STATEMENT OF ADDITIONAL
INFORMATION
February 28, 2013 as supplemented on September , 2013
The Payden & Rygel Investment Group (the P&R Trust) is a professionally managed,
open-end
management investment company with the nineteen funds listed above available for investment. This Statement of Additional Information (SAI) contains information about the nineteen funds
listed above, and it contains information in addition to the information set forth in the following prospectuses, each dated February 28, 2013: (1) the prospectus, as Supplemented on March 20, 2013 and June 1, 2013, for the Investor Class of
shares for each of the Payden Funds (other then the Payden Floating Rate Fund and the Payden Emerging Markets Corporate Bond Fund) and the Metzler/Payden Fund; (2) the prospectus, as Supplemented on June 1, 2013, for the Adviser Class of shares
for each of the Payden U.S. Government, Payden GNMA, Payden Core Bond, Payden High Income, Payden Emerging Markets Bond, Payden Emerging Markets Local Bond and Payden Equity Income (formerly Payden Value Leaders) Funds; (3) the prospectus for the
Institutional Class of shares for the Payden Emerging Markets Bond Fund; and (4) the three prospectuses for the Institutional Class of shares, Adviser Class of shares and the Retirement Class of shares, respectively, for the Payden/Kravitz
Fund; and (5) the prospectus dated September , 2013 with respect to the Payden Floating Rate Fund and Payden Emerging Markets Corporate Bond Fund. The seven prospectuses shall be referred to in this
SAI individually as a Prospectus, and collectively as the Prospectuses. The SAI is
not a prospectus and should be read in conjunction with the Prospectuses.
2
TABLE OF CONTENTS
3
THE P&R TRUST
The P&R Trust was organized as a Massachusetts business trust on January 22, 1992. The P&R Trust is a professionally managed,
open-end
management investment company which is registered under the Investment Company Act of 1940, as amended (the 1940 Act). The P&R Trust currently offers shares of each of the nineteen funds
listed under the heading The Payden & Rygel Investment Group on the cover page of this SAI. These nineteen funds are comprised of the following:
|
|
|
Payden Funds.
The following seventeen funds of the P&R Trust are known (and sometimes referred to in this SAI) as the Payden
Funds: Payden Cash Reserves Money Market Fund, Payden Limited Maturity Fund, Payden Low Duration Fund (formerly Payden Short Bond Fund), Payden U.S. Government Fund, Payden GNMA Fund, Payden Core Bond Fund, Payden Corporate Bond Fund, Payden
High Income Fund, Payden Floating Rate Fund, Payden Tax Exempt Bond Fund, Payden California Municipal Income Fund, Payden Global Low Duration Fund (formerly Payden Global Short Bond Fund), Payden Global Fixed Income Fund, Payden Emerging Markets
Bond Fund, Payden Emerging Markets Local Bond Fund, Payden Emerging Markets Corporate Bond Fund and Payden Equity Income Fund (formerly Payden Value Leaders Fund). Payden & Rygel (Payden) is the investment adviser to the Payden
Funds.
|
|
|
|
Metzler/Payden Fund.
The Metzler/Payden European Emerging Markets Fund is known (and sometimes referred to in this SAI) as the
Metzler/Payden Fund. Metzler/Payden LLC (Metzler/Payden) is the investment adviser to the Metzler/Payden Fund.
|
The Metzler/Payden Fund is a successor mutual fund to a previously operational fund (the Predecessor Fund) that was a series of a separate legal entity called The Metzler/Payden Investment
Group (the Predecessor Trust), a Delaware statutory trust. The Predecessor Fund was reorganized into a newly organized series of the P&R Trust, effective January 21, 2011, which is the Metzler/Payden Fund. Any reference in this
SAI to performance information, expense information, financial highlights, events that occurred or payments that were made prior to January 21, 2011 for the Metzler/Payden Fund refers to the Predecessor Fund or the Predecessor Trust.
|
|
|
Payden/Kravitz Fund.
The Payden/Kravitz Cash Balance Plan Fund is known (and sometimes referred to in this SAI) as the
Payden/Kravitz Fund. Payden/Kravitz Investment Advisers LLC (Payden/Kravitz) is the investment adviser to the Payden/Kravitz Fund.
|
Throughout this SAI when discussing these nineteen funds generally, the funds may be referred to individually as a Fund, and collectively as the Funds. References to a Funds
investment adviser include Payden, Metzler/Payden and Payden/Kravitz, as applicable.
FUNDAMENTAL
AND OPERATING POLICIES
Each Funds investment objective is fundamental and may not be changed without shareholder approval, as described
in the Voting discussion in the Other Information section in this SAI. Any policy that is not specified in a Prospectus or in the SAI as being fundamental is a
non-fundamental,
or
operating, policy. If the Board of Trustees for the P&R Trust (the Board) determines that a Funds investment objective may best be achieved by changing a
non-fundamental
policy, the Board
may make such change without shareholder approval. Any investment restriction which involves a maximum percentage of securities or assets will not be violated unless an excess occurs immediately after, and is caused by, an acquisition of securities
or other assets of, or borrowings by, the Fund.
PAYDEN FUNDS FUNDAMENTAL POLICIES
As a matter of fundamental policy:
(1) BORROWING. No Payden Fund may borrow money, except as a temporary measure for extraordinary or emergency purposes or for the clearance of
transactions, and then only in amounts not exceeding 30% of its total assets valued at market (for this purpose, reverse repurchase agreements and delayed delivery transactions covered by segregated accounts are not considered to be borrowings).
4
(2) COMMODITIES. No Payden Fund may purchase or sell commodities or commodity contracts, except that
(i) each Payden Fund, other than the Payden Cash Reserves Money Market Fund, may enter into financial and currency futures contracts and options on such futures contracts, (ii) each Payden Fund, other than the Payden Cash Reserves Money
Market, Payden U.S. Government, Payden GNMA, Payden Tax Exempt Bond, and Payden California Municipal Income Funds may enter into forward foreign currency exchange contracts (the Payden Funds do not consider such contracts to be commodities), and
(iii) each Payden Fund, other than the Payden U.S. Government and Payden Cash Reserves Money Market Funds, may invest in instruments which have the characteristics of both futures contracts and securities.
(3) LOANS. No Payden Fund may make loans, except that (i) each Payden Fund may purchase money market securities and enter into repurchase
agreements, (ii) each Payden Fund may acquire bonds, debentures, notes and other debt securities, and (iii) each Payden Fund, other than the Payden U.S. Government Fund, may lend portfolio securities in an amount not to exceed 33% of its
total assets (with the value of all loan collateral being
marked-to-market
daily at no less than 100% of the loan amount).
(4) MARGIN. No Payden Fund may purchase securities on margin, except that (i) each Payden Fund may use short-term credit necessary for
clearance of purchases of portfolio securities, and (ii) each Payden Fund, other than the Payden U.S. Government and Payden Cash Reserves Money Market Funds, may make margin deposits in connection with futures contracts and options on futures
contracts.
(5) MORTGAGING. No Payden Fund may mortgage, pledge, hypothecate or in any manner transfer any security owned by the Fund as
security for indebtedness, except as may be necessary in connection with permissible borrowings and then only in amounts not exceeding 30% of the Funds total assets valued at market at the time of the borrowing.
(6) ASSETS INVESTED IN ANY ISSUER. No Payden Fund may purchase a security if, as a result, with respect to 50% of the Funds total assets, more
than 5% of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(7) SHARE OWNERSHIP OF ANY ISSUER. No Payden Fund may purchase a security if, as a result, with respect to 50% of the Funds total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Fund (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(8) REAL ESTATE. No Payden Fund may purchase or sell real estate (although it may purchase securities secured by real estate partnerships or
interests therein, or issued by companies or investment trusts which invest in real estate or interests therein) or real estate limited partnership interests.
(9) SHORT SALES. No Payden Fund may effect short sales of securities.
(10) UNDERWRITING. No Payden Fund may underwrite securities issued by other persons, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended (the Securities Act), in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
(11) SENIOR SECURITIES. No Payden Fund may issue senior securities (as defined in the 1940 Act) except as permitted by rule, regulation
or order of the Securities and Exchange Commission (the SEC).
(12) GLOBAL DIVERSIFICATION. Under normal market conditions,
each of the Payden Global Fixed Income and Payden Global Low Duration (formerly Payden Global Short Bond) Funds invests at least 65% of its total assets in debt securities of issuers located in at least three countries (one of which may be the
United States).
(13) TAX EXEMPT SECURITIES. Under normal market conditions, each of the Payden Tax Exempt Bond and Payden California
Municipal Income Funds invests at least 80% of the value of its net assets in a
non-diversified
portfolio of debt obligations issued by state and local governments, territories and possessions of the United
States, regional government authorities, and their agencies and instrumentalities which provide interest income that, in the opinion of bond counsel to the issuer at the time of original issuance, is exempt from Federal income taxes (municipal
securities).
5
(14) INDUSTRY DIVERSIFICATION. The Payden Equity Income Fund (formerly Payden Value Leaders Fund) will
not purchase any security which would cause 25% or more of its total assets at the time of purchase to be invested in the securities of any one or more issuers conducting their principal business activities in the same industry, provided that
(i) there is no limitation with respect to U.S. Government obligations and repurchase obligations secured by such obligations, (ii) wholly owned finance companies are considered to be in the industries of their parents, (iii) Standard
and Poors Depository Receipts (SPDRs) and other similar derivative instruments are divided according to the industries of their underlying common stocks, and (iv) utilities are divided according to their services (for example, gas,
gas transmission, electric and telephone will each be considered a separate industry). Each foreign government and supranational organization is considered to be an industry.
(15) BELOW INVESTMENT GRADE DEBT. The Payden High Income Fund invests at least 80% of its total assets in debt securities rated below investment grade, or those determined by Payden to be of
comparable quality.
PAYDEN FUNDS OPERATING POLICIES
As a matter of
non-fundamental
operating policy:
(1) CONTROL OF PORTFOLIO COMPANIES. No Payden Fund may invest in companies for the purpose of exercising management or control.
(2) ILLIQUID SECURITIES. No Payden Fund may purchase a security if, as a result of such purchase, more than 15% of the Funds net assets would
be invested in illiquid securities or other securities that are not readily marketable, including repurchase agreements which do not provide for payment within seven days. For this purpose, restricted securities eligible for resale pursuant to
Rule 144A under the Securities Act may be determined to be liquid. In the case of the Payden Cash Reserves Money Market Fund, at least 10% of the Funds total assets must be invested in securities with daily liquidity (i.e., cash, direct
obligations of the U.S. Government and securities that will mature or be exercisable on demand within one business day) and at least 30% of its total assets must be invested in securities with weekly liquidity (i.e., securities with daily liquidity,
securities that will mature or be exercisable on demand within five business days and securities of U.S. Government agencies and instrumentalities that are issued at a discount to the principal at maturity and have a remaining maturity of 60 days or
less). Payden will take steps to keep the amount of illiquid securities, securities with daily liquidity and securities with weekly liquidity within the prescribed limitations.
(3) INVESTMENT COMPANIES. No Payden Fund may purchase securities of
open-end
or
closed-end
investment companies except
in compliance with the 1940 Act and the rules and regulations thereunder.
(4) OIL AND GAS PROGRAMS. No Payden Fund may purchase
participations or other direct interests in oil, gas, or other mineral exploration or development programs or leases.
(5) BORROWING. The
Payden U.S. Government Fund may not borrow amounts exceeding 33% of total assets valued at market (including reverse repurchase agreements and delayed delivery transactions).
(6) TAX EXEMPT SECURITIES. Under normal circumstances, the Payden California Municipal Income Fund invests at least 80% of the value of its net assets in securities of the State of California, local
governments and governmental authorities within California and their agencies and instrumentalities which provide interest income that, in the opinion of bond counsel to the issuer at the time of original issuance, is exempt from California personal
income taxes.
(7) CORPORATE BONDS. The Payden Corporate Bond Fund will invest at least 80% of its total assets in corporate bonds or
similar debt instruments.
(8) INVESTMENT GRADE SECURITIES. The Payden Corporate Bond Fund will invest at least 80% of its total assets
in debt instruments or similar income producing instruments that are rated investment grade, or those determined by Payden to be of comparable quality.
6
METZLER/PAYDEN FUND FUNDAMENTAL POLICIES
As a matter of fundamental policy:
(1) BORROWING. The Metzler/Payden Fund may not borrow
money, except as a temporary measure for extraordinary or emergency purposes or for the clearance of transactions, and then only in amounts not exceeding 30% of its total assets valued at market (for this purpose, reverse repurchase agreements and
delayed delivery transactions covered by segregated accounts are not considered to be borrowings).
(2) COMMODITIES. The Metzler/Payden
Fund may not purchase or sell commodities or commodity contracts, except that (i) the Metzler/Payden Fund may enter into financial and currency futures contracts and options on such futures contracts, (ii) the Metzler/Payden Fund may enter
into forward foreign currency exchange contracts (the Metzler/Payden Fund does not consider such contracts to be commodities), and (iii) the Metzler/Payden Fund may invest in instruments which have the characteristics of both futures contracts
and securities.
(3) LOANS. The Metzler/Payden Fund may not make loans, except that (i) the Metzler/Payden Fund may purchase money
market securities and enter into repurchase agreements, (ii) the Metzler/Payden Fund may acquire bonds, debentures, notes and other debt securities, and (iii) the Metzler/Payden Fund may lend portfolio securities in an amount not to exceed
33% of its total assets (with the value of all loan collateral being
marked-to-market
daily at no less than 100% of the loan amount).
(4) MARGIN. The Metzler/Payden Fund may not purchase securities on margin, except that (i) the Metzler/Payden Fund may use short-term credit
necessary for clearance of purchases of portfolio securities, and (ii) the Metzler/Payden Fund may make margin deposits in connection with futures contracts and options on futures contracts.
(5) MORTGAGING. The Metzler/Payden Fund may not mortgage, pledge, hypothecate or in any manner transfer any security owned by the Fund as security
for indebtedness, except as may be necessary in connection with permissible borrowings and then only in amounts not exceeding 30% of the Funds total assets valued at market at the time of the borrowing.
(6) ASSETS INVESTED IN ANY ISSUER. The Metzler/Payden Fund may not purchase a security if, as a result, with respect to 50% of the Funds total
assets, more than 5% of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(7) SHARE OWNERSHIP OF ANY ISSUER. The Metzler/Payden Fund may not purchase a security if, as a result, with respect to 50% of the Funds total
assets, more than 10% of the outstanding voting securities of any issuer would be held by the Fund (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(8) REAL ESTATE. The Metzler/Payden Fund may not purchase or sell real estate (although it may purchase securities secured by real estate
partnerships or interests therein, or issued by companies or investment trusts which invest in real estate or interests therein) or real estate limited partnership interests.
(9) SHORT SALES. The Metzler/Payden Fund may not effect short sales of securities.
(10) UNDERWRITING. The Metzler/Payden Fund may not underwrite securities issued by other persons, except to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
(11) SENIOR SECURITIES. The Metzler/Payden Fund may not issue senior securities (as defined in the 1940 Act) except as permitted by rule, regulation or order of the SEC.
METZLER/PAYDEN FUND OPERATING POLICIES
As a matter of
non-fundamental
operating policy:
(1) CONTROL OF PORTFOLIO COMPANIES. The Metzler/Payden Fund may not invest in companies for the purpose of exercising management or control.
7
(2) ILLIQUID SECURITIES. The Metzler/Payden Fund may not purchase a security if, as a result of such
purchase, more than 15% of the Funds net assets would be invested in illiquid securities or other securities that are not readily marketable, including repurchase agreements which do not provide for payment within seven days. For this purpose,
restricted securities eligible for resale pursuant to Rule 144A under the Securities Act may be determined to be liquid.
(3) INVESTMENT COMPANIES. The Metzler/Payden Fund may not purchase securities of
open-end
or
closed-end
investment companies except in compliance with the 1940 Act and the rules and regulations thereunder.
(4) OIL AND GAS PROGRAMS. The Metzler/Payden Fund may not purchase participations or other direct interests in oil, gas, or other mineral exploration or development programs or leases.
PAYDEN/KRAVITZ FUND FUNDAMENTAL POLICIES
As a matter of fundamental policy:
(1) BORROWING. The Payden/Kravitz Fund may not borrow money, except to the extent permitted under the 1940 Act, including the rules, regulations and
interpretations thereunder and any exemptive relief obtained by the Fund.
(2) COMMODITIES. The Payden/Kravitz Fund may not purchase or
sell commodities or commodity contracts, except that the Payden/Kravitz Fund (i) may enter into financial and currency futures contracts and options on such futures contracts, (ii) may enter into forward foreign currency exchange contracts
(the Fund does not consider such contracts to be commodities), and (iii) may invest in instruments which have the characteristics of both futures contracts and securities.
(3) LOANS. The Payden/Kravitz Fund may not make loans, except that the Payden/Kravitz Fund (i) may purchase money market securities and enter into repurchase agreements, (ii) may acquire
bonds, debentures, notes and other debt securities, and (iii) may lend portfolio securities in an amount not to exceed 33% of its total assets (with the value of all loan collateral being
marked-to-market
daily at no less than 100% of the loan amount).
(4) MARGIN. The
Payden/Kravitz Fund may not purchase securities on margin, except that the Payden/Kravitz Fund may (i) use short-term credit necessary for clearance of purchases of portfolio securities, and (ii) may make margin deposits in connection with
futures contracts and options on futures contracts.
(5) MORTGAGING. The Payden/Kravitz Fund may not mortgage, pledge, hypothecate or in
any manner transfer any security owned by the Fund as security for indebtedness, except as may be necessary in connection with permissible borrowings and then only in amounts not exceeding 30% of the Funds total assets valued at market at the
time of the borrowing.
(6) ASSETS INVESTED IN ANY ISSUER. The Payden/Kravitz Fund may not purchase a security if, as a result, with
respect to 50% of the Funds total assets, more than 5% of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(7) SHARE OWNERSHIP OF ANY ISSUER. The Payden/Kravitz Fund may not purchase a security if, as a result, with respect to 50% of the
Funds total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Fund (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
(8) REAL ESTATE. The Payden/Kravitz Fund may not purchase or sell real estate (although it may purchase securities secured by real estate
partnerships or interests therein, or issued by companies or investment trusts which invest in real estate or interests therein) or real estate limited partnership interests.
(9) SHORT SALES. The Payden/Kravitz Fund may not effect short sales of securities.
8
(10) UNDERWRITING. The Payden/Kravitz Fund may not underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
(11) SENIOR SECURITIES. The Payden/Kravitz Fund may not issue senior securities (as defined in the 1940 Act) except as
permitted by rule, regulation or order of the SEC.
PAYDEN/KRAVITZ FUND OPERATING POLICIES
As a matter of
non-fundamental
operating policy:
(1) CONTROL OF PORTFOLIO COMPANIES. The Payden/Kravitz Fund may not invest in companies for the purpose of exercising management or control.
(2) ILLIQUID SECURITIES. The Payden/Kravitz Fund may not purchase a security if, as a result of such purchase, more than 15% of the Funds net assets would be invested in illiquid securities or
other securities that are not readily marketable, including repurchase agreements which do not provide for payment within seven days. For this purpose, restricted securities eligible for resale pursuant to Rule 144A under the Securities Act may
be determined to be liquid.
(3) OIL AND GAS PROGRAMS. The Payden/Kravitz Fund may not purchase participations or other direct interests
in oil, gas, or other mineral exploration or development programs or leases.
INVESTMENT
STRATEGIES/TECHNIQUES AND RELATED RISKS
The investment objectives and general investment policies of each of the Funds are described in each
of the Prospectuses. Additional information concerning investment strategies/techniques and the characteristics of certain of the Funds investments, as well as related risks, is set forth below.
The equity and debt capital markets in the United States and internationally have experienced unprecedented volatility over the past few years. This
financial crisis caused a significant decline in the value and liquidity of many securities. Recently, these market conditions appear to have abated and signs of improvement in the markets have appeared. However, conditions could get worse. Because
the situation is unprecedented and widespread, it may be unusually difficult to identify both risks and opportunities using past models of the interplay of market forces, or to predict the duration of these events.
FUND DIVERSIFICATION
Each of the Payden High
Income Fund and Payden Cash Reserves Money Market Fund is classified as a diversified fund. Each of the other Funds is classified as a non-diversified fund. As provided in the 1940 Act, a diversified fund has, with respect to
at least 75% of its total assets, no more than 5% of its total assets invested in the securities of one issuer, plus cash, Government securities, and securities of other investment companies. Because the investment adviser may from time to time
invest a large percentage of a
non-diversified
Funds assets in securities of a limited number of issuers, each
non-diversified
Fund may be more susceptible to
risks associated with a single economic, political or regulatory occurrence than a diversified investment company. However, each Fund intends to qualify as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the Code), and therefore is subject to diversification limits requiring that, as of the close of each fiscal quarter, (i) no more than 25% of its total assets may be invested in the securities of a single issuer (other than
U.S. Government securities), and (ii) with respect to 50% of its total assets, no more than 5% of such assets may be invested in the securities of a single issuer (other than U.S. Government securities) or invested in more than 10% of the
outstanding voting securities of a single issuer. The Payden Cash Reserves Money Market Fund may invest no more than 5% of its total assets in the first tier securities of any one issuer, and no more than 1/2 of 1% of its total assets in the
securities of any one issuer that are not first tier securities. As used herein, first tier means that the security is rated in the highest category for short-term securities by at least two nationally recognized rating services (or by
one if only one rating service has rated the security) or, if unrated, is determined by Payden to be of comparable quality.
EQUITY AND
EQUITY-BASED SECURITIES
Common Stocks
9
Common stocks, the most familiar type of equity securities, represent an equity (ownership) interest in a
corporation. Although common stocks have a history of long-term growth in value, their prices fluctuate based on changes in the issuers financial condition and prospects and on overall market and economic conditions. In addition, small
companies and new companies often have limited product lines, markets or financial resources, and may be dependent upon one person, or a few key persons, for management. The securities of such companies may be subject to more volatile market
movements than securities of larger, more established companies, both because the securities typically are traded in lower volume and because the issuers typically are more subject to changes in earnings and prospects.
Preferred Stocks
Preferred stock, unlike
common stock, offers a stated dividend rate payable from a corporations earnings. Such preferred stock dividends may be cumulative or
non-cumulative,
participating, or auction rate. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be cumulative, requiring all or a portion of prior unpaid dividends to be paid. Preferred stock also generally has a preference over common stock on the
distribution of a corporations assets in the event of liquidation of the corporation, and may be participating, which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of
preferred stocks on the distribution of a corporations assets in the event of a liquidation are generally subordinate to the rights associated with a corporations debt securities.
Real Estate Investment Trusts
A real estate investment trust (REIT) is a pooled
investment vehicle that is organized as a corporation or business trust which invests primarily in income producing real estate or real estate loans or interests. As indicated in the Prospectuses, certain of the Funds may invest in REITs. An
investment in REITs is subject to certain risks associated with the direct ownership of real estate and with the real estate industry in general. These risks 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 funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; costs resulting from the
clean-up
of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates. To the extent that assets underlying a REITs investments are concentrated geographically, by property type or in certain other respects, the REIT may be subject to certain
of the foregoing risks to a greater extent. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs may be affected by changes in the value of the underlying
property owned by the REITs. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Mortgage REITs may be affected by the quality of any credit extended. REITs are
dependent upon management skills, are not diversified, and are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for
tax-free
pass-through of income under the Code, and failing to maintain their exemptions from registration under the 1940 Act.
10
REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the
value of a REITs investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected to decline. In contrast, as interest rates on
adjustable rate mortgage loans are reset periodically, yields on a REITs investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to
those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company
securities.
Depository Receipts
American Depository Receipts (ADRs), European Depository Receipts (EDRs) and Global Depository Receipts (GDRs) are
used to invest in foreign issuers. Generally, an ADR is a dollar-denominated security issued by a U.S. bank or trust company which represents, and may be converted into, the underlying security that is issued by a foreign company. Generally, an EDR
represents a similar securities arrangement but is issued by a European bank, while GDRs are issued by a depository. ADRs, EDRs and GDRs may be denominated in a currency different from the underlying securities into which they may be converted.
Typically, ADRs, in registered form, are designed for issuance in U.S. securities markets and EDRs, in bearer form, are designed for issuance in European securities markets. ADRs may be sponsored by the foreign issuer or may be unsponsored.
Unsponsored ADRs are organized independently and without the cooperation of the foreign issuer of the underlying securities. As a result, available information regarding the issuer may not be as current as for sponsored ADRs, and the prices of
unsponsored ADRs may be more volatile than if they were sponsored by the issuers of the underlying securities.
Convertible Securities and
Warrants
A convertible security is a fixed income security (a debt instrument or preferred stock) which may be converted at a stated price or
stated rate within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stock in an issuers capital structure, but are usually subordinated to
similar
non-convertible
securities. While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar
non-convertible
security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the
convertible securitys underlying common stock.
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 credit standing of the issuer and other factors may also affect the investment value of a convertible security. 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 is increasingly influenced by its conversion value.
Although to a lesser extent
than with fixed income securities generally, the market value of convertible debt securities tends to vary inversely with the level of interest rates. The value of the security declines as interest rates increase and increases 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 stocks and, therefore, also will react to variations in the general
market for equity securities. Although under normal market conditions longer term securities have greater yields than do shorter term securities of similar quality, they are subject to greater price fluctuations. A convertible security may be
subject to redemption at the option of the issuer at a price established in the instrument governing the convertible security. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to
redeem the security, convert it into the underlying common stock or sell it to a third party.
Warrants give the holder the right to purchase
a specified number of shares of the underlying stock at any time at a fixed price, but do not pay a fixed dividend. An investment in warrants involves certain risks, including the possible
11
lack of a liquid market for resale, potential price fluctuations as a result of speculation or other factors, and the possible failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Funds entire investment in the warrant). As a matter of
operating policy, no Fund will invest more than 5% of its total assets in warrants.
FIXED INCOME SECURITIES
U.S. Treasury Obligations
U.S. Treasury
obligations are debt securities issued by the U.S. Treasury. They are direct obligations of the U.S. Government and differ mainly in the lengths of their maturities (e.g., Treasury bills mature in one year or less, and Treasury notes and bonds
mature in two to 30 years).
U.S. Government Agency Securities
U.S. Government Agency securities are issued or guaranteed by U.S. Government sponsored enterprises and Federal agencies. These include securities issued by the Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Bank, and the Tennessee Valley
Authority. Some of these securities are supported by the full faith and credit of the U.S. Treasury, and others only by the credit of the instrumentality, which may include the right of the issuer to borrow from the Treasury. These securities may
have maturities from one day to 30 years, are generally not callable and normally have interest rates that are fixed for the life of the security.
Inflation-Indexed Securities
Inflation-indexed fixed income securities are structured to provide
protection against inflation and are issued by the U.S. and foreign governments, their agencies and instrumentalities and U.S. and foreign corporations. The value of principal or interest payments of an inflation-indexed security is adjusted
periodically to track general movements of inflation in the country of issue.
As an example, a Fund may invest in U.S. Treasury Inflation
Protected Securities (TIPS). Principal amounts of TIPS are adjusted daily based on changes in the rate of inflation (currently represented by the Consumer Price Index (CPI) for Urban Consumers,
non-seasonally
adjusted). The U.S. Treasury currently issues TIPS only in
10-year
maturities, although TIPS have previously been issued with maturities of five, 10 and
30 years. TIPS pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. The interest rate on TIPS is fixed at issuance, but over the life of the bond may be paid on an increasing or decreasing
principal value. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed even during a period of deflation. However, because the principal amount of TIPS would be adjusted downward during a period of
deflation, the Fund will be subject to deflation risk with respect to its investments in these securities.
The value of inflation-indexed
securities such as TIPS generally fluctuates in response to changes in real interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value of TIPS. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value
of TIPS. Although the principal value of TIPS declines in periods of deflation, holders at maturity receive no less than the par value of the bond. However, if the Fund purchases TIPS in the secondary market whose principal values have been adjusted
upward due to inflation since issuance, the Fund may experience a loss if there is a subsequent period of deflation. If inflation is lower than expected during the period the Fund holds TIPS, the Fund may earn less on the security than on a
conventional bond.
The daily adjustment of the principal value of TIPS is currently tied to the
non-seasonally
adjusted CPI for Urban Consumers, which the U.S. Bureau of Labor Statistics calculates monthly. The CPI is a measurement of changes in the cost of living, made up of components such as housing,
food, transportation and energy. There can be no
12
assurance that such index will accurately measure the real rate of inflation in the prices of goods and services. In addition, calculation of the CPI includes a three-month lag for purposes of
determining the principal value of TIPS, which, consequently, could have a negative impact on the value of TIPS under certain market conditions.
Foreign Government Obligations
Foreign government obligations are debt securities issued or
guaranteed by a supranational organization, or a foreign sovereign government or one of its agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality.
Bank Obligations
Bank obligations include
certificates of deposit, bankers acceptances, and other debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction.
Loan Participations and Assignments
Loan participations typically represent direct participation in a loan to a corporate borrower, and generally are offered by banks or other financial
institutions or lending syndicates. Such indebtedness may be secured or unsecured. A Fund may participate in such syndications, or can buy part of a loan, becoming a part lender. When purchasing loan participations, a Fund assumes the credit risk
associated with the corporate borrower and may assume the credit risk associated with an interposed bank or other financial intermediary. The participation interests in which a Fund intends to invest may not be rated by any nationally recognized
rating service.
A loan is often administered by an agent bank acting as agent for all holders. The agent bank administers the terms of the
loan, as specified in the loan agreement. In addition, the agent bank is normally responsible for the collection of principal and interest payments from the corporate borrower and the apportionment of these payments to the credit of all institutions
that are parties to the loan agreement. Unless, under the terms of the loan or other indebtedness, a Fund has direct recourse against the corporate borrower, the Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institutions employment as agent bank might be terminated in the
event that it fails to observe a requisite standard of care or becomes insolvent. A successor agent bank would generally be appointed to replace the terminated agent bank, and assets held by the agent bank under the loan agreement should remain
available to holders of such indebtedness. However, if assets held by the agent bank for the benefit of a Fund were determined to be subject to the claims of the agent banks general creditors, the Fund might incur certain costs and delays in
realizing payment on a loan or loan participation and could suffer a loss of principal and/or interest. In situations involving other interposed financial institutions (e.g., an insurance company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the corporate borrower for payment
of principal and interest. If a Fund does not receive scheduled interest or principal payments on such indebtedness, the Funds share price and yield could be adversely affected. Loans that are fully secured offer a Fund more protection than an
unsecured loan in the event of
non-payment
of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
A Fund may limit the amount of its total assets that it will invest in any one issuer
or in issuers within the same industry. For purposes of such limits, a Fund generally will treat the corporate borrower as the issuer of indebtedness held by the Fund. In the case of loan participations where a bank or other lending
institution serves as a financial intermediary between a Fund and the corporate borrower, if the participation does not shift to the Fund the direct debtor-creditor relationship with the corporate borrower, SEC interpretations require the Fund to
treat both the lending bank or other lending institution and the corporate borrower as issuers for the purposes of determining whether the Fund has invested more than 5% of its total assets in a
13
single issuer. Treating a financial intermediary as an issuer of indebtedness may restrict a Funds ability to invest in indebtedness related to a single financial intermediary, or a group
of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.
Loans and
other types of direct indebtedness may not be readily marketable and may be subject to restrictions on resale. In some cases, negotiations involved in disposing of indebtedness may require weeks to complete. Consequently, some indebtedness may be
difficult or impossible to dispose of readily at what the relevant Funds investment adviser believes to be a fair price. In addition, valuation of illiquid indebtedness involves a greater degree of judgment in determining a Funds net
asset value than if that value were based on available market quotations, and could result in significant variation in the Funds daily share price. At the same time, some loan interests are traded among certain financial institutions and
accordingly may be deemed liquid. As the overnight market for different types of indebtedness develops, the liquidity of these instruments is expected to improve. Each of the Funds currently intends to treat indebtedness for which there is no
readily available market as illiquid for purposes of the Funds limitations on illiquid investments. Investments in loan participation are considered to be debt obligations for purposes of investment restrictions relating to the lending of
funds or assets by a Fund.
Investments in loans through a direct assignment of the financial institutions interests with respect to the
loan may involve additional risks to the Fund. For example, if a loan is foreclosed, a Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it
is a conceivable that under emerging legal theories of lender liability, a Fund could be held liable as
co-lender.
It is unclear whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive regulatory guidance, each of the Funds relies on the research of the Funds investment adviser in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund.
Senior Loans
The Payden Floating Rate Fund invests principally in senior floating rate loans made to or issued by U.S. or non-U.S. banks or other corporations (Senior Loans). Senior Loans include senior
floating rate loans and institutionally traded senior floating rate debt obligations issued by asset-backed pools and other issues, and interests therein. Senior Loan interests may be acquired from U.S. or foreign commercial banks, insurance
companies, finance companies or other financial institutions that have made loans or are members of a lending syndicate or from other holders of loan interests. Senior Loans typically pay interest at rates which are re-determined periodically on the
basis of a floating base lending rate (such as the London Inter-Bank Offered Rate, LIBOR) plus a premium. Senior Loans are typically of below investment grade quality. Senior Loans generally (but not always) hold the most senior position
in the capital structure of a borrower and are often secured with collateral.
To the extent that the collateral, if any, securing a Senior
Loan consists of the stock of the borrowers subsidiaries or other affiliates, the Payden Floating Rate Fund will be subject to the risk that this stock will decline in value. Such a decline, whether as a result of bankruptcy proceedings or
otherwise, could cause the Senior Loan to be undercollateralized or unsecured. In most credit agreements there is no formal requirement to pledge additional collateral. In addition, a Senior Loan may be guaranteed by, or fully secured by assets of,
shareholders or owners, even if the Senior Loans are not otherwise collateralized by assets of the borrower. There may be temporary periods when the principal asset held by a borrower is the stock of a related company, which may not legally be
pledged to secure a secured Senior Loan. On occasions when such stock cannot be pledged, the secured Senior Loan will be temporarily unsecured until the stock can be pledged or is exchanged for or replaced by other assets, which will be pledged as
security for such Senior Loan. However, the borrowers ability to dispose of such securities, other than in connection with such pledge or replacement, will be strictly limited for the protection of the holders of secured Senior Loans.
In addition to the risks typically associated with debt securities and loans generally, Senior Loans are also subject to the risk that a
court could subordinate a Senior Loan, which typically holds a senior position in the capital structure of a borrower, to presently existing or future indebtedness or take other action detrimental to the holders of Senior Loans. If a borrower
becomes involved in bankruptcy proceedings, a court potentially could invalidate the Payden Floating Rate Funds security interest in any loan collateral or subordinate the Funds rights under a secured Senior Loan to the interests of the
borrowers unsecured creditors. Such action by a court could be based, for example, on a fraudulent conveyance claim to the effect that the borrower did not receive fair consideration for granting the security interest in the loan
collateral to the Fund. For secured Senior Loans made in connection with a highly leveraged transaction, consideration for granting a security interest may be deemed inadequate if the proceeds of such loan were not received or retained by the
borrower, but were instead paid to other persons, such as shareholders of the borrower, in an amount which left the borrower insolvent or without sufficient working capital. There are also other events, such as the failure to perfect a security
interest due to faulty documentation or faulty official filings, which could lead to the invalidation of the Funds security interest in any loan collateral. If the Funds security interest in loan collateral is invalidated or a secured
Senior Loan is subordinated to other debt of a borrower in bankruptcy or other proceedings, it is unlikely that the Fund would be able to recover the full amount of the principal and interest due on the secured Senior Loan.
If a borrower defaults on a collateralized Senior Loan, the Payden Floating Rate Fund may receive assets other than cash or securities in full or partial
satisfaction of the borrowers obligation under the Senior Loan. Those assets may be illiquid, and the Fund might not be able to realize the benefit of the assets for legal, practical or other reasons. The Fund might hold those assets until
Payden determined it was appropriate to dispose of them. If the collateral becomes illiquid or loses some or all of its value, the collateral may not be sufficient to protect the Fund in the event of a default of scheduled interest or principal
payments.
The Fund can invest in Senior Loans that are not secured by any specific collateral of the borrower. If the borrower is unable to
pay interest or defaults in the payment of principal, there will be no collateral on which the Fund can foreclose. Therefore, these loans typically present greater risks than collateralized Senior Loans.
Due to restrictions on transfers in loan agreements and the nature of the private syndication of Senior Loans including, for example, the lack of
publicly-available information, some Senior Loans are not as easily purchased or sold as publicly-traded securities. Some Senior Loans and other Fund investments are illiquid, which may make it difficult for the Fund to value them or dispose of them
at an acceptable price. Direct investments in Senior Loans and investments in participation interests in or assignments of Senior Loans may be limited.
Corporate Debt Securities
Investments in U.S. dollar denominated securities of domestic or
foreign issuers are limited to corporate debt securities (corporate bonds, debentures, notes and other similar corporate debt instruments) which meet the minimum rating criteria set forth in the applicable Prospectus. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies. Credit ratings evaluate the safety of principal and interest payments of securities, not their
market value. The rating of an issuer is also heavily weighted by past developments and does not necessarily reflect probable future conditions. There is frequently a lag between the time a rating is assigned and the time it is updated. As credit
rating agencies may fail to timely change credit ratings of securities to reflect subsequent events, the relevant Funds investment adviser will also monitor issuers of such securities.
High Yield Bonds
Below investment grade debt securities, commonly referred to as high yield
bonds or junk bonds are considered to be speculative and involve a greater risk of default or price changes due to changes in the issuers creditworthiness than higher rated securities. High yield securities are generally
subject to greater credit risk than higher-rated securities because the issuers are more vulnerable to economic downturns, higher interest rates or adverse issuer-specific developments. In addition, the prices of high yield securities are generally
subject to greater market risk and therefore react more sharply to changes in interest rates. Their value and liquidity may also be diminished by adverse publicity and investor perceptions. Also, legislative proposals limiting the tax benefits to
the issuers or holders of taxable high yield securities or requiring federally insured savings and loan institutions to reduce their holdings of taxable high yield securities have had and may continue to have an adverse effect on the market value of
these securities.
Because high yield securities are frequently traded only in markets where the number of potential purchasers and sellers,
if any, is limited, the ability of a Fund to sell these securities at their fair value either to meet redemption requests or to respond to changes in the financial markets may be limited. In such an event, such securities could be regarded as
illiquid for the purposes of the limitation on the purchase of illiquid securities. Thinly traded high yield securities may be more difficult to value accurately for the purpose of determining a Funds net asset value. Also, because the market
for certain high yield securities is relatively new, that market may be particularly sensitive to an economic downturn or a general increase in interest rates.
14
Mortgage-Related Securities
Mortgage-related securities are interests in pools of mortgage loans made to U.S. residential home buyers, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial
banks and others. Pools of mortgage loans are assembled, and interests in those pools are sold to investors by various governmental, government-related and private organizations. A Fund may also invest in debt securities which are secured with
collateral consisting of U.S. mortgage-related securities, and in other types of U.S. mortgage-related securities.
The recent financial
downturn (particularly the increase in delinquencies and defaults on residential mortgages, falling home prices, and unemployment) has adversely affected the market for mortgage-related securities. In addition, various market and governmental
actions may impair the ability to foreclose on or exercise other remedies against underlying mortgage holders, or may reduce the amount received upon foreclosure. These factors have caused certain mortgage-related securities to experience lower
valuations and reduced liquidity. There is also no assurance that the U.S. Government will take further action to support the mortgage-related securities industry, as it has in the past, should the economic downturn continue or the economy
experience another downturn. Further, recent legislative action and any future government actions may significantly alter the manner in which the mortgage-related securities market functions. Each of these factors could ultimately increase the risk
that a Fund could realize losses on mortgage-related securities.
If a Fund purchases mortgage-backed securities that are
subordinated to other interests in the same mortgage pool, the Fund as a holder of those securities may only receive payments after the pools obligations to other investors have been satisfied. An unexpectedly high rate of defaults
on the mortgages held by a mortgage pool may limit substantially the pools ability to make payments of principal or interest to the Fund as a holder of such subordinated securities, reducing the values of those securities or in some cases
rendering them worthless; the risk of such defaults is generally higher in the case of mortgage pools that include
so-called
sub-prime mortgages. An unexpectedly high or low rate of prepayments on
a pools underlying mortgages may have similar effects on subordinated securities. A mortgage pool may issue securities subject to various levels of subordination; the risk of
non-payment
affects
securities at each level, although the risk is greater in the case of more highly subordinated securities.
U.S. Mortgage Pass-Through
Securities. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a
pass-through of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the Government National Mortgage Association
(GNMA)) are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The rate of
pre-payments
on underlying
mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective duration of the security relative to what was anticipated at the time of purchase. To the extent that
unanticipated rates of
pre-payment
on underlying mortgages increase the effective duration of a mortgage-related security, the volatility of such security can be expected to increase. The residential mortgage
market in the United States recently has experienced difficulties that may adversely affect the performance and market value of certain of the Funds mortgage-related investments. Delinquencies and losses on residential mortgage loans
(especially subprime and second-lien mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of housing values (as has recently been experienced and may continue to be experienced in many
housing markets) may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement
mortgages at comparably low interest rates. Also, a number of residential mortgage loan originators have experienced serious financial difficulties or bankruptcy. Owing largely to the foregoing, reduced investor demand for mortgage loans and
mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for certain mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is
possible that such limited liquidity in such secondary markets could continue or worsen.
15
Agency Mortgage-Related Securities. The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the FHA), or guaranteed by
the Department of Veterans Affairs (the VA).
Government-related guarantors (i.e., not backed by the full faith and credit of the
U.S. Government) include Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). FNMA is a government-sponsored corporation. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation that issues Participation Certificates (PCs), which are pass-through securities, each representing an undivided
interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government.
On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed FNMA and FHLMC into conservatorship. As the conservator, FHFA
succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. FHFA selected a new chief executive officer and
chairman of the board of directors for each of FNMA and FHLMC.
In connection with the conservatorship, the U.S. Treasury entered into a
Senior Preferred Stock Purchase Agreement with each of FNMA and FHLMC pursuant to which the U.S. Treasury will purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement
contains various covenants that severely limit each enterprises operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprises senior preferred stock and warrants to purchase 79.9%
of each enterprises common stock. In February 2009, the U.S. Treasury announced that it was doubling the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. In December 2009, the U.S.
Treasury mended its Senior Preferred Stock Purchase Agreement to remove its $200 billion cap per institution to accommodate any cumulative reduction in net worth over the next three years. The U.S. Treasurys obligations under the Senior
Preferred Stock Program are for an indefinite period of time. In August 2012, the Senior Preferred Stock Purchase Agreement was further amended to, among other things, accelerate the wind down of the retained portfolio, terminate the requirement
that FHMA and FHLMC each pay a 10% dividend annually on all amounts received under the funding commitment, and require the submission of an annual risk management plan to the U.S. Treasury.
16
FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remain liable
for all of its obligations, including its guaranty obligations, associated with its mortgage-backed securities. The Senior Preferred Stock Purchase Agreement is intended to enhance each of FNMAs and FHLMCs ability to meet its
obligations. The FHFA has indicated that the conservatorship of each enterprise will end when the director of FHFA determines that FHFAs plan to restore the enterprise to a safe and solvent condition has been completed. Under the Federal
Housing Finance Regulatory Reform Act of 2008 (the Reform Act), which was included as part of the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA
or FHLMC prior to FHFAs appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration
of FNMAs or FHLMCs affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period of time after its appointment as conservator or receiver.
FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views
repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or
receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMAs or FHLMCs assets available
therefor.
In the event of repudiation, the payments of interest to holders of FNMA or FHLMC mortgage-backed securities would be reduced if
payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty
obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders.
Further, in its capacity as
conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or
receiver, were to transfer any such guaranty obligation to another party, holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of
that party.
In addition, certain rights provided to holders of mortgage-backed securities issued by FNMA and FHLMC under the operative
documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC mortgage-backed securities may
provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the
appointment of a conservator or receiver, holders of such mortgage-backed securities have the right to replace FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed securities holders consent. The
17
Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed. The Reform Act also
provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which FNMA or FHLMC is a party, or obtain possession of or exercise control over any property of FNMA or
FHLMC, or affect any contractual rights of FNMA or FHLMC, without the approval of FHFA, as conservator or receiver, for a period of 45 or 90 days following the appointment of FHFA as conservator or receiver, respectively.
In addition, in a February 2011 report to Congress from the Treasury Department and the Department of Housing and Urban Development, the Obama
administration provided a plan to reform Americas housing finance market. The plan would reduce the role of and eventually eliminate FNMA and FHLMC. Notably, the plan does not propose similar significant changes to GNMA, which guarantees
payments on mortgage-related securities backed by federally insured or guaranteed loans such as those issued by the FHA or guaranteed by the VA. The report also identified three proposals for Congress and the administration to consider for the
long-term structure of the housing finance markets after the elimination of FNMA and FHLMC, including implementing: (i) a privatized system of housing finance that limits government insurance to very limited groups of creditworthy
low-and
moderate-income borrowers; (ii) a privatized system with a government backstop mechanism that would allow the government to insure a larger share of the housing finance market during a future housing
crisis; and (iii) a privatized system where the government would offer reinsurance to holders of certain highly-rated mortgage-related securities insured by private insurers and would pay out under the reinsurance arrangements only if the
private mortgage insurers were insolvent.
Privately Issued Mortgage-Related Securities. Commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools created by such
non-governmental
issuers generally offer a higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities or private insurers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a
mortgage-related security meets a Funds investment quality standards. However, there can be no assurance that insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. In addition, a Fund may buy
mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originators/servicers and poolers, the Funds investment adviser determines that the securities meet the
Funds quality standards.
Privately issued mortgage-related securities are not subject to the same underwriting requirements for the
underlying mortgages that are applicable to those mortgage-related securities that have a government or government-sponsored entity guarantee. As a result, the
18
mortgage loans underlying privately issued mortgage-related securities may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics than government or
government-sponsored mortgage-related securities and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics. Mortgage pools underlying privately issued mortgage-related securities more
frequently include second mortgages, high
loan-to-value
ratio mortgages and manufactured housing loans, in addition to commercial mortgages and other types of mortgages
where a government or government-sponsored entity guarantee is not available. The coupon rates and maturities of the underlying mortgage loans in a privately-issued mortgage-related securities pool may vary to a greater extent than those included in
a government guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans are loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. For these reasons, the loans
underlying these securities have had in many cases higher default rates than those loans that meet government underwriting requirements.
The
risk of
non-payment
is greater for mortgage-related securities that are backed by loans that were originated under weak underwriting standards, including loans made to borrowers with limited means to make
repayment. A level of risk exists for all loans, although, historically, the poorest performing loans have been those classified as subprime. Other types of privately issued mortgage-related securities, such as those classified as
pay-option
adjustable rate or
Alt-A
have also performed poorly. Even loans classified as prime have experienced higher levels of delinquencies and defaults. The substantial
decline in real property values across the U.S. has exacerbated the level of losses that investors in privately issued mortgage-related securities have experienced. It is not certain when these trends may reverse. Market factors that may adversely
affect mortgage loan repayment include adverse economic conditions, unemployment, a decline in the value of real property, or an increase in interest rates.
Privately issued mortgage-related securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived weakness in the mortgage and real
estate market sectors. Without an active trading market, mortgage-related securities held in a Funds portfolio may be particularly difficult to value because of the complexities involved in assessing the value of the underlying mortgage loans.
The Funds may purchase privately issued mortgage-related securities that are originated, packaged and serviced by third party entities. It is
possible these third parties could have interests that are in conflict with the holders of mortgage-related securities, and such holders (such as a Fund) could have rights against the third parties or their affiliates. For example, if a loan
originator, servicer or its affiliates engaged in negligence or willful misconduct in carrying out its duties, then a holder of the mortgage-related security could seek recourse against the originator/servicer or its affiliates, as applicable. Also,
as a loan originator/servicer, the originator/servicer or its affiliates may make certain representations and warranties regarding the quality of the mortgages and properties underlying a mortgage-related security. If one or more of those
representations or warranties is false, then the holders of the mortgage-related securities (such as a Fund) could trigger an obligation of the originator/servicer or its affiliates, as applicable, to repurchase the mortgages from the issuing trust.
Notwithstanding the foregoing, many of the third parties that are legally bound by trust and other documents have failed to perform their respective duties, as stipulated in such trust and other documents, and investors have had limited success in
enforcing terms.
19
Although the underlying mortgage loans in a pool may have maturities of up to 30 years, the actual
average life of the pool certificates typically will be substantially less because the mortgages will be subject to normal principal amortization and may be prepaid prior to maturity. Prepayment rates vary widely and may be affected by changes in
market interest rates. In periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of the pool certificates. Conversely, when interest rates are rising, the rate of prepayments tends to
decrease, thereby lengthening the actual average life of the certificates. Accordingly, it is not possible to predict accurately the average life of a particular pool.
Although the market for mortgage pass-through securities has become increasingly liquid over time, securities issued by certain private organizations may not be readily marketable, or general market
conditions at any point in time may affect the marketability of such securities. As a matter of operating policy, a Fund will not purchase mortgage-related securities which in the investment advisers opinion are illiquid if, as a result, more
than 15% of the value of the Funds total assets will be illiquid.
Collateralized Mortgage Obligations (CMOs). A CMO is a
hybrid between a mortgage-backed bond and a mortgage pass-through security. Like a bond, interest and prepaid principal is paid, in most cases, semi-annually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA.
CMOs are structured into multiple classes, each bearing
a different stated maturity. Actual maturity and average life depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes
receive principal only after the earlier classes have been retired.
Foreign Mortgage-Related Securities. Foreign mortgage-related securities
are interests in pools of mortgage loans made to residential home buyers domiciled in a foreign country. These include mortgage loans made by trust and mortgage loan companies, credit unions, chartered banks, and others. Pools of mortgage loans are
assembled as
20
securities for sale to investors by various governmental, government-related, and private organizations (e.g., Canada Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a pass-through of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net
of fees or costs which may be incurred. Some mortgage-related securities are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment
Timely payment of interest and
principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, issued by governmental entities, private insurers and mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Funds investment quality standards. However, there can be no assurance that private insurers
or guarantors will meet their obligations. In addition, a Fund may buy mortgage-related securities without insurance or guarantees, if through an examination of the loan experience and practices of the originator/servicers and poolers, the
Funds investment adviser determines that the securities meet the Funds quality standards.
Although the underlying mortgage loans
in a pool may have maturities of up to 30 years, the actual average life of the pool certificates typically will be substantially less because the mortgages will be subject to normal principal amortization and may be prepaid prior to maturity.
Prepayment rates vary widely and may be affected by changes in market interest rates. In periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of the pool certificates. Conversely,
when interest rates are rising, the rate of prepayments tends to decrease, thereby lengthening the actual average life of the certificates. Accordingly, it is not possible to predict accurately the average life of a particular pool.
Other Mortgage-Related Securities. Other mortgage-related securities include securities of U.S. or foreign issuers that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real property. These other mortgage-related securities may be equity or debt securities issued by governmental agencies or instrumentalities or by private originators of, or
investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities.
Other Asset-Backed Securities
Asset-backed securities include, but are not limited to,
Certificates for Automobile Receivables (CARSsm) and credit card receivable securities. CARSsm represent undivided fractional interests in a trust with assets consisting of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing these contracts. In addition to the general risks pertaining to all asset-backed securities, CARSsm are subject to the risks of delayed payments or losses if the full amounts due on underlying sales
contracts are not realized by the trust due to unanticipated legal or administrative costs of enforcing the contracts, or due to depreciation, damage or loss of the vehicles securing the contracts. Credit card receivable securities are backed by
receivables from revolving credit card accounts. Since balances on revolving credit card accounts are generally paid down more rapidly than CARSsm, issuers often lengthen the maturity of these securities by providing for a fixed period during which
interest payments are passed through and principal payments are used to fund the transfer of additional receivables to the underlying pool. In addition, unlike most other asset-backed securities, credit card receivable securities are backed by
obligations that are not secured by interests in personal or real property. Other assets often used as collateral include, but are not limited to, home equity loans, student loans and loans on commercial and industrial equipment and manufactured
housing.
Payment of principal and interest on asset-backed securities may largely depend upon the cash flows generated by the assets backing
the securities. In an effort to lessen the effect of failures by obligors on these underlying assets to make payments, such securities may contain elements of credit support. Credit support for asset-backed securities may be based on the underlying
assets or credit enhancements provided by a third party. Credit support falls into two classes: liquidity protection and protection against ultimate default on the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that scheduled payments on the underlying pool are made in a timely fashion. Protection against ultimate default ensures payment on at least a portion of the assets in the pool.
This protection may be provided through guarantees, insurance policies, letters of credit obtained from third parties, various means of structuring the transaction, or a combination of such approaches. The degree of credit support provided on each
issue is based generally on historical information respecting the level of credit risk associated with such payments. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in an asset-backed security.
Asset-backed securities are subject to the risk of prepayment. Prepayments of principal of asset-backed securities affect the average life of
the asset-backed securities in a Funds portfolio. Prepayments are affected by the level of interest rates and other factors, including general economic conditions. In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of asset-backed securities. In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, affecting the Funds yield. Thus, asset-backed securities may have less potential for capital appreciation in periods of falling interest rates than other fixed income securities of comparable duration,
although they may have a comparable risk of decline in market value in periods of rising interest rates.
The values of asset-backed
securities are affected by, among other things, changes in the markets perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution
providing any credit enhancement, and the exhaustion of any credit enhancement. In its capacity as purchaser of an asset-backed security, a Fund would generally have no recourse to the entity that originated the loans in the event of default by the
borrower. Asset backed securities may present certain risks not relevant to mortgage-backed securities. Assets underlying asset-backed securities such as credit card receivables are generally unsecured, and debtors are entitled to the protection of
various state and federal consumer protection laws, some of which provide a right of set-off that may reduce the balance owed.
Asset-backed
securities are relatively new and untested instruments and may be subject to greater risk of default during periods of economic downturn than other securities. In addition, the secondary market for asset-backed securities may not be as liquid as the
market for other securities, which may result in difficulty in valuing asset-backed securities.
Consistent with a Funds investment
objectives and policies, the Fund may invest in other types of asset-backed securities.
21
Variable and Floating Rate Instruments
Certain of the obligations purchased by a Fund may carry variable or floating rates of interest and may involve a conditional or unconditional demand feature. Such obligations may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate.
Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on
these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market
interest rates. While such instruments may provide a Fund with a certain degree of protection against rising interest rates, the Fund will participate in any declines in interest rates as well. A demand instrument with a demand notice period
exceeding seven days may be considered illiquid if there is no secondary market for such security. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for a Fund to
dispose of a variable or floating rate note if the issuer defaults on its payment obligation or during periods that the Fund is not entitled to exercise its demand rights.
Obligations with Puts Attached
Obligations with puts attached are long-term fixed rate debt
obligations that have been coupled with an option granted by a third party financial institution allowing a Fund at specified intervals to tender (or put) such debt obligations to the institution and receive the face value. These third
party puts are available in many different forms, may be represented by custodial receipts or trust certificates and may be combined with other features such as interest rate swaps. The financial institution granting the option does not provide
credit enhancement. If there is a default on, or significant downgrading of, the bond or a loss of its
tax-exempt
status, the put option will terminate automatically. The risk to the Fund will then be that of
holding a long-term bond.
These investments may require that a Fund pay a tender fee or other fee for the features provided. In addition, a
Fund may acquire
stand-by
commitments from banks or broker-dealers with respect to the securities held in its portfolio. Under a
stand-by
commitment, a bank
or broker-dealer agrees to purchase at the Funds option a specific security at a specific price on a specific date.
The Fund may pay
for a
stand-by
commitment either separately, in cash, or in the form of a higher price paid for the security. The Fund will acquire
stand-by
commitments solely to
facilitate portfolio liquidity.
Money Market Obligations
Money market obligations include U.S. dollar denominated bank certificates of deposit, bankers acceptances, commercial paper and other short-term debt obligations of U.S. and foreign issuers, including
U.S. Government and agency obligations. All money market obligations are high quality, meaning that the security is rated in one of the two highest categories for short-term securities by at least two nationally recognized rating services (or by one
if only one rating service has rated the security) or, if unrated, is determined by the relevant Funds investment adviser to be of comparable quality.
INVESTMENTS IN REGISTERED INVESTMENT COMPANIES
As permitted under the 1940 Act and the rules
thereunder, each Fund may acquire the shares of affiliated funds (i.e., the other Funds) and of unaffiliated funds (collectively, Acquired Funds).
Each Fund may invest in shares of Acquired Funds, including affiliated funds, to the extent permitted by applicable law and subject to certain restrictions set forth in this SAI.
Generally, under the 1940 Act and SEC rules thereunder, each Funds acquisition of the securities of affiliated Acquired Funds is subject to the
following guidelines and restrictions:
|
(A)
|
The Fund may own an unlimited amount of any affiliated Acquired Funds voting securities.
|
|
(B)
|
The sales load and distribution fees paid by the Fund with respect to an affiliated Acquired Fund, aggregated with any distribution fees of the Fund, may not be
excessive under Financial Industry Regulatory Authority (FINRA) rules.
|
22
|
(C)
|
Any affiliated Acquired Fund must have a policy that prohibits it from acquiring any securities of registered
open-end
funds or
registered unit investment trusts in reliance on certain sections of the 1940 Act.
|
In addition, each Fund may acquire shares of
unaffiliated Acquired Funds. In addition to guidelines (B) and (C) above, under the 1940 Act and SEC rules thereunder, each Funds acquisition of the securities of unaffiliated Acquired Funds is subject to the following guidelines and
restrictions:
|
(D)
|
The Fund and its affiliated persons may own no more than 3% of an unaffiliated Acquired Funds voting securities.
|
|
(E)
|
The Fund and the Acquired Fund, in the aggregate, may not charge a sales load greater than the limits set forth in Rule 2830(d)(3) of the Conduct Rules of the
FINRA applicable to funds of funds.
|
|
(F)
|
The Acquired Fund is not obligated to redeem its securities held by the Fund in an amount greater than 1% of the Acquired Funds total outstanding securities
during any period less than 30 days.
|
|
(G)
|
The purchase or acquisition of the Acquired Fund is made pursuant to an arrangement with the Acquired Fund or its principal underwriter whereby the Fund is obligated
either to (i) seek instructions from its shareholders with regard to the voting of all proxies with respect to the Acquired Fund and vote in accordance with such instructions; or (ii) vote the shares of the Acquired Fund held by the Fund
in the same proportion as the vote of all other shareholders of the Acquired Fund.
|
Acquired Funds typically incur fees that are
separate from those fees incurred directly by each Fund. Each Funds purchase of such investment company securities results in the layering of expenses as Fund shareholders would incur not only a proportionate share of the expenses of the
Acquired Funds held by a Fund, but also expenses of the Fund.
Under certain circumstances an
open-end
investment company in which a Fund invests may determine to make payment of a redemption by the Fund wholly or in part by a distribution in kind of securities from its portfolio, instead of in cash. As a result, the Fund may hold such securities
until the Funds investment adviser determines it is appropriate to dispose of them. Such disposition will impose additional costs on the Fund.
Investment decisions by the investment advisers to the Acquired Funds in which each Fund invests are made independently of the Fund.
INVESTMENTS IN EXCHANGE-TRADED FUNDS
The Funds may also invest directly in exchange-traded funds
(ETFs). The Acquired Funds in which a Fund invests may also invest in ETFs. Investments in shares of ETFs by a Fund or an Acquired Fund in which a Fund invests are subject to the guidelines set forth above under INVESTMENTS IN
REGISTERED INVESTMENT COMPANIES applicable to unaffiliated funds (i.e., guidelines (D) through (G)).
An ETF is a type of index
fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track a particular market index or basket of securities. A Fund could purchase an ETF to temporarily gain
exposure to a portion of a U.S. or foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in
an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Because an ETF attempts to exactly replicate the particular stock index or basket of securities to which it is related, any price movement away
from the value of the underlying stocks is generally quickly eliminated by professional traders. Thus, each investment adviser believes that the movement of the share prices of the ETFs in which the Funds invest should closely track the movement of
the particular stock index or basket of securities to which it is related.
23
INVESTMENTS BY FUNDS AND BY ACQUIRED FUNDS IN WHICH THE FUNDS INVEST
Each Fund may invest directly in the types of securities specified in the applicable Prospectus and this SAI. In addition, investments by the Acquired
Funds, and consequently by each Fund investing in Acquired Funds, may include such securities. References in this SAI to investments by a Fund include the Funds direct investments, as well as its indirect investments
(i.e., investments by its Acquired Funds). Greater detail about the types of investments and investment guidelines of any Acquired Fund are included in the Acquired Funds prospectus and statement of additional information.
COUNTRY FUNDS
Subject to the provisions of the
1940 Act and the restrictions set forth in the applicable Prospectus and elsewhere in this SAI, a Fund may invest in the shares of investment companies that invest in specified foreign markets. Several foreign governments permit investments by
non-residents
in their markets only through participation in certain investment companies specifically organized to participate in such markets. The Fund may also invest a portion of its assets in unit trusts and
country funds that invest in foreign markets that are smaller than those in which the Fund would ordinarily invest directly. Investments in such pooled vehicles should enhance the geographical diversification of the portfolios assets, thereby
reducing the risks associated with investing in certain smaller foreign markets. Investments by the Fund in such vehicles should also provide increased liquidity and lower transaction costs for the Fund than are normally associated with direct
investment in such markets. However, an investment in a country fund by a Fund will involve payment by the Fund of its pro rata share of advisory and administrative fees charged by such country fund.
MONEY MARKET FUNDS
To maintain liquidity, each
Fund may invest in money market funds. Under normal circumstances, a money market investment made by the Payden Tax Exempt Bond Fund will be in Federal
tax-free
mutual funds. As a matter of operating policy,
none of the Funds anticipates investing more than 15% of its total assets in money market funds, except that each Fund may invest more than 15% of its total assets in the Payden Cash Reserves Money Market Fund. It will do so for cash management
purposes or for temporary defensive purposes. An investment in a money market mutual fund by a Fund will involve indirectly payment by the Fund of its pro rata share of advisory and administrative fees of such money market fund.
REPURCHASE AGREEMENTS
To maintain liquidity,
each Fund may enter into repurchase agreements (agreements to purchase U.S. Treasury notes and bills, subject to the sellers agreement to repurchase them at a specified time and price) with well-established registered securities dealers or
banks.
Repurchase agreements are the economic equivalent of loans by a Fund. In the event of a bankruptcy or default of any registered dealer
or bank, a Fund could experience costs and delays in liquidating the underlying securities which are held as collateral, and a Fund might incur a loss if the value of the collateral declines during this period.
REVERSE REPURCHASE AGREEMENTS
Each Fund may
enter into reverse repurchase agreements (agreements to sell portfolio securities, subject to such Funds agreement to repurchase them at a specified time and price) with well-established registered dealers and banks. Each Fund covers its
obligations under a reverse repurchase agreement by maintaining a segregated account comprised of cash, U.S. Government securities or high-grade debt obligations, maturing no later than the expiration of the agreement, in an amount
(marked-to-market
daily) equal to its obligations under the agreement. Reverse repurchase agreements are the economic equivalent of borrowing by a Fund, and are entered into
by the Fund to enable it to avoid selling securities to meet redemption requests during market conditions deemed unfavorable by the Funds investment adviser.
24
ILLIQUID SECURITIES
As a matter of operating policy, no Fund may invest more than 15% of the value of its net assets in securities that at the time of purchase have legal or contractual restrictions on resale or are
otherwise illiquid. In the case of the Payden Cash Reserves Money Market Fund, at least 10% of the Funds total assets must be invested in securities with daily liquidity (i.e., cash, direct obligations of the U.S. Government and securities
that will mature or be exercisable on demand within one business day) and at least 30% of its total assets must be invested in securities with weekly liquidity (i.e., securities with daily liquidity, securities that will mature or be exercisable on
demand within five business days and securities of U.S. Government agencies and instrumentalities that are issued at a discount to the principal at maturity and have a remaining maturity of 60 days or less). Payden will take steps to keep the amount
of illiquid securities, securities with daily liquidity and securities with weekly liquidity within the prescribed limitations. Each Funds investment adviser will monitor the amount of illiquid securities in the Funds portfolio, to
ensure compliance with the Funds investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been registered under the Securities Act, securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as private placement or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Fund might be unable to dispose
of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemption requests within seven days. The Fund might also have to register such restricted securities in order to dispose
of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
25
A large institutional market has developed for certain securities that are not registered under the
Securities Act, including repurchase agreements, commercial paper, securities of foreign issuers (foreign securities), municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional
market in which the unregistered security can be readily resold or on an issuers ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments. In accordance with guidelines established by the Board, each Funds investment adviser will determine the liquidity of each investment using various factors such as (1) the frequency
of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the nature of the security (including any demand or tender features), and (5) the
likelihood of continued marketability and credit quality of the issuer.
PAYDEN CASH RESERVES MONEY MARKET FUND
The operations of the Payden Cash Reserves Money Market Fund are governed by
Rule 2a-7
under the 1940 Act.
Under the rule, the Fund must maintain a dollar-weighted average portfolio maturity of 60 days or less, and a dollar-weighted average life (portfolio maturity measured without reference to any maturity shortening provisions of adjustable rate
securities by reference to their interest rate reset date) of 120 days or less, (2) purchase instruments having remaining maturities of 397 days or less, and (3) invest only in securities determined by the Board to be of high quality
with minimal credit risks.
FOREIGN INVESTMENTS
The applicable Prospectus describes the extent to which each of the Funds may invest in securities of issuers organized or headquartered in foreign countries (foreign securities).
Risks of Foreign Investing
There are special
risks in investing in any foreign securities in addition to those relating to investments in U.S. securities.
Political and Economic Factors.
Individual foreign economies of certain countries may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency,
diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Recently, various countries have seen significant internal conflicts and in some cases, civil
wars may have had an adverse impact on the securities markets of the countries concerned. In addition, the occurrence of new disturbances due to acts of war or other political developments cannot be excluded. Apparently stable systems may experience
periods of disruption or improbable reversals of policy. Nationalization, expropriation or confiscatory taxation, currency blockage, political changes, government regulation, political, regulatory or social instability or uncertainty or diplomatic
developments could adversely affect the Funds investments. The transformation from a centrally planned, socialist economy to a more market oriented economy has also resulted in many economic and social disruptions and distortions. Moreover,
there can be no assurance that the economic, regulatory and political initiatives necessary to achieve and sustain such a transformation will continue or, if such initiatives continue and are sustained, that they will be successful or that such
initiatives will continue to benefit foreign (or non-national) investors. Certain instruments, such as inflation index instruments, may depend upon measures compiled by governments (or entities under their influence) which are also the obligors.
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 include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of
interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries.
Euro-Related Risks.
The recent global economic crisis brought several small economies in Europe to the brink of bankruptcy and many other economies into recession and weakened the banking and financial sectors of many European countries. For example, the governments of
Greece, Spain, Portugal, and the Republic of Ireland have all recently experienced large public budget deficits, the effects of which are still yet unknown and may slow the overall recovery of the European economies from the recent global economic
crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or multilateral agencies and offices. Assistance may be dependent on a countrys
implementation of reforms or reaching a certain level of performance. Failure to reach those objectives or an insufficient level of assistance could result in a deep economic downturn which could significantly affect the value of a Funds
European investments.
The Economic and Monetary Union of the European Union (EMU) is comprised of the European Union members that
have adopted the euro currency. By adopting the euro as its currency, a member state relinquishes control of its own monetary policies. As a result, European countries are significantly affected by fiscal and monetary controls implemented by the
EMU. The euro currency may not fully reflect the strengths and weaknesses of the various economies that comprise the EMU and Europe generally and it is also possible, that the euro could be abandoned in the future by countries that have already
adopted its use.
Emerging Markets Investments. Investments by a Fund in securities issued by the governments of emerging or developing
countries, and of companies within those countries, involve greater risks than other foreign investments. Investments in emerging or developing markets involve exposure to economic and legal structures that are generally less diverse and mature (and
in some cases the absence of developed legal structures governing private and foreign investments and private property), and to political systems which can be expected to have less stability, than those of more developed countries. The risks of
investment in such countries may include matters such as relatively unstable governments, higher degrees of government involvement in the economy, the absence until recently of capital market structures or market-oriented economies, economies based
on only a few industries, securities markets which trade only a small number of securities, restrictions on foreign investment in stocks, and significant foreign currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more developed foreign markets. Such volatility may be exacerbated by illiquidity.
The average daily trading volume in all of the emerging markets combined is a small fraction of the average daily volume of the U.S. market. Small trading volumes may result in a Fund being forced to purchase securities at substantially higher
prices than the current market, or to sell securities at much lower prices than the current market.
Restrictions on Foreign
Investment
. A number of emerging securities markets restrict foreign investment to varying degrees. Furthermore, repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration
and/or approval in some countries. While a Fund will only invest in markets where these restrictions are considered acceptable, new or additional repatriation or other restrictions might be imposed subsequent to the Funds investment. If such
restrictions were to be imposed subsequent to a Funds investment in the securities markets of a particular country, the Funds response might include, among other things, applying to the appropriate authorities for a waiver of the
restrictions or engaging in transactions in other markets designed to offset the risks of decline in that country. Such restrictions will be considered in relation to a Funds liquidity needs and all other acceptable positive and negative
factors. Some emerging markets limit foreign investment, which may decrease returns relative to domestic investors. A Fund may seek exceptions to those restrictions. If those restrictions are present and cannot be avoided by the Fund, the
Funds returns may be lower.
Settlement Risks
. Settlement systems in emerging markets may be less well organized than in
developed markets. Supervisory authorities may also be unable to apply standards comparable with those in developed markets. Thus there may be risks that settlement may be delayed and that cash or securities belonging to a Fund may be in jeopardy
because of failures of or defects in the systems. In particular, market practice may require that payment be made prior to receipt of the security which is being purchased or that delivery of a security must be made before payment is received. In
such cases, default by a broker or bank through whom the relevant transaction is effected might result in a loss being suffered by the Fund. A Fund seeks, when possible, to use counterparties whose financial status is such that this risk is reduced.
However, there can be no certainty that a Fund will be successful in eliminating or reducing this risk, particularly as counterparties operating in developing countries frequently lack the substance, capitalization and/or financial resources of
those in developed countries.
There may also be a danger that, because of uncertainties in the operation of settlement systems in individual
markets, competing claims may arise in respect of securities held by or to be transferred to a Fund. Furthermore, compensation schemes may be non-existent, limited or inadequate to meet a Funds claims in any of these events.
Counterparty and Third Party Risk
. Trading in the securities of emerging markets presents additional credit and financial risks. A Fund may have
limited access to, or there may be a limited number of, potential counterparties that trade in the securities of emerging market issuers. Governmental regulations may restrict potential counterparties to certain financial institutions located or
operating in the particular emerging market. Potential counterparties may not possess, adopt or implement creditworthiness standards, financial reporting standards or legal and contractual protections similar to those in developed markets. Currency
hedging techniques may not be available or may be limited. A Fund may not be able to reduce or mitigate risks related to trading with emerging market counterparties. The Funds seek, when possible, to use counterparties whose financial status is such
that the risk of default is reduced, but the risk of losses resulting from default is still possible.
Government in the Private
Sector
. Government involvement in the private sector varies in degree among the emerging markets in which a Fund may invest. Such involvement may, in some cases, include government ownership of companies in certain sectors, wage and price
controls or imposition of trade barriers and other protectionist measures. With respect to any developing country, there is no guarantee that some future economic or political crisis will not lead to price controls, forced mergers of companies,
expropriation, or creation of government monopolies, to the possible detriment of a Funds investment in that country.
Litigation
. A Fund may encounter substantial difficulties in obtaining and enforcing judgments against individuals and companies located in
certain developing countries. It may be difficult or impossible to obtain or enforce legislation or remedies against governments, their agencies and sponsored entities.
Fraudulent Securities
. It is possible, particularly in emerging markets, that purported securities in which a Fund invests may subsequently be found to be fraudulent and as a consequence the Fund
could suffer losses.
Local Taxation
. The local taxation of income and capital gains accruing to non-residents varies among developing
countries and, in some cases, is comparatively high. In addition, developing countries typically have less well-defined tax laws and procedures and such laws may permit retroactive taxation so that a Fund could in the future become subject to local
tax liabilities that had not been anticipated in conducting its investment activities or valuing its assets. The Funds seek to reduce these risks by careful management of assets. However, there can be no assurance that these efforts will be
successful.
26
Currency Fluctuations. To the extent that a Fund invests in securities denominated in foreign currencies, a
change in the value of any such currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of the Funds assets denominated in that currency. Such changes will also affect the Funds income. The value
of a Funds assets may also be affected significantly by currency restrictions and exchange control regulations enacted from time to time.
Market Characteristics. The Funds investment advisers expect that most foreign securities in which any Fund invests will be purchased in
over-the-counter
markets or on bond exchanges located in the countries in which the principal offices of the issuers of the various securities are located, if that is the best
available market. Foreign bond markets may be more volatile than those in the United States. While growing in volume, they usually have substantially less volume than U.S. markets, and the Funds foreign bond holdings may be less liquid and
more volatile than U.S. Government securities. Moreover, settlement practices for transactions in foreign markets may differ from those in U.S. markets, and may include delays beyond periods customary in the United States.
Transactions in options on securities, futures contracts and futures options may not be regulated as effectively on foreign exchanges as similar
transactions in the United States, and may not involve clearing mechanisms and related guarantees. The value of such positions also could be adversely affected by the imposition of different exercise terms and procedures and margin requirements than
in the United States. Foreign security trading practices, including those involving securities settlement where Fund assets may be released prior to payment, may expose a Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer.
The value of a Funds portfolio positions may also be adversely impacted by delays in the Funds ability to
act upon economic events occurring in foreign markets during
non-business
hours in the United States.
Legal and Regulatory Matters. Certain foreign countries may have less supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United States.
Taxes. The interest payable on certain of a Funds
foreign portfolio securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Funds shareholders. A shareholder otherwise subject to U.S. Federal income taxes may, subject to
certain limitations, be entitled to claim a credit or deduction for U.S. Federal income tax purposes for its proportionate share of such foreign taxes paid by a Fund. The Funds intend to sell such bonds prior to the interest payment date in order to
avoid withholding.
Costs. The expense ratio of a Fund investing in foreign securities (before reimbursement by the Funds investment
adviser pursuant to any applicable expense limitation described in the applicable Prospectus) is likely to be higher than those of investment companies investing in domestic securities, since the cost of maintaining the custody of foreign securities
is higher than that of domestic securities.
MUNICIPAL SECURITIES
Each of the Payden Tax Exempt Bond and Payden California Municipal Income Funds invests primarily in a
non-diversified
portfolio of debt obligations issued by state
and local governments, territories and possessions of the United States, regional government authorities, and their agencies and instrumentalities which provide interest income that, in the opinion of bond counsel to the issuer at the time of
original issuance, is exempt from Federal income taxes (municipal securities). Municipal securities include both notes (which have maturities of less than one year) and bonds (which have maturities of one year or more) that bear fixed or
variable rates of interest.
In general, municipal securities are issued to obtain funds for a variety of public purposes, such as the
construction, repair, or improvement of public facilities including airports, bridges, housing, hospitals, mass transportation, schools, streets, and water and sewer works. Municipal securities may be issued to refinance outstanding obligations as
well as to raise funds for general operating expenses and lending to other public institutions and facilities.
The two principal
classifications of municipal securities are general obligation securities and revenue securities. General obligation securities are secured by the issuers pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Characteristics and methods of enforcement of general obligation bonds vary
27
according to the law applicable to a particular issuer, and the taxes that can be levied for the payment of debt service may be limited or unlimited as to rates or amounts of special assessments.
Revenue securities are payable only from the revenues derived from a particular facility, a class of facilities or, in some cases, from the proceeds of a special excise tax. Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water, and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Although the principal security behind these bonds may vary, many provide additional security
in the form of a debt service reserve fund the assets of which may be used to make principal and interest payments on the issuers obligations. Housing finance authorities have a wide range of security, including partially or fully insured
mortgages, rent subsidized and collateralized mortgages, and the net revenues from housing or other public projects. Some authorities are provided further security in the form of a states assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Each Fund may purchase insured municipal debt in which scheduled payments of interest and
principal are guaranteed by a private,
non-governmental
or governmental insurance company. The insurance does not guarantee the market value of the municipal debt or the value of the shares of the Fund.
Payden may use interest rate and municipal bond index futures and options on futures contracts, options on securities, and interest rate
swaps to effect a change in the Payden California Municipal Income Funds exposure to interest rate changes.
Securities of issuers of
municipal obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject
to laws enacted in the future by Congress, state legislatures of referenda extending the time for payment of principal or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy
taxes. Furthermore, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal obligations may be materially affected.
The perceived increased likelihood of default among issuers of municipal securities has resulted in constrained liquidity, increased price volatility and
credit downgrades of issuers of municipal securities. Local and national market forces, such as declines in real estate prices and general business activity, may result in decreasing tax bases, fluctuations in interest rates, and increasing
construction costs, all of which could reduce the repayment ability of certain issuers of municipal securities to repay their obligations. Certain issuers of municipal securities have also been unable to obtain additional financing through, or must
pay higher interest rates on, new issues, which may reduce revenues available for issuers of municipal securities to pay existing obligations. In addition, recent events have demonstrated that the lack of disclosure rules in this area can make it
difficult for investors to obtain reliable information on the obligations underlying municipal securities. Adverse developments in the municipal securities market may negatively affect the value of all or a substantial portion of a Funds
holdings in municipal securities.
Certain of the municipal securities in which each Fund may invest, and certain of the risks of such
investments, are described below.
Moral Obligation Securities
Municipal securities may include moral obligation securities which are usually issued by special purpose public authorities. If the issuer of moral obligation bonds cannot fulfill its
financial responsibilities from current revenues, it may draw upon a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Zero Coupon Securities
Zero coupon securities
are debt securities issued or sold at a discount from their face value. These securities do not entitle the holder to interest payments prior to maturity or a specified redemption date, when they are redeemed at face value. Zero coupon securities
may also take the form of debt securities that have been stripped of their unmatured interest coupons, the coupons themselves, and receipts and certificates representing interests in such stripped obligations and coupons. The market prices of zero
coupon securities tend to be more sensitive to interest rate changes, and are more volatile, than interest bearing securities of like maturity. The discount from face value is amortized over the life of the security and such amortization will
constitute the income earned on the security for accounting and tax purposes. Even though income is accrued on a current basis, a Fund does not receive the income currently in cash. Therefore, the Fund may have to sell other portfolio investments to
obtain cash needed to make income distributions.
Mortgage-Backed Securities
Mortgage-backed securities are municipal debt obligations issued to provide financing for residential housing mortgages to targeted groups. Payments made on the underlying mortgages and passed through to
a Fund will represent both regularly scheduled principal and interest payments. The Fund may also receive additional principal payments representing prepayments of the underlying mortgages. Investing in such municipal debt obligations
28
involves special risks and considerations, including the inability to predict accurately the maturity of the Funds investments as a result of prepayments of the underlying mortgages (which
may require the Fund to reinvest principal at lower yields than would otherwise have been realized), the illiquidity of certain of such securities, and the possible default by insurers or guarantors supporting the timely payment of interest and
principal.
Municipal Lease Obligations
Municipal lease obligations are lease obligations or installment purchase contract obligations of municipal authorities. Although lease obligations do not constitute general obligations of the
municipality for which its taxing power is pledged, a lease obligation is ordinarily backed by the municipalitys covenant to budget for, appropriate and make the payments due under the lease obligation. A Fund may also purchase
certificates of participation, which are securities issued by a particular municipality or municipal authority to evidence a proportionate interest in base rental or lease payments relating to a specific project to be made by the
municipality, agency or authority. However, certain lease obligations contain non-appropriation clauses which provide that the municipality has no obligation to make lease or installment purchase payments in any year unless money is
appropriated for such purpose for such year. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of default and foreclosure might prove difficult. In addition, these
securities represent a relatively new type of financing, and certain lease obligations may therefore be considered to be illiquid securities.
Subject to its ability to invest in below investment grade municipal securities, a Fund will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only lease obligations which meet the following criteria: (1) rated A or better by at least one national recognized securities rating organization; (2) secured by payments
from a governmental lessee which has actively traded debt obligations; (3) determined by the Funds investment adviser to be critical to the lessees ability to deliver essential services; and (4) contain legal features which the
Funds investment adviser deems appropriate, such as covenants to make lease payments without the right of offset or counterclaim, requirements for insurance policies, and adequate debt service reserve funds.
Short-Term Obligations
Short-term municipal
obligations include the following:
Tax Anticipation Notes are used to finance working capital needs of municipalities and are issued in
anticipation of various seasonal tax revenues, to be payable from these specific future taxes. They are usually general obligations of the issuer, secured by the taxing power of the municipality for the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds of revenue, such as Federal revenues available under the
Federal Revenue Sharing Program. They also are usually general obligations of the issuer.
Bond Anticipation Notes normally are issued to
provide interim financing until long-term financing can be arranged. The long-term bonds then provide the money for the repayment of the notes.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365 days or less) promissory notes issued by municipalities to supplement
their cash flow.
Floating Rate and Variable Rate Demand Notes
Floating rate and variable rate demand notes and bonds may have a stated maturity in excess of one year, but permit a holder to demand payment of principal plus accrued interest upon a specified number of
days notice. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. The issuer has a corresponding right, after a given period, to prepay in its discretion the outstanding principal of
the obligation plus accrued interest upon a specific number of days notice to the holders. The interest rate of a floating rate instrument may be based on a known lending rate, such as a banks prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at specified intervals at a market rate.
29
A Fund will limit its purchase of municipal securities that bear floating rates and variable rates of
interest to those meeting the rating quality standards set forth in the applicable Prospectus. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. The Funds investment adviser
monitors the earning power, cash flow and other liquidity ratios of the issuers of such obligations, as well as the creditworthiness of the institution responsible for paying the principal amount of the obligations under the demand feature.
A Fund may also invest in municipal securities in the form of participation interests in variable rate
tax-exempt
demand obligations held by a financial institution, usually a commercial bank. Municipal participation interests provide the purchaser with an undivided interest in one or more underlying municipal
securities and the right to demand payment from the institution upon a specified number of days notice (no more than seven) of the unpaid principal balance plus accrued interest. In addition, the municipal participation interests are typically
enhanced by an irrevocable letter of credit or guarantee from such institution. Since the Fund has an undivided interest in the obligation, it participates equally with the institution with the exception that the institution normally retains a fee
out of the interest paid for servicing, providing the letter of credit or guarantee, and issuing the repurchase commitment.
Obligations with
Puts Attached
Long-term fixed rate municipal debt obligations may be coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or put) such debt obligations to the institution and receive the face value. These third party puts are available in many different forms, and may be represented by custodial receipts or
trust certificates and may be combined with other features such as interest rate swaps. The financial institution granting the option does not provide credit enhancement. If there is a default on, or significant downgrading of, the bond or a loss of
its
tax-exempt
status, the put option will terminate automatically. The risk to the Fund will then be that of holding a long-term bond.
These investments may require that the Fund pay a tender fee or other fee for the features provided. In addition, the Fund may acquire
stand-by
commitments from banks or broker-dealers with respect to the municipal securities held in its portfolios. Under a
stand-by
commitment, a bank or broker-dealer agrees to purchase at the Funds option
a specific municipal security at a specific price on a specific date. The Fund may pay for a
stand-by
commitment either separately, in cash, or in the form of a higher price paid for the security. The Fund
will acquire
stand-by
commitments solely to facilitate portfolio liquidity.
Municipal Securities
Market Risk
Investing in the municipal securities market involves certain risks. The municipal securities market is one in which dealer firms
make markets in bonds on a principal basis using their proprietary capital, and during the recent market turmoil these firms capital became severely constrained. As a result, some firms were unwilling to commit their capital to purchase and to
serve as a dealer for municipal securities and, accordingly, municipal securities can experience downturns in trading activity and the supply of municipal securities may exceed the demand in the market. During such periods, the spread can widen
between the price at which an obligation can be purchased and the price at which it can be sold. Less liquid obligations can become more difficult to value and be subject to erratic price movements. Economic and other events (whether real or
perceived) can reduce the demand for certain investments or for investments generally, which may reduce market prices and cause the value of Fund shares to fall. The frequency and magnitude of such changes cannot be predicted. The increased presence
of
non-traditional
participants in the municipal securities markets may lead to greater volatility in the markets.
The amount of public information available about the municipal securities in the Funds portfolio is generally less than that for corporate equities or bonds, and the Funds investment
performance may therefore be more dependent on Paydens analytical abilities than if the Fund were to invest in stocks or taxable bonds. The secondary market for municipal securities also tends to be less well-developed and less liquid than
many other securities markets, which may adversely affect the Funds ability to sell its municipal securities at attractive prices or at prices approximating those at which the Fund currently values them. Municipal securities may contain
redemption provisions, which may allow the securities to be called or redeemed prior to their stated maturity, potentially resulting in the distribution of principal and a reduction in subsequent interest distributions.
The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local governments. If the current national economic recession continues, the ability of municipalities to collect revenue and service their obligations could be materially and
adversely affected. The taxing power of any government entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity
relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or
impose other constraints on enforcement of such obligations, or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund
could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled.
30
SPECIAL RISKS OF INVESTING PRIMARILY IN CALIFORNIA MUNICIPAL SECURITIES
The Payden California Municipal Income Fund invests primarily in California municipal securities. The value of its portfolio investments with respect to
these securities will be highly sensitive to events affecting the fiscal stability of the State of California (referred to in this section as California or the State) and its municipalities, authorities and other
instrumentalities that issue such securities. The following information is only a brief summary of the complex factors affecting the financial situation in California and is based on information available as of the date of this SAI primarily from
official statements and legislative analyses relating to the States budget, and from official statements for securities offerings of the State.
General Economic Conditions
Economic Outlook. The economy of the State is the largest among the
50 states and one of the largest in the world. The diversified economy of the State has major components in high technology, trade, entertainment, agriculture, manufacturing, government, tourism, construction and financial services. Certain of the
States significant industries, such as high technology, are sensitive to economic disruptions in their export markets.
The States
economy is in the midst of a modest, drawn-out recovery from the most severe economic downturn and financial pressure since the 1930s. Improvements in consumer spending, and recently in the housing market, accelerating job gains and growth in
industries beyond the international trade, tourism and technology-related sectors have been positive indicators of Californias ongoing economic recovery. While Chinas economic slowdown, the European financial crisis and uncertainty with
respect to federal fiscal policies have impeded greater economic growth and revenue generation, analysts generally have projected that the States economy should continue to expand at a moderate pace in the near future. The Legislative
Analysts Office (LAO), a non-partisan fiscal and policy adviser, has stated that, while the States economy is improving in many important ways, continued fiscal risks and pressures block a more robust recovery. There can be
no assurance that the positive economic and fiscal trends will continue or that the economy will not become more difficult.
As of December
2012, Californias unemployment was 9.8%, compared to 12.4% at the recessions peak in October 2010 and the pre-recession low of 4.8% in November 2006. Job growth in the State increased by 1.5% during the twelve-month period ending
December 2012. As of December 2012, California has recovered two-thirds of its employment losses and regained a little more than 40% of the jobs it lost during the recession.
Geography. Californias geographic location subjects it to earthquake and wildfire risks. It is impossible to predict the time, magnitude or location of a major earthquake or wildfire or its effect
on the California economy. In January 1994, a major earthquake struck the Los Angeles area, causing significant damage in a four county area. In October 2007, a series of wildfire burned across Southern California, forcing approximately
1 million evacuations and causing significant damage in seven counties. The possibility exists that other such earthquakes or wildfires could create major dislocation of the California economy and could significantly affect State and local
governmental budgets.
State Budgets
Budget Process. California has a fiscal year ending on June 30 of each year. Under the State constitution, the Governor must submit a proposed budget
to the Legislature by January 10 of the preceding fiscal year and the Legislature must adopt a final budget by June 15 of the preceding fiscal year. Both the proposed budget and final budget are required to be balanced, in that General
Fund expenditures must not exceed projected General Fund revenues and transfers for the fiscal year.
31
California receives revenues from taxes, fees and other sources, the most significant of which are personal
income tax, sales and use tax and corporate tax (which collectively constitute more than 90% of General Fund revenues and transfers). During the economic downturn, historic revenue shortfalls resulted in multi-billion dollar budget deficits for
consecutive fiscal years and severe cash shortages in California. During the 2011-12 and 2012-13 fiscal years, the State budget addressed approximately $20 billion in annual deficits through a combination of significant spending cuts, temporary tax
increases, borrowing, and other budgetary measures. While the State has continued to face fiscal pressure from budget obligations accumulated over the prior decade and unfunded liabilities associated with the state employee retirement systems and
state retiree health benefits, the State projects that the budget will be balanced in an ongoing manner for the foreseeable future. However, unanticipated or rising costs, revenue shortfalls or the States inability to enact or effectively
realize budget solutions may adversely affect Californias fiscal outlook and cause the State to continue facing acute long-term challenges and budget deficits.
Current Budget. The California State Budget for the 2012-13 fiscal year (the 2012 Budget Act) was passed by the State Legislature and signed by the Governor on June 27, 2012. The 2012
Budget Act projected General Fund revenues and transfers of $95.9 billion and authorized General Fund expenditures of $91.3 billion for the fiscal year ended June 30, 2013. In order to close the estimated $15.7 billion budget deficit for the
2012-13 fiscal year, the 2012 Budget Act adopted a combination of significant expenditure reductions, a temporary personal income tax increase (approved by voters at the November 2012 general election) and other budgetary solutions. Assuming all of
the budgetary goals and projections of the 2012 Budget Act were achieved, the State projected a $948 million available reserve at the end of the 2012-13 fiscal year.
In its annual report on Californias fiscal outlook, released on November 14, 2012 (the Fiscal Report), the LAO provided an independent assessment of Californias economic
outlook and the States projected General Fund revenues and expenditures. The LAO indicated that the State will incur a budget deficit of $943 million as of June 30, 2013 absent corrective measures (primarily due to lower revenues and the
States inability to fully realize savings from certain budgetary measures). The Fiscal Report also projected that, based on current economic growth and budgetary policy, there is a possibility that California may have a surplus of more than
$1 billion in fiscal year 2014-15, which may grow to more than $9 billion in fiscal year 2017-18. However, the LAO cautioned that these surplus projections were based on a number of assumptions that, if changed, could result in much smaller
future surpluses or possibly ongoing budget deficits.
32
The Governors Budget for the 2013-14 fiscal year (2013 Governors Budget), released
on January 10, 2013, provided an update to the States economic outlook at the end of the 2012-13 fiscal year since the 2012 Budget Act. The 2013 Governors Budget projected General Fund revenues and transfers of $95.4 billion and
General Fund expenditures of $93.0 billion for the 2012-13 fiscal year, eliminating the $2.2 billion deficit carried over from the 2011-12 fiscal year. Assuming all of the budgetary actions proposed by the Governor are successfully implemented, the
2013 Governors Budget projected that the budget reserve as of June 30, 2013 will be $785 million.
Future Budgets. The 2013
Governors Budget projected General Fund revenues and transfers in fiscal year 2013-14 of $98.5 billion and proposed General Fund expenditures of $97.7 billion for the 2013-14 fiscal year, assuming adoption of all proposed budget measures,
including a multi-year plan to increase funding for education by $19 billion relative to the 2011-12 budget based on new models and formulas for funding all levels of education services. Certain proposals in the 2013 Governors Budget to pay
outstanding obligations to schools and local government, end a longstanding lag in state contributions to state employee pensions and retire special fund loans are subject to further legislative action to implement. Assuming enactment of the
proposed budgets corrective actions, the 2013 Governors Budget projected a $1.6 billion available reserve at the end of the 2013-14 fiscal year.
In its January 14, 2013 Overview of the Governors Budget (the LAO Overview), the LAO projected significantly larger budget surpluses for the State beyond fiscal year
2013-14, but acknowledged that it did not forecast the Governors proposals for structural reform of education funding and repayment of certain outstanding debt obligations. While the LAO commended the Governors commitment to fiscal
reform and discipline, especially in light of the ongoing volatility of State revenue estimates and pressures from uncertain federal fiscal policies, the LAO Overview cautioned that the Governors multi-year budget plan does not provide for
sizeable reserves or address the significant unfunded liabilities associated with state employee retirement systems and state retiree health benefits.
It cannot be predicted what actions will be taken in the future by the Legislature and the Governor to deal with changing State revenues and expenditures. The State budget will be affected by national and
State economic conditions and other factors.
Constraints on the Budget Process. Constitutional amendments approved by voters affect the
budget process. These include Proposition 58, approved in 2004, which requires the State to enact a balanced budget, establish a special reserve in the General Fund and restrict future borrowing to cover budget deficits, and Proposition 25, approved
by voters in 2010, which decreased the vote required for the Legislature to adopt a final budget from a two-thirds majority vote to a simple majority vote. Proposition 25 retained the two-thirds vote requirement for taxes. As a result of the
provisions requiring the enactment of a balanced budget and restricting borrowing, the State may, in some cases, have to take immediate actions during the fiscal year to correct budgetary shortfalls. The balanced budget determination is made by
subtracting expenditures from all available resources, including prior-year balances.
33
If the Governor determines that the State is facing substantial revenue shortfalls or spending deficiencies,
the Governor is authorized to declare a fiscal emergency and call the Legislature into special session to consider proposed legislation to address the emergency. If the Legislature fails to pass and send to the Governor legislation to address the
budgetary or fiscal emergency within 45 days, the Legislature would be prohibited from acting on any other bills or adjourning in joint recess until such legislation is passed. During the economic downturn from fiscal year 2008-09 to fiscal year
2010-11, the Governor declared fiscal emergencies on January 10, 2008, December 1, 2008, July 1, 2009, January 8, 2010, July 28, 2010, November 11, 2010 and January 20, 2011, and called five special sessions of the
Legislature to resolve the budget imbalances, enact economic stimulus and address the States liquidity problems.
Proposition 58 also
requires a specified portion of estimated annual General Fund revenues to be transferred by the Controller into a special reserve (the Budget Stabilization Account) no later than September 30 of each fiscal year. These transfers will be made
until the balance in the Budget Stabilization Account reaches $8 billion or 5% of the estimated General Fund revenues for that fiscal year, whichever is greater, and then whenever the balance falls below the $8 billion or 5% target. The annual
transfers can be suspended or reduced for a fiscal year by an executive order issued by the Governor no later than June 1 of the preceding fiscal year. The Governor has issued such an executive order for each of the 2008-09, 2009-10, 2010-11,
2011-12 and 2012-13 fiscal years. There are currently no funds in the Budget Stabilization Account.
Proposition 58 prohibits certain future
borrowing to cover budget deficits. This restriction applies to general obligation bonds, revenue bonds, and certain other forms of long-term borrowing. The restriction does not apply to certain other types of borrowing, such as short-term borrowing
to cover cash shortfalls in the General Fund (including revenue anticipation notes or revenue anticipation warrants currently used by the State), or inter-fund borrowings.
State Indebtedness
General Obligation Bonds and Revenue Bonds. As of January 1, 2013, the
State had approximately $79.6 billion aggregate principal of outstanding long-term general obligation bonds. The current estimate of the interest to be paid on the principal amount outstanding is approximately $65.7 billion. As of January 1,
2013, general obligation bond authorizations of approximately $32.2 billion remained unissued. As part of the 2012 Budget Act, the Legislature cancelled $32.6 million of unused bond authorizations in eight bond acts.
Ratings. As of February 19, 2013, the States general obligation bonds were rated A1 by Moodys, A by Standard & Poors
(S&P), and A- by Fitch Ratings. Though bonds issued by the State remain investment grade according to each ratings agency, California currently has the lowest credit rating of any state from Fitch Ratings and the second
lowest rating from Moodys and S&P, and therefore pays higher interest rates than its peers when issuing general obligation bonds. However, on January 31, 2013, S&P upgraded Californias ratings from A- to A based on
Californias improved fiscal condition and cash position, and the states projections of a structurally balanced budget through at least the next several years. The S&P also indicated that further upward rating movement was
possible based on an improved economic outlook and revenue, but cautioned that the States rating could face downward pressure if structural deficits and cash-flow problems return. The ratings agencies continue to monitor the States
budget outlook closely to determine whether to alter the ratings. It is not possible to determine whether, or the extent to which, Moodys, S&P or Fitch Ratings will change such ratings in the future.
Infrastructure Planning. Despite the recession and budget problems, California has continued to invest in maintaining and improving the States
infrastructure. On July 6, 2012, the Legislature approved funding to construct a high-speed railway system from San Francisco to Los Angeles and modernize local and regional rail systems. Initial construction of the project is scheduled to
being in the Central Valley during the summer of 2013. In the November 2014 general election, California voters will vote to approve the issuance of $11.14 billion in new general obligation bonds for various purposes relating to the improvement of
the States water supply system, drought relief and groundwater protection. The State will release its 2013 Five-Year Infrastructure Plan later this year. The plan will outline the States priorities for the next five years for major state
infrastructure programs, including high-speed rail and other transportation and resource programs.
34
Under certain circumstances, the State also provides infrastructure funding assistance to local governments
and the private sector such as for schools and local transportation programs, water projects, housing developments, and hospitals.
Pension
Trusts and Unfunded Liability. The two main State pension funds, the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), have sustained
significant investment losses in recent years and currently have substantial unfunded liabilities. CalPERS estimated that its unfunded accrued liability allocable to State employees of $27.2 billion on an actuarial value of assets basis and $38.5
billion on a market value of assets basis, based on data through June 30, 2011. CalSTRS reported the unfunded actuarial liability of its Defined Benefit Plan at June 30, 2011 at $64.5 billion on an actuarial basis and $68.4 billion on a
market value basis. The State also has an unfunded liability relating to other State retirees post-employment health care benefits which is estimated to be $62.1 billion as of June 30, 2011.
General Fund contributions to CalPERS and CalSTRS for fiscal year 2012-13 are estimated to be approximately $2.2 billion and $3.3 billion,
respectively (representing about 3.9% of all General Fund expenditures in the 2012-13 fiscal year). There can be no assurances that the States annual required contributions to CalPERS and CalSTRS will not significantly increase in the future.
On September 12, 2012, the State adopted the CalPERS Pension Reform Act of 2013 which reduces pension benefits for newly-hired CalPERS
employees, encourages later retirement and caps compensation in calculating pension benefits for higher-income employees. CalPERS estimated that the reform legislation will reduce annual General Fund contributions to CalPERS by over $70 million
in fiscal year 2013-14 and over $200 million by fiscal year 2020-21.
Medi-Cal and Health Care Reform. In the 2012 Budget Act, projected
General Fund expenditures for Californias Medi-Cal program were $15.5 billion in fiscal year 2011-12 and $14.6 billion in fiscal year 2012-13 after the application of federal matching funds. The federal Affordable Care Act, which expands
Medi-Cal coverage beginning on January 1, 2014 and requires temporary rate increases for primary care beginning in 2013, is expected to result in a substantial increase to General Fund expenditures in future years. A preliminary analysis by the
State estimated annual costs to be $264.7 million in fiscal year 2013-14 and up to $3.5 billion by fiscal year 2020-21.
Local Government.
The primary units of local government in California are the counties, which vary significantly in size and population. Counties are
responsible for provision of many basic services, including indigent healthcare, welfare, courts, jails and public safety in unincorporated areas. There are also hundreds of incorporated cities and thousands of other special districts formed for
education, utility and other services. In the 2011 Budget Act, California shifted responsibility for additional programs from the State to local governments, including certain criminal justice programs, mental health services, substance abuse
treatment, child and elderly welfare programs and the California Work Opportunity and Responsibility to Kids (CalWORKs). Local governments are limited in their ability to raise revenues due to constitutional constraints on their ability to impose or
increase various taxes, fees, and assessments without voter approval. Counties, in particular, have had fewer options to raise revenues than many other local government entities.
Local governments in California have experienced notable financial difficulties from time to time, and there is no assurance that any California issuer will make full or timely payments of principal or
interest or remain solvent. It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated to the creditworthiness of obligations issued by the State, and there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
Proposition 1A, enacted by the Legislature and approved by the
voters in November 2004, has reduced the Legislatures authority over local government revenue sources by placing restrictions on the States access to local governments property, sales and vehicle licensing revenues.
Proposition 1A also prohibits the State from mandating activities on cities, counties or special districts without providing for the funding needed to comply with the mandates. The State mandate provisions of Proposition 1A do not apply to schools
or community colleges or to mandates relating to employee rights.
Proposition 22, enacted by the Legislature and approved by the voters in
November 2010, prohibits any future borrowing by the State from local government funds, and generally prohibits the Legislature from making changes in local government funding sources. Allocation of local transportation funds cannot be changed
without an extensive process.
35
Constitutional and Legislative Factors.
Initiative constitutional amendments affecting State and local taxes and appropriations have been proposed and adopted pursuant to the States initiative process from time to time. If any such
initiatives are adopted, the State could be pressured to provide additional financial assistance to local governments or appropriate revenues as mandated by such initiatives. Propositions that may be adopted in the future may also place increasing
pressure on the States budget over future years, potentially reducing resources available for other State programs, especially to the extent any mandated spending limits would restrain the States ability to fund such other programs by
raising taxes. Because of the complexities of constitutional amendments and related legislation concerning appropriations and spending limits, the ambiguities and possible inconsistencies in their terms, the applicability of any exceptions and
exemptions and the impossibility of predicting future appropriations, it is not possible to predict the impact on the bonds in the portfolio of the Payden California Municipal Income Fund.
Effect of other State Laws on Bond Obligations.
Some of the California municipal securities in
which the Payden California Municipal Income Fund can invest may be obligations payable solely from the revenues of a specific institution or secured by specific properties. These are subject to provisions of California law that could adversely
affect the holders of such obligations. For example, the revenues of California healthcare institutions may be adversely affected by State laws reducing Medi-Cal reimbursement rates, and California law limits the remedies available to a creditor
secured by a mortgage or deed of trust on real property. Debt obligations payable solely from revenues of healthcare institutions may also be insured by the State but no guarantee exists that adequate reserve funds will be appropriated by the
Legislature for such purpose.
Litigation.
The State is a party to numerous legal proceedings, many of which normally occur in governmental operations. In addition, the State is involved in certain other legal proceedings that, if decided against
the State might require the State to make significant future expenditures or impair future revenue sources. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation or estimate
the potential impact on the ability of the State to pay debt service costs on its obligations.
On March 25, 2011, the trial court in
Orinda Convalescent Hospital Inc., et al. v. Department of Health Services et al.
ruled that the quality assurance fee (QAF) charged to skilled nursing facilities since 2004 was properly characterized as a tax rather
than a fee. The trial court then denied the plaintiffs claim for refund of QAF amounts, finding that the QAF was constitutionally valid. Plaintiffs have appealed the denial of refund. QAF amounts collected from all providers to
date total nearly $2 billion, and California has received additional federal financial participation based on its imposition and collection of the QAF. An adverse ruling could also negatively affect the States receipt of federal funds.
On October 7, 2010, the San Francisco County Superior Court in
Gillette Company v. Franchise Tax Board
, a consolidation of six
actions by several multi-state corporations, ruled that the Legislatures modification of the Revenue and Taxation Code, implementing a double-weighted sales factor in Californias apportionment of income formula for the taxation of
multi-state business entities, was valid and constitutional. The California Court of Appeal, First Appellate District, reversed the trial court judgment, and in its decision issued in October 2012, held that the State was bound by the
single-weighted sales factor contained in the Multistate Tax Compact for the tax years at issue and that attempting to override the Multistate Tax Compact violated the constitutional protections against impairment of contracts. The adverse ruling in
this consolidated case affects multiple taxpayers and creates potential exposure to refund claims in excess of $750 million.
36
On August 29, 2008, the Los Angeles Superior Court ruled in favor of the plaintiff in
Nortel
Networks Inc. v. State Board of Equalization
, a tax refund case involving the interpretation of certain statutory sales and use tax exemptions for custom-written computer software and licenses to use computer software. On
January 18, 2011, the adverse trial court ruling was upheld by the California Court of Appeal and a petition for review filed by the State Board was denied by the California Supreme Court. The adverse trial court ruling, if applied to other
similarly situated taxpayers, unless limited in scope by two similar refund cases filed by Lucent Technologies, Inc. against the State Board of Equalization, could have a significant negative impact in the range of approximately $300 million
annually, on tax revenues.
On May 5, 2010, the Sacramento County Superior Court denied each petitioners request in
California
Redevelopment Associations, et al. v. Genest, et al.
and
County of Los Angeles, et al. v. Genest, et al
. to enjoin the States implementation of legislation requiring local redevelopment agencies to remit $1.7 million in fiscal year
2009-10 and $350 million in fiscal year 2010-11 to county education funds. Both matters have been appealed. If the favorable rulings for the State are reversed, a General Fund liability of up to $2.1 billion may be incurred, which amount would be
owed to the redevelopment agencies.
In
California School Boards Association v. State of California
, plaintiff alleges, among other
things, that a trailer bill enacted in October 2010 as part of the 2010 Budget Act violates the California Constitution provision which requires that a statute embrace one subject expressed in its title. Specifically, plaintiff alleges that AB 1610
entitled Education finance contains appropriations, amendments, and new laws that are not expressed in its title. AB 1610 contains a $340 million reduction in an education appropriation, approximately $5 billion in payments deferred to
next fiscal year, and hundreds of millions of dollars in reversions to the General Fund. If the court declares AB 1610 unconstitutional, these fiscal provisions may be declared void.
Two cases seeking to proceed as class actions (
Bakersfield Mall LLC v. Franchise Tax Board
and
CA-Centerside II, LLC v. Franchise Tax Board
) challenge the fee imposed by the California tax
code upon limited liability companies registered in California, alleging discrimination against interstate commerce, violation the U.S. and California Constitutions, improper exercise of the States police powers, and misapplication by the
Franchise Tax Board. If either case proceeds as a class action, the claimed refunds could be in excess of $500 million.
In
Gail Marie
Harrington-Wisely, et al. v. State of California, et al.
, a class action asserting that the use by the California Department of Corrections and Rehabilitation (the CDCR) of a body-imaging machine to search visitors to state prisons
for contraband violated the rights of the visitors. The trial court granted judgment in favor of the State, and plaintiffs appeal was dismissed by the California Court of Appeal, Second Appellate District. The parties agreed to a stipulated
judgment and dismissed the case subject to further review on or after 2013 if the CDCR uses similar technology in the future. If plaintiffs were successful in obtaining damages for every use of the body-imaging machine, damages could be as high as
$3 billion.
37
DERIVATIVE INSTRUMENTS
In pursuing their individual objectives, each of the Funds (except the Payden Cash Reserves Money Market Fund) may purchase and sell (write) put options and call options on securities, securities
indexes, commodity indexes and foreign currencies, and may enter into interest rate, foreign currency, index and commodity futures contracts and purchase and sell options on such futures contracts (futures options), except that those
Funds that may not invest in foreign currency-denominated securities may not enter into transactions involving currency futures or options. These transactions may be for hedging purposes, to seek to replicate the composition and performance of a
particular index, or as part of their overall investment strategies. Each of the Funds (except the Payden Cash Reserves Money Market Fund) also may purchase and sell foreign currency options for purposes of increasing exposure to a foreign currency
or to shift exposure to foreign currency fluctuations from one country to another.
Each Fund (except the Payden Cash Reserves Money Market
Fund) also may enter into swap agreements with respect to interest rates, commodities, indexes of securities or commodities and credit default situations, and to the extent it may invest in foreign currency-denominated securities, may enter into
swap agreements with respect to foreign currencies. Such Funds may also invest in structured notes. If other types of financial instruments, including other types of options, futures contracts, or futures options are traded in the future, a Fund may
also use those instruments, provided that the Board determines that their use is consistent with the Funds investment objective.
38
The value of some derivative instruments in which a Fund invests may be particularly sensitive to many
factors, including for example changes in prevailing interest rates, and like the other investments of the Fund, the ability of a Fund to successfully utilize these instruments may depend in part upon the ability of the Funds investment
adviser to forecast interest rates and other economic factors correctly. If the investment adviser incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Fund could be exposed
to the risk of loss.
A Fund might not employ any of the strategies described in this section, and no assurance can be given that any strategy
used will succeed. If the Funds investment adviser incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for a Fund, the Fund might have been in a better position if it had not
entered into the transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation,
between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses
by offsetting favorable price movements in related investments or otherwise, due to the possible inability of a Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio
security at a disadvantageous time because the Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Fund to close out or to liquidate its
derivatives positions. In addition, a Funds use of such instruments may cause the Fund to realize higher amounts of short-term capital gains (generally taxed at ordinary income tax rates) than if it had not used such instruments. For a Fund
that gains exposure to an asset class using derivative instruments backed by a collateral portfolio of fixed income instruments, changes in the value of the fixed income instruments may result in greater or lesser exposure to that asset class than
would have resulted from a direct investment in securities comprising that asset class.
Options on Securities and Indexes
A Fund may, to the extent specified herein or in the applicable Prospectus, purchase and sell both put and call options on fixed income or other
securities or indexes in standardized contracts traded on foreign or domestic securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an
over-the-counter
market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has
the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Upon exercise, the writer of an option on an index is obligated
to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect features of a particular financial or securities market, a specific group
of financial instruments or securities, or certain economic indicators.)
A Fund will write call options and put options only if they are
covered. In the case of a call option on a security, the option is covered if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by the Funds investment adviser in accordance with established procedures in such amount are segregated) upon conversion or exchange
of other securities held by the Fund. For a call option on an index, the option is covered if the Fund maintains with its custodian assets determined to be liquid by the Funds investment adviser in accordance with established procedures, in an
amount equal to the contract value of the index. A call option is also covered if the Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the
39
exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by the Funds investment adviser in accordance with
established procedures. A put option on a security or an index is covered if the Fund segregates assets determined to be liquid by the Funds investment adviser in accordance with established procedures equal to the exercise price.
A put option is also covered if the Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by the Funds investment adviser in accordance with established procedures.
If an option written by a Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at the time the option was written. If
an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires. A Fund may sell put or call
options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium
received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it
is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The
premium paid for a put or call option purchased by a Fund is an asset of the Fund. The premium received for an option written by a Fund is recorded as a deferred credit. The value of an option purchased or written is
marked-to-market
daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
A Fund may write covered straddles consisting of a combination of a call and a put written on the
same underlying security. A straddle will be covered when sufficient assets are deposited to meet the Funds immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the
call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is in the money.
Risks Associated with Options on Securities and Indexes
There are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in
an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in
return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. If a put or call option purchased by a Fund is not sold when it has remaining value, and if the market price
of the underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a
put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
40
There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position.
If the Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If the Fund were unable to close out a covered call option
that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise. As the writer of a covered call option, a Fund forgoes, during the options life, the opportunity to profit from
increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call.
If
trading were suspended in an option purchased by a Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call
option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Funds
securities during the period the option was outstanding.
Foreign Currency Options
A Fund that invests in foreign currency-denominated securities may buy or sell put and call options on foreign currencies. The Fund may buy or sell put and call options on foreign currencies either on
exchanges or in the
over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise
price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be
subject to position limits that may limit the ability of the Fund to reduce foreign currency risk using such options.
Over-the-counter
options differ from traded options
in that they are
two-party
contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
Futures Contracts and Options on Futures Contracts
A futures contract is an agreement between two parties to buy and sell a security or commodity for a set price on a future date. These contracts are traded on exchanges, so that, in most cases, either
party can close out its position on the exchange for cash, without delivering the security or commodity. An option on a futures contract gives the holder of the option the right to buy or sell a position in a futures contract to the writer of the
option, at a specified price and on or before a specified expiration date.
Each Fund (except the Payden Cash Reserves Money Market Fund) may
invest in futures contracts and options thereon (futures options) with respect to, but not limited to, interest rates, commodities, and security or commodity indexes. To the extent that a Fund may invest in foreign currency-denominated
securities, it may also invest in foreign currency futures contracts and options thereon.
An interest rate, commodity, foreign currency or
index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, commodity, foreign currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which
the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments and foreign currencies, including, for example, the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month
U.S. Treasury bills;
90-day
commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the Japanese yen; the Swiss franc;
the Mexican peso; and certain multinational currencies, such as the euro. It is expected that other futures contracts will be developed and traded in the future. As described in the applicable Prospectus, one or more of the Funds may also invest in
commodity futures contracts and options thereon. A commodity futures contract is an agreement between two parties, in which one party agrees to buy a commodity, such as an energy, agricultural or metal commodity, from the other party at a later date
at a price and quantity agreed-upon when the contract is made.
41
A Fund may purchase and write call and put futures options, as specified for that Fund in the applicable
Prospectus. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. A call option is in the money if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is in the money
if the exercise price exceeds the value of the futures contract that is the subject of the option.
Limitations on Use of Futures and Futures
Options
A Fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a
Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of assets determined to be liquid by the Funds investment adviser in accordance with established procedures (initial
margin). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. Margin requirements on foreign exchanges may be different than U.S. exchanges. The
initial margin is in the nature of a performance bond or good faith deposit on the futures contract that is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. Each such Fund expects to
earn interest income on its initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called variation
margin, equal to the daily change in value of the futures contract. This process is known as
marking-to-market.
Variation margin does not represent a
borrowing or loan by the Fund, but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, the Fund will
mark-to-market
its open futures positions.
A Fund is also required to deposit and maintain margin
with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the underlying securities
or commodities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity with the same delivery date. If an offsetting purchase price is less than the original sale price, a Fund realizes a
capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction
costs must also be included in these calculations.
A Fund may write covered straddles consisting of a call and a put written on the same
underlying futures contract. A straddle will be covered when sufficient assets are deposited to meet the Funds immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of
the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is in the money.
When purchasing a futures contract, a Fund will maintain with its custodian (and
mark-to-market
on a daily basis) assets determined to be liquid by the Funds investment adviser in accordance with established procedures that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract.
42
Alternatively, the Fund may cover its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will
maintain with its custodian (and
mark-to-market
on a daily basis) assets determined to be liquid by the Funds investment adviser in accordance with established
procedures that are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may cover its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Funds custodian).
When selling a
call option on a futures contract, a Fund will maintain with its custodian (and
mark-to-market
on a daily basis) assets determined to be liquid by the Funds
investment adviser in accordance with established procedures, that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the
Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option
permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund. When selling a put option on a futures contract, a Fund will maintain with its custodian (and
mark-to-market
on a daily basis) assets determined to be liquid by the Funds investment adviser in accordance with established procedures established that equal the
purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the
same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Fund.
To the extent that securities with maturities greater than one year are used to segregate assets to cover a Funds obligations under futures contracts and related options, such use will not eliminate
the risk of a form of leverage, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Funds portfolio, and may require liquidation of portfolio positions when it is not advantageous
to do so. However, any potential risk of leverage resulting from the use of securities with maturities greater than one year may be mitigated by the overall duration limit on a Funds portfolio securities. Thus, the use of a longer-term
security may require the Fund to hold offsetting short-term securities to balance the Funds portfolio such that the Funds duration does not exceed the maximum permitted for the Fund in the applicable Prospectus.
The requirements for qualification as a regulated investment company also may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See Taxation.
Risks Associated with Futures and Futures Options
There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract
may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and futures options on securities, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and
the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities historically have reacted to an increase or decrease in interest rates in a manner similar to the
reaction of the underlying U.S. Government securities. To the extent that a municipal bond fund enters into such futures contracts, however, the value of such futures will not vary in direct proportion to the value of the Funds holdings of
municipal securities. Thus, the anticipated spread between the price of the futures contract and the hedged security may be distorted due to differences in the nature of the markets. The spread also may be distorted by differences in initial and
variation margin requirements, the liquidity of such markets and the participation of speculators in such markets.
43
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a
single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous days settlement price at the end of the current trading session. Once the daily limit has been
reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses
because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist
at a time when a Fund seeks to close out a futures or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Risks Associated with Commodity Futures Contracts
There are several additional risks associated
with transactions in commodity futures contracts.
Storage. Unlike the financial futures markets, in the commodity futures markets there are
costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the
physical commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
Reinvestment. In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by
selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a
lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher
futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have
significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or
lower futures prices, or choose to pursue other investments.
Other Economic Factors. The commodities that underlie commodity futures
contracts may be subject to additional economic and
non-economic
variables, such as droughts, floods, weather, livestock diseases, embargoes, tariffs, and international economic, political and regulatory
developments. These factors may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of
supply and demand factors. Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional
investment risks which subject a Funds investments to greater volatility than investments in traditional securities.
Additional Risks
of Options on Securities, Futures Contracts, Options on Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon
Options on securities, futures contracts, and options on currencies may be traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in,
44
or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading decisions, (iii) delays in a Funds ability to act upon economic events occurring in foreign markets during
non-business
hours
in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, and (v) lesser trading volume.
Swap Agreements and Options on Swap Agreements
Each Fund (except the Payden Cash Reserves Money
Market Fund) may engage in swap transactions, including, but not limited to, swap agreements on interest rates, security or commodity indexes, specific securities and commodities, total return swaps and credit default and event-linked swaps. To the
extent a Fund may invest in foreign currency-denominated securities, it may also invest in currency exchange rate swap agreements. A Fund may also enter into options on swap agreements (swap options).
A Fund may enter into swap transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of
attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, to protect against currency fluctuations, as a duration management
technique, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, or to gain exposure to certain markets in the most economical way possible.
Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In
a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) 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 foreign currency, or in a basket of securities or commodities representing a particular index. A quanto or differential swap combines both an interest rate and a currency transaction. Other
forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or floor; and interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. As a matter of operating policy, the aggregate purchase price of caps and floors held by a Fund may not exceed 5% of its total
assets at the time of purchase.
Consistent with a Funds investment objective and general investment polices, certain of the Funds may
invest in commodity swap agreements. For example, an investment in a commodity swap agreement may involve the exchange of floating-rate interest payments for the total return on a commodity index. In a total return commodity swap, a Fund will
receive the price appreciation of a commodity index, a portion of the index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, the Fund may pay a fixed fee, established at the outset of the
swap. However, if the term of the commodity swap is more than one period, with interim swap payments, the Fund may pay an adjustable or floating fee. With a floating rate, the fee may be pegged to a base rate, such as the London
Interbank Offered Rate, and is adjusted each period. Therefore, if interest rates increase over the term of the swap contract, the Fund may be required to pay a higher fee at each swap reset date.
A Fund may enter into credit default swap agreements. While the structure of a credit default swap depends on the particular swap agreement, a typical
credit default structure is as follows. The buyer in a credit default contract is obligated to pay the seller a periodic stream of payments over the term of the contract provided that no event of default on an underlying
reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or par value, of the reference obligation in exchange for the reference obligation. The Fund may be either the buyer
or seller in a credit default swap transaction. If the Fund is a buyer and no event of default occurs, the Fund will lose its investment and recover nothing. However, if an event of default occurs, the Fund (if the buyer) will receive the full
notional value of the reference obligation that may have little or no value. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, which typically is between six months and three years, provided that there is no
default event. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation. Credit default swap transactions involve greater risks than if the Fund had invested in the reference obligation
directly.
45
A swap option is a contract that gives a counterparty the right (but not the obligation) in return for
payment of a premium, to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. Each Fund (except the Payden Equity Income (formerly Payden
Value Leaders) and Payden Cash Reserves Money Market Funds) may write (sell) and purchase put and call swap options.
Most swap
agreements entered into by a Fund would calculate the obligations of the parties to the agreement on a net basis. Consequently, the Funds current obligations (or rights) under a swap agreement will generally be equal only to the
net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the net amount). The Funds current obligations under a swap agreement will be accrued daily
(offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by the Funds investment adviser in accordance with
established procedures, to avoid any potential leveraging of the Funds portfolio. Generally, the notional amount of any long positions in credit default swaps will be covered by the segregation of assets. However, long and short positions in
credit default swaps which reference the same credit, pay/receive the same currency and have the same counterparty may be netted for purposes of the calculation of asset segregation. Obligations under swap agreements so covered will not be construed
to be senior securities for purposes of the Funds investment restriction concerning senior securities. As a matter of operating policy, a Fund will not enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the Funds total assets. Also as a matter of operating policy, a Fund will not enter into a swap transaction at any time that the aggregate amount of its net obligations
under such transactions exceeds 30% of its total assets (for the Metzler/Payden Fund, 15% of the Funds total assets). If a Fund enters into a swap transaction on other than a net basis, the Fund maintains a segregated account in the full
amount accrued on a daily basis of the Funds obligations with respect to the transaction. Such segregated accounts are maintained in accordance with applicable regulations of the SEC.
Whether a Funds use of swap agreements or swap options will be successful in furthering its investment objective will depend on the ability of the Funds investment adviser to predict correctly
whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid
depending on the underlying circumstances. 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 agreement counterparty. A Fund will enter into swap
agreements only with counterparties that meet certain standards of creditworthiness. Certain restrictions imposed on the Funds by the Code may limit the Funds ability to use swap agreements. The swaps market is a relatively new market and is
largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Funds ability to terminate existing swap agreements or to realize amounts to be received under such
agreements.
Depending on the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a
swap option than it will incur when it purchases a swap option. When the Fund purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Fund writes a
swap option, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
Certain swap
agreements are exempt from most provisions of the Commodity Exchange Act (CEA) and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the Commodity Futures Trading
Commission (CFTC). To qualify for this exemption, a swap agreement must be entered into by eligible participants, which includes the following, provided the participants total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan,
governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee
benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement
46
may not be part of a fungible class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.
This exemption
is not exclusive, and participants may continue to rely on existing exclusions for swaps, such as the Policy Statement issued in July 1989 which recognized a safe harbor for swap transactions from regulation as futures or commodity option
transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin
system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.
Structured Notes
Structured notes are derivative debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities may include a multiplier that multiplies the indexed element by
a specified factor and, therefore, the value of such securities may be very volatile. To the extent a Fund invests in these securities, however, the Funds investment adviser analyzes these securities in its overall assessment of the effective
duration of the Funds portfolio in an effort to monitor the Funds interest rate risk.
Hybrid Instruments
A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward
contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some
other economic factor (each a benchmark). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the
benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such an
hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration management, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser
of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero.
Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the
credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the net asset value of the Fund. No Fund will invest more than 5% of its total assets in hybrid instruments.
Certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components
that have payment features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, and are considered hybrid instruments because they have both
security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable. A Fund will only invest in commodity-linked hybrid instruments
that qualify under applicable rules of the CFTC for an exemption from the provisions of the CEA.
47
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies
as defined in the 1940 Act. As a result, a Funds investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Government Regulation of Derivatives
Government regulation of various types of derivative instruments, including futures and swap agreements, may limit or prevent a Fund from using such
instruments as a part of its investment strategy, and could ultimately prevent a Fund from being able to achieve its investment objective. Limits or restrictions applicable to the counterparties with which the Funds engage in derivative transactions
could also prevent the Funds from using certain instruments.
There is also a possibility of additional future regulatory changes altering,
perhaps to a material extent, the nature of an investment in the Funds or the ability of the Funds to continue to implement their investment strategies. The futures markets are subject to comprehensive statutes, regulations, and margin requirements.
In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation of higher margin
requirements, the establishment of daily price limits and the suspension of trading. The regulation of swaps and futures transactions in the U.S. is a rapidly changing area of law and is subject to modification by government and judicial action.
In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law on July 21,
2010. The Dodd-Frank Act has changed and will continue to change the way in which the U.S. financial system is supervised and regulated. Title VII of the Dodd-Frank Act sets forth a new legislative framework for over-the-counter (OTC)
derivatives, including financial instruments, such as swaps, in which the Funds may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the CFTC to regulate OTC
derivatives and market participants, and will require clearing and exchange trading of many OTC derivatives transactions.
Provisions in the
Dodd-Frank Act include new capital and margin requirements and the mandatory use of clearinghouse mechanisms for many OTC derivative transactions. The CFTC, SEC and other federal regulators have been tasked with developing the rules and regulations
enacting the provisions of the Dodd-Frank Act. Because there is a prescribed phase-in period during which most of the mandated rulemaking and regulations will be implemented, it is not possible at this time to gauge the exact nature and scope of the
impact of the Dodd-Frank Act on any of the Funds. However, it is expected that swap dealers, major market participants and swap counterparties will experience new and/or additional regulations, requirements, compliance burdens and associated costs.
The new law and the rules to be promulgated may negatively impact a Funds ability to meet its investment objective either through limits or requirements imposed on it or upon its counterparties. In particular, new position limits imposed on a
Fund or its counterparties may impact that Funds ability to invest in futures, options and swaps in a manner that efficiently meets its investment objective. New requirements, including capital and mandatory clearing, may increase the cost of
a Funds investments and cost of doing business, which could adversely affect investors.
Exclusion from Definition of Commodity Pool
Operator
Pursuant to amendments by the Commodity Futures Trading Commission to Rule 4.5 under the CEA, The Payden & Rygel Investment Group
has filed a notice of exemption from registration as a commodity pool operator with respect to the Funds. The Funds and their investment advisers are therefore not subject to registration or regulation as a pool operators under the CEA.
Effective December 31, 2012, in order to claim the Rule 4.5 exemption, the Funds are significantly limited in their ability to invest in commodity futures, options and swaps (including securities futures, broad-based stock index futures and
financial futures contracts). As a result, in the future the Funds will be more limited in their ability to use these instruments than in the past and these limitations may have a negative impact on the ability of the investment advisers to manage
the Funds, and on the Funds performance.
DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES
Each Fund (except the Payden Cash Reserves Money Market Fund, the Payden Tax Exempt Bond Fund and the Payden California Municipal Income Fund) may enter
into, or acquire participations in, delayed funding loans and revolving credit facilities. Delayed funding loans and revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand
by the borrower during a specified term. A revolving credit facility differs from a delayed funding loan in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit
facility. Delayed funding loans and revolving credit facilities usually provide for floating or variable rates of interest. These commitments may have the effect of requiring a Fund to increase its investment in a company at a time when it might not
otherwise decide to do so (including at a time when the companys financial condition makes it unlikely that such amounts will be repaid). To the extent that the Fund is committed to advance additional funds, it will at all times segregate
assets, determined to be liquid by the Funds investment adviser in accordance with established procedures in an amount sufficient to meet such commitments.
A Fund may invest in delayed funding loans and revolving credit facilities with credit quality comparable to that of issuers of its securities investments. Delayed funding loans and revolving credit
facilities may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than
fair market value. Each Fund currently intends to treat delayed funding loans and revolving credit facilities for which there is no readily available market as illiquid for purposes of the Funds limitation on illiquid investments. For a
further discussion of the risks involved in investing in loan participations and other forms of direct indebtedness see Loan Participations and Assignments. Participation interests in revolving credit facilities will be subject to the
limitations discussed in Loan Participations and Assignments. Delayed funding loans and revolving credit facilities are considered to be debt obligations for purposes of the Funds investment restriction relating to the lending of
funds or assets by the Fund.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS.
Each of the Funds may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. When such purchases are outstanding,
the Fund will segregate until the settlement date assets determined to be liquid by the Funds investment adviser in accordance with procedures established by the Board, in an amount sufficient to meet the purchase price. Typically, no income
accrues on securities the Fund has committed to purchase prior to the time delivery of the securities is made, although the Fund may earn income on securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Fund is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Funds
other investments. If the Fund remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage.
When a Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does not participate in future gains or losses
with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Fund could miss a favorable price or yield opportunity or could suffer a loss. A Fund may dispose of or renegotiate a transaction after
it is entered into, and may sell when-issued, delayed delivery or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which a Fund may purchase or
sell securities on a when-issued, delayed delivery, or forward commitment basis.
48
FOREIGN CURRENCY TRANSACTIONS
As indicated in the applicable Prospectus, certain Funds may enter into foreign currency transactions. A Fund normally conducts its foreign currency exchange transactions either on a spot
(cash) basis at the spot rate prevailing in the foreign currencies or on a forward basis. Under normal circumstances, the Fund will enter into forward currency contracts (contracts to purchase or sell a specified currency at a specified future
date and price). The Fund generally will not enter into a forward currency contract with a term of greater than one year. Although forward currency contracts are used primarily to protect the Fund from adverse currency movements, they may also be
used to increase exposure to a currency, and involve the risk that anticipated currency movements will not be accurately predicted and the Funds total return will be adversely affected as a result. Most forward foreign currency transactions
entered into by the Funds calculate the obligations of the parties to the agreement on a net basis. Consequently, a Funds obligations will be equal to the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the net amount). A Funds gain or loss position under the forward transaction will be accrued daily and any net loss positions will be covered by the segregation of assets
determined to be liquid by the Funds investment adviser in accordance with established procedures.
Precise matching of the amount of
forward currency contracts and the value of securities denominated in such currencies of a Fund will not generally be possible, since the future value of such securities in foreign currencies will change as a consequence of market movements in the
value of those securities between the date the forward currency contract is entered into and the date it matures. Prediction of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under certain circumstances, the Fund may commit a substantial portion of its assets to the consummation of these contracts. The Fund generally will not enter into such forward currency contracts or maintain a net
exposure to such contracts where the consummation of the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Funds portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies.
At the maturity of a forward currency contract, a Fund may either sell the portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
It may be necessary for a Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver.
If a Fund retains a portfolio security and engages in an offsetting foreign currency transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract
prices. If the Fund engages in an offsetting foreign currency transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the date the Fund enters into a
forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
A Funds dealings in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Use of forward currency contracts to hedge against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result from an increase in
the value of that currency.
49
Although a Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings
of foreign currencies into U.S. dollars on a daily basis. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
GOVERNMENT INTERVENTION IN FINANCIAL MARKETS
Recent instability in the financial markets has led the U.S. Government to take a number of unprecedented actions designed to support certain financial
institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. Most significantly, the U.S. Government has enacted a broad-reaching new regulatory framework over the financial
services industry and consumer credit markets, the potential impact of which on the value of securities held by a Fund is unknown. Federal, state, and other governments, their regulatory agencies, or self regulatory organizations may take actions
that affect the regulation of the instruments in which the Funds invest, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Funds themselves are regulated. Such
legislation or regulation could limit or preclude a Funds ability to achieve its investment objective.
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 a program may have positive or
negative effects on the liquidity, valuation and performance of the Funds portfolio holdings. Furthermore, volatile financial markets can expose the Funds to greater market and liquidity risk and potential difficulty in valuing portfolio
instruments held by the Funds. Each Funds investment adviser will monitor developments and seek to manage the Fund in a manner consistent with achieving the Funds investment objective, but there can be no assurance that it will be
successful in doing so.
The value of a Funds holdings is also generally subject to the risk of future local, national, or global
economic disturbances based on unknown weaknesses in the markets in which a fund invests. In the event of such a disturbance, issuers of securities held by a Fund may experience significant declines in the value of their assets and even cease
operations, or may receive government assistance accompanied by increased restrictions on their business operations or other government intervention. In addition, it is not certain that the U.S. Government will intervene in response to a future
market disturbance and the effect of any such future intervention cannot be predicted. It is difficult for issuers to prepare for the impact of future financial downturns, although companies can seek to identify and manage future uncertainties
through risk management programs.
INCREASING GOVERNMENT DEBT
The total public debt of the United States as a percent of gross domestic product has grown rapidly since the beginning of the recent financial downturn. Current governmental agencies project that the
United States will continue to maintain high debt levels even after the end of the downturn. Although high debt levels do not necessarily indicate or cause economic problems, they may create certain systemic risks if sound debt management practices
are not implemented. A high national debt level may increase market pressures to meet government funding needs, which may drive debt cost higher and cause the U.S. Treasury to sell additional debt with shorter maturity periods, thereby increasing
refinancing risk. A high national debt also raises concerns that the U.S. Government will not be able to make principal or interest payments when they are due. In the worst case, unsustainable debt levels can decline the valuation of currencies, and
can prevent the U.S. Government from implementing effective counter-cyclical fiscal policy in economic downturns.
RATINGS AS INVESTMENT
CRITERIA
In general, the ratings of nationally recognized rating services represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and subjective, are not absolute standards of quality and do not evaluate the market value risk of the securities. These ratings will be used by the Funds as initial criteria for the
selection of portfolio securities, but the Funds also will rely upon the independent advice of their advisers to evaluate potential investments. Among the factors that will be considered are the long-term ability of the issuer to pay principal and
interest and general economic trends.
If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates,
or if the maturity is extended, a Funds portfolio managers will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults, the investors in a security held by a Fund may become the holders
of underlying assets. In that case, the Fund may become the holder of securities that it could not otherwise purchase at a time when those assets may be difficult to sell or can be sold only at a loss.
LENDING OF PORTFOLIO SECURITIES
To realize
additional income, certain of the Funds may lend securities with a value of up to 30% of their respective total assets to broker-dealers, institutional investors or other persons. Each loan will be secured by collateral which is maintained at no
less than 100% of the value of the securities loaned by
marking-to-market
daily. A Fund will have the right to call each loan and obtain the securities on five business
days notice or, in connection with securities trading on foreign markets, within a longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. Loans will only be
made to persons deemed by the Funds investment adviser to be of good standing in accordance with standards approved by the Board and will not be made unless, in the judgment of the Funds investment adviser, the consideration to be earned
from such loans would justify the risk. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail
financially. In addition, voting rights or rights to consent with respect to the loaned securities pass to the borrower.
TEMPORARY DEFENSIVE
MEASURES
Each Fund may establish and maintain reserves when the Funds investment adviser determines that such reserves would be
desirable for temporary defensive purposes (for example, during periods of substantial volatility in interest rates) or to enable it to take advantage of buying opportunities. A Funds reserves may be invested in domestic and foreign money
market instruments, including government obligations.
BORROWING
Each Fund may borrow for temporary, extraordinary or emergency purposes, or for the clearance of transactions, and then only in amounts not exceeding 30% of its total assets valued at market (for this
purpose, reverse repurchase agreements and delayed delivery transactions covered by segregated accounts are not considered to be borrowings). The Payden U.S. Government Fund may not borrow amounts exceeding 33% of total assets valued at market
(including reverse repurchase agreements and delayed delivery transactions). The 1940 Act requires each Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell securities at that time. To avoid the potential leveraging effects of a Funds borrowings, additional investments will not be made while borrowings are in excess of 5%
of the Funds total assets. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. Each Fund also may be required to maintain minimum average balances in connection with
any such borrowings or to pay a commitment or other fee to maintain a line of credit, either of which would increase the cost of borrowing over the stated interest rate.
Borrowing involves special risk considerations. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. To
the extent a Fund is leveraged, the value of its assets will tend to increase more when its portfolio securities increase in value, and to decrease more when its portfolio securities decrease in value, than if its assets were not leveraged. The
rights of any lender to the Fund to receive payments of interest or repayments of principal will be senior to those of the investors in the Fund. Consequently, the Fund might have to sell portfolio securities to meet interest or principal payments
at a time when fundamental investment considerations would not favor such sales. Also, the terms of any borrowings may contain provisions that limit certain activities of the Fund, including the ability to make distributions.
50
AVERAGE MATURITY AND DURATION CALCULATIONS
Average Maturity
The portfolio average maturity of a Fund will be computed by weighting the
maturity of each security in the Funds portfolio by the market value of that security. For securities which have put dates, reset dates, or trade based on average life, the put date, reset date or average life will be used instead of the final
maturity date for the average maturity calculation. Average life is normally used when trading mortgage-backed securities and asset-backed securities.
Duration
One common measure of the price volatility of a fixed income security is duration, a
weighted average
term-to-maturity
of the present value of a securitys cash flows. As it is a weighted
term-to-maturity,
duration is generally measured in years and can vary from zero to the
time-to-maturity
of the security.
Duration is a complex formula that utilizes cash flow and the market yield of the security. Bonds of the same maturity can have different durations if they have different coupon rates or yields.
For securities which pay periodic coupons and have a relatively short maturity, duration tends to approximate the term to maturity. As the maturity of
the bond extends, the duration also extends but at a slower rate. For example, the duration of a
2-year
security can be about 1.8 years; the duration of a
30-year
bond will be roughly 10 to 11 years. However, the duration of any security that pays interest only at maturity is the term to maturity. Thus a
30-year
zero coupon bond has a duration of 30 years.
Asset-backed and mortgage-backed securities require a more complex duration calculation. These securities are generally collateralized with
loans issued to individuals or businesses and often allow the borrower the discretion to repay the loan prior to maturity. Loan prepayments typically occur when interest rates have fallen sufficiently to allow the borrower to refinance the loan at a
lower interest rate. Given that the cash flows for these types of securities are not known with certainty, the standard duration calculation is not accurate. An effective duration is calculated instead, using a process in which cash flows are
estimated and duration is computed for a variety of interest rate scenarios. The effective duration of the security is the average of these durations weighted by the probability of each interest rate scenario. The effective duration for a bond with
known cash flows is the same as its modified duration.
The effective duration of the portfolio can be determined by weighting the effective
duration of each bond by its market value. Effective duration is a much better indicator of price volatility than term to maturity. For example, the term to maturity for both a
30-year
bond and a
30-year
zero coupon security is 30 years. A portfolio manager using average maturity to judge price volatility would expect to see no difference in portfolio impact from these two securities (given equal
yield). However, the
30-year
zero coupon bond will experience a percentage price change roughly three times greater than that of the
30-year
bond.
DISCLOSURE OF FUND PORTFOLIO HOLDINGS
In order to exercise oversight over the disclosure of information about portfolio securities, the Board has adopted a policy and related procedures with respect to the disclosure of the portfolio holdings
of each of its Funds. You may obtain a listing of the portfolio holdings of any Fund by sending a written request to the Fund at 333 South Grand Avenue, 32nd Floor, Los Angeles, CA 90071. With the exception of certain third-party providers to the
Funds, portfolio holdings of the Fund are made available to any person, including without limitation individual investors, institutional investors, intermediaries that distribute the Funds shares and rating and ranking organizations, as of a
month-end
and are released after the following month-end. As an example, Fund portfolio holdings as of January 31 are first made available to any person on March 1.
Employees of the following third-party service providers, whose job responsibilities require them to have access to a Funds portfolio holdings on a
daily basis, are not subject to the delayed availability policy: the Funds investment
51
adviser, fund administrator, fund accountant, custodian, transfer agent, independent registered public
accounting firm, outside counsel, and financial printer. Each of these third-party providers requires that their employees maintain the confidentiality of this information and prohibits any trading based on this confidential information. In
addition, in order to comply with amendments to Rule
2a-7
under the 1940 Act, information concerning the holdings of the Payden Cash Reserves Money Market Fund, as well as its weighted average maturity and
weighted average life, will be posted on the Payden Funds website five business days after the end of the month and will remain posted for six months thereafter.
None of the Funds, their investment advisers, or any other party receives any compensation in connection with the disclosure of information about portfolio holdings of a Fund. Further, there are no
ongoing arrangements for any Fund to make available to any person information on the Funds portfolio holdings outside the disclosure policy just described. Finally, the Funds Chief Compliance Officer must approve any disclosure of the
Funds portfolio holdings that is outside the terms of this disclosure policy.
There can be no guarantee that a Funds disclosure
policy and related procedures will be effective in preventing the misuse of information about portfolio holdings of the Fund by the persons in possession of this information.
MANAGEMENT OF THE P&R TRUST
TRUSTEES AND OFFICERS
The Trustees of the P&R Trust are responsible for the overall management of the Funds, including establishing the Funds policies, general
supervision and review of their investment activities. Massachusetts law requires each Trustee to perform his or her duties as a Trustee, including duties as a member of any Board committee on which he or she serves, in good faith, in a manner he or
she reasonably believes to be in the best interests of the P&R Trust, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The officers of the P&R Trust, who administer the Funds
daily operations, are appointed by the Board of Trustees.
Board of Trustees
The current members of the Board of Trustees and their affiliations and principal occupations for the past five years are as set forth below. The Trustees listed as Independent Trustees are
not interested persons of the P&R Trust, as defined in the 1940 Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME
,
ADDRESS
AND
AGE
|
|
POSITION
WITH
P
&
R
TRUST
|
|
YEAR
FIRST
ELECTED
AS
A
TRUSTEE
OF
P
&
R
TRUST
|
|
PRINCIPAL
OCCUPATION
(
S
)
DURING
PAST
5
YEARS
|
|
NUMBER
OF
P
&
R
TRUST
SERIES
OVERSEEN
BY
TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD
BY
TRUSTEE
|
|
OTHER
RELEVANT
EXPERIENCE
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W.D. Hilton, Jr.
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 66
|
|
Trustee
|
|
1993
|
|
President and CEO, Trust Services, Inc.; Executive Director, NGC Bodily Injury Trust; and Managing Trustee, Fuller-Austin Trust
|
|
All (19)
|
|
None
|
|
Bank board experience
Executive management (CFO) experience
Board service for charitable/ educational/nonprofit organizations
|
|
|
|
|
|
|
|
Gerald S. Levey, M.D.
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 76
|
|
Trustee
|
|
2000
|
|
Vice Chancellor and Dean (1994-2010) and Dean Emeritus (2010-present) and Distinguished Professor of Medicine (1998-present), David Geffen School of Medicine at the University of
California, Los Angeles
|
|
All (19)
|
|
None
|
|
Executive management experience
Board service for charitable/ educational/nonprofit organizations
|
|
|
|
|
|
|
|
Thomas V. McKernan
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 69
|
|
Trustee
|
|
1993
|
|
Chairman, Automobile Club of Southern California
|
|
All (19)
|
|
None
|
|
Executive management (CFO) experience
Board service for charitable/ educational/nonprofit organizations
MBA
|
|
|
|
|
|
|
|
Rosemarie T. Nassif
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 71
|
|
Trustee
|
|
2008
|
|
President (1999-2010) and President Emerita (2010-present), Holy Names University, Oakland; Program Director, Conrad Hilton Foundation
|
|
All (19)
|
|
None
|
|
Bank board experience
Board service for charitable/ educational/nonprofit organizations
|
|
|
|
|
|
|
|
Andrew J. Policano
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 64
|
|
Trustee
|
|
2008
|
|
Dean, The Paul Merage School of Business, at the University of California Irvine
|
|
All (19)
|
|
Director, Badger Meter, Inc. (flow measurement
and manufacturer); Director, Rockwell
|
|
Published research finance & economics
Board service for charitable/
educational/nonprofit organizations
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME
,
ADDRESS
AND
AGE
|
|
POSITION
WITH
P
&
R
TRUST
|
|
YEAR
FIRST
ELECTED
AS
A
TRUSTEE
OF
P
&
R
TRUST
|
|
PRINCIPAL
OCCUPATION
(
S
)
DURING
PAST
5
YEARS
|
|
NUMBER
OF
P
&
R
TRUST
SERIES
OVERSEEN
BY
TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD
BY
TRUSTEE
|
|
OTHER
RELEVANT
EXPERIENCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collins (aerospace and communications company)
|
|
Ph.D. Economics
|
|
|
|
|
|
|
|
Dennis C. Poulsen
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 70
|
|
Trustee
|
|
1992
|
|
Chairman of the Advisory Board, Rose Hills Company
(mortuary and cemetery)
|
|
All (19)
|
|
|
|
Executive management (CEO) experience
Board service for charitable/ educational/nonprofit organizations
J.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stender E. Sweeney
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 74
|
|
Trustee
|
|
1992
|
|
Private Investor
|
|
All (19)
|
|
Director, Avis
Budget Group, Inc.
(car rental company)
|
|
Corporate board experience (audit chair)
Executive management (CFO) experience
Board service for charitable/ educational/nonprofit organizations
MBA
|
|
|
|
|
|
|
|
Interested Trustees*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan A. Payden
333 South Grand
Avenue Los Angeles,
CA
90071
Age: 81
|
|
Chairman, CEO and Trustee
|
|
1992
|
|
President, Chief
Executive Officer and
Director, Payden &
Rygel
|
|
All (19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael E. Salvay
333 South Grand
Avenue Los Angeles,
CA 90071
Age: 51
|
|
Trustee
|
|
2009
|
|
Managing Principal,
Payden & Rygel
|
|
All (19)
|
|
|
|
|
|
|
|
|
|
|
|
Mary Beth Syal
333 South Grand
Avenue Los Angeles,
CA
90071
Age: 51
|
|
Trustee
|
|
2000
|
|
Managing Principal and
Director, Payden &
Rygel
|
|
All (19)
|
|
|
|
|
*
|
Interested persons of the P&R Trust by virtue of their affiliation with Payden.
|
Information Concerning the Board
The Role of the Board
The Board provides oversight of the management and operations of all of the Funds. Like all mutual funds, the
day-to-day
responsibility for the management and operation of the Funds is the responsibility of various service providers to the Funds, such as the Funds investment advisers, distributor,
administrator, custodian and transfer agent. The Board approves all significant agreements between the Funds and their service providers. The Board has appointed various senior individuals of an adviser to the Funds to serve as officers of the
P&R Trust, with responsibility to monitor and report to the Board on the
day-to-day
operations of the Funds. In conducting this oversight, the Board receives regular
reports from these officers and service providers regarding the operations of each of the Funds. The Board has appointed a Chief Compliance Officer who administers the compliance program for the Funds and regularly reports to the Board as to
compliance matters. Some of these reports are provided as part of formal board meetings which are typically held quarterly, in person, and involve the Boards review of recent operations of the various Funds. From time to time, one or more
members of the Board may also meet with P&R Trust officers in less formal settings, between formal board meetings, to discuss various topics. In all cases, however, the role of the Board and of any individual Trustee of the P&R Trust is one
of oversight and not of management of the
day-to-day
affairs of the Funds and its oversight role does not make the Board a guarantor of the investments, operations or
activities of the various Funds.
Board Leadership Structure
The Board has structured itself in a manner that it believes allows it to effectively perform its oversight function. It has established three standing committees, an Audit Committee, a Pricing Committee
and a Governance Committee, which are discussed in greater detail below under Board Committees. Seventy percent of the members of the Board are Independent Trustees. The members of each of the Audit Committee and the Governance Committee
are all Independent Trustees. The Chairman of the Board is also the President and Chief Executive Officer (CEO) of Payden. The Board has not appointed a lead Independent Trustee. The Board reviews its structure annually. In developing
its structure, the Board has considered that the Chairman of the Board, as the CEO of Payden, can provide valuable input based on her tenure with Payden and experience in the types of securities in which the Funds invest. The Board has also
determined that the structure, function and composition of its three board committees are appropriate means to provide effective oversight and address any potential conflicts of interest that may arise from the Chairmans status as an
Interested Trustee.
53
Board Oversight of Risk Management
As part of its oversight function, the Board receives and reviews various risk management reports and assessments and discusses these matters with appropriate management and other personnel. Because risk
management is a broad concept comprised of many elements (such as, for example, investment risk, issuer and counterparty risk, compliance risk, operational risks, business continuity risks, etc.) the oversight of different types of risks is handled
in different ways. For example, the Audit Committee supports the Boards oversight of risk management in a variety of ways, including (i) meeting with the Funds Treasurer and with the Funds independent registered public
accounting firm to discuss, among other things, the internal control structure of the Funds financial reporting function and compliance with the requirements of the Sarbanes-Oxley Act of 2002, and (ii) reporting to the Board as to these
and other matters. Similarly, the Pricing Committee supports the Boards oversight of risk management in the context of the pricing of securities and any potential impact on the net asset value for the various Funds.
Information about Each Trustees Qualification, Experience, Attributes or Skills
The Governance Committee of the Board and the Board itself select Independent Trustees with a view toward constituting a board of trustees that, as a body, possesses the qualifications, skills, attributes
and experience to appropriately oversee the actions of each of the service providers to each of the Funds, to decide upon matters of general policy and to represent the long-term interests of the shareholders of each of the Funds. In doing so, the
Governance Committee and the Board consider the qualifications, skills, attributes and experience of the current Board members, with a view toward maintaining a board that is diverse in viewpoint, experience, education and skills.
The Board seeks Independent Trustees who have high ethical standards and the highest levels of integrity and commitment, who have inquiring and
independent minds, mature judgment, good communication skills, and other complementary personal qualifications and skills that enable them to function effectively in the context of the board and committee structure of the P&R Trust, and who have
the ability and willingness to dedicate sufficient time to effectively fulfill their duties and responsibilities.
As indicated in the chart
above, each Independent Trustee has a significant record of accomplishments in governance, business,
not-for-profit
organizations, government service, academia, law,
accounting or other professions. Although no single list could identify all experience upon which each Independent Trustees draws in connection with his or her service, the chart summarizes key experience for each Independent Trustee. These
references to the qualifications, attributes and skills of the Independent Trustees are pursuant to the disclosure requirements of the SEC, and shall not be deemed to impose any greater responsibility or liability on any Trustee or the Board as a
whole. Notwithstanding the accomplishments listed, none of the Independent Trustees is considered an expert within the meaning of the Federal securities laws with respect to information in the registration statement for the Funds.
Interested Trustees have similar qualifications, skills and attributes as the Independent Trustees. Interested Trustees serve as senior
officers of Payden or its affiliates. This management role with the service providers to the Funds also permits them to make a significant contribution to the Board.
54
Board Committees
The Board has established three standing committees an Audit Committee, a Pricing Committee and a Governance Committee. The functions performed by each of these committees are described below. Each
current Trustee of the P&R Trust attended 75% or more of the respective meetings of the full Board and of any committees of which he or she was a member that were held during the fiscal year ended October 31, 2012. The full Board met four
times during the fiscal year ended October 31, 2012.
Each Independent Trustee is a member of the P&R Trusts Audit Committee.
The principal responsibilities of the Audit Committee are to: (i) oversee the P&R Trusts accounting and financial reporting policies and practices, its internal controls and, as appropriate, the internal controls of certain service
providers; (ii) oversee the quality and objectivity of the P&R Trusts financial statements and the independent audit thereof; (iii) act as a liaison between the P&R Trusts independent registered public accounting firm
and the full Board; (iv) oversee the selection of independent counsel and monitor its continued performance; (v) develop and recommend to the Board for its approval, an annual board self-assessment process; and (vi) receive reports
from its members as to matters of regulatory news, industry developments or matters of interest learned through such members participation in industry forums, conferences or other programs in the nature of continuing education. Thomas V.
McKernan, an Independent Trustee, is Chairman of the Audit Committee. The Audit Committee met four times during the fiscal year ended October 31, 2012.
The Pricing Committees principal function is to generally oversee the P&R Trusts pricing policies and procedures for securities in which the Funds invest as applied on a
day-to-day
basis by the P&R Trusts management and the Funds investment advisers. The Pricing Committee is also responsible for recommending changes in these
policies and procedures for adoption by the Board. W.D. Hilton, Jr., Michael E. Salvay and Mary Beth Syal are the Trustee members of the Pricing Committee, and W.D. Hilton, Jr. is Chairman of the Pricing Committee. The Pricing Committee held four
meetings during the fiscal year ended October 31, 2012.
The Governance Committee is responsible for the identification and evaluation of
possible candidates to serve as Trustees of the P&R Trust. Thomas V. McKernan and W.D. Hilton, Jr., each of whom is an Independent Trustee, are the members of the Governance Committee, and Thomas V. McKernan is Chairman of the Governance
Committee. The Governance Committee did not meet during the fiscal year ended October 31, 2012. Shareholders may recommend names of Trustee candidates to the Governance Committee by written submission to: The Payden & Rygel Investment
Group, Attention: Edward Garlock, Secretary, 333 South Grand Avenue, 32nd Floor, Los Angeles, CA 90071.
55
Governance Committee Considerations for Independent Trustees of the P&R Trust
The Governance Committee evaluates candidates qualifications for Board membership and the independence of such candidates under the requirements of
the 1940 Act. The Governance Committee believes that the significance of each nominees experience, qualifications, attributes or skills is particular to that individual, meaning there is no single litmus test of these matters, and that board
effectiveness is best evaluated at the group level, not at the individual trustee level. As a result, the Governance Committee has not established specific, minimum qualifications that must be met by an individual wishing to serve as a trustee of
the P&R Trust. When evaluating candidates for a position on the Board, the Governance Committee considers the potential impact of the candidate, along with his or her particular experiences, on the Board as a whole. The diversity of a
candidates background or experiences, when considered in comparison to the background and experiences of other members of the Board, may or may not impact the Governance Committees view as to the candidate. In assessing these matters,
the Governance Committee typically considers the following minimum criteria: (i) the candidates experience as a director or senior officer of public companies or other fund complexes; (ii) the candidates educational background;
(iii) the candidates reputation for high ethical standards and personal and professional integrity; (iv) any specific financial, technical or other expertise possessed by the candidate, and the extent to which such expertise would
complement the Boards existing mix of skills and qualifications; (v) the candidates perceived ability to contribute to the ongoing functions of the Board, including the candidates ability and commitment to attend meetings
regularly and work collaboratively with other members of the Board; (vi) the candidates ability to qualify as an Independent Trustee under the requirements of the 1940 Act, the candidates independence from the Funds service
providers and the existence of any other relationships that might give rise to conflict of interest or the appearance of a conflict of interest; and (vii) such other factors as the Governance Committee determines to be relevant in light of the
existing composition of the Board and any anticipated vacancies or other transitions (
e.g.
, whether or not a candidate is an audit committee financial expert under the federal securities laws).
Trustee Compensation.
Each Independent Trustee
receives an annual retainer of $50,000, plus $5,000 for each
in-person
Board meeting, $2,500 for each telephonic Board meeting, $3,000 for each
in-person
Committee
meeting and $1,500 for each telephonic Committee meeting, and reimbursement of related expenses. Chairmen of Board committees each receive an annual retainer of $2,000. The following table sets forth the aggregate compensation paid by the P&R
Trust for the fiscal year ended October 31, 2012 to the Trustees who are not affiliated with Payden, Metzler/Payden or Payden/Kravitz and the aggregate compensation paid to such Trustees for services on the Board. The P&R Trust does not
maintain a retirement plan for its Trustees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
AGGREGATE
COMPENSATION
FROM P&R
TRUST
|
|
|
PENSION OR
RETIREMENT
BENEFITS
ACCRUED AS
PART OF P&R
TRUST
EXPENSES
|
|
|
ESTIMATED
ANNUAL
BENEFITS
UPON
RETIREMENT
|
|
|
TOTAL
COMPENSATION
FROM P&R TRUST
AND P&R TRUST
COMPLEX
PAID TO TRUSTEE
|
|
W.D. Hilton, Jr.
|
|
$
|
96,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
96,000
|
|
Gerald S. Levey, M.D.
|
|
$
|
82,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
82,000
|
|
Thomas V. McKernan
|
|
$
|
84,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
84,000
|
|
Rosemarie T. Nassif
|
|
$
|
82,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
82,000
|
|
Andrew J. Policano
|
|
$
|
82,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
82,000
|
|
Dennis C. Poulsen
|
|
$
|
82,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
82,000
|
|
Stender E. Sweeney
|
|
$
|
82,000
|
|
|
|
None
|
|
|
|
N/A
|
|
|
$
|
82,000
|
|
P&R Trust Fund Shares Owned by Trustees as of December 31, 2012.
|
|
|
|
|
NAME
|
|
DOLLAR RANGE OF FUND
SHARES OWNED*
|
|
AGGREGATE DOLLAR RANGE
OF SHARES OWNED IN
ALL
P&R TRUST FUNDS*
|
Independent Trustees
|
|
|
|
|
W. D. Hilton, Jr
|
|
|
|
Over $100,000
|
Payden Cash Reserves Money Market Fund
|
|
$50,001 - $1,00,000
|
|
|
Payden GNMA Fund
|
|
Over $100,000
|
|
|
Payden High Income Fund
|
|
Over $ 100,000
|
|
|
Payden Core Bond Fund
|
|
Over $ 100,000
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
Over $100,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
Over $100,000
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
Over $100,000
|
|
|
Payden Global Low Duration Fund
|
|
$10,001 - $50,000
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
Over $100,000
|
|
|
Payden Corporate Bond Fund
|
|
Over $100,000
|
|
|
Gerald S. Levey, M.D.
|
|
|
|
$10,001 - $50,000
|
Payden High Income Fund
|
|
$10,001 - $50,000
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$10,001 - $50,000
|
|
|
Thomas V. McKernan
|
|
|
|
Over $100,000
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
Over $100,000
|
|
|
Payden California Municipal Income Fund
|
|
Over $100,000
|
|
|
Payden High Income Fund
|
|
Over $100,000
|
|
|
Payden Tax Exempt Bond Fund
|
|
Over $100,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
Over $100,000
|
|
|
Payden Limited Maturity Fund
|
|
Over $100,000
|
|
|
Payden GNMA Fund
|
|
$1 - $10,000
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
Over $100,000
|
|
|
56
|
|
|
|
|
NAME
|
|
DOLLAR RANGE OF FUND
SHARES
OWNED*
|
|
AGGREGATE DOLLAR RANGE
OF SHARES OWNED IN
ALL
P&R TRUST FUNDS*
|
Rosemarie T. Nassif
|
|
|
|
Over $100,000
|
Payden Emerging Markets Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden High Income Fund
|
|
$10,001 - $50,000
|
|
|
Payden Tax Exempt Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden Low Duration Fund
|
|
$10,001 - $50,000
|
|
|
Andrew J. Policano
|
|
|
|
$50,001 - $100,000
|
Payden Global Fixed Income Fund
|
|
$10,001 - $50,000
|
|
|
Payden Corporate Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden Low Duration Fund
|
|
$1 - $10,000
|
|
|
Payden Global Low Duration Fund
|
|
$1 - $10,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
$1 - $10,000
|
|
|
Payden High Income Fund
|
|
$10,001 - $50,000
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$1 - $10,000
|
|
|
Dennis C. Poulsen
|
|
|
|
Over $100,000
|
Payden Emerging Markets Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden High Income Fund
|
|
$10,001 - $50,000
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
$10,001 - $50,000
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$10,001 - $50,000
|
|
|
Stender E. Sweeney
|
|
|
|
Over $100,000
|
Payden High Income Fund
|
|
$50,001 - $100,000
|
|
|
Payden GNMA Fund
|
|
$50,001 - $100,000
|
|
|
Payden Core Bond Fund
|
|
Over $100,000
|
|
|
Payden Cash Reserves Money Market Fund
|
|
$1 - $10,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
$50,001 - $100,000
|
|
|
Payden Limited Maturity Fund
|
|
$1 - $10,000
|
|
|
Payden California Municipal Income Fund
|
|
$1 - $10,000
|
|
|
Payden Low Duration Fund
|
|
$1 - $10,000
|
|
|
Payden U.S. Government Fund
|
|
Over $100,000
|
|
|
Interested Trustees
|
|
|
|
|
Joan A. Payden
|
|
|
|
Over $100,000
|
Payden Tax Exempt Bond Fund
|
|
$1- $10,000
|
|
|
Payden High Income Fund
|
|
Over $100,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
Over $100,000
|
|
|
Payden California Municipal Income Fund
|
|
Over $100,000
|
|
|
Payden Corporate Bond Fund
|
|
Over $100,000
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
Over $100,000
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
Over $100,000
|
|
|
Payden U.S. Government Fund
|
|
$10,001 - $50,000
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
Over $100,000
|
|
|
Payden California Municipal Income Fund
|
|
Over $100,000
|
|
|
Payden Corporate Bond Fund
|
|
Over $100,000
|
|
|
Michael E. Salvay
|
|
|
|
Over $100,000
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$50,001 - $100,000
|
|
|
Payden Cash Reserves Money Market Fund
|
|
$50,001 - $100,000
|
|
|
Payden Emerging Markets Bond Fund
|
|
$10,001 - $50,000
|
|
|
Payden High Income Fund
|
|
$50,001 - $100,000
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
$10,001 - $50,000
|
|
|
Mary Beth Syal
|
|
|
|
Over $100,000
|
Metzler/Payden European Emerging Markets Fund
|
|
Over $100,000
|
|
|
*
|
Ownership disclosure is made using the following ranges: None; $1 $10,000; $10,001 $50,000; $50,001 $100,000; and over $100,000.
|
Officers
The current
officers of the P&R Trust who perform policy-making functions and their affiliations and principal occupations for the past five years are as set forth below.
|
|
|
|
|
|
|
NAME, ADDRESS AND AGE
|
|
POSITION
WITH
P&R
TRUST
|
|
YEAR FIRST
ELECTED AS
AN OFFICER
OF P&R
TRUST
|
|
PRINCIAPAL OCCUPATION(S)
DURING PAST 5
YEARS
|
Joan A. Payden
333 South Grand Avenue
Los Angeles, CA 90071
Age: 81
|
|
Chairman, CEO and Trustee
|
|
1992
|
|
President, Chief Executive Officer and Director, Payden & Rygel
|
|
|
|
|
Brian W. Matthews
333 South Grand Avenue
Los Angeles, CA 90071
Age: 52
|
|
Vice President and Chief Financial Officer
|
|
2003
|
|
Managing Principal, CFO and Director, Payden & Rygel
|
|
|
|
|
Yot Chattrabhuti
333 South Grand Avenue
Los Angeles, CA 90071
Age: 57
|
|
Vice President
|
|
1997
|
|
Principal, Mutual Fund Operations, Payden & Rygel
|
57
|
|
|
|
|
|
|
NAME, ADDRESS AND AGE
|
|
POSITION WITH
P&R TRUST
|
|
YEAR FIRST
ELECTED
AS AN OFFICER
OF
P&R TRUST
|
|
PRINCIAPAL OCCUPATION(S)
DURING PAST 5
YEARS
|
Bradley F. Hersh
333 South Grand Avenue
Los Angeles, CA 90071
Age: 44
|
|
Vice President and Treasurer
|
|
1998
|
|
Vice President and Treasurer, Payden & Rygel
|
|
|
|
|
David L. Wagner
333 South Grand Avenue
Los Angeles, CA 90071
Age: 62
|
|
Vice President and Chief Compliance Officer
|
|
1996
|
|
Senior Vice President, Risk Management, Payden & Rygel
|
|
|
|
|
Edward S. Garlock
333 South Grand Avenue
Los Angeles, CA 90071
Age: 62
|
|
Secretary
|
|
1997
|
|
Managing Principal, General Counsel, Chief Compliance Officer and Director, Payden & Rygel
|
Codes of Ethics
Each of the P&R Trust, Payden, Metzler/Payden, Payden/Kravitz and Payden & Rygel Distributors, the Funds distributor, has adopted a
Code of Ethics pursuant to
Rule 17j-1
of the 1940 Act. Each Code of Ethics permits applicable personnel subject to the particular Code of Ethics to invest in securities, including under certain
circumstances securities that may be purchased or held by the Funds of the P&R Trust.
Proxy Voting Policies and Procedures
The Board adopted the P&R Trusts Proxy Voting Policy and Procedures (P&R Trust Proxy Policy), pursuant to which it
delegated the responsibility for voting proxies relating to portfolio securities held by the Payden Funds to Payden as part of Paydens general investment management responsibilities, subject to the continuing oversight of the Board. Similarly,
pursuant to the P&R Trust Proxy Policy, the Board delegated the responsibility for voting proxies relating to portfolio securities held by the Metzler/Payden Fund to Metzler/Payden and the responsibility for voting proxies relating to the
portfolio securities held by the Payden/Kravitz Fund to Payden/Kravitz, as part of Metzler/Paydens and Payden/Kravitzs respective general investment management responsibilities, subject to the continuing oversight of the Board. Under the
P&R Trust Proxy Policy, each of Payden, Metzler/Payden and Payden/Kravitz, respectively, shall present to the Board at least annually its policies, procedures and other guidelines for voting proxies, and at least annually, Payden, Metzler/Payden
and Payden/Kravitz, respectively, shall provide to the Board a record of each proxy voted with respect to portfolio securities of each of the Payden Funds, the Metlzer/Payden Fund and the Payden/Kravitz Fund, respectively, during the year. The
delegation by the Board to Payden, Metzler/Payden and Payden/Kravitz, respectively, of the authority to vote proxies may be revoked by the Board, in whole or in part, at any time. Information regarding how the P&R Trust voted proxies relating to
portfolio securities of each of the Funds during the most recent
12-month
period ended June 30 are available without charge, upon request, by calling
1-800-572-9336,
and on the SECs website at www.sec.gov.
Paydens Proxy Voting Policy states that it expects to fulfill its fiduciary obligation to each Payden Fund by monitoring events
concerning the issuer of the particular security at issue and then by voting the proxies in a manner that is consistent with the best interests of the applicable Payden Fund and that does not subordinate the Payden Funds interests to its own.
With respect to several common issues that are presented, Paydens policy provides that, absent special client circumstances or specific client policies or instructions, Payden will vote as follows on the issues listed below:
|
|
|
Vote for stock option plans and other incentive compensation plans that give both senior management and other employees an opportunity to share in the
success of the issuer. However, consideration may be given to the amount of shareholder dilution.
|
|
|
|
Vote for programs that permit an issuer to repurchase its own stock.
|
|
|
|
Vote for proposals that support board independence (e.g., declassification of directors, or requiring a majority of outside directors).
|
58
|
|
|
Vote against management proposals to make takeovers more difficult (e.g., poison pill provisions, or supermajority votes).
|
|
|
|
Vote for management proposals on the retention of its independent registered public accounting firm. However, consideration may be given to the
non-audit
fees paid to the independent registered public accounting firm.
|
|
|
|
Vote for management endorsed director candidates, absent any special circumstances.
|
With respect to the wide variety of social and corporate responsibility issues that are presented, Paydens general policy is to take a position in
favor of responsible social policies that are designed to advance the economic value of the issuing company. Further, Paydens policy provides that, except in rare instances, abstention is not an acceptable position and votes will be cast
either for or against all issues presented. If unusual or controversial issues are presented that are not covered by Paydens general proxy voting policies, Paydens Proxy Voting Committee will determine the manner of voting the proxy in
question. However, many countries have proxy blocking regulations, which prohibit the sale of shares from the date that the vote is filed until the shareholder meeting. A Fund would be unable to sell its shares if a negative news event
occurred during this time, thus harming shareholders. Payden reserves the right to decline to vote proxies for stocks affected by proxy blocking regulations.
From time to time, Payden may purchase for a Funds portfolio securities that have been issued by another of its investment advisory clients (other than an Acquired Fund). In that case, however, a
conflict of interest may exist between the interests of the Fund and the interests of Payden. To ensure that proxy votes are voted in the Funds best interest and unaffected by any conflict of interest that may exist, Payden will vote on a
proxy question that presents a material conflict of interest between the interests of the Fund and the interests of Payden as follows. If one of Paydens general proxy voting policies described above applies to the proxy issue in question,
Payden will vote the proxy in accordance with that policy. This assumes, of course, that the policy in question furthers the interests of the Fund and not of Payden. However, if the general proxy voting policy does not further the interests of the
Fund, Payden will then seek specific instructions from the Fund.
Metzler/Paydens Proxy Voting Policy states that it expects
to fulfill its fiduciary obligation to the Metzler/Payden Fund by monitoring events concerning the issuer of the particular security at issue and then by voting the proxies in a manner that is consistent with the best interests of the Metzler/Payden
Fund and that does not subordinate the Metzler/Payden Funds interests to its own. With respect to several common issues that are presented, Metzler/Paydens policy provides that, absent special client circumstances or specific client
policies or instructions, Metzler/Payden will vote as follows on the issues listed below:
|
|
|
Vote for stock option plans and other incentive compensation plans that give both senior management and other employees an opportunity to share in the
success of the issuer. However, consideration may be given to the amount of shareholder dilution.
|
|
|
|
Vote for programs that permit an issuer to repurchase its own stock.
|
|
|
|
Vote for proposals that support board independence (e.g., declassification of directors, or requiring a majority of outside directors).
|
|
|
|
Vote against management proposals to make takeovers more difficult (e.g., poison pill provisions, or supermajority votes).
|
|
|
|
Vote for management proposals on the retention of its independent registered public accounting firm. However, consideration may be given to the
non-audit
fees paid to the independent registered public accounting firm.
|
|
|
|
Vote for management endorsed director candidates, absent any special circumstances.
|
With respect to the wide variety of social and corporate responsibility issues that are presented, Metzler/Paydens general policy is to take a
position in favor of responsible social policies that are designed to advance the economic value of the issuing company. Further, Metzler/Paydens policy provides that, except in rare instances, abstention is not an acceptable position and
votes will be cast either for or against all issues presented. If unusual or controversial
59
issues are presented that are not covered by Metzler/Paydens general proxy voting policies,
Metzler/Paydens Proxy Voting Committee will determine the manner of voting the proxy in question. However, many countries have proxy blocking regulations, which prohibit the sale of shares from the date that the vote is filed until
the shareholder meeting. The Metzler/Payden Fund would be unable to sell its shares if a negative news event occurred during this time, thus harming shareholders. Metzler/Payden reserves the right to decline to vote proxies for stocks affected by
proxy blocking regulations.
From time to time, Metzler/Payden may purchase for the Metzler/Payden Funds portfolio securities that have
been issued by another of its investment advisory clients (other than an Acquired Fund). In that case, however, a conflict of interest may exist between the interests of the Metzler/Payden Fund and the interests of Metzler/Payden. To ensure that
proxy votes are voted in the Metzler/Payden Funds best interest and unaffected by any conflict of interest that may exist, Metzler/Payden will vote on a proxy question that presents a material conflict of interest between the interests of the
Metzler/Payden Fund and the interests of Metzler/Payden as follows. If one of Metzler/Paydens general proxy voting policies described above applies to the proxy issue in question, Metzler/Payden will vote the proxy in accordance with that
policy. This assumes, of course, that the policy in question furthers the interests of the Metzler/Payden Fund and not of Metzler/Payden. However, if the general proxy voting policy does not further the interests of the Metzler/Payden Fund,
Metzler/Payden will then seek specific instructions from the Metzler/Payden Fund.
Payden/Kravitzs Proxy Voting Policy
states that it expects to fulfill its fiduciary obligation to the Payden/Kravitz Fund by monitoring events concerning the issuer of the particular security at issue and then by voting the proxies in a manner that is consistent with the best
interests of the Payden/Kravitz Fund and that does not subordinate the Payden/Kravitz Funds interests to its own. With respect to several common issues that are presented, Payden/Kravitzs policy provides that, absent special client
circumstances or specific client policies or instructions, Payden/Kravitz will vote as follows on the issues listed below:
|
|
Vote for stock option plans and other incentive compensation plans that give both senior management and other employees an opportunity to share in the
success of the issuer. However, consideration may be given to the amount of shareholder dilution.
|
|
|
Vote for programs that permit an issuer to repurchase its own stock.
|
|
|
Vote for proposals that support board independence (e.g., declassification of directors, or requiring a majority of outside directors).
|
|
|
Vote against management proposals to make takeovers more difficult (e.g., poison pill provisions, or supermajority votes).
|
|
|
Vote for management proposals on the retention of its independent registered public accounting firm. However, consideration may be given to the
non-audit
fees paid to the independent registered public accounting firm.
|
|
|
Vote for management endorsed director candidates, absent any special circumstances.
|
With respect to the wide variety of social and corporate responsibility issues that are presented, Payden/Kravitzs general policy is to take a
position in favor of responsible social policies that are designed to advance the economic value of the issuing company. Further, Payden/Kravitzs policy provides that, except in rare instances, abstention is not an acceptable position and
votes will be cast either for or against all issues presented. If unusual or controversial issues are presented that are not covered by Payden/Kravitzs general proxy voting policies, Payden/Kravitzs Proxy Voting Committee will determine
the manner of voting the proxy in question. However, many countries have proxy blocking regulations, which prohibit the sale of shares from the date that the vote is filed until the shareholder meeting. The Payden/Kravitz Fund would be
unable to sell its shares if a negative news event occurred during this time, thus harming shareholders. Payden/Kravitz reserves the right to decline to vote proxies for stocks affected by proxy blocking regulations.
From time to time, Payden/Kravitz may purchase for the Payden/Kravitz Funds portfolio securities that have been issued by another of its investment
advisory clients. In that case, however, a conflict of interest may exist between the interests of the Payden/Kravitz Fund and the interests of Payden/Kravitz. To ensure that proxy votes are voted in the Payden/Kravitz Funds best interest and
60
unaffected by any conflict of interest that may exist, Payden/Kravitz will vote on a proxy question that
presents a material conflict of interest between the interests of the Payden/Kravitz Fund and the interests of Payden/Kravitz as follows. If one of Payden/Kravitzs general proxy voting policies described above applies to the proxy issue in
question, Payden/Kravitz will vote the proxy in accordance with that policy. This assumes, of course, that the policy in question furthers the interests of the Payden/Kravitz Fund and not of Payden/Kravitz. However, if the general proxy voting
policy does not further the interests of the Payden/Kravitz Fund, Payden/Kravitz will then seek specific instructions from the Payden/Kravitz Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Control Persons
of the Payden Funds, the Metzler/Payden Fund and the Payden/Kravitz Fund
As of July 9, 2013, the following persons held of record 25% or more
of the outstanding shares of the Payden Funds, the Metzler/Payden Fund and the Payden/Kravitz Fund. The P&R Trust has no other information regarding the beneficial ownership of such shares:
|
|
|
|
|
|
|
|
|
|
|
PAYDEN CALIFORNIA MUNICIPAL INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
53.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN CORE BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
JICARILLA APACHE NATION
|
|
DULCE
|
|
|
NM
|
|
|
|
33.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN CORE BOND FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
|
|
JOHN BARNETT STEWART
|
|
RAYNE
|
|
|
LA
|
|
|
|
25.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN CORPORATE BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
32.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKET BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
34.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKET BOND FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
76.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKETS LOCAL BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
JOHN ARRILLAGA SURVIVORS TRUST
|
|
PALO ALTO
|
|
|
CA
|
|
|
|
27.59
|
%
|
RICHARD PEERY SEPARATE PROPERTY TRUST
|
|
PALO ALTO
|
|
|
CA
|
|
|
|
27.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKETS LOCAL BOND FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
54.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN EQUITY INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
54.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN GLOBAL FIXED INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
|
NJ
|
|
|
|
42.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN GNMA FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
38.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN HIGH INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
|
NJ
|
|
|
|
32.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN HIGH INCOME FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
|
NJ
|
|
|
|
63.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
METZLER/PAYDEN EUROPEAN EMERGING MARKETS FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SHWAB & CO INC
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
52.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN CASH RESERVES MONEY MARKET FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
MAC & CO
|
|
PITTSBURGH
|
|
|
PA
|
|
|
|
49.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN/KRAVITZ CASH BALANCE PLAN, INSTITUTIONAL CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SHWAB & CO INC
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
29.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN/KRAVITZ CASH BALANCE PLAN, RETIREMENT CLASS
|
|
|
|
|
|
|
|
|
|
|
HARTFORD LIFE INSURANCE CO
|
|
HARTFORD
|
|
|
CT
|
|
|
|
77.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN TAX EXEMPT BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
|
|
CHARLES SHWAB & CO INC
|
|
SAN FRANCISCO
|
|
|
CA
|
|
|
|
76.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
PAYDEN US GOVERNMENT FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
|
|
NATIONWIDE TRUST CO
|
|
COLUMBUS
|
|
|
OH
|
|
|
|
58.53
|
%
|
61
If any of the above Payden Funds held an annual or special meeting of shareholders, the effect of other
shareholders voting rights could be diminished by the influence of these controlling shareholders substantial voting power.
Principal Holders of Securities of the Payden Funds, the Metzler/Payden Fund and the Payden/Kravitz Fund
As of July 9, 2013, the following persons held of record 5% or more of the outstanding shares of the Payden Funds, the Metzler/Payden Fund and the
Payden/Kravitz Fund. The P&R Trust has no other information regarding the beneficial ownership of such shares:
|
|
|
|
|
|
|
|
|
PAYDEN CALIFORNIA MUNICIPAL INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
53.73
|
%
|
P. POLLOCK
|
|
BEVERLY HILLS
|
|
CA
|
|
|
7.80
|
%
|
DUBAIN 1991 TRUST
|
|
SAN FRANCISCO
|
|
CA
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN CORE BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
JICARILLA APACHE NATION
|
|
DULCE
|
|
NM
|
|
|
33.61
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
24.99
|
%
|
SALEM HOSPITAL
|
|
SALEM
|
|
OR
|
|
|
6.24
|
%
|
ST LUKES REGIONAL MEDICAL CENTER
|
|
BOISE
|
|
ID
|
|
|
5.61
|
%
|
BERT BELL/PETE ROZELLE NFL PLAYER RETIREMENT PLAN
|
|
BALTIMORE
|
|
MD
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN CORE BOND FUND. ADVISER CLASS
|
|
|
|
|
|
|
|
|
J. STEWART
|
|
RAYNE
|
|
LA
|
|
|
25.04
|
%
|
SEI PRIVATE TRUST COMPANY
|
|
OAKS
|
|
PA
|
|
|
21.00
|
%
|
H. MCDONALD & D. MCDONALD
|
|
WASHINGTON
|
|
DC
|
|
|
17.71
|
%
|
P. MILLS
|
|
ALBUQUERQUE
|
|
NM
|
|
|
11.93
|
%
|
J. ELLIOT & J. ELLIOT
|
|
LAS VEGAS
|
|
NV
|
|
|
8.71
|
%
|
UBS FINANCIAL SERVICES INC
|
|
TOLEDO
|
|
OH
|
|
|
6.49
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN CORPORATE BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
32.89
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
11.74
|
%
|
PEERY FOUNDATION
|
|
PALO ALTO
|
|
CA
|
|
|
10.34
|
%
|
TEXAS TECH UNIVERSITY
|
|
LUBBOCK
|
|
TX
|
|
|
6.25
|
%
|
JOAN A PAYDEN LIVING TRUST
|
|
SANTA MONICA
|
|
CA
|
|
|
6.05
|
%
|
A&P CHILDREN INVESTMENT LLC
|
|
PALO ALTO
|
|
CA
|
|
|
5.80
|
%
|
ARRILLAGA FOUNDATION
|
|
PALO ALTO
|
|
CA
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKET BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
34.90
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
24.20
|
%
|
TD AMERITRADE INC
|
|
OMAHA
|
|
NE
|
|
|
6.27
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKET BOND FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
76.57
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
11.78
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKETS BOND FUND, INSTUTIONAL CLASS
|
|
|
|
|
|
|
|
|
NORTHERN TRUST AS CUSTODIAN
|
|
CHICAGO
|
|
IL
|
|
|
22.96
|
%
|
JOHN ARRILLAGA SURVIVORS TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
19.83
|
%
|
RICHARD T PEERY SEPARATE PROPERTY TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
19.83
|
%
|
AMERICAN FEDERATION OF MUSICIANS & EMPLOYERS PENSION PLAN
|
|
NEW YORK
|
|
NY
|
|
|
17.52
|
%
|
BUILDING SERVICE 32BJ PENSION FUND
|
|
NEW YORK
|
|
NY
|
|
|
14.99
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKETS LOCAL BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
JOHN ARRILLAGA SURVIVORS TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
27.59
|
%
|
RICHARD T PEERY SEPARATE PROPERTY TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
27.59
|
%
|
VALLEE CO
|
|
MILWAUKEE
|
|
WI
|
|
|
20.58
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EMERGING MARKETS LOCAL BOND FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO INC
|
|
SAN FRANCISCO
|
|
CA
|
|
|
54.24
|
%
|
RAYMOND JAMES
|
|
OOLTEWAH
|
|
TN
|
|
|
5.90
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
5.38
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EQUITY INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
54.19
|
%
|
NATIONAL I A M BENEFIT TRUST FUND
|
|
WASHINGTON
|
|
DC
|
|
|
6.82
|
%
|
SEI PRIVATE TRUST COMPANY
|
|
OAKS
|
|
PA
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN EQUITY INCOME FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
E TRADE CLEARING LLC
|
|
MERRIFIELD
|
|
VA
|
|
|
14.62
|
%
|
E TRADE CLEARING LLC
|
|
MERRIFIELD
|
|
VA
|
|
|
10.09
|
%
|
E TRADE CLEARING LLC
|
|
JERSEY CITY
|
|
NJ
|
|
|
8.78
|
%
|
UHV SPUTTERING INC
|
|
MORGAN HILL
|
|
CA
|
|
|
6.27
|
%
|
E TRADE CLEARING LLC
|
|
JERSEY CITY
|
|
NJ
|
|
|
6.07
|
%
|
E TRADE CLEARING LLC
|
|
JERSEY CITY
|
|
NJ
|
|
|
5.69
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN GLOBAL FIXED INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
42.52
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
24.88
|
%
|
TD AMERITRADE INC
|
|
OMAHA
|
|
NE
|
|
|
12.81
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN GLOBAL LOW DURATION FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
24.96
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
13.16
|
%
|
KAISER PERMANENTE
|
|
OAKLAND
|
|
CA
|
|
|
9.55
|
%
|
DARTMOUTH COLLEGE
|
|
BOSTON
|
|
MA
|
|
|
9.22
|
%
|
TD AMERITRADE INC
|
|
OMAHA
|
|
NE
|
|
|
5.78
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN GNMA FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
38.32
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
15.17
|
%
|
TD AMERITRADE INC
|
|
OMAHA
|
|
NE
|
|
|
7.87
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN GNMA FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
NATIONWIDE TRUST CO
|
|
COLUMBUS
|
|
OH
|
|
|
23.33
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
8.83
|
%
|
E TRADE CLEARING LLC
|
|
JERSEY CITY
|
|
NJ
|
|
|
8.18
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
5.62
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN HIGH INCOME FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
32.37
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
11.03
|
%
|
JOHN ARRILLAGA SURVIVORS TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
5.62
|
%
|
RICHARD T PEERY SEPARATE PROPERTY TRUST
|
|
PALO ALTO
|
|
CA
|
|
|
5.62
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN HIGH INCOME FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
63.56
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
11.99
|
%
|
UHV SPUTTERING INC
|
|
MORGAN HILL
|
|
CA
|
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN LIMITED MATURITY FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
ASSOC ELECTRIC & GAS INS SERVICES LTD
|
|
EAST
RUTHERFORD
|
|
NJ
|
|
|
9.98
|
%
|
INDIANA UNIVERSITY FOUDATION
|
|
BLOOMINGTON
|
|
IN
|
|
|
9.96
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
9.84
|
%
|
LARK SWEEP 1 PARTNERS RESERVE
|
|
THE PLAINS
|
|
VA
|
|
|
8.05
|
%
|
CITY OF JACKSONVILLE
|
|
JACKSONVILLE
|
|
FL
|
|
|
7.45
|
%
|
SGI-USA
|
|
SANTA MONICA
|
|
CA
|
|
|
7.44
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN LOW DURATION FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
NORTH DAKOTA UNIVERSITY
|
|
BISMARCK
|
|
ND
|
|
|
19.34
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
10.17
|
%
|
CYSTIC FIBROSIS FOUNDATION
|
|
BETHESDA
|
|
MD
|
|
|
8.84
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
NEW YORK
|
|
NY
|
|
|
7.40
|
%
|
TD AMERITRADE INC FOR THE
|
|
OMAHA
|
|
NE
|
|
|
6.22
|
%
|
NATIONAL I A M BENEFIT TRUST FUND
|
|
WASHINGTON
|
|
DC
|
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
METZLER/PAYDEN EUROPEAN EMERGING MARKETS FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SHWAB & CO INC
|
|
SAN FRANCISCO
|
|
CA
|
|
|
52.51
|
%
|
TD AMERITRADE INC FOR THE
|
|
OMAHA
|
|
NE
|
|
|
8.48
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN CASH RESERVES MONEY MARKET FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
MAC & CO
|
|
PITTSBURGH
|
|
PA
|
|
|
49.11
|
%
|
BAND & CO
|
|
MILWAUKEE
|
|
WI
|
|
|
10.12
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN/KRAVITZ CASH BALANCE PLAN FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
NATIONWIDE TRUST CO FSB
|
|
COLUMBUS
|
|
OH
|
|
|
15.90
|
%
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
15.25
|
%
|
HARTFORD LIFE INS CO
|
|
HARTFORD
|
|
CT
|
|
|
14.04
|
%
|
WILMINGTON TRUST
|
|
PHOENIX
|
|
AZ
|
|
|
13.33
|
%
|
FIFTH THIRD BANK
|
|
CINCINNATI
|
|
OH
|
|
|
11.36
|
%
|
MASSACHUSETTS MUTUAL LIFE INSURANCE CO
|
|
SPRINGFIELD
|
|
MA
|
|
|
10.27
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN/KRAVITZ CASH BALANCE PLAN FUND, INSTITUTIONAL CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
29.07
|
%
|
JOHN HANCOCK LIFE INSURANCE COMPANY USA
|
|
BOSTON
|
|
MA
|
|
|
14.95
|
%
|
GREAT-WEST TRUST CO
|
|
GREENWOOD
VILLAGE
|
|
CO
|
|
|
13.68
|
%
|
TD AMERITRADE TRUST COMPANY
|
|
DENVER
|
|
CO
|
|
|
6.76
|
%
|
PAYDEN & RYGEL CASH BALANCE PENSION PLAN
|
|
LOS ANGELES
|
|
CA
|
|
|
6.69
|
%
|
NATIONWIDE TRUST CO
|
|
COLUMBUS
|
|
OH
|
|
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN/KRAVITZ CASH BALANCE PLAN FUND, RETIREMENT CLASS
|
|
|
|
|
|
|
|
|
HARTFORD LIFE INS CO
|
|
HARTFORD
|
|
CT
|
|
|
77.06
|
%
|
PERSHING LLC
|
|
JERSEY CITY
|
|
NJ
|
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN TAX EXEMPT BOND FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO
|
|
SAN FRANCISCO
|
|
CA
|
|
|
76.77
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
12.47
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN US GOVERNMENT FUND, INVESTOR CLASS
|
|
|
|
|
|
|
|
|
PUBLIC HOSPITAL DISTRICT NO 2, KIRK COUNTY
|
|
KIRKLAND WA
|
|
MN
|
|
|
19.90
|
%
|
PUBLIC HOSPITAL DISTRICT NO 2, SNOHOMISH COUNTY
|
|
LYNNWOOD
|
|
WA
|
|
|
13.92
|
%
|
PEERY FOUNDATION
|
|
PALO ALTO
|
|
CA
|
|
|
9.56
|
%
|
TD AMERITRADE INC
|
|
OMAHA
|
|
NE
|
|
|
7.36
|
%
|
1ST ENTERPRISE BANK
|
|
LOS ANGELES
|
|
CA
|
|
|
6.68
|
%
|
|
|
|
|
|
|
|
|
|
PAYDEN US GOVERNMENT FUND, ADVISER CLASS
|
|
|
|
|
|
|
|
|
NATIONWIDE TRUST CO
|
|
COLUMBUS
|
|
OH
|
|
|
58.53
|
%
|
NATIONAL FINANCIAL SERVICES CORP
|
|
JERSEY CITY
|
|
NJ
|
|
|
37.34
|
%
|
62
Management Ownership of the Payden Funds, the Metzler/Payden Fund and the Payden/Kravitz Fund.
As of July 9, 2013, the Trustees and officers of the P&R Trust, collectively, owned (1) 4.58% of the outstanding shares of the Metzler/Payden
European Emerging Markets Fund; (2) less than 1% of the outstanding shares of the Payden/Kravitz Fund; and (3) less than 1% of the outstanding shares of each of the Payden Funds, except for the Payden Corporate Bond Fund 6.54%; Payden
California Municipal Income Fund, 4.51%; Payden Equity Income (formerly Payden Value Leaders) Fund, 2.82%; Payden Emerging Markets Bond Fund (Investor Class), 1.61%; Payden Tax Exempt Bond Fund, 2.93%; Payden Emerging Markets Local Bond Fund
(Investor Class), 1.44%; Payden Emerging Markets Local Bond Fund (Adviser Class), 3.41%; and Payden U.S. Government Fund (Adviser Class), 1.18%.
63
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISERS
Adviser Payden
Funds
Payden was founded in 1983 as an independent investment counseling firm specializing in the management of short term fixed income
securities. Today, the firm provides a broad array of investment management services involving both fixed income and equity securities and other investment techniques. Payden is owned by its President and CEO, Joan Payden, who is the majority
shareholder, eleven Managing Principals and eight Principals, all of whom are active in the firms operations. As of June 30, 2013, its staff consisted of 170 employees, 67 of whom either have advanced degrees and/or are Chartered Financial
Analysts. As of such date, it had 334 client relationships, including pension funds, endowments, credit unions, foundations, corporate cash accounts and individuals, and managed total assets of approximately $83 billion, with approximately
$12.5 billion invested globally.
Payden provides investment management services to the Payden Funds pursuant to an Investment Management
Agreement with the P&R Trust, dated as of June 24, 1992, as amended from time to time (the Payden Agreement). The Payden Agreement provides that Payden will pay all expenses incurred in connection with managing the ordinary
course of a Payden Funds business, except the following expenses, which are paid by each Payden Fund: (i) the fees and expenses incurred by a Payden Fund in connection with the management of the investment and reinvestment of the Payden
Funds assets; (ii) the fees and expenses of Trustees who are not affiliated persons, as defined in Section 2(a)(3) of the 1940 Act, of Payden; (iii) the fees and expenses of the Trusts custodian, transfer agent, fund
accounting agent and administrator; (iv) the charges and expenses of legal counsel and independent accountants for the P&R Trust and legal counsel to the Independent Trustees; (v) brokers commissions and any issue or transfer
taxes chargeable to a Payden Fund in connection with its securities and futures transactions; (vi) all taxes and corporate fees payable by a Payden Fund to Federal, state or other governmental agencies; (vii) a Payden Funds portion
of the fees of any trade associations of which the P&R Trust may be a member; (viii) a Payden Funds portion of the cost of fidelity bonds and trustees and officers errors and omission insurance; (ix) the fees and expenses
involved in registering and maintaining registration of a Payden Fund and of its shares with the SEC, registering the P&R Trust as a broker or dealer and qualifying the shares of a Payden Fund under state securities laws, including the
preparation and printing of the P&R Trusts registration statements, prospectuses and statements of additional information for filing under Federal and state securities laws for such purposes; (x) communications expenses with respect
to investor services and all expenses of shareholders and trustees meetings and of preparing, printing and mailing reports to shareholders in the amount necessary for distribution to the shareholders; (xi) litigation and
indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the P&R Trusts business, and (xii) any expenses assumed by the P&R Trust pursuant to a plan of distribution adopted in conformity
with
Rule 12b-1
under the 1940 Act.
The Payden Agreement provides that Payden receives a monthly
fee from each Fund
64
at the following annual rates:
|
|
|
FUND
|
|
FEE
|
Payden Cash Reserves Money Market Fund
|
|
0.15% of average daily net assets
|
|
|
Payden Limited Maturity Fund
|
|
0.28% for the first $1 billion of average daily net assets
|
Payden Low Duration Fund
|
|
0.25% of average daily net assets above $1 billion
|
Payden U.S. Government Fund
|
|
|
Payden Core Bond Fund
|
|
|
|
|
Payden Corporate Bond Fund
|
|
0.35% of average daily net assets
|
|
|
Payden GNMA Fund
|
|
0.27% of average daily net assets
|
|
|
Payden High Income Fund
|
|
0.35% of average daily net assets
|
|
|
Payden Tax Exempt Bond Fund
|
|
0.32% for the first $500 million of average daily net assets
|
|
|
0.28% of average daily net assets for the next $500 million
|
|
|
0.25% of average daily net assets above $1 billion
|
|
|
Payden California Municipal Income Fund
|
|
0.32% for the first $1 billion of average daily net assets
|
|
|
0.25% of average daily net assets above $1 billion
|
|
|
Payden Global Low Duration Fund
|
|
0.30% of the first $2 billion of average daily net assets
|
Payden Global Fixed Income Fund
|
|
0.25% of average daily net assets above $2 billion
|
|
|
Payden Emerging Markets Bond Fund
|
|
0.45% of average daily net assets
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
0.60% of average daily net assets
|
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
0.50% for the first $2 billion of average daily net assets
|
|
|
0.30% of average daily net assets above $2 billion
|
65
Gross fees earned by Payden, Payden Fund expenses subsidized by Payden and the net advisory fee or net
expense subsidy for the past three fiscal years ended October 31 for all Payden Funds are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED OCTOBER 31
|
|
|
|
2010 (000S)
|
|
|
2011 (000S)
|
|
|
2012 (000S)
|
|
|
|
FEE
|
|
|
SUBSIDY
|
|
|
NET
FEE/SUBSIDY
|
|
|
FEE
|
|
|
SUBSIDY
|
|
|
NET
|
|
|
FEE
|
|
|
SUBSIDY
|
|
|
NET
FEE/SUBSIDY
|
|
Payden Cash Reserves Money Market Fund
|
|
$
|
1,286
|
|
|
$
|
(1,314
|
)
|
|
$
|
(28
|
)
|
|
$
|
958
|
|
|
$
|
(1,427
|
)
|
|
$
|
(469
|
)
|
|
$
|
909
|
|
|
$
|
(1,391
|
)
|
|
$
|
(482
|
)
|
Payden Limited Maturity Fund
|
|
|
430
|
|
|
|
(135
|
)
|
|
|
295
|
|
|
|
584
|
|
|
|
(139
|
)
|
|
|
445
|
|
|
|
662
|
|
|
|
(141
|
)
|
|
|
521
|
|
Payden Low Duration Fund
|
|
|
1,329
|
|
|
|
(240
|
)
|
|
|
1,089
|
|
|
|
1,428
|
|
|
|
(155
|
)
|
|
|
1,273
|
|
|
|
1,566
|
|
|
|
(96
|
)
|
|
|
1,470
|
|
Payden U.S. Government Fund
|
|
|
288
|
|
|
|
(55
|
)
|
|
|
233
|
|
|
|
262
|
|
|
|
(24
|
)
|
|
|
238
|
|
|
|
215
|
|
|
|
(26
|
)
|
|
|
189
|
|
Payden GNMA Fund
|
|
|
1,755
|
|
|
|
(1,216
|
)
|
|
|
539
|
|
|
|
1,947
|
|
|
|
(840
|
)
|
|
|
1,107
|
|
|
|
2,623
|
|
|
|
(1,193
|
)
|
|
|
1,430
|
|
Payden Core Bond Fund
|
|
|
1,552
|
|
|
|
|
|
|
|
1,552
|
|
|
|
1,522
|
|
|
|
|
|
|
|
1,522
|
|
|
|
1,748
|
|
|
|
|
|
|
|
1,748
|
|
Payden Corporate Bond Fund
|
|
|
152
|
|
|
|
(132
|
)
|
|
|
20
|
|
|
|
156
|
|
|
|
(137
|
)
|
|
|
19
|
|
|
|
138
|
|
|
|
(101
|
)
|
|
|
37
|
|
Payden High Income Fund
|
|
|
2,897
|
|
|
|
|
|
|
|
2,897
|
|
|
|
3,683
|
|
|
|
|
|
|
|
3,683
|
|
|
|
3,798
|
|
|
|
|
|
|
|
3,798
|
|
Payden Tax Exempt Bond Fund
|
|
|
75
|
|
|
|
(78
|
)
|
|
|
(3
|
)
|
|
|
51
|
|
|
|
(75
|
)
|
|
|
(24
|
)
|
|
|
45
|
|
|
|
(75
|
)
|
|
|
(30
|
)
|
Payden California Municipal Income Fund
|
|
|
144
|
|
|
|
(55
|
)
|
|
|
89
|
|
|
|
137
|
|
|
|
(51
|
)
|
|
|
86
|
|
|
|
150
|
|
|
|
(54
|
)
|
|
|
96
|
|
Payden Global Low Duration Fund
|
|
|
197
|
|
|
|
(47
|
)
|
|
|
150
|
|
|
|
327
|
|
|
|
|
|
|
|
327
|
|
|
|
198
|
|
|
|
(32
|
)
|
|
|
166
|
|
Payden Global Fixed Income Fund
|
|
|
270
|
|
|
|
(117
|
)
|
|
|
153
|
|
|
|
216
|
|
|
|
(99
|
)
|
|
|
117
|
|
|
|
141
|
|
|
|
(97
|
)
|
|
|
44
|
|
Payden Emerging Markets Bond Fund
|
|
|
1,508
|
|
|
|
(184
|
)
|
|
|
1,324
|
|
|
|
2,834
|
|
|
|
|
|
|
|
2,834
|
|
|
|
3,738
|
|
|
|
(146
|
)
|
|
|
3,592
|
|
Payden Emerging Markets Local Bond Fund*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
496
|
|
|
|
(71
|
)
|
|
|
425
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
|
140
|
|
|
|
(50
|
)
|
|
|
90
|
|
|
|
201
|
|
|
|
(58
|
)
|
|
|
143
|
|
|
|
594
|
|
|
|
(146
|
)
|
|
|
448
|
|
Payden Floating Rate Fund**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden Emerging Markets Corporate Bond Fund**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
The Payden Emerging Markets Local Bond Fund commenced operations on November 2, 2011.
|
(**)
|
The Payden Floating Rate Fund and the Payden Emerging Markets Corporate Bond Fund commenced operations on September , 2013.
|
The Payden Funds are responsible for their own operating expenses. Payden has contractually agreed that, for so long as it acts
as investment adviser to certain Payden Funds, the Total Annual Fund Operating Expenses (excluding Acquired Fund Fees and Expenses, interest and taxes) of each of those Funds will not exceed the percentage indicated of the particular Funds
average daily net assets on an annualized basis. In addition, Payden has also contractually agreed to temporarily limit the Total Annual Fund Operating Expenses After Fee Waiver or Expense Reimbursement (excluding Acquired Fund Fees and Expenses,
interest and taxes) for certain Payden Funds to the percentage indicated of the Funds average daily net assets on an annualized basis. This Agreement has a one-year term ending February 28, 2014; it may be renewed and may be amended by
approval of a majority of the P&R Trusts Board of Trustees. Each Payden Fund remains liable to Payden for expenses subsidized in any fiscal year up to a maximum of three years from the end of the period in which the expenses were
subsidized. However, for any Payden Fund in any given year, such reimbursement may not be paid prior to the Payden Funds payment of current ordinary operating expenses, and the level of reimbursement cannot cause the Payden Funds annual
expense ratio to exceed the contractual expense limits discussed above.
66
In the event the operating expenses of a Payden Fund, including all investment advisory and administration
fees, but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, for any fiscal year exceed the Payden Funds applicable expense limitation, Payden shall reduce its advisory fee to the extent of
its share of such excess expenses. The amount of any such reduction to be borne by Payden shall be deducted from the monthly advisory fee otherwise payable with respect to the Payden Fund during such fiscal year; and if such amounts should exceed
the monthly fee, Payden shall pay to the Payden Fund its share of such excess expenses no later than the last day of the first month of the next succeeding fiscal year.
The Payden Agreement provides that Payden will not be liable for any error of judgment or mistake of law or for any loss suffered by the Payden Funds in connection with the performance of the Payden
Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of Paydens duties or
from reckless disregard by Payden of its duties and obligations thereunder. Unless earlier terminated as described below, the Payden Agreement will continue in effect with respect to each Payden Fund for two years after the Funds inclusion in
the P&R Trusts Master Trust Agreement (on or around its commencement of operations) and then continue for each such Payden Fund for periods not exceeding one year so long as such continuation is approved annually by the Board (or by a
majority of the outstanding voting shares of each such Payden Fund as defined in the 1940 Act) and by a majority of the Trustees who are not interested persons of any party to the Payden Agreement by vote cast in person at a meeting called for such
purpose. The Payden Agreement terminates upon assignment and may be terminated with respect to a Payden Fund without penalty on 60 days written notice at the option of either party thereto or by the vote of the shareholders of the Payden
Fund.
Adviser Metzler/Payden Fund
Metzler/Payden, founded in 1998, is a joint venture owned equally by Payden and MP&R Ventures, Inc., an affiliate of B. Metzler seel. Sohn & Co. Holding AG (Metzler) of Frankfurt,
Germany. It has approximately $1.5 billion of assets under management as of June 30, 2013. Payden, founded in 1983, is one of the largest independent investment counseling firms in the United States, with approximately $83 billion in
assets under management as of June 30, 2013. Metzler is a major German financial institution, and through its various subsidiaries, is one of the leading investment managers in Germany. As of June 30, 2013, it manages assets totaling 53 billion
euro for institutional clients and mutual funds, including European equity and balanced funds.
Metzler/Paydens focus is the management
of equity and fixed income securities in both the domestic and global markets. Portfolios are actively managed according to client approved guidelines and benchmarks. In addition to its own employees, Metzler/Paydens investment management
process utilizes different teams, composed of personnel made available by Payden and Metzler pursuant to a Service Agreement, which are responsible for the
day-to-day
management of client portfolios, including the Metzler/Payden Fund, within the broad investment parameters set by Metzler/Paydens
Co-Chief
Investment Officers.
Metzler/Payden provides investment management services to the Metzler/Payden Fund pursuant to an Investment Management Agreement with the P&R Trust,
dated as of January 12, 2011, as amended from time to time (the Metzler/Payden Agreement). The Metzler/Payden Agreement provides that Metzler/Payden will pay all expenses incurred in connection with managing the ordinary course of
the Metzler/Payden Funds business, except the following expenses, which are paid by the Metzler/Payden Fund: (i) the fees and expenses incurred by the Metzler/Payden Fund in connection with the management of the investment and
reinvestment of the Metzler/Payden Funds assets; (ii) the fees and expenses of Trustees who are not affiliated persons, as defined in Section 2(a)(3) of the 1940 Act, of Metzler/Payden; (iii) the fees and expenses of the
Trusts custodian, transfer agent, fund accounting agent and administrator; (iv) the charges and expenses of legal counsel and independent accountants for the P&R Trust and legal counsel to the Independent Trustees;
(v) brokers commissions and any issue or transfer taxes chargeable to the Metzler/Payden Fund in connection with its securities and futures transactions; (vi) all taxes and corporate fees payable by the Metzler/Payden Fund to
Federal, state or other governmental agencies; (vii) the Metzler/Payden Funds portion of the fees of any trade associations of which the P&R Trust may be a member; (viii) the Metzler/Payden Funds portion of the cost of
fidelity bonds and trustees and officers errors and omission insurance; (ix) the fees and expenses involved in registering and maintaining registration of the Metzler/Payden Fund and of its shares with the SEC, registering the P&R Trust as
a broker or dealer and qualifying the shares of the Metzler/Payden Fund under state securities laws, including the preparation and printing of the P&R Trusts registration statements, prospectuses and statements of additional information
for filing under Federal and
67
state securities laws for such purposes; (x) communications expenses with respect to investor services and all expenses of shareholders and trustees meetings and of preparing,
printing and mailing reports to shareholders in the amount necessary for distribution to the shareholders; (xi) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the P&R
Trusts business, and (xii) any expenses assumed by the P&R Trust pursuant to a plan of distribution adopted in conformity with
Rule 12b-1
under the 1940 Act.
The Metzler/Payden Agreement provides that Metzler/Payden receives a monthly fee from the Metzler/Payden Fund at the annual rate of 0.75% of average
daily net assets.
Gross fees earned by Metzler/Payden, Metzler/Payden Fund expenses subsidized by Metzler/Payden and the net advisory fee or
net expense subsidy for the past three fiscal years ended October 31 for the Metzler/Payden Fund are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED OCTOBER 31
|
|
2010 (000S)
|
|
|
2011 (000S)
|
|
|
2012 (000S)
|
|
FEE
|
|
|
SUBSIDY
|
|
|
NET
FEE/SUBSIDY
|
|
|
FEE
|
|
SUBSIDY
|
|
|
NET
FEE/SUBSIDY
|
|
|
FEE
|
|
|
SUBSIDY
|
|
|
NET
FEE/SUBSIDY
|
|
$
|
1,442
|
|
|
$
|
(263
|
)
|
|
$
|
1,179
|
|
|
$1,170
|
|
$
|
(147
|
)
|
|
$
|
1,023
|
|
|
$
|
626
|
|
|
$
|
(62
|
)
|
|
$
|
564
|
|
The Metzler/Payden Fund is responsible for its own operating expenses. Metzler/Payden has contractually agreed to reduce
fees payable to it by the Metzler/Payden Fund and to pay Metzler/Payden Fund operating expenses to the extent necessary to limit the Metzler/Payden Funds aggregate Total Annual Fund Operating Expenses (excluding interest and tax expenses) to
1.50%. Any such reductions made by Metzler/Payden in its fees or payment of expenses which are the Metzler/Payden Funds obligation are subject to reimbursement by the Metzler/Payden Fund to Metzler/Payden, if so requested by Metzler/Payden, in
subsequent fiscal years if the aggregate amount actually paid by the Metzler/Payden Fund toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed this expense limitation on Metzler/Payden Fund
expenses. Metzler/Payden is permitted to be reimbursed only for fee reductions and expense payments made in the previous three fiscal years. Such reimbursement may not be paid prior to the Metzler/Payden Funds payment of current ordinary
operating expenses.
In the event the operating expenses of the Metzler/Payden Fund, including all investment advisory and administration
fees, but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, for any fiscal year exceed the Metzler/Payden Funds applicable expense limitation, Metzler/Payden shall reduce its advisory fee
to the extent of its share of such excess expenses. The amount of any such reduction to be borne by Metzler/Payden shall be deducted from the monthly advisory fee otherwise payable with respect to the Metzler/Payden Fund during such fiscal year; and
if such amounts should exceed the monthly fee, Metzler/Payden shall pay to the Metzler/Payden Fund its share of such excess expenses no later than the last day of the first month of the next succeeding fiscal year.
The Metzler/Payden Agreement provides that Metzler/Payden will not be liable for any error of judgment or mistake of law or for any loss suffered by the
Metzler/Payden Fund in connection with the performance of the Metzler/Payden Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of Metzler/Paydens duties or from reckless disregard by Metzler/Payden of its duties and obligations thereunder. Unless earlier terminated as described below, the Metzler/Payden Agreement will
continue in effect with respect to the Metzler/Payden Fund for two years after the Metzler/Payden Funds inclusion in the P& R Trusts Master Trust Agreement (on or around its commencement of operations) and then continue for the
Metzler/Payden Fund for periods not exceeding one year so long as such continuation is approved annually by the Board (or by a majority of the outstanding voting shares of the Metzler/Payden Fund as defined in the 1940 Act) and by a majority of the
Trustees who are not interested persons of any party to the Metzler/Payden Agreement by vote cast in person at a meeting called for such purpose. The Metzler/Payden Agreement terminates upon assignment and may be terminated with respect to the
Metzler/Payden Fund without penalty on 60 days written notice at the option of either party thereto or by the vote of the shareholders of the Metzler/Payden Fund.
68
Adviser Payden/Kravitz Fund
Payden/Kravitz, founded in 2008, is a joint venture owned equally by Payden and Kravitz Investment Services, Inc. (Kravitz). It has approximately $200 million in assets under management
as of June 30, 2013. Payden, founded in 1983, is one of the largest independent investment counseling firms in the United States, with approximately $83 billion in assets under management as of June 30, 2013. Kravitz is an investment
counseling firm, with approximately $375 million in assets under management as of June 30, 2013. Payden/Kravitz was initially founded to provide investment management services to the Payden/Kravitz Fund, and it provides those services
pursuant to an Investment Management Agreement with the P&R Trust, dated as of June 18, 2008 (the Payden/Kravitz Agreement).
The Payden/Kravitz Agreement provides that Payden/Kravitz will pay for all expenses incurred in connection with managing the ordinary course of the Payden/Kravitz Funds business, except the
following expenses, which are paid by the Payden/Kravitz Fund: (i) the fees and expenses incurred by the Payden/Kravitz Fund in connection with the management of the investment and reinvestment of the Payden/Kravitz Funds assets;
(ii) the fees and expenses of Trustees who are not affiliated persons, as defined in Section 2(a)(3) of the 1940 Act, of Payden/Kravitz; (iii) the fees and expenses of the Payden/Kravitz Funds custodian, transfer agent, fund
accounting agent and administrator; (iv) the Payden/Kravitz Funds portion of charges and expenses of legal counsel and independent accountants for the P&R Trust and legal counsel to the Independent Trustees; (v) brokers
commissions and any issue or transfer taxes chargeable to the Payden/Kravitz Fund in connection with its securities and futures transactions; (vi) all taxes and corporate fees payable by the Payden/Kravitz Fund to Federal, state or other
governmental agencies; (vii) the Payden/Kravitz Funds portion of the fees of any trade associations of which the P&R Trust may be a member; (viii) the Payden/Kravitz Funds portion of the cost of fidelity bonds and trustees
and officers errors and omission insurance; (ix) the fees and expenses involved in registering and maintaining registration of the Payden/Kravitz Fund and of its shares with the SEC and qualifying the shares of the Payden/Kravitz Fund under
state securities laws, including the Payden/Kravitz Funds portion of the preparation and printing of the P&R Trusts registration statements, prospectuses and statements of additional information for filing under the Federal and state
securities laws for such purposes; (x) communications expenses with respect to investor services and all expenses of shareholders and trustees meetings and of preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders; (xi) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the P&R Trusts business; (xii) any expenses assumed by the
P&R Trust on behalf of the Adviser Class or the Retirement Class of the Payden/Kravitz Fund pursuant to the P&R Trusts
Rule 12b-l
Distribution Plan; and (xiii) any expenses payable by
the Payden/Kravitz Fund pursuant to the P&R Trusts Shareholder Servicing Plan. The Payden/Kravitz Agreement provides that Payden/Kravitz receives a monthly fee from the Payden/Kravitz Fund at the annual rate of 1.10% of average daily net
assets.
Gross fees earned by Payden/Kravitz, Payden/Kravitz Fund expenses subsidized by Payden/Kravitz and the net advisory fee or net
expense subsidy for the past three fiscal years ended October 31 for the Payden/Kravitz Fund are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31
|
|
2010 (000s)
|
|
|
2011 (000s)
|
|
|
2012 (000s)
|
|
Fee
|
|
|
(Subsidy)
|
|
|
Net
Fee/(Subsidy)
|
|
|
Fee
|
|
(Subsidy)
|
|
|
Net
Fee/(Subsidy)
|
|
|
Fee
|
|
|
(Subsidy)
|
|
|
Net
Fee/(Subsidy)
|
|
$
|
427
|
|
|
$
|
(284
|
)
|
|
$
|
143
|
|
|
$744
|
|
$
|
(253
|
)
|
|
$
|
491
|
|
|
$
|
1,204
|
|
|
$
|
(337
|
)
|
|
$
|
867
|
|
The Payden/Kravitz Fund is responsible for its own operating expenses under the Payden/Kravitz Agreement. Payden/Kravitz
has agreed to reduce fees payable to it by the Payden/Kravitz Fund under the Payden/Kravitz Agreement, and to pay Payden/Kravitz Fund operating expenses to the extent necessary to limit the Payden/Kravitz Funds aggregate Net Annual Fund
Operating Expenses (excluding interest and tax expenses) to the limit set forth in the Fees and Expenses Table (expense limitation) of the applicable Prospectus. Any such reductions made by Payden/Kravitz in its fees or payment of
expenses which are the Payden/Kravitz Funds obligation are subject to reimbursement by the Payden/Kravitz Fund to Payden/Kravitz if so requested by Payden/Kravitz, in subsequent fiscal years if the aggregate amount actually paid by the
Payden/Kravitz Fund toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the expense limitation on Payden/Kravitz Fund expenses. Payden/Kravitz is permitted to be reimbursed only for fee
reductions and expense payments made in the previous three fiscal years. Such reimbursement may not be paid prior to the Payden/Kravitz Funds payment of current ordinary operating expenses.
In the event the operating expenses of the Payden/Kravitz Fund, including all investment advisory and administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as litigation, for any fiscal year exceed the Payden/Kravitz Funds applicable expense limitation, Payden/Kravitz shall reduce its advisory fee to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Payden/Kravitz shall be deducted from the monthly advisory fee otherwise payable with respect to the Payden/Kravitz Fund during such fiscal year; and if such amounts should exceed
the monthly fee, Payden/Kravitz shall pay to the Payden/Kravitz Fund its share of such excess expenses no later than the last day of the first month of the next succeeding fiscal year.
69
The Payden/Kravitz Agreement provides that Payden/Kravitz will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Payden/Kravitz Fund in connection with the performance of the Payden/Kravitz Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services
or a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of Payden/Kravitzs duties or from reckless disregard by Payden/Kravitz of its duties and obligations thereunder. Unless earlier terminated as
described below, the Payden/Kravitz Agreement will continue in effect with respect to the Payden/Kravitz Fund for two years after the Payden/Kravitz Funds inclusion in the P&R Trusts Master Trust Agreement (on or around the
Payden/Kravitz Funds commencement of operations) and then continue for the Payden/Kravitz Fund for periods not exceeding one year so long as such continuation is approved annually by the Board (or by a majority of the outstanding voting shares
of the Payden/Kravitz Fund as defined in the 1940 Act) and by a majority of the Trustees who are not interested persons of any party to the Payden/Kravitz Agreement by vote cast in person at a meeting called for such purpose. The Payden/Kravitz
Agreement terminates upon assignment and may be terminated with respect to the Payden/Kravitz Fund without penalty on 60 days written notice at the option of either party thereto or by the vote of the shareholders of the Payden/Kravitz
Fund.
SHAREHOLDER SERVICING PLAN
The P&R Trust has adopted a Shareholder Servicing Plan with respect to the Funds that allows each Fund (other than the Payden Cash Reserves Money
Market Fund) to pay to broker-dealers and other financial intermediaries a fee for shareholder services provided to Fund shareholders who invest in the Fund through the intermediary. With respect to each Fund, the fee is payable at an annual rate
not to exceed 0.25% of the Funds average daily net assets invested through the intermediary. Because these fees are paid out of the Funds assets, over time these fees will also increase the cost of a shareholders investment in the
Fund.
The shareholder services that may be provided under the Shareholder Servicing Plan are
non-distribution
shareholder services that the intermediary provides with respect to shares of the Fund owned from time to time by customers of the intermediary. Such services include (i) transfer agent
and
sub-transfer
agent type of services for beneficial owners of Fund shares, (ii) aggregating and processing purchase and redemption orders for Fund shareholders, (iii) providing beneficial owners
of Fund shares who are not record owners with statements showing their positions in the Fund, (iv) processing dividend payments for Fund shares, (v) providing
sub-accounting
services for Fund shares
held beneficially, (vi) forwarding shareholder communications, such as proxies, shareholder reports, dividend and tax notices, and updated prospectuses to beneficial owners of shares who are not record owners, (vii) receiving, tabulating
and transmitting proxies executed by beneficial owners of Fund shares who are not record owners, (viii) responding generally to inquiries these shareholders have about the Fund or Funds, and (ix) providing such other information and
assistance to these shareholders as they may reasonably request.
In addition to fees paid under the Shareholder Servicing Plan for the Funds,
a Funds investment adviser may pay service, administrative or other similar fees to broker-dealers or other financial intermediaries. Those fees are generally for
sub-accounting,
sub-transfer
agency and other shareholder services associated with shareholders whose shares are held of record in omnibus or other group accounts. Those payments are sometimes necessary to ensure that the Fund is
listed on supermarket and other platforms maintained by certain dealers, agents and financial institutions. The Funds investment adviser believes that such payments and listings will make shares of the Fund available to a wider distribution
network. The rate of those fees paid by the Funds investment adviser may vary and ranges from 0.10% to 0.15% of the average daily net assets of the Fund attributable to a particular intermediary.
DISTRIBUTION ARRANGEMENT
Pursuant to a
distribution agreement (the Distribution Agreement) with the P&R Trust, Payden & Rygel Distributors (the Distributor), 333 South Grand Avenue, Los Angeles, California 90071, acts as distributor for each of the
Funds. The Distributor has agreed to use its best efforts to effect sales of shares of the Funds, but is not obligated to sell any specified number of shares. The offering of Fund shares is continuous. The Distribution Agreement contains provisions
with respect to renewal and termination similar to those in the respective Investment
70
Management Agreements described above. Pursuant to the Distribution Agreement, the P&R Trust has agreed
to indemnify the Distributor to the extent permitted by applicable law against certain liabilities under the Securities Act.
Except in
connection with the
Rule 12b-1
distribution plan as described below, no compensation is payable by the Funds to the Distributor for its distribution services. The Distributor pays for the personnel
involved in accepting orders for purchase and redemption of Fund shares, expenses incurred in connection with the printing of Prospectuses and SAIs (other than those sent to existing shareholders), sales literature, advertising and other
communications used in the public offering of shares of a Fund, and other expenses associated with performing services as distributor of the Funds shares. Each Fund pays the expenses of issuance, registration and transfer of its shares,
including filing fees and legal fees.
RULE
12b-1
DISTRIBUTION PLAN
Pursuant to SEC
Rule 12b-1,
the Board has adopted the
Rule 12b-1
Distribution Plan (Distribution Plan), under which each class of shares of a Fund with a
12b-1
fee is allowed to pay asset-based sales charges or distribution and service fees for the distribution,
sale or servicing of its shares. These activities include advertising, compensation to the Distributor and other intermediaries for sales and marketing activities and materials and related shareholder servicing. The Distribution Plan applies to the
following Fund classes: (1) the Adviser Class shares of each of the Payden U.S. Government, Payden GNMA, Payden Core Bond, Payden High Income, Payden Emerging Markets Bond, Payden Emerging Markets Local Bond and Payden Equity Income (formerly
Payden Value Leaders) Funds (each a Payden Fund Adviser Class), (2) the Adviser Class shares of the Payden/Kravitz Fund (the Payden/Kravitz Fund Adviser Class), and (3) the Retirement Class shares of the
Payden/Kravitz Fund (the Payden/Kravitz Fund Retirement Class). For each Payden Fund Adviser Class and the Payden/Kravitz Fund Adviser Class, the fee is payable at an annual rate of 0.25% of the average daily net assets of the applicable
Adviser Class, regardless of the actual expenses incurred, which the Distributor may use to compensate other broker-dealers. Similarly, for the Payden/Kravitz Fund Retirement Class, the fee is payable at an annual rate of 0.50% of the average daily
net assets of the Payden/Kravitz Fund Retirement Class, regardless of the actual expenses incurred, which the Distributor may use to compensate other broker-dealers. As indicated in the table in the Fees and Expenses section in the
applicable Prospectus for each Payden Fund Adviser Class, the Payden/Kravitz Fund Adviser Class and the Payden/Kravitz Fund Retirement Class, this
12b-1
distribution fee is included in the Annual Fund
Operating Expenses. Because these fees are paid out of the assets of each Payden Fund Adviser Class, the Payden/Kravitz Fund Adviser Class, and the Payden/Kravitz Fund Retirement Class on an ongoing basis, over time these fees will increase the cost
of an investment in shares of each Payden Fund Adviser Class, the Payden/Kravitz Fund Adviser Class, and the Payden/Kravitz Fund Retirement Class.
The Distribution Plan continues in effect from year to year, provided that each such continuance is approved at least annually by a vote of the Board, including a majority vote of the Trustees who are not
interested persons of the P&R Trust (as defined in the 1940 Act) and have no direct or indirect financial interest in the operations of the Plan or in any agreement relating to the Plan (the
Rule 12b-1
Trustees), cast in person at a meeting called for the purpose of voting on such continuance. The Distribution Plan may be terminated with respect to a Fund at any time, without
penalty, by the vote of a majority of the
Rule 12b-1
Trustees or the class affected by the vote of the holders of a majority of the outstanding shares of the Fund or the class affected. The Distribution
Plan may not be amended to increase materially the amounts to be paid by the shareholders of a Rule
12b-1
class of any Fund with a Rule
12b-1
class of share for the
services described therein without approval by the shareholders of such class, and all material amendments are required to be approved by the Board in the manner described above. The Distribution Plan will automatically terminate in the event of its
assignment.
The P&R Trust, when approving the establishment of the Distribution Plan, determined that there are various anticipated
benefits to each of the various Funds with a
Rule 12b-1
class of shares from such establishment, including the likelihood that the Distribution Plan will stimulate sales of shares of each
Rule 12b-1
class and assist in increasing the asset base of each of each such Fund in the face of competition from a variety of financial products and the potential advantage to the shareholders of the various
Rule 12b-1
classes of prompt and significant growth of the asset base of the those Funds, including greater liquidity, more investment flexibility and achievement of greater economies of scale.
71
Except to the extent that affiliates of Payden receive distribution fees from the Distributor, or that the
Funds investment advisers benefit through increased fees from an increase in the net assets of the Funds with a
Rule 12b-1
class of shares, which may result in part from the expenditures, no
interested person of the P&R Trust nor any Trustee who is not an interested person of the P&R Trust has or had a direct or indirect financial interest in the operation of the Distribution Plan or any related agreements.
For the fiscal year ended October 31, 2012, the Funds with a
Rule 12b-1
class of shares paid the
following
12b-1
fees to the Distributor.
|
|
|
|
|
FISCAL YEAR ENDED OCTOBER 31, 2012
|
|
TOTAL FEES PAID
TO THE DISTRIBUTOR
|
|
ADVISER CLASS
|
|
|
|
|
Payden U.S. Government Fund
|
|
$
|
1,937
|
|
Payden GNMA Fund
|
|
$
|
210,597
|
|
Payden Core Bond Fund
|
|
$
|
31,595
|
|
Payden High Income Fund
|
|
$
|
13,077
|
|
Payden Emerging Markets Bond Fund
|
|
$
|
63,779
|
|
Payden Emerging Markets Local Bond Fund
|
|
$
|
39
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$
|
6,536
|
|
Payden/Kravitz Cash Balance Plan Fund
|
|
$
|
139,515
|
|
RETIREMENT CLASS
|
|
|
|
|
Payden/Kravitz Cash Balance Plan Fund
|
|
$
|
84,383
|
|
ADMINISTRATOR, TRANSFER AGENT, FUND ACCOUNTANT, CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Administrator
Treasury Plus, Incorporated
(Treasury Plus), located at 333 South Grand Avenue, Los Angeles, California 90071, is a wholly owned subsidiary of Payden which serves as administrator to each Fund. Under the Administration Agreement with the P&R Trust, Treasury
Plus has agreed to prepare periodic reports to regulatory authorities, maintain financial accounts and records of each of the Funds, transmit communications by each Fund to shareholders of record, make periodic reports to the Board regarding Fund
operations, and oversee the work of the fund accountant and transfer agent.
For providing administrative services to the P&R Trust,
Treasury Plus receives a monthly fee at the annual rate of 0.15% of the daily net assets of the Funds.
Under the Administration Agreement
with the P&R Trust, Treasury Plus has agreed that, if in any fiscal year the expenses borne by a Fund exceed the applicable expense limitations imposed by the securities regulations of any state in which shares of the Fund are registered or
qualified for sale to the public, it will reimburse the Fund for a portion of such excess expenses, which portion is determined by multiplying the excess expenses by the ratio of (i) the fees respecting the Fund otherwise payable to Treasury
Plus pursuant to its agreement with the P&R Trust, to (ii) the aggregate fees respecting the Fund otherwise payable to Treasury Plus pursuant to its agreement and to Payden pursuant to its Investment Management Agreement with the P&R
Trust.
During the last three fiscal years, Treasury Plus earned the amounts listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED OCTOBER 31
|
|
|
|
2010
(000S)
|
|
|
2011
(000S)
|
|
|
2012
(000S)
|
|
Payden Cash Reserves Money Market Fund
|
|
$
|
1,286
|
|
|
$
|
958
|
|
|
$
|
909
|
|
Payden Limited Maturity Fund
|
|
|
230
|
|
|
|
313
|
|
|
|
355
|
|
Payden Low Duration Fund
|
|
|
712
|
|
|
|
765
|
|
|
|
839
|
|
Payden U.S. Government Fund
|
|
|
154
|
|
|
|
140
|
|
|
|
115
|
|
Payden GNMA Fund
|
|
|
975
|
|
|
|
1,082
|
|
|
|
1,457
|
|
Payden Core Bond Fund
|
|
|
831
|
|
|
|
815
|
|
|
|
936
|
|
Payden Corporate Bond Fund
|
|
|
65
|
|
|
|
67
|
|
|
|
59
|
|
Payden High Income Fund
|
|
|
1,242
|
|
|
|
1,578
|
|
|
|
1,628
|
|
Payden Tax Exempt Bond Fund
|
|
|
35
|
|
|
|
24
|
|
|
|
21
|
|
Payden California Municipal Income Fund
|
|
|
67
|
|
|
|
64
|
|
|
|
71
|
|
Payden Global Low Duration Fund
|
|
|
98
|
|
|
|
164
|
|
|
|
99
|
|
Payden Global Fixed Income Fund
|
|
|
135
|
|
|
|
108
|
|
|
|
70
|
|
Payden Emerging Markets Bond Fund
|
|
|
502
|
|
|
|
945
|
|
|
|
1,246
|
|
Payden Emerging Markets Local Bond Fund*
|
|
|
|
|
|
|
|
|
|
|
124
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
|
42
|
|
|
|
60
|
|
|
|
178
|
|
Metzler/Payden European Emerging Markets Fund
|
|
|
289
|
|
|
|
234
|
|
|
|
125
|
|
Payden/Kravitz Cash Balance Plan Fund
|
|
|
58
|
|
|
|
102
|
|
|
|
164
|
|
Payden Floating Rate Fund**
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden Emerging Markets Corporate Bond Fund**
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
The Payden Emerging Markets Local Bond Fund commenced operations on November 2, 2011.
|
(**)
|
The Payden Floating Rate Fund and the Payden Emerging Markets Corporate Bond Fund commenced operations on September , 2013.
|
72
Transfer Agent
Pursuant to its agreement with the P&R Trust, UMB Fund Services, Inc. (UMB), located at 803 W. Michigan Street, Milwaukee, Wisconsin 53233, provides transfer agency services to each of the
Funds. These services include the issuance and redemption of Fund shares, maintenance of shareholder accounts and preparations of annual investor tax statements. UMB receives from the P&R Trust fees for these transfer agency services, and
certain
out-of-pocket
expenses are also reimbursed at actual cost.
Fund Accountant
Pursuant to its agreement with the P&R Trust, The Bank of New York Mellon
(BNY Mellon), located at 135 Santilli Highway, Everett, Massachusetts 02149, provides fund accounting services to each of the Funds. These services include the calculation of daily expense accruals and net asset value per share for the
Funds. BNY Mellon receives from the P&R Trust fees for these fund accounting services, and certain
out-of-pocket
expenses are also reimbursed at actual cost.
The liability provisions of the agreement between Treasury Plus, UMB and BNY Mellon with the P&R Trust are similar to those of the Payden
Agreement discussed above. In addition, the P&R Trust has agreed to indemnify Treasury Plus, UMB and BNY Mellon against certain liabilities. The agreement may be terminated by either party to such agreement on 90 days notice.
Custodian
Pursuant to its
agreement with the P&R Trust, BNY Mellon (the Custodian) serves as custodian for the assets of each of the Funds. The Custodians address is One Boston Place, Boston, Massachusetts 02109. Under its Custodian Agreement with the
P&R Trust, the Custodian has agreed among other things to maintain a separate account in the name of each Fund; hold and disburse portfolio securities and other assets on behalf of the Funds; collect and make disbursements of money on behalf of
the Funds; and receive all income and other payments and distributions on account of each Funds portfolio securities.
Pursuant to rules
adopted under the 1940 Act, the Funds may maintain foreign securities and cash in the custody of certain eligible foreign banks and securities depositories. The Board has delegated to the Custodian the selection of foreign custodians and to the
applicable investment adviser the selection of securities depositories. Selection of such foreign custodial institutions and securities depositories is made following a consideration of a number of factors, including (but not limited to) the
reliability and financial stability of the institution; the ability of the institution to perform capably custodial services for the Funds; the reputation of the institution in its national market; the political and economic stability of the country
in which the institution is located; and risks of nationalization or expropriation of Fund assets. No assurance can be given that the appraisal by the Custodian and by the applicable investment adviser of the risks in connection with foreign
custodial and securities depository arrangements will always be correct, or that expropriation, nationalization, freezes, or confiscation of assets that would impact assets of a Fund will not occur, and shareholders bear the risk of losses arising
from these or other events.
73
PORTFOLIO MANAGERS
PAYDEN FUNDS
Adviser Portfolio Manager
Conflicts of Interest
Payden adopted policies and procedures that address conflicts of interest that may arise between a portfolio
managers management of a Payden Fund and his or her management of other Funds and accounts. Potential areas of conflict could involve allocation of investment opportunities and trades among Funds and accounts, use of information regarding the
timing of Fund trades, personal investing activities, portfolio manager compensation and proxy voting of portfolio securities. Payden has adopted policies and procedures that it believes are reasonably designed to address these conflicts. However,
there is no guarantee that such policies and procedures will be effective or that Payden will anticipate all potential conflicts of interest.
Adviser Portfolio Manager Fund Holdings and Other Managed Accounts
As described below, portfolio managers may personally own shares of the Fund or Funds for which they act as portfolio manager. In addition, portfolio managers may manage a portion of other mutual funds,
pooled investment vehicles or accounts advised by Payden.
The following table reflects information as of October 31, 2012. None of these
accounts pay performance-based fees.
|
|
|
|
|
|
|
|
|
PORTFOLIO MANAGER
|
|
DOLLAR RANGE OF
FUND SHARES
OWNED (1)
|
|
NUMBER OF OTHER
REGISTERED
INVESTMENT
COMPANIES (RICS)
THAT
PORTFOLIO
MANAGER MANAGES
(ASSETS OF RIC IN
MILLIONS) (2)
|
|
NUMBER OF OTHER
POOLED INVESTMENT
VEHICLES (PIVS)
THAT PORTFOLIO
MANAGER MANAGES
(ASSETS OF PIVS
IN MILLIONS) (3)
|
|
NUMBER OF OTHER
ACCOUNTS THAT
PORTFOLIO MANAGER
MANAGES (ASSETS
OF OTHER ACCOUNTS
IN MILLIONS) (4)
|
MARY BETH SYAL
|
|
|
|
1 $775
|
|
2 $109
|
|
23 $3,132
|
Payden Limited Maturity Fund
|
|
None
|
|
|
|
|
|
|
Payden Low Duration Fund
|
|
None
|
|
|
|
|
|
|
Payden Global Low Duration Fund
|
|
None
|
|
|
|
|
|
|
ERIC HOVEY(5)
|
|
|
|
None
|
|
None
|
|
None
|
Payden Limited Maturity Fund
|
|
None
|
|
|
|
|
|
|
Payden Low Duration Fund
|
|
None
|
|
|
|
|
|
|
Payden Global Low Duration Fund
|
|
None
|
|
|
|
|
|
|
DAVID P. BALLANTINE
|
|
|
|
None
|
|
None
|
|
3 $1,220
|
Payden Limited Maturity Fund
|
|
None
|
|
|
|
|
|
|
Payden Low Duration Fund
|
|
None
|
|
|
|
|
|
|
Payden U.S. Government Fund
|
|
None
|
|
|
|
|
|
|
Payden GNMA Fund
|
|
$1 - $10,000
|
|
|
|
|
|
|
Payden Global Low Duration Fund
|
|
None
|
|
|
|
|
|
|
GARY S. GREENBERG
|
|
|
|
None
|
|
None
|
|
None
|
Payden GNMA Fund
|
|
None
|
|
|
|
|
|
|
Payden U.S. Government Fund
|
|
None
|
|
|
|
|
|
|
JAMES T. WONG
|
|
|
|
None
|
|
2 $24
|
|
None
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$100,001 - $500,000
|
|
|
|
|
|
|
FRANK LEE
|
|
|
|
None
|
|
None
|
|
None
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
None
|
|
|
|
|
|
|
KRISTIN J. CEVA
|
|
|
|
None
|
|
2 $356
|
|
None
|
74
|
|
|
|
|
|
|
|
|
PORTFOLIO MANAGER
|
|
DOLLAR RANGE OF
FUND SHARES
OWNED (1)
|
|
NUMBER OF
OTHER
REGISTERED
INVESTMENT
COMPANIES (RICS)
THAT PORTFOLIO
MANAGER MANAGES
(ASSETS OF RIC IN
MILLIONS) (2)
|
|
NUMBER OF OTHER
POOLED INVESTMENT
VEHICLES (PIVS)
THAT PORTFOLIO
MANAGER MANAGES
(ASSETS OF
PIVS
IN MILLIONS) (3)
|
|
NUMBER OF OTHER
ACCOUNTS THAT
PORTFOLIO MANAGER
MANAGES (ASSETS
OF OTHER ACCOUNTS
IN MILLIONS) (4)
|
Payden Global Fixed Income Fund
|
|
None
|
|
|
|
|
|
|
Payden Emerging Markets Bond Fund
|
|
Over $100,000
|
|
|
|
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
None
|
|
|
|
|
|
|
TIMOTHY K. RIDER
|
|
|
|
None
|
|
1 $258
|
|
None
|
Payden Global Fixed Income Fund
|
|
None
|
|
|
|
|
|
|
NIGEL JENKINS
|
|
|
|
None
|
|
3 $367
|
|
None
|
Payden Global Fixed Income Fund
|
|
None
|
|
|
|
|
|
|
SABUR MOINI
|
|
|
|
None
|
|
1 $69
|
|
None
|
Payden High Income Fund
|
|
None
|
|
|
|
|
|
|
JORDAN LOPEZ(6)
|
|
|
|
None
|
|
1 $69
|
|
None
|
Payden High Income Fund
|
|
None
|
|
|
|
|
|
|
MICHAEL E. SALVAY
|
|
|
|
None
|
|
None
|
|
41 $7,951
|
Payden Core Bond Fund
|
|
None
|
|
|
|
|
|
|
Payden Corporate Bond Fund
|
|
None
|
|
|
|
|
|
|
Payden Tax Exempt Bond Fund
|
|
None
|
|
|
|
|
|
|
Payden California Municipal Income Fund
|
|
None
|
|
|
|
|
|
|
NATALIE TREVITHICK(7)
|
|
|
|
None
|
|
None
|
|
None
|
Payden Corporate Bond Fund
|
|
None
|
|
|
|
|
|
|
BRAD BOYD
|
|
|
|
1 $128
|
|
None
|
|
None
|
Payden Core Bond Fund
|
|
None
|
|
|
|
|
|
|
ARTHUR HOVSEPIAN
|
|
|
|
None
|
|
None
|
|
None
|
Payden Emerging Markets Bond Fund
|
|
None
|
|
|
|
|
|
|
Payden Emerging Markets Local Bond Fund
|
|
None
|
|
|
|
|
|
|
VLADIMIR MILEV(8)
|
|
|
|
None
|
|
None
|
|
None
|
Payden Emerging Markets Bond Fund
|
|
None
|
|
|
|
|
|
|
DARREN CAPELOTO(9)
|
|
|
|
None
|
|
None
|
|
None
|
Payden Emerging Markets Local Bond Fund
|
|
None
|
|
|
|
|
|
|
(1)
|
Ownership disclosure is made using the following ranges: None; $1 $10,000; $10,001 $50,000; $50,001 $100,000; $100,001 $500,000; $500,001
$1,000,000; over $1,000,000. The amounts listed include shares owned through Paydens 401(k) plan.
|
(2)
|
Indicates fund(s) where the portfolio manager also has significant responsibilities for the
day-to-day
management of the fund(s).
|
(3)
|
Represents both domestic pooled investment vehicles and offshore funds advised by Payden. The offshore funds are only sold to offshore investors.
|
(4)
|
Reflects other separately managed accounts in which Payden is the investment adviser.
|
(5)
|
Mr. Hovey became a portfolio manager for the Payden Limited Maturity, Payden Low Duration and Payden Global Low Duration Funds on January 31, 2013. The information
presented is as of that date.
|
(6)
|
Mr. Lopez became a portfolio manager for the Payden High Income Fund on August 14, 2012. The information presented is as of October 31, 2012.
|
(7)
|
Ms. Trevithick became a portfolio manager for the Payden Corporate Bond Fund on January 31, 2013. The information presented is as of that date.
|
(8)
|
Mr. Milev became a portfolio manager for the Payden Emerging Markets Bond Fund on January 31, 2013. The information presented is as of that date.
|
(9)
|
Mr. Capeloto became a portfolio manager for the Payden Emerging Markets Local Bond Fund on January 31, 2013. The information Presented is as of that date.
|
Adviser Portfolio Manager Compensation
Portfolio managers and other investment personnel are paid competitive salaries by Payden. In addition, they may receive bonuses based on the overall profit of the firm and their contribution to the
investment team(s) on which they participate. The relative mix of compensation represented by salary and bonus will vary depending on the individuals contribution to the investment team(s), contributions to the firm overall and other factors.
75
METZLER/PAYDEN FUND
Portfolio Manager Conflicts of Interest
Metzler/Payden has adopted policies and procedures that
address conflicts of interest that may arise between a portfolio managers management of the Metzler/Payden Fund and his or her management of other accounts. Potential areas of conflict could involve allocation of investment opportunities and
trades among the Fund and accounts, use of information regarding the timing of Fund trades, personal investing activities, portfolio manager compensation and proxy voting of portfolio securities. Metzler/Payden has adopted policies and procedures
that it believes are reasonably designed to address these conflicts. However, there is no guarantee that such policies and procedures will be effective or that Metzler/Payden will anticipate all potential conflicts of interest.
Portfolio Manager Fund Holdings and Other Managed Accounts
As described below, portfolio managers may personally own shares of the Metzler/Payden Fund. In addition, portfolio managers may manage a portion of other mutual funds, pooled investment vehicles or
accounts advised by Metzler/Payden.
The following table reflects information as of October 31, 2012. None of these accounts pay
performance-based fees, with the exception of one pooled investment vehicle for which both Mr. Brueck and Ms. Beer are portfolio managers.
|
|
|
|
|
|
|
|
|
PORTFOLIO MANAGER
|
|
DOLLAR RANGE
OF FUND SHARES
OWNED(1)
|
|
NUMBER OF
OTHER REGISTERED
INVESTMENT
COMPANIES
(RICS) THAT
PORTFOLIO MANAGER
MANAGES
(ASSETS
OF RICS IN
MILLIONS)(2)
|
|
NUMBER OF OTHER
POOLED INVESTMENT
VEHICLES (PIVS)
THAT PORTFOLIO
MANAGER MANAGES
(ASSETS OF
PIVS
IN MILLIONS)(3)
|
|
NUMBER OF
OTHER ACCOUNTS
THAT PORTFOLIO
MANAGER MANAGES
(ASSETS OF
OTHER ACCOUNTS
IN MILLIONS)(4)
|
MARKUS BRUECK
|
|
|
|
None
|
|
3 $110
|
|
5 $400
|
Metzler/Payden European Emerging Markets Fund
|
|
None
|
|
|
|
|
|
|
SIMONE BEER
|
|
|
|
None
|
|
1 $15
|
|
1 $15
|
Metzler/Payden European Emerging Markets Fund
|
|
None
|
|
|
|
|
|
|
(1)
|
Ownership disclosure is made using the following ranges: None; $1 $10,000; $10,001 $50,000; $50,001 $100,000; $100,001 $500,000; $500,001
$1,000,000; over $1,000,000.
|
(2)
|
Indicates fund(s) where the portfolio manager also has significant responsibilities for the
day-to-day
management of the fund(s).
|
(3)
|
Represents both domestic pooled investment vehicles and offshore funds advised by Metzler/Payden. The offshore funds are only sold to offshore investors.
|
(4)
|
Reflects other separately managed accounts in which Metzler/Payden is the investment adviser.
|
76
Portfolio Manager Compensation
A portfolio managers compensation is split into a fixed and a variable component. The variable component is mainly determined by the performance of the individual accounts managed by the portfolio
manager, the overall performance of the firm, in this case the Metzler Bank Group, and the portfolio managers interaction within in the team.
PAYDEN/KRAVITZ FUND
Portfolio Manager Conflicts of Interest
Payden/Kravitz has adopted policies and procedures that address conflicts of interest that may arise between a portfolio managers management of the
Payden/Kravitz Fund and his or her management of other funds and accounts. Potential areas of conflict could involve allocation of investment opportunities and trades among funds and accounts, use of information regarding the timing of Fund trades,
personal investing activities, portfolio manager compensation and proxy voting of portfolio securities. Payden/Kravitz has adopted policies and procedures that it believes are reasonably designed to address these conflicts. However, there is no
guarantee that such policies and procedures will be effective or that Payden/Kravitz will anticipate all potential conflicts of interest.
Portfolio Manager Fund Holdings and Other Managed Accounts
As described below, portfolio manager may personally own shares of the Payden/Kravitz Fund. In addition, portfolio managers may manage a portion of other mutual funds, pooled investment vehicles or
accounts advised by Payden/Kravitz, Payden or Kravitz.
The following table reflects information as of October 31, 2012. None of these
accounts pay performance-based fees.
|
|
|
|
|
|
|
|
|
PORTFOLIO MANAGER
|
|
DOLLAR RANGE
OF FUND SHARES
OWNED (1)
|
|
NUMBER OF OTHER
REGISTERED
INVESTMENT
COMPANIES (RICS)
THAT PORTFOLIO
MANAGER
MANAGES
(ASSETS OF RIC
IN MILLIONS) (2)
|
|
NUMBER OF OTHER
POOLED INVESTMENT
VEHICLES (PIVS)
THAT PORTFOLIO
MANAGER
MANAGES
(ASSETS OF PIVS
IN MILLIONS) (3)
|
|
NUMBER OF OTHER
ACCOUNTS THAT
PORTFOLIO MANAGER
MANAGES (ASSETS
OF OTHER
ACCOUNTS
IN MILLIONS) (4)
|
BRAD BOYD
|
|
None
|
|
None
|
|
None
|
|
None
|
BRIAN MATTHEWS
|
|
None
|
|
4 $1,133
|
|
None
|
|
34 $9,438
|
SCOTT WEINER
|
|
None
|
|
None
|
|
1 $38
|
|
15 $17,715
|
(1)
|
Ownership disclosure is made using the following ranges: None; $1 $10,000; $10,001 $50,000; $50,001 $100,000; $100,001 $500,000; $500,001
$1,000,000; over $1,000,000. The amounts listed include shares owned through Paydens 401(k) Plan.
|
(2)
|
Indicates fund(s) where the portfolio manager also has significant responsibilities for the
day-to-day
management of the fund(s).
|
(3)
|
Represents both domestic pooled investment vehicles and offshore funds advised by Payden/Kravitz, or by its parent entities, Payden or Kravitz. The offshore funds are
only sold to offshore investors.
|
(4)
|
Reflects other separately managed accounts in which Payden/Kravitz, or its parent entities, Payden or Kravitz, is the investment adviser.
|
Portfolio Manager Compensation
Portfolio
managers and other investment personnel are paid by Payden or Kravitz, respectively, and in each case, they are paid competitive salaries. In addition, they may receive bonuses based on the overall profit of the respective firm and their
contribution to the investment team(s) on which they participate. The relative mix of compensation represented by salary and bonus will vary depending on the individuals contribution to the investment team(s), contributions to the respective
firm overall and other factors.
77
PORTFOLIO TRANSACTIONS BROKERAGE ALLOCATION AND OTHER
PRACTICES
The Funds pay commissions to brokers in connection with the purchase and sale of equity securities, options and futures contracts.
There is generally no stated commission in the case of fixed-income securities, which are traded in the
over-the-counter
markets, but the price paid by a Fund usually
includes an undisclosed dealer commission or
mark-up.
In underwritten offerings, the price paid by a Fund includes a disclosed, fixed commission or discount retained by the underwriter or dealer. Agency
transactions involve the payment by a Fund of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a particular broker may charge different commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities involve commissions which are generally higher than those in the United States.
A Funds
investment adviser places all orders for the purchase and sale of portfolio securities, options and futures contracts for the Funds it manages and buys and sells such securities, options and futures for the Funds through a substantial number of
brokers and dealers. In so doing, the Funds investment adviser seeks the best execution available. In seeking the most favorable execution, the investment adviser considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions. In light of such factors, a Funds investment adviser may select a broker that charges a higher brokerage commission than another broker
might have charged for the same transaction. The Funds investment adviser periodically evaluates the performance of brokers used for the purchase and sale of portfolio securities to ensure that the Fund is obtaining best execution of these
transactions. None of the Funds investment advisers have any soft dollar arrangements with any broker-dealer.
Some
securities considered for investment by a Funds portfolio may also be appropriate for other clients served by the Funds investment adviser. If a purchase or sale of securities consistent with the investment policies of a Fund is
considered at or about the same time as a similar transaction for one or more other clients served by the Funds investment adviser, transactions in such securities will be allocated among the Fund and other clients in a manner deemed fair and
reasonable by the investment adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Funds investment adviser, and the results of such allocations, are subject to periodic
review by the Funds Board.
The investment adviser manages the Fund without regard generally to restrictions on portfolio turnover,
except those imposed on its ability to engage in short-term trading by provisions of the Federal tax laws (see Taxation). Trading in fixed-income securities does not generally involve the payment of brokerage commissions, but does
involve indirect transaction costs. The higher the rate of portfolio turnover, the higher these transaction costs borne by the Fund generally will be. The turnover rate of a Fund is calculated by dividing (a) the lesser of purchases or sales of
portfolio securities for a particular fiscal year by (b) the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. In calculating the rate of portfolio turnover, all securities, including options,
whose maturities or expiration dates at the time of acquisition were one year or less, are excluded. Interest rate and currency swap, cap and floor transactions do not affect the calculation of portfolio turnover.
The only Funds which paid brokerage commissions during the last three fiscal years are noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED OCTOBER 31
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
$
|
27,716
|
|
|
$
|
126,049
|
|
|
$
|
337,899
|
|
Metzler/Payden European Emerging Markets Fund
|
|
|
1,150,932
|
|
|
|
1,109,553
|
|
|
|
528,169
|
|
Payden/Kravitz Cash Balance Plan Fund
|
|
|
1,971
|
|
|
|
18,387
|
|
|
|
3,499
|
|
Payden Low Duration Fund
|
|
|
|
|
|
|
900
|
|
|
|
|
|
Payden Corporate Bond Fund
|
|
|
|
|
|
|
831
|
|
|
|
690
|
|
Payden Global Low Duration Fund
|
|
|
|
|
|
|
585
|
|
|
|
|
|
78
The Board periodically reviews the performance of Payden, Metzler/Payden and Payden/Kravitz in connection
with the placement of portfolio transactions on behalf of the Funds of which each serves as investment adviser.
PURCHASES AND REDEMPTIONS
Certain managed account clients of the investment adviser for a Fund may purchase shares of that Fund. To avoid
the imposition of duplicative fees, the Funds investment adviser may be required to make adjustments in the management fees charged separately by the investment adviser to these managed account clients to offset the generally higher level of
management fees and expenses resulting from a clients investment in the Fund.
Each Fund offers its shares to the public on a continuous
basis. The public offering price for each class of shares of a Fund is equal to the net asset value per share at the time of purchase.
Each
Fund may, at the sole discretion of the Funds investment adviser, accept securities in exchange for shares of the Fund. Securities which may be accepted in exchange for shares of the Fund must: (1) meet the investment objectives and
policies of the Fund; (2) be acquired for investment and not for resale; (3) be liquid securities which are not restricted as to transfer either by law or liquidity of market, as determined by reference to the liquidity and pricing
policies established by the Board; and (4) have a value which is readily ascertainable as evidenced by, for example, a listing on a recognized stock exchange, or market quotations by third party broker-dealers.
The minimum initial investment for shares of the Investor Class of each of the Payden Cash Reserves Money Market Fund, Payden Limited Maturity Fund,
Payden Low Duration Fund, Payden Corporate Bond Fund, Payden Tax Exempt Bond Fund, Payden California Municipal Income Fund, Payden Global Low Duration Fund, Payden Global Fixed Income Fund, Metzler/Payden European Emerging Markets Fund and
Payden/Kravitz Cash Balance Plan Fund is $5,000. The minimum initial investment for shares of the Investor Class of each of the Payden U.S. Government Fund, Payden GNMA Fund, Payden Core Bond Fund, Payden High Income Fund, Payden Floating Rate Fund,
Payden Emerging Markets Bond Fund, Payden Emerging Markets Local Bond Fund, Payden Emerging Markets Corporate Bond Fund and Payden Equity Income Fund (formerly Payden Value Leaders Fund) is $100,000, except that the minimum initial investment may be
modified for certain financial intermediaries that submit trades on behalf of underlying investors. Each of these seven Payden Funds, or such Payden Funds Distributor, may lower or waive the minimum initial investment for certain categories of
investors at their discretion. The minimum initial investment shall be $5,000 for (1) any current or retired officer, Trustee or employee (and members of his or her family) of Payden, its affiliates or the P&R Trust, or (2) purchasers
with substantive business or personal relationships to Payden, its affiliates or the P&R Trust. The minimum initial investment for shares of the Institutional Class of the Payden Emerging Markets Bond Fund is $50,000,000, except that the minimum
initial investment may be modified for certain financial intermediaries that submit trades on behalf of underlying investors.
Each Fund
reserves the right to suspend or postpone redemptions during any period when: (a) trading on the New York Stock Exchange is restricted, as determined by the SEC, or that Exchange is closed for other than customary weekend and holiday closings;
(b) the SEC has by order permitted such suspension; or (c) an emergency, as determined by the SEC, exists, making disposal of portfolio securities or valuation of net assets of the Fund not reasonably practicable.
Each Payden Fund and the Payden/Kravitz Fund will redeem shares solely in cash up to the lesser of $250,000 or 1% of its net assets during any
90-day
period for any one shareholder. Each Payden Fund and the Payden/Kravitz Fund reserves the right to pay any redemption price exceeding this amount in whole or in part by a distribution in kind of securities
held by the Fund in lieu of cash. The Metzler/Payden Fund reserves the right to pay any redemption price in whole or in part by a distribution in kind of securities held by the Metzler/Payden Fund in lieu of cash. It is highly unlikely that shares
would ever be redeemed in kind. If shares are redeemed in kind, however, the redeeming shareholder would incur transaction costs upon the disposition of the securities received in the distribution.
Due to the relatively high cost of maintaining smaller accounts, each Fund reserves the right to redeem shares in any account for their then-current
value (which will be promptly be paid to the investor) if at any time, due to shareholder redemptions, the shares in the Fund account do not have a value of at least $5,000. An investor will be notified that the value of his or her account is less
than the minimum and allowed at least 30 days to bring the value of the account up to at least $5,000 before the redemption is processed. The P&R Trusts Master Trust Agreement also authorizes each Fund to redeem shares under certain
other circumstances as may be specified by the Board.
79
TAXATION
Each Fund intends to qualify annually and has elected to be treated as a regulated investment company under Subchapter M of the Code. However, should a
Fund fail to qualify as a regulated investment company under Subchapter M, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to shareholders would be taxed as dividend income
to the extent of the Funds earnings and profits. To qualify as a regulated investment company, a Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, net income derived from interests in qualified publicly traded partnerships, or other income (including gains from options, futures and
forward contracts) derived with respect to its business of investing in such stock, securities or currencies (Qualifying Income Test); and (b) diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of a Funds assets is represented by cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited
for the purposes of this calculation to an amount not greater than 5% of the value of a Funds total assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of a
Funds total assets is invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies) or of two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses (the Diversification Test). The U.S. Treasury is authorized to promulgate regulations under which gains from foreign currencies (and options, futures, and forward contracts on foreign currency) would
constitute qualifying income for purposes of the Qualifying Income Test only if such gains are directly relating to investing in stocks or securities. To date, such regulations have not been issued.
In addition, no definitive guidance currently exists with respect to the classification of interest rate swaps and cross-currency swaps as securities or
foreign currencies for purposes of certain of the tests described above. Accordingly, to avoid the possibility of disqualification as a regulated investment company, a Fund will limit its positions in swaps to transactions for the purpose of hedging
against either interest rate or currency fluctuation risks, and will treat swaps as excluded assets for purposes of determining compliance with the Diversification Test.
If a Fund qualifies as a regulated investment company, the Fund will not be subject to U.S. Federal income tax on its investment company taxable income and net capital gains (any net long-term capital
gains in excess of the sum of net short-term capital losses and capital loss carryovers) reported by the Fund as capital gain dividends, if any, that it distributes to shareholders, if the Fund distributes to its shareholders at least 90% of its
investment company taxable income (which includes dividends, interest and net short-term capital gains in excess of any long-term capital losses) and 90% of its net exempt interest income each taxable year. Each Fund (other than the Payden Equity
Income Fund (formerly Payden Value Leaders Fund) and the Metzler/Payden Fund) intends to distribute to its shareholders substantially all of its investment company taxable income monthly and any net capital gains annually. Each of the Payden Equity
Income Fund and the Metzler/Payden Fund intends to distribute to its shareholders substantially all of its investment company taxable income semi-annually and any net capital gains annually. Investment company taxable income or net capital gains not
distributed by a Fund on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To avoid the tax, a Fund must distribute during each calendar year an amount at least equal to the sum
of (1) 98% of its ordinary income (with adjustments) for the calendar year and foreign currency gains or losses for the calendar year, (2) 98.2% of its capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year, and (3) all ordinary income and capital gains for previous years that were not distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October, November, or December of that year to shareholders of record on a date in such a month and paid by a Fund during January of the following year. Such distributions will
be taxable to shareholders (other than those not subject to Federal income tax) in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. To avoid application of the excise
tax, the Funds intend to make their distributions in accordance with the distribution requirements.
DISTRIBUTIONS
Each of the Payden Tax Exempt Bond Fund and the Payden California Municipal Income Fund intends to qualify to pay exempt-interest dividends to
its shareholders, who may exclude those dividends from their gross income for Federal income tax purposes. In order to be able to pay those dividends, a Fund must satisfy the additional requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets must consist of obligations the interest on which is excludable from gross income under section 103(a) of the Code.
80
With the exception of exempt-interest dividends from the Payden Tax Exempt Bond Fund and the Payden
California Municipal Income Fund, dividends paid out of a Funds investment company taxable income will generally be taxable to a U.S. shareholder as ordinary income. Distributions received by
tax-exempt
shareholders will not be subject to Federal income tax to the extent permitted under the applicable tax exemption.
For individual
shareholders, a portion of the distributions paid by a Fund may be qualified dividends eligible for taxation at long-term capital gain rates to the extent the Fund reports the amount distributed as a qualifying dividend. In the case of corporate
shareholders, a portion of the distributions may qualify for the inter-corporate dividends-received deduction to the extent a Fund reports the amount distributed as a qualifying dividend. Distributions of net capital gains, and reported as such, if
any, are taxable as long-term capital gains, regardless of how long the shareholder has held a Funds shares and are not eligible for the dividends received deduction. The tax treatment of dividends and distributions will be the same whether a
shareholder reinvests them in additional shares or elects to receive them in cash. A 3.8% federal Medicare contribution tax applies to dividend income and net capital gains for taxpayers in higher income tax brackets. A shareholder may realize
taxable income from a Fund even in periods during which share values have declined. Tax considerations are not the primary objective in making a Funds investment decisions.
HEDGING TRANSACTIONS
Many of the options, futures contracts and forward contracts used by the
Funds are section 1256 contracts. Any gains or losses on section 1256 contracts are generally considered 60% long-term and 40% short-term capital gains or losses (60/40). Also, section 1256 contracts held by a Fund at the end
of each taxable year (and, for purposes of the 4% excise tax, on certain other dates as prescribed under the Code) are
marked-to-market
with the result that
unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions and certain other transactions in options, futures and forward contracts undertaken by a Fund, may result in
straddles for U.S. Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Fund. In addition, losses realized by a Fund on positions that are part of a straddle may be deferred under
the straddle rules, rather than being taken into account in calculating the investment company taxable income or net capital gain for the taxable year in which such losses are realized. Because limited regulations implementing the straddle rules
have been promulgated, the tax consequences of transactions in options, futures and forward contracts to a Fund are not entirely clear. The transactions may increase the amount of short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code which are applicable to
straddles. If a Fund makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules
applicable under certain of the elections operate to accelerate the recognition of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that
did not engage in such hedging transactions.
The qualifying income and diversification requirements applicable to the Funds assets may
limit the extent to which a Fund will be able to engage in transactions in options, futures contracts or forward contracts.
81
SALES OF SHARES
Upon disposition of shares of a Fund (whether by redemption, sale or exchange), a shareholder will realize a gain or loss. Such gain or loss will be capital gain or loss if the shares are capital assets
in the shareholders hands, and will be long-term or short-term generally depending upon the shareholders holding period for the shares. Any loss realized on a disposition will be disallowed by wash sale rules to the extent
the shares disposed of are replaced by other Fund shares or other substantially identical stock or securities within a period of 61 days beginning 30 days before and ending 30 days after the disposition. In such a case, the basis of
the shares acquired will be the basis of the shares sold, increased or decreased by the difference, if any, between the price of the acquired share and the shares sold. Any loss realized by a shareholder on a disposition of shares held by the
shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of capital gain dividends received by the shareholder with respect to such shares.
BACKUP WITHHOLDING
A Fund may be required to
withhold for U.S. Federal income taxes at a current rate of 28% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification numbers or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholders U.S. Federal tax liability if the required documentation is provided.
FOREIGN INVESTMENTS
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund amortizes or accrues premiums or discounts, accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures contracts, forward contracts and options,
gains or losses attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains and losses, referred to
under the Code as Section 988 gains or losses, may increase or decrease the amount of the Funds investment company taxable income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such taxes. In addition, the Funds investment advisers intend to manage the Funds with the intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of a Funds total assets at the close of its taxable year consists of securities of foreign corporations, the Fund will be eligible to elect to pass-through to the Funds shareholders the
amount of foreign income and similar taxes paid by the Fund, subject to certain exceptions. If this election is made, a shareholder generally subject to tax will be required to include in gross income (in addition to taxable dividends actually
received) his or her pro rata share of the foreign income taxes paid by the Fund, and may be entitled either to deduct (as an itemized deduction) his or her pro rata share of foreign taxes in computing his or her taxable income or to use such amount
(subject to limitations) as a foreign tax credit against his or her U.S. Federal income tax liability. No deduction for foreign taxes may be claimed by a shareholder who does not itemize deductions. Each shareholder will be notified in writing not
later than 60 days after the close of a Funds taxable year whether the foreign taxes paid by the Fund will pass-through for that year. Absent the Fund making the election to pass through the foreign source income and
foreign taxes, none of the distributions may be treated as foreign source income for purposes of the foreign tax credit calculation.
Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the shareholders U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through election is made, the source of a Funds income will flow through to shareholders of the Fund. With respect to such election, gains from the sale of securities will be
treated as derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income, and to certain other types of income. Shareholders may be
82
unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. The foreign tax credit is modified for purposes of the Federal alternative minimum
tax, and foreign taxes may not be deductible in computing alternative minimum taxable income.
CERTAIN DEBT SECURITIES
Some of the debt securities (with a fixed maturity date of more than one year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount of the original issue discount (OID) is treated as interest income and is included in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security matures. A portion of the OID includable in income with respect to certain high-yield corporate debt securities may be treated as a dividend for Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one year from the date of issuance) that may be acquired by a Fund in
the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the
gain, or principal payment, does not exceed the accrued market discount on such debt security. Market discount generally accrues in equal daily installments. A Fund may make one or more of the elections applicable to debt securities
having market discount, which could affect the character and timing of recognition of income.
Some of the debt securities (with a fixed
maturity date of one year or less from the date of issuance) that may be acquired by a Fund may be treated as having an acquisition discount, or OID in the case of certain types of debt securities. Generally, the Fund will be required to include the
acquisition discount, or OID, in income ratably over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. The Fund may make one or more of the elections
applicable to debt securities having acquisition discount, or OID, which could affect the character and timing of recognition of income.
A
Fund generally will be required to distribute dividends to shareholders representing discount on debt securities that is currently includable in income, even though cash representing such income may not have been received by the Fund. Cash to pay
such dividends may be obtained from sales proceeds of securities held by the Fund.
OTHER TAXES
Distributions also may be subject to additional state, local and foreign taxes, depending on each shareholders particular situation. Under the laws
of various states, distributions of investment company taxable income generally are taxable to shareholders even though all or a substantial portion of such distributions may be derived from interest on certain Federal obligations which, if the
interest were received directly by a resident of such state, would be exempt from such states income tax (qualifying Federal obligations). However, some states may exempt all or a portion of such distributions from income tax to
the extent the shareholder is able to establish that the distribution is derived from qualifying Federal obligations. Moreover, for state income tax purposes, interest on some Federal obligations generally is not exempt from taxation, whether
received directly by a shareholder or through distributions of investment company taxable income (for example, interest on Federal National Mortgage Association Certificates and Government National Mortgage Association Certificates). Each Fund will
provide information annually to shareholders indicating the amount and percentage of the Funds dividend distribution which is attributable to interest on Federal obligations, and will indicate to the extent possible from what types of Federal
obligations such dividends are derived.
Shareholders are advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Fund. The information above is only a summary of some of the tax considerations generally affecting the Funds and their shareholders. Paul Hastings LLP, counsel to the P&R Trust, has expressed no
opinion in respect thereof.
83
FUND PERFORMANCE
Each Fund may quote its performance in various ways. All performance information supplied by a Fund in advertising is historical and is not intended to
indicate future returns. A Funds share price, yield and total returns fluctuate in response to market conditions and other factors, and the value of Fund shares when redeemed may be more or less than their original cost.
YIELD CALCULATIONS
Yields for each class of
shares of a Fund (other than the Payden Cash Reserves Money Market Fund) used in advertising are computed by dividing the interest income of the class for a given
30-day
or one month period, net of expenses
allocable to the class, by the average number of shares of the class entitled to receive dividends during the period, dividing this figure by the class net asset value per share at the end of the period and annualizing the result (assuming
compounding of income) in order to arrive at an annual percentage rate. Income is calculated for purposes of yield quotations in accordance with standardized methods applicable to bond funds. In general, interest income is reduced with respect to
bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. For a Funds
investments denominated in foreign currencies, income and expenses are calculated first in their respective currencies, and converted to U.S. dollars either when they are actually converted or at the end of the period, whichever is earlier. Capital
gains and losses are generally excluded from the calculation, as are gains and losses from currency exchange rate fluctuations.
The Fund may,
from time to time, include the current yield or effective yield in advertisements or reports to shareholders or prospective investors. These performance figures are based on historical results calculated under uniform SEC formulas and are not
intended to indicate future performance.
Yield refers to the income generated by an investment in the Fund over a
seven-day
period, expressed as an annual percentage rate. Effective yields are calculated similarly, but assume that the income earned from the Fund is reinvested in the Fund. Because of the effects of compounding,
effective yields are slightly higher than yields.
With respect to the Payden Cash Reserves Money Market Fund, yields and effective yields for
each class of shares of the Fund used in advertising are based on a
seven-day
base period. A yield quotation is computed by determining the net change, exclusive of capital changes, in the value of a
hypothetical
pre-existing
account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by 365/7 with the resulting yield figure carried to at least the nearest 0.01%. An effective yield quotation,
carried to at least the nearest 0.01%, is computed by determining the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing
account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
Because yield accounting methods differ from the methods used for other accounting purposes, the Funds yield may not equal its distribution rate or
income reported in the Funds financial statements. Yields and other performance information may be quoted numerically, or in a table, graph or similar illustration.
TOTAL RETURN CALCULATIONS
Total returns quoted in advertising with respect to shares of a Fund
reflect all aspects of the Funds return, including the effect of reinvesting dividends and capital gain distributions, and any change in the net asset value per share over the period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in shares of the Fund over a stated period, and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of 100% over ten years would result from an average annual total return of 7.18%, which is the steady annual total return that would equal 100% growth on a compounded basis
in ten years. While average annual total returns are a convenient means of comparing investment alternatives, investors should realize that a Funds performance is not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual
year-to-year
performance of the Fund.
84
The
one-year,
five-year,
ten-year
and since inception total returns for each of the Funds through October 31, 2012 are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
1 YEAR
|
|
|
5 YEARS
|
|
|
10 YEARS
|
|
|
ANNUALIZED
RETURN SINCE
INCEPTION*
|
|
|
INCEPTION DATE
|
PAYDEN FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Share Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden Cash Reserves Money Market Fund
|
|
|
0.02
|
|
|
|
0.68
|
|
|
|
1.78
|
|
|
|
|
|
|
December 17, 1997
|
Payden Limited Maturity Fund
|
|
|
1.66
|
|
|
|
1.17
|
|
|
|
1.76
|
|
|
|
|
|
|
May 2, 1994
|
Payden Low Duration Fund
|
|
|
4.13
|
|
|
|
3.56
|
|
|
|
3.19
|
|
|
|
|
|
|
January 1, 1994
|
Payden U.S. Government Fund
|
|
|
2.32
|
|
|
|
4.04
|
|
|
|
3.33
|
|
|
|
|
|
|
January 1, 1995
|
Payden GNMA Fund
|
|
|
4.77
|
|
|
|
6.93
|
|
|
|
5.45
|
|
|
|
|
|
|
August 27, 1999
|
Payden Core Bond Fund
|
|
|
9.06
|
|
|
|
6.28
|
|
|
|
4.96
|
|
|
|
|
|
|
January 1, 1994
|
Payden Corporate Bond Fund
|
|
|
11.39
|
|
|
|
|
|
|
|
|
|
|
|
11.51
|
|
|
March 12, 2009
|
Payden High Income Fund
|
|
|
12.69
|
|
|
|
6.26
|
|
|
|
7.88
|
|
|
|
|
|
|
December 30, 1997
|
Payden Tax Exempt Bond Fund
|
|
|
6.56
|
|
|
|
4.47
|
|
|
|
3.82
|
|
|
|
|
|
|
December 21, 1993
|
Payden California Municipal Income Fund
|
|
|
7.73
|
|
|
|
5.00
|
|
|
|
4.10
|
|
|
|
|
|
|
December 17, 1998
|
Payden Global Low Duration Fund
|
|
|
5.59
|
|
|
|
3.29
|
|
|
|
3.56
|
|
|
|
|
|
|
September 18, 1996
|
Payden Global Fixed Fund
|
|
|
8.54
|
|
|
|
5.18
|
|
|
|
4.52
|
|
|
|
|
|
|
September 1, 1992
|
Payden Emerging Markets Bond Fund
|
|
|
15.80
|
|
|
|
9.45
|
|
|
|
10.96
|
|
|
|
|
|
|
December 17, 1998
|
Payden Emerging Markets Local Bond Fund **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.58
|
|
|
November 2, 2011
|
Payden Equity Income (formerly Payden Value Leaders) Fund
|
|
|
15.40
|
|
|
|
-0.89
|
|
|
|
5.49
|
|
|
|
|
|
|
November 1, 1996
|
Payden Floating Rate Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September , 2013
|
Payden Emerging Markets Corporate Bond Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September , 2013
|
|
|
|
|
|
|
Adviser Share Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden U.S. Government Fund
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
2.10
|
|
|
November 2, 2009
|
Payden GNMA Fund
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
5.72
|
|
|
November 2, 2009
|
Payden Core Bond Fund
|
|
|
8.81
|
|
|
|
|
|
|
|
|
|
|
|
5.95
|
|
|
November 2, 2009
|
Payden High Income Fund
|
|
|
12.38
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
|
November 2, 2009
|
Payden Emerging Market Bond Fund
|
|
|
15.49
|
|
|
|
|
|
|
|
|
|
|
|
11.87
|
|
|
November 2, 2009
|
Payden Emerging Markets Local Bond Fund **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.26
|
|
|
November 2, 2011
|
Payden Equity Income (formerly Payden Value Leaders) Fund **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.46
|
|
|
December 1, 2011
|
|
|
|
|
|
|
Institutional Share Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden Emerging Markets Bond Fund **
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.04
|
|
|
April 9, 2012
|
|
|
|
|
|
|
METZLER/PAYDEN FUND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metzler/Payden European Emerging Markets Fund
|
|
|
-5.15
|
|
|
|
-10.64
|
|
|
|
|
|
|
|
13.02
|
|
|
December 30, 2002
|
|
|
|
|
|
|
PAYDEN/KRAVITZ FUND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payden/Kravitz Cash Balance Plan Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Share Class
|
|
|
6.25
|
|
|
|
|
|
|
|
|
|
|
|
3.91
|
|
|
September 22, 2008
|
Adviser Share Class
|
|
|
5.88
|
|
|
|
|
|
|
|
|
|
|
|
3.65
|
|
|
September 22, 2008
|
Retirement Share Class
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
3.09
|
|
|
April 6, 2009
|
*
|
If less than ten years since inception.
|
**
|
Not annualized if less than one year since inception.
|
In addition to average annual total returns, a Fund may quote unaveraged or cumulative total returns for shares reflecting the simple change in value of an investment over a stated period of time. Average
annual and cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. Total returns may be broken down
into their components of income, capital (including capital gains and changes in share price) and currency returns in order to illustrate the relationship of these factors and their contributions to total return. Total returns, yields and other
performance information maybe quoted numerically, or in a table, graph or similar illustration.
85
OTHER INFORMATION
CAPITALIZATION OF THE P&R TRUST
Each Fund
listed below is a series of the P&R Trust, an
open-end
management investment company organized as a Massachusetts business trust in January 1992. The capitalization of each such Fund consists solely
of an unlimited number of shares of beneficial interest. The Board has currently authorized nineteen series of shares: (1) the sixteen series of Payden Funds the Payden Cash Reserves Money Market Fund, Payden Limited Maturity Fund,
Payden Low Duration Fund, Payden U.S. Government Fund, Payden GNMA Fund, Payden Core Bond Fund, Payden Corporate Bond Fund, Payden High Income Fund, Payden Floating Rate Fund, Payden Tax Exempt Bond Fund, Payden California Municipal Income Fund,
Payden Equity Income Fund (formerly Payden Value Leaders Fund), Payden Global Low Duration Fund, Payden Global Fixed Income Fund, Payden Emerging Markets Bond Fund, Payden Emerging Markets Local Bond Fund and Payden Emerging Markets Corporate Bond
Fund; (2) the Metzler/Payden European Emerging Markets Fund; and (3) the Payden/Kravitz Cash Balance Plan Fund.
As indicated, the
Board has established more than one class of shares for each of the following Funds: (1) the Payden/Kravitz Cash Balance Plan Fund the Institutional Class, the Adviser Class and the Retirement Class; (2) the Payden Emerging Markets Bond
Fund the Investor Class, the Institutional Class and the Adviser Class; (3) for each of the Payden U.S. Government, Payden GNMA, Payden Core Bond, Payden High Income, Payden Floating Rate, Payden Emerging Markets Local Bond, Payden
Emerging Markets Corporate Bond and Payden Equity Income (formerly Payden Value Leaders) Funds the Investor Class and the Adviser Class; and (4) the Payden Cash Reserves Money Market Fund the Investor Class and Class D,
although no Class D Shares have been issued to date.
The Board may establish additional funds (with different investment objectives and
fundamental policies) and additional classes of shares at any time in the future. Advisory and administrative fees will generally be charged to each class of shares based upon the assets of that class. Expenses attributable to a single class of
shares will be charged to that class. Establishment and offering of additional portfolios will not alter the rights of the Funds shareholders. Shares do not have preemptive rights or subscription rights. All shares, when issued, will be fully
paid and
non-assessable
by the P&R Trust. The Board may liquidate a Fund at any time without shareholder approval. In liquidation of a Fund, each shareholder is entitled to receive his or her pro rata
share of the assets of the Fund.
Expenses incurred by the P&R Trust in connection with its organization and the initial public offering
are being reimbursed to Payden, subject to the expense limitation described in the Prospectus under Investment Adviser, and amortized on a straight line basis over a period of five years. Expenses incurred in the organization of
subsequently offered series of the P&R Trust will be charged to those series and will be amortized on a straight line basis over a period of not less than five years.
MASTER TRUST AGREEMENT OF THE P&R TRUST
Under Massachusetts law, shareholders of a Fund
could, under certain circumstances, be held personally liable for the obligations of that Fund. However, the Master Trust Agreement disclaims liability of the shareholders of a Fund for acts or obligations of the P&R Trust, which are binding
only on the assets and property of the Fund, and requires that notice of the disclaimer be given in each contract or obligation entered into or executed by a Fund or the Board. The P&R Trust Master Trust Agreement provides for indemnification
out of Fund property for all loss and expense of any shareholder held personally liable for the obligations of a Fund. The risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which a Fund
itself would be unable to meet its obligations and thus should be considered remote.
86
The Master Trust Agreement provides further that no officer or Trustee of the P&R Trust will be
personally liable for any obligations of the P&R Trust, nor will any officer or Trustee be personally liable to the P&R Trust or its shareholders except by reason of his or her own bad faith, willful misfeasance, gross negligence in the
performance of his or her duties or reckless disregard of his or her obligations and duties. With these exceptions, the Master Trust Agreement provides that a Trustee or officer of the P&R Trust is entitled to be indemnified against all
liabilities and expenses, including reasonable accountants and counsel fees, incurred by the Trustee or officer in connection with the defense or disposition of any proceeding in which he or she may be involved or with which he or she may be
threatened by reason of his or her being or having been a Trustee or officer.
87
VOTING OF THE P&R TRUST
Shareholders of the Funds will vote in the aggregate and not by series or class except as otherwise required by law or when the Board determines that the matter to be voted upon affects only the interests
of the shareholders of a particular series or class of shares. Pursuant to
Rule 18f-2
under the 1940 Act, the approval of an investment advisory agreement or any change in a fundamental policy would be
acted upon separately by the series affected. Matters such as ratification of the independent registered public accounting firm and election of Trustees are not subject to separate voting requirements and may be acted upon by shareholders of the
P&R Trust voting without regard to series or class.
MARKET PRICING ERRORS
The Board has adopted Guidelines Concerning Correction of Market Pricing Errors, which set forth the procedures used in handling market pricing errors and their impact on a Funds net
asset value per share (NAV) and its shareholders. Depending on the size of the error, corrective action may involve a prospective correction of the NAV only, correction of any erroneous NAV and compensation to the Fund, or correction of
any erroneous NAV, compensation to the Fund and reprocessing of individual shareholder transactions. Under the Guidelines, exceptions to the policy may be granted as facts or circumstances warrant.
COUNSEL
Paul Hastings LLP (Paul
Hastings) acts as counsel to each of the P&R Trust and to the Independent Trustees of the P&R Trust. Paul Hastings address is 515 South Flower Street, 25th Floor, Los Angeles, California 90071.
LICENSE AGREEMENT AND MARKS
Payden has entered
into a
non-exclusive
License Agreement with the P&R Trust which permits the P&R Trust to use the name Payden & Rygel. Payden has the right to require the P&R Trust to cease
using the name at such time as Payden is no longer employed as investment manager to the P&R Trust.
Payden is the service
mark of Payden.
Metzler/Payden has entered into a
non-exclusive
License Agreement with the P&R
Trust which permits the P&R Trust to use the name Metzler/Payden. Metzler/Payden has the right to require the P&R Trust to cease using the name at such time as Metzler/Payden is no longer employed as investment manager to the
P&R Trust.
Kravitz has entered into a
non-exclusive
License Agreement with the P&R Trust
which permits the P&R Trust to use the names Kravitz Investment Services, Inc. or Kravitz. Kravitz has the right to require the P&R Trust to cease using the name or names as such time as Payden/Kravitz is no longer
employed as investment adviser to the P&R Trust.
88
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the P&R Trusts registration statement filed with the SEC under the Securities Act with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The registration statement, including the exhibits filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in any of the Prospectuses as to the contents of any contract or other documents referred to herein are not
necessarily complete, and, in each instance, reference is made to the copy of such contract or other documents filed as an exhibit to the P&R Trust registration statement, such statement being qualified in all respects by such reference.
89
THE PAYDEN & RYGEL INVESTMENT GROUP
F O R M
N-1A