GSAM did not support the shareholder proposal in both years, GSAM will still vote against the committee member(s). |
|
The average board tenure exceeds 15 years, and there has not been a new nominee in the past 5 years. |
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
|
The non-audit fees paid to the auditor are excessive (generally over 50% or more of the audit fees); |
|
The company receives an adverse opinion on the companys financial statements from its auditor and there is not clear evidence that the situation has been remedied; |
|
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm; or |
|
No members of the Audit Committee hold sufficient financial expertise. |
Vote CASE-BY-CASE on members of the Audit Committee and/or the full board if poor accounting practices, which rise to a level of serious concern are identified, such as fraud, misapplication of GAAP and material weaknesses identified in Section 404 disclosures.
Examine the severity, breadth, chronological sequence and duration, as well as the companys efforts at remediation or corrective actions, in determining whether negative vote recommendations are warranted against the members of the Audit Committee who are responsible for the poor accounting practices, or the entire board.
A-3
See section 3 on executive and director compensation for reasons to withhold from members of the Compensation Committee.
In limited circumstances, GSAM may vote AGAINST or WITHHOLD from all nominees of the board of directors (except from new nominees who should be considered on a CASE-BY-CASE basis and except as discussed below) if:
|
The companys poison pill has a dead-hand or modified dead-hand feature for two or more years. Vote against/withhold every year until this feature is removed; however, vote against the poison pill if there is one on the ballot with this feature rather than the director; |
|
The board adopts or renews a poison pill without shareholder approval, does not commit to putting it to shareholder vote within 12 months of adoption (or in the case of an newly public company, does not commit to put the pill to a shareholder vote within 12 months following the IPO), or reneges on a commitment to put the pill to a vote, and has not yet received a withhold/against recommendation for this issue; |
|
The board failed to act on takeover offers where the majority of the shareholders tendered their shares; |
|
If in an extreme situation the board lacks accountability and oversight, coupled with sustained poor performance relative to peers. |
Shareholder proposal regarding Independent Chair (Separate Chair/CEO)
Vote on a CASE-BY-CASE basis.
GSAM will generally recommend a vote AGAINST shareholder proposals requiring that the chairmans position be filled by an independent director, if the company satisfies 3 of the 4 following criteria:
|
Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties; |
|
Two-thirds independent board; |
|
All independent key committees (audit, compensation and nominating committees); or |
|
Established, disclosed governance guidelines. |
Shareholder proposal regarding board declassification
GSAM will generally vote FOR proposals requesting that the board adopt a declassified structure in the case of operating and holding companies.
Majority Vote Shareholder Proposals
GSAM will vote FOR proposals requesting that the board adopt majority voting in the election of directors provided it does not conflict with the state law where the company is incorporated. GSAM also looks for companies to adopt a post-election policy outlining how the company will address the situation of a holdover director.
Cumulative Vote Shareholder Proposals
GSAM will generally support shareholder proposals to restore or provide cumulative voting in the case of operating and holding companies unless:
|
The company has adopted (i) majority vote standard with a carve-out for plurality voting in situations where there are more nominees than seats and (ii) a director resignation policy to address failed elections. |
A-4
3. Executive Compensation
Pay Practices
Good pay practices should align managements interests with long-term shareholder value creation. Detailed disclosure of compensation criteria is preferred; proof that companies follow the criteria should be evident and retroactive performance target changes without proper disclosure is not viewed favorably. Compensation practices should allow a company to attract and retain proven talent. Some examples of poor pay practices include: abnormally large bonus payouts without justifiable performance linkage or proper disclosure, egregious employment contracts, excessive severance and/or change in control provisions, repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval, and excessive perquisites. A company should also have an appropriate balance of short-term vs. long-term metrics and the metrics should be aligned with business goals and objectives.
If the company maintains problematic or poor pay practices, generally vote:
|
AGAINST Management Say on Pay (MSOP) Proposals; or |
|
AGAINST an equity-based incentive plan proposal if excessive non-performance-based equity awards are the major contributor to a pay-for-performance misalignment. |
|
If no MSOP or equity-based incentive plan proposal item is on the ballot, vote AGAINST/WITHHOLD from compensation committee members. |
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Evaluation takes into account potential plan cost, plan features and grant practices. While a negative combination of these factors could cause a vote AGAINST, other reasons to vote AGAINST the equity plan could include the following factors:
|
The plan permits the repricing of stock options/stock appreciation rights (SARs) without prior shareholder approval; or |
|
There is more than one problematic material feature of the plan, which could include one of the following: unfavorable change-in-control features, presence of gross ups and options reload. |
Advisory Vote on Executive Compensation (Say-on-Pay, MSOP) Management Proposals
Vote FOR annual frequency and AGAINST all proposals asking for any frequency less than annual.
Vote CASE-BY-CASE on management proposals for an advisory vote on executive compensation. For U.S. companies, consider the following factors in the context of each companys specific circumstances and the boards disclosed rationale for its practices.
Factors Considered Include:
|
Pay for Performance Disconnect; |
GSAM will consider there to be a disconnect based on a quantitative assessment of the following: CEO pay vs. TSR (Total Shareholder Return) and peers, CEO pay as a percentage of the median peer group or CEO pay vs. shareholder return over time.
|
Long-term equity-based compensation is 100% time-based; |
|
Boards responsiveness if company received 70% or less shareholder support in the previous years MSOP vote; |
|
Abnormally large bonus payouts without justifiable performance linkage or proper disclosure; |
A-5
|
Egregious employment contracts; |
|
Excessive perquisites or excessive severance and/or change in control provisions; |
|
Repricing or replacing of underwater stock options without prior shareholder approval; |
|
Excessive pledging or hedging of stock by executives; |
|
Egregious pension/SERP (supplemental executive retirement plan) payouts; |
|
Extraordinary relocation benefits; |
|
Internal pay disparity; and |
|
Lack of transparent disclosure of compensation philosophy and goals and targets, including details on short-term and long-term performance incentives. |
Other Compensation Proposals and Policies
Employee Stock Purchase PlansNon-Qualified Plans
Vote CASE-BY-CASE on nonqualified employee stock purchase plans taking into account the following factors:
|
Broad-based participation; |
|
Limits on employee contributions; |
|
Company matching contributions; and |
|
Presence of a discount on the stock price on the date of purchase. |
Option Exchange Programs/Repricing Options
Vote CASE-BY-CASE on management proposals seeking approval to exchange/reprice options, taking into consideration:
|
Historic trading patternsthe stock price should not be so volatile that the options are likely to be back in-the-money over the near term; |
Rationale for the re-pricing;
|
If it is a value-for-value exchange; |
|
If surrendered stock options are added back to the plan reserve; |
|
Option vesting; |
|
Term of the optionthe term should remain the same as that of the replaced option; |
|
Exercise priceshould be set at fair market or a premium to market; |
|
Participantsexecutive officers and directors should be excluded. |
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Other Shareholder Proposals on Compensation
Advisory Vote on Executive Compensation (Frequency on Pay)
Vote FOR annual frequency.
A-6
Stock retention holding period
Vote FOR shareholder proposals asking for a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs if the policy requests retention for two years or less following the termination of their employment (through retirement or otherwise) and a holding threshold percentage of 50% or less.
Also consider:
|
Whether the company has any holding period, retention ratio, or officer ownership requirements in place and the terms/provisions of awards already granted. |
Elimination of accelerated vesting in the event of a change in control
Vote AGAINST shareholder proposals seeking a policy eliminating the accelerated vesting of time-based equity awards in the event of a change-in-control.
Performance-based equity awards and pay-for-superior-performance proposals
Generally support unless there is sufficient evidence that the current compensation structure is already substantially performance-based. GSAM considers performance-based awards to include awards that are tied to shareholder return or other metrics that are relevant to the business.
Say on Supplemental Executive Retirement Plans (SERP)
Generally vote AGAINST proposals asking for shareholder votes on SERP.
4. Director Nominees and Proxy Access
Voting for Director Nominees (Management or Shareholder)
Vote CASE-BY-CASE on the election of directors of operating and holding companies in contested elections, considering the following factors:
|
Long-term financial performance of the target company relative to its industry; |
|
Managements track record; |
|
Background of the nomination, in cases where there is a shareholder nomination; |
|
Qualifications of director nominee(s); |
|
Strategic plan related to the nomination and quality of critique against management; |
|
Number of boards on which the director nominee already serves; and |
|
Likelihood that the board will be productive as a result. |
Proxy Access
Vote CASE-BY-CASE on shareholder or management proposals asking for proxy access.
GSAM may support proxy access as an important right for shareholders of operating and holding companies and as an alternative to costly proxy contests and as a method for GSAM to vote for directors on an individual basis, as appropriate, rather than voting on one slate or the other. While this could be an important shareholder right, the following factors will be taken into account when evaluating the shareholder proposals:
|
The ownership thresholds, percentage and duration proposed (GSAM generally will not support if the ownership threshold is less than 3%); |
A-7
|
The maximum proportion of directors that shareholders may nominate each year (GSAM generally will not support if the proportion of directors is greater than 25%); and |
|
Other restricting factors that when taken in combination could serve to materially limit the proxy access provision. |
GSAM will take the above factors into account when evaluating proposals proactively adopted by the company or in response to a shareholder proposal to adopt or amend the right. A vote against governance committee members could result if provisions exist that materially limit the right to proxy access.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When voting in conjunction with support of a dissident slate, vote FOR the reimbursement of all appropriate proxy solicitation expenses associated with the election.
5. Shareholders Rights and Defenses
Shareholder Ability to Act by Written Consent
In the case of operating and holding companies, generally vote FOR shareholder proposals that provide shareholders with the ability to act by written consent, unless:
|
The company already gives shareholders the right to call special meetings at a threshold of 25% or lower; and |
|
The company has a history of strong governance practices. |
Shareholder Ability to Call Special Meetings
In the case of operating and holding companies, generally vote FOR management proposals that provide shareholders with the ability to call special meetings.
In the case of operating and holding companies, generally vote FOR shareholder proposals that provide shareholders with the ability to call special meetings at a threshold of 25% or lower if the company currently does not give shareholders the right to call special meetings. However, if a company already gives shareholders the right to call special meetings at a threshold of at least 25%, vote AGAINST shareholder proposals to further reduce the threshold.
Advance Notice Requirements for Shareholder Proposals/Nominations
In the case of operating and holding companies, vote CASE-BY-CASE on advance notice proposals, giving support to proposals that allow shareholders to submit proposals/nominations reasonably close to the meeting date and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory and shareholder review.
Shareholder Voting Requirements
In the case of operating and holding companies, vote AGAINST proposals to require a supermajority shareholder vote. Generally vote FOR management and shareholder proposals to reduce supermajority vote requirements.
A-8
Poison Pills
Vote FOR shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it, unless the company has:
|
a shareholder-approved poison pill in place; or |
|
adopted a policy concerning the adoption of a pill in the future specifying certain shareholder friendly provisions. |
Vote FOR shareholder proposals calling for poison pills to be put to a vote within a time period of less than one year after adoption.
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the companys existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
6. Mergers and Corporate Restructurings
Vote CASE-BY-CASE on mergers and acquisitions taking into account the following based on publicly available information:
|
Valuation; |
|
Market reaction; |
|
Strategic rationale; |
|
Managements track record of successful integration of historical acquisitions; |
|
Presence of conflicts of interest; and |
|
Governance profile of the combined company. |
7. State of Incorporation
Reincorporation Proposals
GSAM may support management proposals to reincorporate as long as the reincorporation would not substantially diminish shareholder rights. GSAM may not support shareholder proposals for reincorporation unless the current state of incorporation is substantially less shareholder friendly than the proposed reincorporation, there is a strong economic case to reincorporate or the company has a history of making decisions that are not shareholder friendly.
Exclusive venue for shareholder lawsuits
Generally vote FOR on exclusive venue proposals, taking into account:
|
Whether the company has been materially harmed by shareholder litigation outside its jurisdiction of incorporation, based on disclosure in the companys proxy statement; |
|
Whether the company has the following good governance features: |
¡ |
Majority independent board; |
¡ |
Independent key committees; |
A-9
¡ |
An annually elected board; |
¡ |
A majority vote standard in uncontested director elections; |
¡ |
The absence of a poison pill, unless the pill was approved by shareholders; and/or |
¡ |
Separate Chairman CEO role or, if combined, an independent chairman with clearly delineated duties. |
8. Capital Structure
Common and Preferred Stock Authorization
Generally vote FOR proposals to increase the number of shares of common stock authorized for issuance.
Generally vote FOR proposals to increase the number of shares of preferred stock, as long as there is a commitment to not use the shares for anti-takeover purposes.
9. Environmental, Social, Governance (ESG) Issues
Overall Approach
GSAM recognizes that Environmental, Social and Governance (ESG) factors can affect investment performance, expose potential investment risks and provide an indication of management excellence and leadership. When evaluating ESG proxy issues, GSAM balances the purpose of a proposal with the overall benefit to shareholders.
Shareholder proposals considered under this category could include, among others, reports on:
1) |
employee labor and safety policies; |
2) |
impact on the environment of the companys production or manufacturing operations; |
3) |
societal impact of products manufactured; |
4) |
risks throughout the supply chain or operations including labor practices, animal treatment practices within food production and conflict minerals; and |
5) |
overall board structure, including diversity. |
When evaluating environmental and social shareholder proposals, the following factors are generally considered:
|
The companys current level of publicly available disclosure, including if the company already discloses similar information through existing reports or policies; |
|
If the company has implemented or formally committed to the implementation of a reporting program based on the Sustainability Accounting Standards Boards (SASB) materiality standards or a similar standard; |
|
Whether adoption of the proposal is likely to enhance or protect shareholder value; |
|
Whether the information requested concerns business issues that relate to a meaningful percentage of the companys business; |
|
The degree to which the companys stated position on the issues raised in the proposal could affect |
|
its reputation or sales, or leave it vulnerable to a boycott or selective purchasing; |
|
Whether the company has already responded in some appropriate manner to the request embodied in the proposal; |
|
What other companies in the relevant industry have done in response to the issue addressed in the proposal; |
|
Whether the proposal itself is well framed and the cost of preparing the report is reasonable; Whether the subject of the proposal is best left to the discretion of the board; |
A-10
|
Whether the company has material fines or violations in the area and if so, if appropriate actions have already been taken to remedy going forward; |
|
Whether providing this information would reveal proprietary or confidential information that would place the company at a competitive disadvantage. |
Environmental Sustainability, climate change reporting
Generally vote FOR proposals requesting the company to report on its policies, initiatives and oversight mechanisms related to environmental sustainability, or how the company may be impacted by climate change. The following factors will be considered:
|
The companys current level of publicly available disclosure including if the company already discloses similar information through existing reports or policies; |
|
If the company has formally committed to the implementation of a reporting program based on the Sustainability Accounting Standards Boards (SASB) materiality standards or a similar standard within a specified time frame; |
|
If the companys current level of disclosure is comparable to that of its industry peers; and |
|
If there are significant controversies, fines, penalties, or litigation associated with the companys environmental performance. |
Establishing goals or targets for emissions reduction
Vote CASE-BY-CASE on the following shareholder proposals if relevant to the company:
|
Seeking information on the financial, physical, or regulatory risks a company faces related to climate change on its operations and investment, or on how the company identifies, measures and manages such risks; |
|
Calling for the reduction of Greenhouse Gas (GHG) emissions; |
|
Seeking reports on responses to regulatory and public pressures surrounding climate change, and for disclosure of research that aided in setting company policies around climate change; |
|
Requesting a report/disclosure of goals on GHG emissions from company operations and/or products; |
|
Requesting a company report on its energy efficiency policies; and |
|
Requesting reports on the feasibility of developing renewable energy resources. |
Political Contributions and Trade Association Spending/Lobbying Expenditures and Initiatives
GSAM generally believes that it is the role of boards and management to determine the appropriate level of disclosure of all types of corporate political activity. When evaluating these proposals, GSAM considers the prescriptive nature of the proposal and the overall benefit to shareholders along with a companys current disclosure of policies, practices and oversight.
Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as:
|
There are no recent, significant controversies, fines or litigation regarding the companys political contributions or trade association spending; and |
|
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibits coercion. |
A-11
Vote AGAINST proposals requesting increased disclosure of a companys policies with respect to political contributions, lobbying and trade association spending as long as:
|
There is no significant potential threat or actual harm to shareholders interests; |
|
There are no recent significant controversies or litigation related to the companys political contributions or governmental affairs; and |
|
There is publicly available information to assess the companys oversight related to such expenditures of corporate assets. |
GSAM generally will vote AGAINST proposals asking for detailed disclosure of political contributions or trade association or lobbying expenditures.
Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level and barring political contributions can put the company at a competitive disadvantage.
Gender Identity and Sexual Orientation
A company should have a clear, public Equal Employment Opportunity (EEO) statement and/or diversity policy. Generally vote FOR proposals seeking to amend a companys EEO statement or diversity policies to additionally prohibit discrimination based on sexual orientation and/or gender identity.
Generally vote FOR proposals requesting reports on a companys efforts to diversify the board, unless:
|
The gender and racial minority representation of the companys board is reasonably inclusive in relation to companies of similar size and business; and |
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board. |
Gender Pay Gap
Generally vote CASE-BY-CASE on proposals requesting reports on a companys pay data by gender, or a report on a companys policies and goals to reduce any gender pay gap, taking into account:
|
The companys current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices; |
|
Whether the company has been the subject of recent controversy, litigation or regulatory actions related to gender pay gap issues; and |
|
Whether the companys reporting regarding gender pay gap policies or initiatives is lagging its peers. |
Labor and Human Rights Standards
Generally vote FOR proposals requesting a report on company or company supplier labor and/or human rights standards and policies, or on the impact of its operations on society, unless such information is already publicly disclosed considering:
|
The degree to which existing relevant policies and practices are disclosed; |
|
Whether or not existing relevant policies are consistent with internationally recognized standards; |
|
Whether company facilities and those of its suppliers are monitored and how; |
|
Company participation in fair labor organizations or other internationally recognized human rights |
A-12
|
initiatives; |
|
Scope and nature of business conducted in markets known to have higher risk of workplace |
|
labor/human rights abuse; |
|
Recent, significant company controversies, fines, or litigation regarding human rights at the |
|
company or its suppliers; |
|
The scope of the request; and |
|
Deviation from industry sector peer company standards and practices. |
A-13
B. Non-U.S. Proxy Items1
The following section is a broad summary of the Guidelines, which form the basis of the Policy with respect to non-U.S. and Japan public equity investments. Applying these guidelines is subject to certain regional and country-specific exceptions and modifications and is not inclusive of all considerations in each market.
1. Operational Items
Financial Results/Director and Auditor Reports
Vote FOR approval of financial statements and director and auditor reports, unless:
|
There are concerns about the accounts presented or audit procedures used; or |
|
The company is not responsive to shareholder questions about specific items that should be publicly disclosed. |
Appointment of Auditors and Auditor Fees
Vote FOR the re-election of auditors and proposals authorizing the board to fix auditor fees, unless:
|
There are serious concerns about the accounts presented, audit procedures used or audit opinion |
|
rendered; |
|
There is reason to believe that the auditor has rendered an opinion that is neither accurate nor |
|
indicative of the companys financial position; |
|
Name of the proposed auditor has not been published; |
|
The auditors are being changed without explanation; |
|
Non-audit-related fees are substantial or are in excess of standard annual audit-related fees; or |
|
The appointment of external auditors if they have previously served the company in an executive capacity or can otherwise be considered affiliated with the company. |
Appointment of Statutory Auditors
Vote FOR the appointment or re-election of statutory auditors, unless:
|
There are serious concerns about the statutory reports presented or the audit procedures used; |
|
Questions exist concerning any of the statutory auditors being appointed; or |
|
The auditors have previously served the company in an executive capacity or can otherwise be considered affiliated with the company. |
Allocation of Income
Vote FOR approval of the allocation of income, unless:
|
The dividend payout ratio has been consistently low without adequate explanation; or |
|
The payout is excessive given the companys financial position. |
Stock (Scrip) Dividend Alternative
Vote FOR most stock (scrip) dividend proposals.
1 |
Excludes Japan public equity investments, please see Section C. |
A-14
Vote AGAINST proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value.
Amendments to Articles of Association
Vote amendments to the articles of association on a CASE-BY-CASE basis.
Change in Company Fiscal Term
Vote FOR resolutions to change a companys fiscal term unless a companys motivation for the change is to postpone its annual general meeting.
Lower Disclosure Threshold for Stock Ownership
Vote AGAINST resolutions to lower the stock ownership disclosure threshold below 5% unless specific reasons exist to implement a lower threshold.
Amend Quorum Requirements
Vote proposals to amend quorum requirements for shareholder meetings on a CASE-BY-CASE basis.
Transact Other Business
Vote AGAINST other business when it appears as a voting item.
2. Board of Directors
Director Elections
Vote FOR management nominees taking into consideration the following:
|
Adequate disclosure has not been provided in a timely manner; or |
|
There are clear concerns over questionable finances or restatements; or |
|
There have been questionable transactions or conflicts of interest; or |
|
There are any records of abuses against minority shareholder interests; or |
|
The board fails to meet minimum corporate governance standards; or |
|
There are reservations about: |
¡ |
Director terms |
¡ |
Bundling of proposals to elect directors |
¡ |
Board independence |
¡ |
Disclosure of named nominees |
¡ |
Combined Chairman/CEO |
¡ |
Election of former CEO as Chairman of the board |
¡ |
Overboarded directors |
¡ |
Composition of committees |
¡ |
Director independence |
A-15
¡ |
Number of directors on the board |
¡ |
Lack of gender diversity on the board |
|
Specific concerns about the individual or company, such as criminal wrongdoing or breach of fiduciary responsibilities; or |
|
Repeated absences at board meetings have not been explained (in countries where this information is disclosed); or |
Unless there are other considerations which may include sanctions from government or authority, violations of laws and regulations, or other issues related to improper business practice, failure to replace management, or egregious actions related to service on other boards. Vote AGAINST the Nominating Committee if the board does not have at least one woman director.
Vote on a CASE-BY-CASE basis in contested elections of directors, e.g., the election of shareholder nominees or the dismissal of incumbent directors, determining which directors are best suited to add value for shareholders.
The analysis will generally be based on, but not limited to, the following major decision factors:
|
Company performance relative to its peers; |
|
Strategy of the incumbents versus the dissidents; |
|
Independence of board candidates; |
|
Experience and skills of board candidates; |
|
Governance profile of the company; |
|
Evidence of management entrenchment; |
|
Responsiveness to shareholders; |
|
Whether a takeover offer has been rebuffed; |
|
Whether minority or majority representation is being sought. |
Vote FOR employee and/or labor representatives if they sit on either the audit or compensation committee and are required by law to be on those committees.
Vote AGAINST employee and/or labor representatives if they sit on either the audit or compensation committee, if they are not required to be on those committees.
Classification of directors
Executive Director
|
Employee or executive of the company; |
|
Any director who is classified as a non-executive, but receives salary, fees, bonus, and/or other benefits that are in line with the highest-paid executives of the company. |
Non-Independent Non-Executive Director (NED)
|
Any director who is attested by the board to be a non-independent NED; |
|
Any director specifically designated as a representative of a significant shareholder of the company; |
|
Any director who is also an employee or executive of a significant shareholder of the company; Beneficial owner (direct or indirect) of at least 10% of the companys stock, either in economic terms or in voting |
A-16
rights (this may be aggregated if voting power is distributed among more than one member of a defined group, e.g., family members who beneficially own less than 10% individually, but collectively own more than 10%), unless market best practice dictates a lower ownership and/or disclosure threshold (and in other special market-specific circumstances); Government representative; |
|
Currently provides (or a relative provides) professional services to the company, to an affiliate of the company, or to an individual officer of the company or of one of its affiliates in excess of $10,000 per year; |
|
Represents customer, supplier, creditor, banker, or other entity with which company maintains transactional/commercial relationship (unless company discloses information to apply a materiality test); |
|
Any director who has conflicting or cross-directorships with executive directors or the chairman of the company; |
|
Relative of a current employee of the company or its affiliates; |
|
Relative of a former executive of the company or its affiliates; |
|
A new appointee elected other than by a formal process through the General Meeting (such as a contractual appointment by a substantial shareholder); |
|
Founder/co-founder/member of founding family but not currently an employee; |
|
Former executive (5 year cooling off period); |
|
Years of service is generally not a determining factor unless it is recommended best practice in a market and/or in extreme circumstances, in which case it may be considered; and |
|
Any additional relationship or principle considered to compromise independence under local corporate governance best practice guidance. |
Independent NED
|
No material connection, either directly or indirectly, to the company other than a board seat. |
Employee Representative
|
Represents employees or employee shareholders of the company (classified as employee representative but considered a non-independent NED). |
Discharge of Directors
Generally vote FOR the discharge of directors, including members of the management board and/or supervisory board, unless there is reliable information about significant and compelling controversies that the board is not fulfilling its fiduciary duties warranted by:
|
A lack of oversight or actions by board members which invoke shareholder distrust related to malfeasance or poor supervision, such as operating in private or company interest rather than in shareholder interest; or |
|
Any legal issues (e.g., civil/criminal) aiming to hold the board responsible for breach of trust in the past or related to currently alleged actions yet to be confirmed (and not only the fiscal year in question), such as price fixing, insider trading, bribery, fraud, and other illegal actions; or |
|
Other egregious governance issues where shareholders may bring legal action against the company or its directors; or |
|
Vote on a CASE-BY-CASE basis where a vote against other agenda items are deemed inappropriate. |
A-17
3. Compensation
Director Compensation
Vote FOR proposals to award cash fees to non-executive directors unless the amounts are excessive relative to other companies in the country or industry.
Vote non-executive director compensation proposals that include both cash and share-based components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both non-executive and executive directors into a single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for non-executive directors.
Compensation Plans
Vote compensation plans on a CASE-BY-CASE basis.
Director, Officer, and Auditor Indemnification and Liability Provisions
Vote proposals seeking indemnification and liability protection for directors and officers on a CASE-BY-CASE basis.
Vote AGAINST proposals to indemnify auditors.
4. Board Structure
Vote AGAINST the introduction of classified boards and mandatory retirement ages for directors.
Vote AGAINST proposals to alter board structure or size in the context of a fight for control of the company or the board.
Chairman CEO combined role (for applicable markets)
GSAM will generally recommend a vote AGAINST shareholder proposals requiring that the chairmans position be filled by an independent director, if the company satisfies 3 of the 4 following criteria:
|
Two-thirds independent board, or majority in countries where employee representation is common practice; |
|
A designated, or a rotating, lead director, elected by and from the independent board members with clearly delineated and comprehensive duties; |
|
Fully independent key committees; and/or |
|
Established, publicly disclosed, governance guidelines and director biographies/profiles. |
5. Capital Structure
Share Issuance Requests
General Issuances:
Vote FOR issuance requests with preemptive rights to a maximum of 100% over currently issued capital.
Vote FOR issuance requests without preemptive rights to a maximum of 20% of currently issued capital.
A-18
Specific Issuances:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive rights.
Increases in Authorized Capital
Vote FOR non-specific proposals to increase authorized capital up to 100% over the current authorization unless the increase would leave the company with less than 30% of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount, unless:
|
The specific purpose of the increase (such as a share-based acquisition or merger) does not meet guidelines for the purpose being proposed; or |
|
The increase would leave the company with less than 30% of its new authorization outstanding after adjusting for all proposed issuances. |
Vote AGAINST proposals to adopt unlimited capital authorizations.
Reduction of Capital
Vote FOR proposals to reduce capital for routine accounting purposes unless the terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring on a CASE-BY-CASE basis.
Capital Structures
Vote FOR resolutions that seek to maintain or convert to a one-share, one-vote capital structure.
Vote AGAINST requests for the creation or continuation of dual-class capital structures or the creation of new or additional super voting shares.
Preferred Stock
Vote FOR the creation of a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital unless the terms of the preferred stock would adversely affect the rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as the maximum number of common shares that could be issued upon conversion meets guidelines on equity issuance requests.
Vote AGAINST the creation of a new class of preference shares that would carry superior voting rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board clearly states that the authorization will not be used to thwart a takeover bid.
Vote proposals to increase blank check preferred authorizations on a CASE-BY-CASE basis.
Debt Issuance Requests
Vote non-convertible debt issuance requests on a CASE-BY-CASE basis, with or without preemptive rights.
Vote FOR the creation/issuance of convertible debt instruments as long as the maximum number of common shares that could be issued upon conversion meets guidelines on equity issuance requests.
A-19
Vote FOR proposals to restructure existing debt arrangements unless the terms of the restructuring would adversely affect the rights of shareholders.
Increase in Borrowing Powers
Vote proposals to approve increases in a companys borrowing powers on a CASE-BY-CASE basis.
Share Repurchase Plans
GSAM will generally recommend FOR share repurchase programs taking into account whether:
|
The share repurchase program can be used as a takeover defense; |
|
There is clear evidence of historical abuse; |
|
There is no safeguard in the share repurchase program against selective buybacks; |
|
Pricing provisions and safeguards in the share repurchase program are deemed to be unreasonable in light of market practice. |
Reissuance of Repurchased Shares
Vote FOR requests to reissue any repurchased shares unless there is clear evidence of abuse of this authority in the past.
Capitalization of Reserves for Bonus Issues/Increase in Par Value
Vote FOR requests to capitalize reserves for bonus issues of shares or to increase par value.
6. Mergers and Corporate Restructurings and Other
Reorganizations/Restructurings
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
Mergers and Acquisitions
Vote CASE-BY-CASE on mergers and acquisitions taking into account the following based on publicly available information:
|
Valuation; |
|
Market reaction; |
|
Strategic rationale; |
|
Managements track record of successful integration of historical acquisitions; |
|
Presence of conflicts of interest; and |
|
Governance profile of the combined company. |
Antitakeover Mechanisms
Generally vote AGAINST all antitakeover proposals, unless they are structured in such a way that they give shareholders the ultimate decision on any proposal or offer.
A-20
Reincorporation Proposals
Vote reincorporation proposals on a CASE-BY-CASE basis.
Related-Party Transactions
Vote related-party transactions on a CASE-BY-CASE basis, considering factors including, but not limited to, the following:
|
The parties on either side of the transaction; |
|
The nature of the asset to be transferred/service to be provided; |
|
The pricing of the transaction (and any associated professional valuation); |
|
The views of independent directors (where provided); |
|
The views of an independent financial adviser (where appointed); |
|
Whether any entities party to the transaction (including advisers) is conflicted; and |
|
The stated rationale for the transaction, including discussions of timing. |
Shareholder Proposals
Vote all shareholder proposals on a CASE-BY-CASE basis.
Vote FOR proposals that would improve the companys corporate governance or business profile at a reasonable cost.
Vote AGAINST proposals that limit the companys business activities or capabilities or result in significant costs being incurred with little or no benefit.
7. Environmental, Social, Governance (ESG) Issues
Please refer to page A-8 for our current approach to these important topics.
A-21
C. Japan Proxy Items
The following section is a broad summary of the Guidelines, which form the basis of the Policy with respect to Japanese public equity investments. Applying these guidelines is not inclusive of all considerations in the Japanese market.
1. Operational Items
Financial Results/Director and Auditor Reports
Vote FOR approval of financial statements and director and auditor reports, unless:
|
There are concerns about the accounts presented or audit procedures used; or |
|
The company is not responsive to shareholder questions about specific items that should be publicly disclosed. |
Appointment of Auditors and Auditor Fees
Vote FOR the re-election of auditors and proposals authorizing the board to fix auditor fees, unless:
|
There are serious concerns about the accounts presented, audit procedures used or audit opinion rendered; |
|
There is reason to believe that the auditor has rendered an opinion that is neither accurate nor indicative of the companys financial position; |
|
Name of the proposed auditor has not been published; |
|
The auditors are being changed without explanation; |
|
Non-audit-related fees are substantial or are in excess of standard annual audit-related fees; or |
|
The appointment of external auditors if they have previously served the company in an executive capacity or can otherwise be considered affiliated with the company. |
Allocation of Income
Vote FOR approval of the allocation of income, unless:
|
The dividend payout ratio is less than 20%; or |
|
The company proposes the payments even though the company posted a net loss for the year under review; |
|
The dividend payout ratio has been consistently low without adequate explanation; or |
|
The payout is excessive given the companys financial position. |
Stock (Scrip) Dividend Alternative
Vote FOR most stock (scrip) dividend proposals.
Vote AGAINST proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value.
Amendments to Articles of Association
Vote amendments to the articles of association on a CASE-BY-CASE basis.
A-22
Change in Company Fiscal Term
Vote FOR resolutions to change a companys fiscal term unless a companys motivation for the change is to postpone its annual general meeting.
Lower Disclosure Threshold for Stock Ownership
Vote AGAINST resolutions to lower the stock ownership disclosure threshold below 5% unless specific reasons exist to implement a lower threshold.
Amend Quorum Requirements
Vote proposals to amend quorum requirements for shareholder meetings on a CASE-BY-CASE basis.
Transact Other Business
Vote AGAINST other business when it appears as a voting item.
2. Board of Directors
Director and Statutory Auditor Elections
Vote FOR management nominees taking into consideration the following:
|
The companys committee structure: statutory auditor board structure, U.S.-type three committee structure, or audit committee structure; or |
|
Adequate disclosure has not been provided in a timely manner; or |
|
There are clear concerns over questionable finances or restatements; or |
|
There have been questionable transactions or conflicts of interest; or |
|
There are any records of abuses against minority shareholder interests; or |
|
The board fails to meet minimum corporate governance standards; or |
|
There are reservations about: |
¡ |
Director terms |
¡ |
Bundling of proposals to elect directors |
¡ |
Board independence |
¡ |
Disclosure of named nominees |
¡ |
Combined Chairman/CEO |
¡ |
Election of former CEO as Chairman of the board |
¡ |
Overboarded directors who sit on more than four public operating and/or holding company boards or are CEOs of public companies who sit on the boards of more than one public companies besides their own |
¡ |
Composition of committees |
¡ |
Director independence |
¡ |
Number of directors on the board |
¡ |
Lack of gender diversity on the board |
A-23
|
Specific concerns about the individual or company, such as criminal wrongdoing or breach of fiduciary responsibilities; or |
|
Attendance at less than 75% of the board and committee meetings without a disclosed valid excuse; or |
|
Unless there are other considerations which may include sanctions from government or authority, violations of laws and regulations, or other issues related to improper business practice, failure to replace management, or egregious actions related to service on other boards. |
Vote AGAINST the Nominating Committee if the board does not have at least one woman director.
Vote AGAINST top executives when the board consists of more than 15 directors and less than 15% of outside directors.
Vote AGAINST top executives when the company has posted average return on equity (ROE) of less than five percent over the last five fiscal years.
Vote on a CASE-BY-CASE basis in contested elections of directors, e.g., the election of shareholder nominees or the dismissal of incumbent directors, determining which directors are best suited to add value for shareholders.
The analysis will generally be based on, but not limited to, the following major decision factors:
|
Company performance relative to its peers; |
|
Strategy of the incumbents versus the dissidents; |
|
Independence of board candidates; |
|
Experience and skills of board candidates; |
|
Governance profile of the company; |
|
Evidence of management entrenchment; |
|
Responsiveness to shareholders; |
|
Whether a takeover offer has been rebuffed; |
|
Whether minority or majority representation is being sought. |
Vote FOR employee and/or labor representatives if they sit on either the audit or compensation committee and are required by law to be on those committees.
Vote AGAINST employee and/or labor representatives if they sit on either the audit or compensation committee, if they are not required to be on those committees.
Classification of directors
Internal Director
|
Employee or executive of the company; |
|
Any director who is classified as a non-executive, but receives salary, fees, bonus, and/or other benefits that are in line with the highest-paid executives of the company. |
Internal Non-Executive Director (NED)
|
Any director who is attested by the board to be a non-independent NED; |
A-24
|
Any director specifically designated as a representative of a significant shareholder of the company; |
|
Any director who is also an employee or executive of a significant shareholder of the company; |
|
Beneficial owner (direct or indirect) of at least 10% of the companys stock, either in economic terms or in voting rights (this may be aggregated if voting power is distributed among more than one member of a defined group, e.g., family members who beneficially own less than 10% individually, but collectively own more than 10%), unless market best practice dictates a lower ownership and/or disclosure threshold (and in other special market-specific circumstances); |
|
Government representative; |
|
Currently provides (or a relative provides) professional services to the company, to an affiliate of the company, or to an individual officer of the company or of one of its affiliates in excess of $10,000 per year; |
|
Represents customer, supplier, creditor, banker, or other entity with which company maintains transactional/commercial relationship (unless company discloses information to apply a materiality test); |
|
Any director who has conflicting or cross-directorships with executive directors or the chairman of the company; |
|
Relative of a current employee of the company or its affiliates; |
|
Relative of a former executive of the company or its affiliates; |
|
Any director who works or worked at companies whose shares are held by the company in question as cross-shareholdings; |
|
A new appointee elected other than by a formal process through the General Meeting (such as a contractual appointment by a substantial shareholder); |
|
Founder/co-founder/member of founding family but not currently an employee; |
|
Former executive (5 year cooling off period); |
|
Years of service is generally not a determining factor unless it is recommended best practice in a market and/or in extreme circumstances, in which case it may be considered; and |
|
Any additional relationship or principle considered to compromise independence under local corporate governance best practice guidance. |
External NED
|
No material connection, either directly or indirectly, to the company other than a board seat. |
Employee Representative
|
Represents employees or employee shareholders of the company (classified as employee representative but considered a non-independent NED). |
Discharge of Directors
Generally vote FOR the discharge of directors, including members of the management board and/or supervisory board, unless there is reliable information about significant and compelling controversies that the board is not fulfilling its fiduciary duties warranted by:
|
A lack of oversight or actions by board members which invoke shareholder distrust related to malfeasance or poor supervision, such as operating in private or company interest rather than in shareholder interest; or |
A-25
|
Any legal issues (e.g., civil/criminal) aiming to hold the board responsible for breach of trust in the past or related to currently alleged actions yet to be confirmed (and not only the fiscal year in question), such as price fixing, insider trading, bribery, fraud, and other illegal actions; or |
|
Other egregious governance issues where shareholders may bring legal action against the company or its directors; or |
|
Vote on a CASE-BY-CASE basis where a vote against other agenda items are deemed inappropriate. |
3. Compensation
Director Compensation
Vote FOR proposals to award cash fees to non-executive directors unless the amounts are excessive relative to other companies in the country or industry.
Vote non-executive director compensation proposals that include both cash and share-based components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both non-executive and executive directors into a single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for non-executive directors.
Compensation Plans
Vote compensation plans on a CASE-BY-CASE basis.
Director, Officer, and Auditor Indemnification and Liability Provisions
Vote proposals seeking indemnification and liability protection for directors and officers on a CASE-BY-CASE basis.
Vote AGAINST proposals to indemnify auditors.
4. Board Structure
Vote AGAINST the introduction of classified boards and mandatory retirement ages for directors.
Vote AGAINST proposals to alter board structure or size in the context of a fight for control of the company or the board.
Chairman CEO combined role
GSAM will generally recommend a vote AGAINST shareholder proposals requiring that the chairmans position be filled by an independent director, if the company satisfies 3 of the 4 following criteria:
|
Two-thirds independent board, or majority in countries where employee representation is common practice; |
|
A designated, or a rotating, lead director, elected by and from the independent board members with clearly delineated and comprehensive duties; |
|
Fully independent key committees; and/or |
|
Established, publicly disclosed, governance guidelines and director biographies/profiles. |
A-26
5. Capital Structure
Share Issuance Requests
General Issuances:
Vote FOR issuance requests with preemptive rights to a maximum of 100% over currently issued capital.
Vote FOR issuance requests without preemptive rights to a maximum of 20% of currently issued capital.
Specific Issuances:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive rights.
Increases in Authorized Capital
Vote FOR non-specific proposals to increase authorized capital up to 100% over the current authorization unless the increase would leave the company with less than 30% of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount, unless:
|
The specific purpose of the increase (such as a share-based acquisition or merger) does not meet guidelines for the purpose being proposed; or |
|
The increase would leave the company with less than 30% of its new authorization outstanding after adjusting for all proposed issuances. |
Vote AGAINST proposals to adopt unlimited capital authorizations.
Reduction of Capital
Vote FOR proposals to reduce capital for routine accounting purposes unless the terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring on a CASE-BY-CASE basis.
Capital Structures
Vote FOR resolutions that seek to maintain or convert to a one-share, one-vote capital structure.
Vote AGAINST requests for the creation or continuation of dual-class capital structures or the creation of new or additional super voting shares.
Preferred Stock
Vote FOR the creation of a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital unless the terms of the preferred stock would adversely affect the rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as the maximum number of common shares that could be issued upon conversion meets guidelines on equity issuance requests.
Vote AGAINST the creation of a new class of preference shares that would carry superior voting rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board clearly states that the authorization will not be used to thwart a takeover bid.
A-27
Vote proposals to increase blank check preferred authorizations on a CASE-BY-CASE basis.
Debt Issuance Requests
Vote non-convertible debt issuance requests on a CASE-BY-CASE basis, with or without preemptive rights.
Vote FOR the creation/issuance of convertible debt instruments as long as the maximum number of common shares that could be issued upon conversion meets guidelines on equity issuance requests.
Vote FOR proposals to restructure existing debt arrangements unless the terms of the restructuring would adversely affect the rights of shareholders.
Increase in Borrowing Powers
Vote proposals to approve increases in a companys borrowing powers on a CASE-BY-CASE basis.
Share Repurchase Plans
GSAM will generally recommend FOR share repurchase programs taking into account whether:
|
The share repurchase program can be used as a takeover defense; |
|
There is clear evidence of historical abuse; |
|
There is no safeguard in the share repurchase program against selective buybacks; |
|
Pricing provisions and safeguards in the share repurchase program are deemed to be unreasonable in light of market practice. |
Reissuance of Repurchased Shares
Vote FOR requests to reissue any repurchased shares unless there is clear evidence of abuse of this authority in the past.
Capitalization of Reserves for Bonus Issues/Increase in Par Value
Vote FOR requests to capitalize reserves for bonus issues of shares or to increase par value.
6. Mergers and Corporate Restructurings and Other
Reorganizations/Restructurings
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
Mergers and Acquisitions
Vote CASE-BY-CASE on mergers and acquisitions taking into account the following based on publicly available information:
|
Valuation; |
|
Market reaction; |
|
Strategic rationale; |
|
Managements track record of successful integration of historical acquisitions; |
A-28
|
Presence of conflicts of interest; and |
|
Governance profile of the combined company. |
Antitakeover Mechanisms
Generally vote AGAINST all antitakeover proposals, unless they are structured in such a way that they give shareholders the ultimate decision on any proposal or offer.
Reincorporation Proposals
Vote reincorporation proposals on a CASE-BY-CASE basis.
Related-Party Transactions
Vote related-party transactions on a CASE-BY-CASE basis, considering factors including, but not limited to, the following:
|
The parties on either side of the transaction; |
|
The nature of the asset to be transferred/service to be provided; |
|
The pricing of the transaction (and any associated professional valuation); |
|
The views of independent directors (where provided); |
|
The views of an independent financial adviser (where appointed); |
|
Whether any entities party to the transaction (including advisers) is conflicted; and |
|
The stated rationale for the transaction, including discussions of timing. |
Shareholder Proposals
Vote all shareholder proposals on a CASE-BY-CASE basis.
Vote FOR proposals that would improve the companys corporate governance or business profile at a reasonable cost.
Vote AGAINST proposals that limit the companys business activities or capabilities or result in significant costs being incurred with little or no benefit.
7. Environmental, Social, Governance (ESG) Issues
Please refer to page A-8 for our current approach to these important topics.
A-29