for
their performance. In the absence of a default, the collateral pledged or
received by the fund cannot be repledged, resold, or rehypothecated. The master
netting arrangements provide that, in the event of a counterparty’s default
(including bankruptcy), the fund may terminate the forward currency contracts,
determine the net amount owed by either party in accordance with its master
netting arrangements, and sell or retain any collateral held up to the net
amount owed to the fund under the master netting arrangements. The forward
currency contracts contain provisions whereby a counterparty may terminate open
contracts if the fund’s net assets decline below a certain level, triggering a
payment by the fund if the fund is in a net liability position at the time of
the termination. The payment amount would be reduced by any collateral the fund
has pledged. Any securities pledged as collateral for open contracts are noted
in the Schedule of Investments. The value of collateral received or pledged is
compared daily to the value of the forward currency contracts exposure with each
counterparty, and any difference, if in excess of a specified minimum transfer
amount, is adjusted and settled within two business days.
Forward
currency contracts are valued at their quoted daily prices obtained from an
independent third party, adjusted for currency risk based on the expiration date
of each contract. The notional amounts of the contracts are not recorded in the
Statement of Assets and Liabilities. Fluctuations in the value of the contracts
are recorded in the Statement of Assets and Liabilities as an asset (liability)
and in the Statement of Operations as unrealized appreciation (depreciation)
until the contracts are closed, when they are recorded as realized gains
(losses) on forward currency contracts.
During
the six months ended March 31, 2026, the fund’s average investment in forward
currency contracts represented 18% of net assets, based on the average of the
notional amounts at each quarter-end during the period.
6. Swap
Contracts: The fund invests in credit default swaps to adjust the overall credit
risk of the fund or to actively overweight or underweight credit risk to a
specific issuer or group of issuers. The fund may sell credit protection through
credit default swaps to simulate investments in long positions that are either
unavailable or considered to be less attractively priced in the bond market. The
fund may purchase credit protection through credit default swaps to reduce
credit exposure to a given issuer or issuers. Under the terms of the swaps, an
up-front payment may be exchanged between the seller and buyer. In addition, the
seller of the credit protection receives a periodic payment of premium from the
buyer that is a fixed percentage applied to a notional amount. If, for example,
the reference entity is subject to a credit event (such as bankruptcy, failure
to pay, or obligation acceleration) during the term of the swap, the seller
agrees to either physically settle or cash settle the swap contract. If the swap
is physically settled, the seller agrees to pay the buyer an amount equal to the
notional amount and take delivery of a debt instrument of the reference issuer
with a par amount equal to such notional amount. If the swap is cash settled,
the seller agrees to pay the buyer the difference between the notional amount
and the final price for the relevant debt instrument, as determined either in a
market auction or pursuant to a pre-agreed-upon valuation procedure.
The
fund enters into interest rate swap transactions to adjust the fund’s
sensitivity to changes in interest rates and maintain the ability to generate
income at prevailing market rates. Under the terms of the swaps, one party pays
the other either an amount that is a fixed percentage rate or a floating rate,
which is reset periodically based on short-term interest rates, applied to a
notional amount. In return, the counterparty agrees to pay a different floating
rate, which is reset periodically based on short-term interest rates, applied to
the same notional amount.
The
fund enters into centrally cleared credit default and interest rate swaps to
achieve the same objectives specified with respect to the equivalent
over-the-counter swaps but with less counterparty risk because a regulated
clearinghouse is the counterparty instead of the clearing broker or executing
broker. The clearinghouse imposes initial margin requirements to secure the
fund’s performance, and requires daily settlement of variation margin
representing changes in the market value of each contract. To further mitigate
counterparty risk, the fund trades with a diverse group of prequalified
executing brokers; monitors the financial strength of its clearing brokers,
executing brokers, and clearinghouse; and has entered into agreements with its
clearing brokers and executing brokers.
The
primary risk associated with selling credit protection is that, upon the
occurrence of a defined credit event, the market value of the debt instrument
received by the fund (or, in a cash settled swap, the debt instruments used to
determine the settlement payment by the fund) will be significantly less than
the amount paid by the fund and, in a physically settled swap, the fund may
receive an illiquid debt instrument. A risk associated with all types of swaps
is the possibility that a counterparty may default on its obligation to pay net
amounts due to the fund. The fund’s maximum amount subject to counterparty risk
is the unrealized appreciation on the swap contract. The fund mitigates its
counterparty risk by entering into swaps only with a diverse group of
prequalified counterparties, monitoring their financial strength, entering into
master netting arrangements with its counterparties, and requiring its
counterparties to transfer collateral as security for their performance. In the
absence of a default, the collateral pledged or received by the fund cannot be
repledged, resold, or rehypothecated. In the event of a counterparty’s default
(including bankruptcy), the fund may terminate any swap contracts with that
counterparty, determine the net amount owed by either party in accordance with
its master netting arrangements, and sell or retain any collateral held up to
the net amount owed to the fund under the master netting arrangements. The swap
contracts contain provisions whereby a counterparty may terminate open contracts
if the fund’s net assets decline below a certain level, triggering a payment by
the fund if the fund is in a net liability position at the time of the
termination. The payment amount would be reduced by any collateral the fund has
pledged. Any securities pledged as collateral for open contracts are noted in
the Schedule of Investments. The value of collateral received or pledged is
compared daily to the value of the swap contracts exposure with each
counterparty, and any difference, if in excess of a specified minimum transfer
amount, is adjusted and settled within two business days.
The
notional amounts of swap contracts are not recorded in the Statement of Assets
and Liabilities. Swaps are valued daily based on market quotations received from
independent pricing services or recognized dealers and the change in value is
recorded in the Statement of Assets and Liabilities as an asset (liability) and
in the Statement of Operations as unrealized appreciation (depreciation) until
the seller of credit protection is required to take delivery (or, in a cash
settled swap, pay the settlement amount determined) upon occurrence of a credit
event, periodic payments are made, or the swap terminates, at which time
realized gain (loss) is recorded. The net premium to be received or paid by the
fund under swap contracts is accrued daily and recorded as realized gain (loss)
over the life of the contract.
During
the six months ended March 31, 2026, the fund’s average amounts of investments
in credit protection sold and credit protection purchased represented 5% and 1%
of net assets, respectively, based on the average of the notional amounts at
each quarter-end during the period. The average amount of investments in
interest rate swaps represented 6% of net assets, based on the average of
notional amounts at each quarter-end during the period.
