Selection Criteria
The Sponsor has selected closed-end
funds for the portfolio believed to have the
best potential to achieve the Trust’s investment
objective. The closed-end funds’ portfolios
consist primarily of income-producing
securities, including: high-yield securities or
“junk” bonds, convertible bonds, preferred
securities, REITs, corporate bonds,
government bonds, international bonds and
equities.
When selecting closed-end funds for
inclusion in the portfolio the Sponsor looks at
numerous factors. These factors include, but are
not limited to: - Investment Objective. The sponsor favors
funds that have a clear investment
objective in line with the Trust’s objective
and, based upon a review of publicly
available information, appear to be
maintaining it.
- Premium/Discount. The Sponsor favors
funds that are trading at a discount
relative to their peers and relative to their
long-term average.
- Consistent Dividend. The Sponsor favors
funds that have a history of paying a
consistent and competitive dividend.
- Performance. The Sponsor favors funds
that have a history of strong relative performance (based on market price and
net asset value) when compared to their
peers and an applicable index.
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Risks and Other Considerations
As with all investments, you may lose some
or all of your investment in the Trust. No
assurance can be given that the Trust’s investment
objective will be achieved. The Trust also might
not perform as well as you expect. This can
happen for reasons such as these: - Securities prices can be volatile. The
value of your investment may fall over
time. Market value fluctuates in
response to various factors. These can
include stock market movements,
purchases or sales of securities by the
Trust, government policies, litigation,
and changes in interest rates, inflation,
the financial condition of the securities’
issuer or even perceptions of the issuer.
Units of the Trust are not deposits of
any bank and are not insured or
guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
- Due to the current state of the
economy, the value of the securities
held by the Trust may be subject to
steep declines or increased volatility
due to changes in performance or
perception of the issuers. Starting in
December 2007, economic activity
declined across all sectors of the
economy, and the United States
experienced increased unemployment.
The economic crisis affected the global
economy with European and Asian
markets also suffering historic losses.
Standard & Poor’s Rating Services
recently lowered its long-term sovereign
credit rating on the United States to
“AA+” from “AAA,” which could lead
to increased interest rates and volatility.
Extraordinary steps have been taken by
the governments of several leading countries to combat the economic crisis;
however, the impact of these measures
is not yet fully known and cannot be
predicted.
- The Trust includes closed-end funds.
Closed-end funds are actively managed
investment companies that invest in
various types of securities. Closed-end
funds issue common shares that are
traded on a securities exchange. Closed-
End Funds are subject to various risks,
including management’s ability to meet
the closed-end fund’s investment
objective and to manage the closed-end
fund’s portfolio during periods of
market turmoil and as investors’
perceptions regarding closed-end funds
or their underlying investments change.
closed-end funds are not redeemable at
the option of the shareholder and they
may trade in the market at a discount to
their net asset value. Closed-end funds
may also employ the use of leverage
which increases risk and volatility.
Instability in the auction rate preferred
shares market may affect the volatility
of closed-end funds that use such
instruments to provide leverage.
- The value of the fixed-income
securities in the closed-end funds will
generally fall if interest rates, in
general, rise. Typically, fixed-income
securities with longer periods before
maturity are more sensitive to interest
rate changes.
- A closed-end fund or an issuer of
securities held by a closed-end fund
may be unwilling or unable to make
principal payments and/or to declare
distributions in the future, may call a
security before its stated maturity, or
may reduce the level of distributions declared. This may result in a reduction
in the value of your units.
- The financial condition of a Closed-
End Fund or an issuer of securities
held by a closed-end fund may
worsen, resulting in a reduction in
the value of your units. This may
occur at any point in time, including
during the primary offering period.
- Certain closed-end funds held by
the Trust invest in preferred
securities. Preferred securities are
typically subordinated to bonds and
other debt instruments in a company’s
capital structure in terms of priority to
corporate income and therefore will be
subject to greater credit risk than those
debt instruments.
- Certain closed-end funds held by the
Trust invest in bonds that are rated
below investment-grade and are
considered to be “junk” securities.
Below investment-grade obligations are
considered to be speculative and are
subject to greater market and credit risks,
and accordingly, the risk of non-payment
or default is higher than with investmentgrade
securities. In addition, such
securities may be more sensitive to
interest rate changes and more likely to
receive early returns of principal.
- Certain closed-end funds held by the
Trust may invest in bonds that are
rated as investment-grade by only one
rating agency. As a result, such splitrated
securities may have more
speculative characteristics and are subject
to a greater risk of default than securities
rated as investment-grade by more than
one rating agency.
Certain closed-end funds held by
the Trust invest in convertible
securities. Convertible securities
generally offer lower interest or
dividend yields than non-convertible
fixed-income securities of similar
credit quality because of the potential
for capital appreciation. The market
values of convertible securities tend to
decline as interest rates increase and,
conversely, to increase as interest rates
decline. However, a convertible
security’s market value also tends to
reflect the market price of the common
stock of the issuing company,
particularly when that stock price is
greater than the convertible security’s
“conversion price.” Convertible
securities fall below debt obligations of
the same issuer in order of preference
or priority in the event of a liquidation
and are typically unrated or rated lower
than such debt obligations.
- Certain closed-end funds held by the
Trust invest in call options. The call
writing portion of the investment strategy
of the closed-end funds may not be
successful in that the closed-end funds
may not realize the full appreciation of
stocks on which the closed-end funds
have written call options. The ability to
successfully implement the closed-end
fund’s investment strategy depends on
the closed-end fund’s adviser’s ability
to predict pertinent market movements,
which cannot be assured.
- The value of a call option held by a
closed-end fund may be adversely
affected if the market for the option
becomes less liquid or smaller. The
value of an option will be affected by
changes in the value and dividend rates
of the stock subject to the option, an increase in interest rates, a change in the
actual and perceived volatility of the
stock market and the common stock, and
the remaining time to expiration.
- Certain closed-end funds held by
the Trust invest in foreign securities.
Investment in foreign securities presents
additional risk. Foreign risk is the risk
that foreign securities will be more
volatile than U.S. securities due to such
factors as adverse economic, currency,
political, social or regulatory
developments in a country, including
government seizure of assets, excessive
taxation, limitations on the use or
transfer of assets, the lack of liquidity or
regulatory controls with respect to
certain industries or differing legal
and/or accounting standards.
- Certain closed-end funds held by the
Trust invest in securities issued by
companies headquartered or
incorporated in countries considered
to be emerging markets. Emerging
markets are generally defined as
countries with low per capita income in
the initial stages of their industrialization
cycles. Risks of investing in developing
or emerging countries include the
possibility of investment and trading
limitations, liquidity concerns, delays
and disruptions in settlement
transactions, political uncertainties and
dependence on international trade and
development assistance. Companies
headquartered in emerging market
countries may be exposed to greater
volatility and market risk.
- Certain closed-end funds held by the
Trust invest in REITs and other real
estate securities. REITs may concentrate
their investments in specific geographic areas or in specific property types, such as
hotels, shopping malls, residential
complexes and office buildings. The
value of the REIT and the ability of the
REIT to distribute income may be
adversely affected by several factors,
including: rising interest rates; changes in
the national, state and local economic
climate and real estate conditions;
perceptions of prospective tenants about
the safety, convenience and attractiveness
of the properties; the ability of the owner
to provide adequate management,
maintenance and insurance; the cost of
complying with the Americans with
Disabilities Act; increased competition
from new properties; the impact of
present or future environmental
legislation and compliance with
environmental laws; changes in real estate
taxes and other operating expenses;
adverse changes in governmental rules
and fiscal policies; adverse changes in
zoning laws; declines in the value of real
estate; the downturn in the subprime
mortgage lending market and the real
estate markets in the United States; and
other factors beyond the control of the
issuer of the REIT.
- Certain closed-end funds held by
the Trust invest in common stocks.
Common stocks represent a
proportional share of ownership in a
company. Common stock prices
fluctuate for several reasons including
changes in investors’ perceptions of
the financial condition of an issuer,
changes in the general condition of the
relevant stock market, such as the
market volatility recently exhibited, or
when political or economic events
affect the issuers. Common stock
prices may also be particularly
sensitive to rising interest rates, as the cost of capital rises and borrowing
costs increase.
- Certain closed-end funds held by
the Trust may invest in senior loans.
Borrowers under senior loans may
default on their obligations to pay
principal or interest when due. This nonpayment
would result in a reduction of
income to the applicable closed-end
fund, a reduction in the value of the
senior loan experiencing non-payment
and a decrease in the net asset value of
the closed-end fund. Although senior
loans in which the closed-end funds
invest may be secured by specific
collateral, there can be no assurance that
liquidation of collateral would satisfy
the borrower’s obligation in the event of
non-payment of scheduled principal or
interest or that such collateral could be
readily liquidated.
Senior loans in which the closed-end
funds invest:
— generally are of below investmentgrade
credit quality;
— may be unrated at the time of
investment;
— generally are not registered with the
Securities and Exchange
Commission (“SEC”) or any state
securities commission; and
— generally are not listed on any
securities exchange.
In addition, the amount of public
information available on senior loans
generally is less extensive than that
available for other types of assets. - Current economic conditions may
lead to limited liquidity and greater
volatility. The markets for fixed-income
securities, such as those held by the
closed-end funds, may experience
periods of illiquidity and volatility.
General market uncertainty and
consequent repricing risk have led to
market imbalances of sellers and buyers,
which in turn have resulted in
significant valuation uncertainties in a
variety of fixed-income securities. These
conditions resulted, and in many cases
continue to result in, greater volatility,
less liquidity, widening credit spreads
and a lack of price transparency, with
many debt securities remaining illiquid
and of uncertain value. These market
conditions may make valuation of some
of the securities held by a closed-end
fund uncertain and/or result in sudden
and significant valuation increases or
declines in its holdings.
- Inflation may lead to a decrease in the
value of assets or income from
investments.
- The Sponsor does not actively manage
the portfolio. The Trust will generally
hold, and may, when creating additional
units, continue to buy, the same
securities even though a security’s
outlook, market value or yield may have
changed.
- Please note that the Sponsor may be engaged as a service provider to certain closed-end funds held by the Trust and therefore certain fees paid by the Trust to such closed-end funds will be paid to the Sponsor for it services to such closed-end funds.f
See “Investment Risks” in Part A of the
prospectus and “Risk Factors” in Part B of the
prospectus for additional information.
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