|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
December 31, 2013, the Funds collected the following redemption fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
Fee Amount
|
|
|
Fund
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class Z
|
|
|
Long/Short Equity Fund
|
|
$
|
3,475
|
|
|
$
|
—
|
|
|
$
|
1,082
|
|
|
$
|
17,014
|
|
|
Long/Short Healthcare Fund
|
|
|
36
|
|
|
|
—
|
|
|
|
16
|
|
|
|
10
|
|
|
Floating Rate Opportunities Fund
|
|
|
42,023
|
|
|
|
17
|
|
|
|
37,964
|
|
|
|
28,585
|
|
Note 9. Disclosure of Significant Risks and Contingencies
The primary risks of investing in the Funds are described below in alphabetical order:
Concentration Risk
The Funds may focus their investments in instruments of only a few companies. The concentration of each Fund’s portfolios in any one obligor
would subject the Funds to a greater degree of risk with respect to defaults by such obligor, and the concentration of the portfolio in any one industry would subject the Funds to a greater degree of risk with respect to economic downturns relating
to such industry.
Counterparty Credit Risk
Counterparty credit risk is the potential loss the Funds may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms
of a contract. Counterparty credit risk is measured as the loss the Funds would record if its counterparties failed to perform pursuant to the terms of their obligations to the Funds. Because the Funds may enter into over-the-counter forwards,
options, swaps and other derivative financial instruments, the Funds may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Funds conduct business only with financial
institutions judged by the Investment Adviser to present acceptable credit risk.
Credit Risk
Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative
with respect to the issuing company’s continuing ability to meet principal and/ or interest payments. Investments in high yield debt and high yield Senior Loans may result in greater net asset value fluctuation than if the Fund did not make
such investments.
Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of scheduled interest and/or principal.
Non-payment would result in a reduction of income to the Fund, a reduction in the value of the
corporate debt obligation experiencing non-payment and a potential decrease in the NAV of the Fund.
Currency Risk
A portion of the Fund’s assets may be
quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a
devaluation of a currency in which the Fund’s investments are quoted or denominated. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S.
dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Emerging Markets Risk
Any investments in Emerging Market Countries (countries in which the capital markets are
developing) may involve greater risks than investments in more developed markets and the prices of such investments may be more volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the
market prices of the Fund’s investments and the income they generate, as well as the Fund’s ability to repatriate such amounts.
Foreign
Securities Risk
Investments in foreign securities involve certain factors not typically associated with investing in U.S. securities, such as risks
relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar (the currency in which the books of the Fund are maintained) and the various foreign currencies in which the Fund’s portfolio
securities will be denominated and costs associated with conversion of investment principal and income from one currency into another; (ii) differences between the U.S. and foreign securities markets, including the absence of uniform
accounting, auditing and financial reporting standards and practices and disclosure requirements, and less government supervision and regulation; (iii) political, social or economic instability; and (iv) the extension of credit, especially
in the case of sovereign debt.
Forward Foreign Currency Exchange Contracts Risk
The Funds are subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Funds may use forward contracts to gain exposure to, or hedge against changes in the
value of foreign currencies. A forward contract represents a commitment for the future purchase or sale of an asset at
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
a specified price on a specified date. Upon entering into such contracts, daily fluctuations in the value of the contract are recorded for financial statement purposes as unrealized gains or
losses by the Funds. At the expiration of the contracts the Funds realize the gain or loss. Upon entering into such contracts, the Funds bear the risk of exchange rates moving unexpectedly, in which case, the Funds may not achieve the anticipated
benefits of the forward contracts and may realize a loss. With forwards, there is counterparty credit risk to the Funds because the forwards are not exchange-traded, and there is no clearinghouse to guarantee the forwards against default.
Futures Contracts Risk
The risks of entering
into futures contracts include the possibilities that their markets may become illiquid and/or changes in the values of the contracts may not correlate to changes in the values of the underlying instruments.
Hedging Transactions Risk
Each Fund may engage in
“hedging,” the practice of attempting to offset a potential loss in one position by establishing an opposite position in another investment. Hedging strategies in general are usually intended to limit or reduce investment risk, but can
also be expected to limit or reduce the potential for profit. For example, if the Funds have taken a defensive posture by hedging its portfolio, and stock prices advance, the return to investors will be lower than if the portfolio had not been
hedged. No assurance can be given that any particular hedging strategy will be successful, or that the Investment Adviser will elect to use a hedging strategy at a time when it is advisable.
Illiquid Securities Risk
The investments made by the Fund may be illiquid, and consequently the Fund may not
be able to sell such investments at prices that reflect the Investment Adviser’s assessment of their value or the amount originally paid for such investments by the Fund. Illiquidity may result from the absence of an established market for the
investments as well as legal, contractual or other restrictions on their resale and other factors. Furthermore, the nature of the Fund’s investments, especially those in financially distressed companies, may require a long holding period prior
to profitability.
Indemnification Risk
The Funds
have a variety of indemnification obligations under contracts with their service providers. The Funds’ maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts and
expect the risk of loss to be remote.
Industry Concentration Risk
The Long/Short Healthcare Fund has a policy of investing primarily in securities issued by healthcare companies, which makes the Fund susceptible to economic, political or regulatory risks or other occurrences
associated with the healthcare industry.
Leverage Risk
Each of the Funds may use leverage in their investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a
fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Funds purchase securities
with borrowed funds, their net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed
funds, the Funds’ use of leverage would result in a lower rate of return than if the Funds were not leveraged.
Options Risk
There are several risks associated with transactions in options on securities. 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 transaction in options or securities may be unsuccessful to some degree because of market behavior or
unexpected events.
When the Funds write a covered call option, the Fund forgoes, during the option’s 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 strike price of the call, but retains 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 and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
When the Funds write a covered put option, the Fund bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could
incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s
potential gain in writing a covered put option is limited to distributions
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus
the put premium.
Short-Selling Risk
Short sales
by the Funds that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short
selling allows the Funds to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices
in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby
exacerbating the loss. The Funds may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Funds might have difficulty purchasing securities to meet
margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
Troubled, Distressed or Bankrupt Companies Risk
The Fund invests in companies that are troubled, in distress or bankrupt. As such, they are subject to a multitude of
legal, industry, market, environmental and governmental forces that make analysis of these companies inherently difficult. Further, the Investment Adviser relies on company management, outside
experts, market participants and personal experience to analyze potential investments for the Fund. There can be no assurance that any of these sources will prove credible, or that the resulting analysis will produce accurate conclusions.
Note 10. Investment Transactions
Purchases & Sales of Securities
The cost of
purchases and the proceeds from sales of investments, other than short-term securities and short-term options, for the period ended December 31, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
Securities
(1)
|
|
|
Other
Securities
|
|
|
Fund
|
|
Purchases
|
|
|
Sales
|
|
|
Purchases
|
|
|
Sales
|
|
|
Long/Short Equity Fund
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,305,237,268
|
|
|
$
|
1,319,052,675
|
|
|
Long/Short Healthcare Fund
|
|
|
—
|
|
|
|
—
|
|
|
|
121,996,073
|
|
|
|
128,963,211
|
|
|
Floating Rate Opportunities Fund
|
|
|
—
|
|
|
|
—
|
|
|
|
497,474,803
|
|
|
|
77,425,626
|
|
|
(1)
|
The Funds did not have any purchases or sales of U.S. Government Securities for the period ended December 31, 2013.
|
Note 11. Affiliated Issuers
Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a Fund owns five percent or more of its outstanding voting
securities.
The Long/Short Equity Fund held at least five percent of the outstanding voting securities of the following company as of December 31,
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Shares at
June
30,
2013
|
|
|
Shares at
December
31,
2013
|
|
|
June 30,
2013
|
|
|
December 31,
2013
|
|
|
Affiliated
Income
|
|
|
Purchases
|
|
|
Sales
|
|
|
Highland/iBoxx Senior Loan, ETF (Common Stocks & Exchange–Traded Funds)
|
|
|
750,000
|
|
|
|
480,654
|
|
|
$
|
14,970,000
|
|
|
$
|
9,579,434
|
|
|
$
|
393,880
|
|
|
$
|
—
|
|
|
$
|
5,382,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
The Floating Rate Opportunities Fund held at least five percent of the outstanding voting securities of the following companies as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Shares at
June
30,
2013
|
|
|
Shares at
December
31,
2013
|
|
|
June 30,
2013
|
|
|
December 31,
2013
|
|
|
Affiliated
Income
|
|
|
Purchases
|
|
|
Sales
|
|
|
CCD Equity Partners, LLC (Common Stocks & Exchange–Traded Funds)
|
|
|
1,648,350
|
|
|
|
1,648,350
|
|
|
$
|
4,714,281
|
|
|
$
|
5,043,951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
CCS Medical, Inc. (Common Stocks & Exchange–Traded Funds)
|
|
|
207,031
|
|
|
|
207,031
|
|
|
|
12,479,828
|
|
|
|
12,465,336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Endurance Business Media, Inc. (Common Stocks & Exchange–Traded Funds)
|
|
|
4,921
|
|
|
|
4,921
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Highland/iBoxx Senior Loan, ETF (Common Stocks & Exchange–Traded Funds)
|
|
|
1,150,000
|
|
|
|
1,150,000
|
|
|
|
22,954,000
|
|
|
|
22,919,500
|
|
|
|
610,482
|
|
|
|
—
|
|
|
|
—
|
|
|
LLV Holdco, LLC (Common Stocks & Exchange–Traded Funds)
|
|
|
37,375
|
|
|
|
34,992
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Nevada Land Group LLC (Common Stocks & Exchange–Traded Funds)
|
|
|
8
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,047,685
|
|
|
|
3,045,302
|
|
|
$
|
40,148,109
|
|
|
$
|
40,428,787
|
|
|
$
|
610,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Legal Matters
Matters Relating to Floating Rate Opportunities Fund’s Investment in TOUSA, Inc.
Floating Rate
Opportunities Fund (“FRO”) is one of numerous defendants (“Lenders”) that have been named in an adversary proceeding pending in the Bankruptcy Court of the Southern District of Florida (the “Court”). The action,
entitled In re Tousa Inc., et al., was filed on July 15, 2008, by the Official Committee of Unsecured Creditors of TOUSA, Inc. and its affiliates (the “Plaintiff”), which are home building companies to which the Lenders loaned money
through different lending facilities. Plaintiff alleges that monies used to repay the Lenders should be voided as fraudulent and preferential transfers under the bankruptcy laws. More specifically, Plaintiff alleges that subsidiaries of the home
building companies were forced to become
co-borrowers
and guarantors of the monies used to repay the Lenders, and that the subsidiaries did not receive fair consideration or reasonably equivalent value when
they transferred the proceeds to repay the Lenders.
Plaintiff seeks to void the transfers and other equitable relief. FRO and other Funds and accounts
managed by the Investment Adviser and the other Lenders are named as defendants in two separate lending capacities; first, as lenders in a credit agreement (the “Credit Lenders”); and second, as lenders in a term loan (the “Term Loan
Lenders”). The case went to trial, which concluded in August 2009. On October 13, 2009, the Bankruptcy Court ruled for the Plaintiff in the action and ordered the Defendants to return the proceeds received from the pay-off of the term loan
at par on July 31, 2007. The proceeds received by FRO totaled $4,000,000. Additionally, the court
ordered the Defendants to pay simple interest on the amount returned at an annual rate of 9%. In November 2009, FRO and other Defendants filed appealed the decision from the Bankruptcy Court to
the District Court. On December 22, 2009, FRO posted $5,310,479 (“Security”) with the Court. This amount was recorded in the Statement of Assets and Liabilities and the Statement of Operations. On February 11, 2011, the District
Court entered an order quashing all liability of the Lenders and declaring the remedies against the Lenders null and void. On May 15, 2012, the Eleventh Circuit Court of Appeal (“Eleventh Circuit”) issued its decision reversing the
judgment of the District Court, affirming the liability findings of the Bankruptcy Court, and remanding to the District Court for further proceedings consistent with their opinion. Briefing has been completed at the District Court, but the case has
been stayed pending the outcome of a related US Supreme Court case which could have a significant effect on the Tousa action. The US Supreme Court case was heard on January 14, 2014, and the Parties are waiting the decision. FRO’s posted
Security will be released upon a final appellate ruling.
Note 13. Reorganization of Floating Rate Fund and Floating Rate Advantage Fund into
Floating Rate Opportunities Fund
On February 21, 2011, the Board of Trustees approved an agreement and plan of reorganization (the
“Agreement”) which provided for the transfer of all of the assets and liabilities of the Floating Rate Advantage Fund and the Floating Rate Fund (collectively, the “Acquired Funds”) into the Floating Rate Opportunities Fund (the
“Reorganization”). The Floating Rate Opportunities Fund
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
was created in anticipation of the Reorganization. Shareholders of each of the Acquired Funds approved the Reorganization at a joint meeting held on May 23, 2011. The primary purpose of the
Reorganization was to provide greater liquidity to the shareholders of the Acquired Funds. The
tax-free
Reorganization was completed on June 13, 2011. The cost of the reorganization was $641,470, of which
57% and 43% was paid by the Floating Rate Advantage Fund and the Floating Rate Fund, respectively. For financial reporting purposes, assets received and shares issued by the Floating Rate Opportunities Fund were recorded at fair value; however, for
tax purposes, the cost basis of the investments received from the Acquired Funds was carried forward to align ongoing reporting of the Floating Rate Opportunities Fund’s realized and unrealized gains and losses with amounts distributable to
shareholders for tax purposes. Using the facts and circumstances of the Reorganization, it was determined that the Floating Rate Advantage Fund would be the accounting survivor. The financial statements and historical information contained in the
Financial Highlights and footnotes for Floating Rate Opportunities Fund reflect this determination.
The shares outstanding and net assets for each Share
class of the Floating Rate Advantage Fund immediately before the Reorganization were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highland Floating Rate
Advantage Fund
|
|
Net Assets
|
|
|
Shares
Outstanding
|
|
|
Conversion
Ratio
|
|
|
Class A
|
|
$
|
152,005,518
|
|
|
|
21,683,600
|
|
|
|
1.0000
|
|
|
Class B
|
|
|
10,590,972
|
|
|
|
1,511,544
|
|
|
|
1.0000
|
|
|
Class C
|
|
|
260,755,064
|
|
|
|
37,203,278
|
|
|
|
1.0000
|
|
|
Class Z
|
|
|
18,149,806
|
|
|
|
2,591,311
|
|
|
|
1.0000
|
|
The shares outstanding for each Share class of the Floating Rate Fund immediately before the Reorganization and shares of the
Floating Rate Opportunities Fund issued to Floating Rate Fund shareholders were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merged Fund
Highland
Floating
Rate Fund
|
|
Shares
Exchanged
|
|
|
Highland
Floating
Rate
Opportunities
Fund
|
|
Shares
Issued
|
|
|
Net
Asset
Value
|
|
|
Conversion
Ratio
|
|
Class A
|
|
|
18,720,164
|
|
|
Class A
|
|
|
17,615,566
|
|
|
$
|
7.01
|
|
|
0.9410
|
|
Class B
|
|
|
1,354,869
|
|
|
Class B
|
|
|
1,273,780
|
|
|
$
|
7.01
|
|
|
0.9402
|
|
Class C
|
|
|
30,496,942
|
|
|
Class C
|
|
|
28,687,427
|
|
|
$
|
7.01
|
|
|
0.9407
|
|
Class Z
|
|
|
3,030,909
|
|
|
Class Z
|
|
|
2,852,666
|
|
|
$
|
7.00
|
|
|
0.9412
|
The net assets and net unrealized appreciation/(depreciation) of Floating Rate Fund and Floating Rate Opportunities
Fund immediately before the Reorganization were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merged Fund
Highland
Floating
Rate Fund
|
|
Shares
Exchanged
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Acquiring
Fund
|
|
Net Asset
Value
|
|
|
Highland Floating Rate Fund
|
|
353,461,456
|
|
$
|
233,892,251
|
|
|
Highland
Floating Rate
Opportunities
Fund
|
|
$
|
441,501,360
|
|
The net assets and shares outstanding of the Floating Rate Opportunities Fund upon the completion of the Reorganization were:
|
|
|
|
|
|
|
|
|
|
|
Highland Floating Rate Opportunities Fund
|
|
Net Assets
|
|
|
Shares
Outstanding
|
|
|
Class A
|
|
$
|
275,493,444
|
|
|
|
39,299,166
|
|
|
Class B
|
|
|
19,516,010
|
|
|
|
2,785,324
|
|
|
Class C
|
|
|
461,823,197
|
|
|
|
65,890,705
|
|
|
Class Z
|
|
|
38,130,164
|
|
|
|
5,443,977
|
|
Assuming the reorganization had been completed on July 1, 2010 the Floating Rate Opportunities Fund results of operations for
the year ended June 30, 2011 would have been as follows:
|
|
|
|
|
|
|
Net investment income (loss)
|
|
$
|
33,880,318
|
|
|
Net realized and unrealized gain (loss) on investments
|
|
$
|
(178,621,241
|
)
|
|
Net increase (decrease) in assets from operations
|
|
$
|
(144,364,864
|
)
|
Note 14. New Accounting Pronouncements
ASU 2013-08
In June 2013, FASB issued an update (“ASU 2013-08”) to ASC Topic 946,
Financial
Services — Investment Companies
(“Topic 946”). ASU 2013-08 amends the guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures. ASU
2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Management is currently evaluating the impact, if any, of ASU 2013-08 on the Fund’s financial statements.
Note 15. Subsequent Events
Management has evaluated the
impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no subsequent events.
ADDITIONAL INFORMATION (unaudited)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
Additional Portfolio Information
The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Funds are made independently from those of such
other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Funds, including investments in different levels of the
capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of
investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may
create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Funds and one or more of such other accounts are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Funds and such other accounts. The Investment Adviser also may aggregate orders to
purchase and sell securities for the Funds and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all
accounts including the Funds, in some cases these activities may adversely affect the price paid or received by the Funds or the size of the position obtained or disposed of by the Funds.
Disclosure of Fund Expenses
As a shareholder of a Fund, you incur two types of
costs: (1) transaction costs, including sales charges (loads) on purchases and redemption fees; and (2) ongoing costs, including management fees; distribution (12b-1) and service fees; and other Fund expenses. This example is intended to
help you understand the ongoing costs (in dollars) of investing in your Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six-month period July 1, 2013 through December 31, 2013, unless otherwise indicated.
This table illustrates your
Fund’s costs in two ways:
Actual Expenses:
The first part of the table provides information about actual account values and actual
expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this
period.
Hypothetical Example for Comparison Purposes:
The second part of the table provides information about hypothetical account values and
hypothetical expenses based on your Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund’s actual return. The actual expense ratio includes voluntary fee waivers or expense
reimbursements by the Fund’s investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending
account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not
reflect any transactional costs, such as sales charges (loads) or redemption fees. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have been higher.
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Account
Value
7/1/2013
|
|
|
Ending
Account
Value
12/31/2013
|
|
|
Annualized
Expense
Ratio
(1)
|
|
|
Annualized
Expense
Ratio
(2)
|
|
|
Expenses
Paid
During
the
Period
(3)
|
|
|
Expenses
Paid
During
the
Period
(4)
|
|
|
Actual
Returns
for
Period
|
|
|
Long/Short Equity Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Fund Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
1,000.00
|
|
|
$
|
1,159.80
|
|
|
|
2.41
|
%
|
|
|
1.87
|
%
|
|
$
|
13.07
|
|
|
$
|
10.18
|
|
|
|
15.98
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,155.90
|
|
|
|
3.05
|
%
|
|
|
2.52
|
%
|
|
|
16.57
|
|
|
|
13.69
|
|
|
|
15.59
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,162.50
|
|
|
|
2.05
|
%
|
|
|
1.52
|
%
|
|
|
11.17
|
|
|
|
8.29
|
|
|
|
16.25
|
%
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
1,000.00
|
|
|
$
|
1,015.78
|
|
|
|
2.41
|
%
|
|
|
1.87
|
%
|
|
$
|
12.18
|
|
|
$
|
9.50
|
|
|
|
5.00
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,012.50
|
|
|
|
3.05
|
%
|
|
|
2.52
|
%
|
|
|
15.45
|
|
|
|
12.78
|
|
|
|
5.00
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,017.54
|
|
|
|
2.05
|
%
|
|
|
1.52
|
%
|
|
|
10.41
|
|
|
|
7.73
|
|
|
|
5.00
|
%
|
|
Long/Short Healthcare Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Fund Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1,000.00
|
|
|
$
|
1,203.10
|
|
|
|
3.30
|
%
|
|
|
2.17
|
%
|
|
$
|
18.32
|
|
|
$
|
12.05
|
|
|
|
20.31
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,199.40
|
|
|
|
3.95
|
%
|
|
|
2.82
|
%
|
|
|
21.95
|
|
|
|
15.69
|
|
|
|
19.94
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,205.70
|
|
|
|
2.94
|
%
|
|
|
1.82
|
%
|
|
|
16.35
|
|
|
|
10.12
|
|
|
|
20.57
|
%
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1,000.00
|
|
|
|
1,014.27
|
|
|
|
3.30
|
%
|
|
|
2.17
|
%
|
|
$
|
16.71
|
|
|
$
|
11.02
|
|
|
|
5.00
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,010.94
|
|
|
|
3.95
|
%
|
|
|
2.82
|
%
|
|
|
20.02
|
|
|
|
14.34
|
|
|
|
5.00
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,016.03
|
|
|
|
2.94
|
%
|
|
|
1.82
|
%
|
|
|
14.90
|
|
|
|
9.25
|
|
|
|
5.00
|
%
|
|
Floating Rate Opportunities Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Fund Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
1,000.00
|
|
|
$
|
1,074.00
|
|
|
|
1.31
|
%
|
|
|
1.28
|
%
|
|
$
|
6.90
|
|
|
$
|
6.74
|
|
|
|
7.40
|
%
|
|
Class B
|
|
|
1,000.00
|
|
|
|
1,076.40
|
|
|
|
1.70
|
%
|
|
|
1.68
|
%
|
|
|
8.84
|
|
|
|
8.74
|
|
|
|
7.64
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,071.30
|
|
|
|
1.84
|
%
|
|
|
1.82
|
%
|
|
|
9.61
|
|
|
|
9.50
|
|
|
|
7.13
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,075.90
|
|
|
|
0.96
|
%
|
|
|
0.93
|
%
|
|
|
5.08
|
|
|
|
4.92
|
|
|
|
7.59
|
%
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
1,000.00
|
|
|
$
|
1,018.70
|
|
|
|
1.31
|
%
|
|
|
1.28
|
%
|
|
$
|
6.72
|
|
|
$
|
6.56
|
|
|
|
5.00
|
%
|
|
Class B
|
|
|
1,000.00
|
|
|
|
1,016.79
|
|
|
|
1.70
|
%
|
|
|
1.68
|
%
|
|
|
8.59
|
|
|
|
8.49
|
|
|
|
5.00
|
%
|
|
Class C
|
|
|
1,000.00
|
|
|
|
1,016.03
|
|
|
|
1.84
|
%
|
|
|
1.82
|
%
|
|
|
9.35
|
|
|
|
9.25
|
|
|
|
5.00
|
%
|
|
Class Z
|
|
|
1,000.00
|
|
|
|
1,020.47
|
|
|
|
0.96
|
%
|
|
|
0.93
|
%
|
|
|
4.94
|
|
|
|
4.79
|
|
|
|
5.00
|
%
|
|
(1)
|
Annualized, based on the Fund’s most recent fiscal half-year expenses, including dividends on short positions and interest expenses, if any.
|
|
(2)
|
Annualized, based on the Fund’s most recent fiscal half-year expenses, excluding dividends on short positions and interest expenses, if any.
|
|
(3)
|
Expenses are equal to the Fund’s annualized expense ratio including interest expense and dividends on short positions, if any, multiplied by the average account value over
the period, multiplied by the number of days in the fiscal half-year, then divided by 365.
|
|
(4)
|
Expenses are equal to the Fund’s annualized expense ratio excluding interest expense and dividends on short positions, if any, multiplied by the average account value over
the period, multiplied by the number of days in the fiscal half-year, then divided by 365.
|
Approval of Highland Funds I Advisory and Sub-Advisory Agreements
The Trust has retained the Investment Adviser to manage the assets of each of Highland Floating Rate Opportunities Fund, Highland Long/Short Equity Fund and
Highland Long/Short Healthcare Fund (for purposes of this section, each a “Fund”) pursuant to investment advisory agreements between the Investment Adviser and each such Fund (the “Advisory Agreements”). The Trust has also
retained Cummings Bay Capital Management, L.P. (the “Sub-Adviser” and, together with the Investment Adviser, the “Advisers”) to serve as sub-adviser to Highland Funds I, on behalf of Highland Long/Short Healthcare Fund
(“Long/Short Healthcare Fund”), pursuant to a subadvisory
agreement (the “Sub-Advisory Agreement” and, together with the Advisory Agreements, the “Agreements”) by and among the Investment Adviser, the Sub-Adviser and Highland Funds
I. The Agreements have been approved by the Funds’ Board of Trustees, including a majority of the Independent Trustees.
Following an initial
two-year term, each of the Agreements continues in effect from year-to-year, provided such continuance is specifically approved at least annually by the vote of holders of at least a majority of the outstanding shares of the Fund or by the Board of
Trustees and, in either event, by a majority of the Independent Trustees of the Fund casting votes in person at a meeting called for such purpose.
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
The Board of Trustees held a meeting of the board on August 29, 2013, at which meeting they gave preliminary
consideration to information bearing on the continuation of each Advisory Agreement for a one-year period commencing December 31, 2013. The primary purpose of the meeting was to ensure that the Trustees had ample opportunity to consider matters
they deemed relevant in considering the continuation of the Agreements, and to request any additional information they considered reasonably necessary to their deliberations, without undue time constraints.
At a meeting held on September 12-13, 2013, the Board of Trustees, including the Independent Trustees, approved the continuance of the Agreements with respect
to each Fund. As part of its review process, the Board of Trustees requested, through Fund counsel and its independent legal counsel, and received from the Advisers, various information and written materials in connection with meetings of the
Board of Trustees held on August 29, 2013 and September 12-13, 2013, including: (1) information regarding the financial soundness of the Advisers and the profitability of the Agreements to the Advisers; (2) information on the
advisory and compliance personnel of the Advisers, including compensation arrangements; (3) information on the internal compliance procedures of the Advisers; (4) comparative information showing how the Funds’ proposed and actual fees
and anticipated and actual operating expenses compare to those of other registered investment companies and private funds that follow investment strategies similar to those of the Funds; (5) information on the investment performance of the
Funds, including comparisons of the Funds’ performance against that of other registered investment companies and private funds that follow investment strategies similar to those of the Funds; (6) information regarding brokerage and
portfolio transactions; and (7) information on any legal proceedings or regulatory audits or investigations affecting the Advisers. The Trustees also relied on information provided in connection with the initial approval of the Agreements, as
well as new information specifically relating to changes from such time, and information provided at periodic meetings of the Trustees over the course of the year. In addition, the Trustees received an independent report from Keil Fiduciary
Strategies (“KFS”), an independent source of investment company data, relating to each Fund’s performance, volatility and expenses compared to the performance, volatility and expenses of a relatively small peer group determined by
Keil Fiduciary Strategies to be comparable. The Trustees also reviewed various factors discussed in independent counsel’s legal memorandum, the detailed information provided by the Investment Adviser and Sub-Adviser and other relevant
information and factors. The Trustees’ conclusions as to the approval of the Agreements were based on a comprehensive consideration of all information provided to the Trustees without any
single factor being dispositive in and of itself. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one
another, giving different weights to various factors.
The nature, extent, and quality of the services to be provided by the Advisers
The Board of Trustees considered the portfolio management services to be provided by the Advisers under the Agreements and the activities related to portfolio
management, including use of technology, research capabilities, and investment management staff. The Board of Trustees discussed the relevant experience and qualifications of the personnel providing advisory services, including the background and
experience of the members of each Fund’s portfolio management team. The Trustees reviewed the management structure, assets under management and investment philosophies and processes of the Advisers. The Trustees also reviewed and discussed
information regarding the Advisers’ compliance policies, procedures and personnel, including compensation arrangements. With regard to Long/Short Healthcare Fund, for which the Investment Adviser has retained the Sub-Adviser, the Trustees
considered the services provided by the Investment Adviser with respect to the supervision of the Sub-Adviser, including the performance of periodic detailed analysis and review of the performance by the Sub-Adviser of its obligations to the Fund,
including, without limitation, a review of the Sub-Adviser’s investment performance in respect of the Fund; preparation and presentation of periodic reports to the Trustees regarding the investment performance of the Sub-Adviser and other
information regarding the Sub-Adviser; review and consideration of any changes in the personnel of the Sub-Adviser responsible for performing the Sub-Adviser’s obligations and making appropriate reports to the Trustees; review and consideration
of any changes in the ownership or senior management of the Sub-Adviser and making appropriate reports to the Trustees; performing periodic in-person or telephonic diligence meetings with representatives of the Sub-Adviser; and preparing
recommendations with respect to the continued retention of the Sub-Adviser or the replacement of the Sub-Adviser. The Trustees concluded that the Advisers had the quality and depth of personnel and investment methods essential to performing their
duties under the Agreements, and that the nature and the quality of such advisory services were satisfactory.
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland Funds I
|
The Advisers’ Historical Performance in Managing the Funds
The Board of Trustees reviewed the historical performance of the Advisers and the Funds’ portfolio management teams in managing the Funds over various time
periods and reflected on previous discussions regarding matters bearing on the Advisers’ performance at their meetings throughout the year. With respect to the Funds, the Trustees discussed relative performance and contrasted the performance of
the Funds and their respective portfolio management teams versus that of the Funds’ peers, as represented by certain other registered investment companies that follow investment strategies similar to the Funds as well as comparable indices.
With respect to each Fund, the Trustees concluded that the Fund’s performance or other relevant factors supported the renewal of the Agreement(s) relating to that Fund. In the case of each Fund that had performance that lagged that of a
relevant peer group for certain (although not necessarily all) periods, the Trustees concluded that other factors relevant to performance supported renewal of the Agreements. These factors included one or more of the following: (1) that
underperformance was attributable, to a significant extent, to investment decisions (such as security selection or sector allocation) by the Advisers that were reasonable and consistent with the Fund’s investment objective and policies; and
(2) that the Fund’s more recent performance was competitive when compared to relevant performance benchmarks or peer groups.
The costs of
the services to be provided by the Investment Adviser and the profits to be realized by the Investment Adviser and its affiliates from the relationship with the Funds
The Board of Trustees also gave substantial consideration to the fees payable under the Agreements, the expenses the Advisers incur in providing advisory services and the profitability to the Advisers of managing
the Funds, including: (1) information regarding the financial condition of the Advisers; (2) information regarding the total fees and payments received by the Advisers for their services and whether such fees are appropriate given
economies of scale and other considerations; (3) comparative information showing (a) the fees payable under the Agreements and the actual fees paid by the Funds to the Investment Adviser versus the investment advisory fees of certain
registered investment companies and private pooled vehicles that follow investment strategies similar to those of the Funds and (b) the expense ratios of the Funds versus the expense ratios of certain registered investment companies and
private pooled vehicles that follow investment strategies similar to those of the Funds;
(4) information regarding the total fees and payments received and the related amounts waived and/or reimbursed by the Investment Adviser for providing administrative services to the Funds
under separate agreements and whether such fees are appropriate; and, (5) with respect to the Advisory Agreement for Long/Short Healthcare Fund, the fact that the fees payable to the Investment Adviser would be reduced by amounts payable to the
Sub-Adviser for a given period. The Trustees also considered the so-called “fall-out benefits” to the Advisers with respect to the Funds, such as the reputational value of serving as Adviser or Sub-Adviser to the relevant Funds, potential
fees paid to the Advisers’ affiliates by a Fund or portfolio companies for services provided, including administrative services provided to the Funds by the Investment Adviser pursuant to separate agreements, and the benefits of research made
available to the Advisers by reason of brokerage commissions (if any) generated by the Funds’ securities transactions. With respect to Long/Short Equity Fund and Long/Short Healthcare Fund, the Board of Trustees considered that the Funds’
actual management fees and total expense ratios were competitive as compared to their respective peer groups. With respect to Floating Rate Opportunities Fund, the Board of Trustees considered that, while the Fund’s relative management fee and
total expenses exceeded the KFS peer group, the Adviser had agreed to limit total annual operating expenses through at least October 31, 2014. After such review, the Trustees determined that the anticipated profitability rates to the Investment
Adviser and Sub-Adviser with respect to the Agreements were fair and reasonable. The Trustees also took into consideration the amounts waived and/or reimbursed, if any, where expense caps or advisory fee waivers had been implemented.
The extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of
shareholders
The Board of Trustees considered the respective asset levels of the Funds, the information provided by the Advisers relating to their
costs and information comparing the fee rates charged by the Advisers with fee rates charged by other unaffiliated investment advisers to their clients. The Trustees concluded that the fee structures are reasonable, and appropriately should result
in a sharing of economies of scale in view of the information provided by the Advisers. The Board determined to continue to review ways, and the extent to which, economies of scale might be shared between the applicable Adviser and/or Sub-Adviser on
the one hand and shareholders of the Funds on the other.
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
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|
|
December 31, 2013
|
|
Highland Funds I
|
Following a further discussion of the factors above and the merits of the Agreements and their various provisions, it
was noted that in considering the approval of the Agreements, no single factor was determinative to the decision of the Board of Trustees. Rather, after weighing all of the factors and reasons discussed above, the Trustees,
includ-
ing the Independent Trustees, unanimously agreed that the Agreements, including the advisory and sub-advisory fees to be paid to the Advisers are fair and reasonable to the Funds in light of the
services that the Advisers provide, the expenses that they incur and the reasonably foreseeable asset levels of the Funds.
IMPORTANT INFORMATION ABOUT THIS REPORT
Investment Adviser
Highland Capital Management Fund Advisors, L.P.
200 Crescent Court, Suite 700
Dallas, TX 75201
Subadviser
(for Highland Long/Short Healthcare Fund)
Cummings Bay Capital
Management, L.P.
200 Crescent Court, Suite 700
Dallas,
TX 75201
Transfer Agent
Boston Financial Data
Services, Inc.
30 Dan Road
Canton, MA 02021-2809
Underwriter
Foreside Funds Distributors LLC
400 Berwyn Park
899 Cassatt Road, 1st Floor
Berwyn, PA 19312
Custodian
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
2001
Ross Avenue, Suite 1800
Dallas, TX 75201
Fund
Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
This report has been prepared for shareholders of Highland Long/Short Equity Fund, Highland Long/Short Healthcare
Fund and Highland Floating Rate Opportunities Fund (collectively, the “Funds”). The Funds mail one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at
1-877-665-1287
to request that additional reports be sent to you.
A description of the policies and procedures that the Funds use to determine how to vote proxies relating to their portfolio securities, and the Funds’ proxy voting records for the most recent
12-month
period ended June 30, are available (i) without charge, upon request, by calling
1-877-665-1287
and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on
Form
N-Q.
The Funds’ Forms
N-Q
are available on the Commission’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s
Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Shareholders may also obtain the Form
N-Q
by visiting the Funds’ website at www.highlandfunds.com.
The
Statements of Additional Information include additional information about the Funds’ Trustees and are available upon request without charge by calling
1-877-665-1287.
Highland Funds
c/o BFDS
30 Dan Road
Canton, MA 02021-2809
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Highland Funds I
|
|
Semi-Annual Report, December 31, 2013
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www.highlandfunds.com
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HLC-HFI-SEMI-12/13
|
Highland/iBoxx Senior Loan ETF
Semi-Annual Report
December 31, 2013
Highland/iBoxx Senior Loan ETF
TABLE OF CONTENTS
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
A prospectus must precede or accompany this report. Please read the prospectus carefully
before you invest.
FUND PROFILE (unaudited)
|
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|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
Highland/iBoxx Senior Loan ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield
performance of the Markit iBoxx USD Liquid Leveraged Loan Index (the “Underlying Index”).
Net Assets as of December 31, 2013
$127.8 million
Portfolio Data as of December 31, 2013
The information below provides a snapshot of Highland/iBoxx Senior Loan ETF at the end of the reporting period.
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|
|
|
|
|
|
Quality Breakdown as of 12/31/13 (%)*
|
|
|
BBB
|
|
|
3.7
|
|
|
BB
|
|
|
33.5
|
|
|
B
|
|
|
53.6
|
|
|
CCC
|
|
|
7.2
|
|
|
D
|
|
|
0.8
|
|
|
Not Rated
|
|
|
1.2
|
|
|
|
|
|
|
|
|
Top 5 Sectors as of 12/31/13 (%)*
|
|
|
Media/Telecommunications
|
|
|
14.7
|
|
|
Service
|
|
|
9.6
|
|
|
Information Technology
|
|
|
9.4
|
|
|
Healthcare
|
|
|
8.6
|
|
|
Food/Tobacco
|
|
|
6.9
|
|
|
|
|
|
|
|
|
Top 10 Holdings as of 12/31/13 (%)*
|
|
|
Caesars Entertainment Operating Co., Inc. (Term B-6 Loan)
|
|
|
2.5
|
|
|
Dell International (Term B Loan)
|
|
|
2.0
|
|
|
Clear Channel Communications, Inc. (Tranche D Term Loan)
|
|
|
2.0
|
|
|
Texas Competitive Electric Holdings Co., LLC (2017 Term Loan (Extending))
|
|
|
1.9
|
|
|
Asurion, LLC (Incremental Tranche B-1 Term Loan)
|
|
|
1.9
|
|
|
First Data Corporation (2018 Dollar Term Loan)
|
|
|
1.8
|
|
|
HJ Heinz Company (Term B-2 Loan)
|
|
|
1.8
|
|
|
Clear Channel Communications, Inc. (Tranche B Term Loan)
|
|
|
1.6
|
|
|
BMC Software Finance (Initial US Term Loan)
|
|
|
1.6
|
|
The Fund is non-diversified and may invest a larger portion of its assets in the securities of fewer issuers than if the Fund was
diversified.
Please refer to Note 7, Disclosure of Significant Risks and Contingencies, for more information.
|
*
|
Quality is calculated as a percentage of total senior loans. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by
Standard & Poor’s, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in
the Fund’s portfolio and not that of the Fund itself. Quality Ratings are subject to change.
|
FINANCIAL STATEMENTS
|
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|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
A guide to understanding the Fund’s financial statements
|
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|
|
Investment Portfolio
|
|
The Investment Portfolio details each of the Fund’s holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and
industry to demonstrate areas of concentration and diversification.
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|
|
Statement of Assets and Liabilities
|
|
This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by
subtracting all of a Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that
share class by the number of shares outstanding in that class as of the last day of the reporting period.
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|
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|
|
Statement of Operations
|
|
This statement reports income earned by the Fund and the expenses incurred by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund
realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from
operations.
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|
|
Statement of Changes in Net Assets
|
|
This statement details how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and
distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding.
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|
|
Financial Highlights
|
|
The Financial Highlights demonstrate how the Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the class’
performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).
|
|
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|
|
Notes to Financial Statements
|
|
These notes disclose the organizational background of the Fund, certain of its significant accounting policies (including those surrounding security valuation, income recognition and
distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.
|
INVESTMENT PORTFOLIO (unaudited)
|
|
|
|
|
As of December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
US Senior Loans (a) - 94.2%
|
|
|
|
|
|
AEROSPACE - 2.0%
|
|
|
|
743,120
|
|
|
Sequa Corp.
Initial Term Loan,
5.250%, 06/19/17
|
|
|
727,857
|
|
|
|
1,815,397
|
|
|
TransDigm, Inc.
Tranche C Term Loan,
3.750%, 02/28/20 (b)
|
|
|
1,822,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,550,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROADCASTING - 4.9%
|
|
|
|
995,000
|
|
|
Charter Communications Operating, LLC Term E Loan,
3.000%, 07/01/20
|
|
|
990,339
|
|
|
|
730,309
|
|
|
Charter Communications Operating, LLC Term F Loan,
3.000%, 12/31/20
|
|
|
726,088
|
|
|
|
2,129,788
|
|
|
Clear Channel Communications, Inc. Tranche B Term Loan,
3.814%, 01/29/16 (b)
|
|
|
2,066,927
|
|
|
|
2,620,212
|
|
|
Clear Channel Communications, Inc.
Tranche D Term Loan,
6.914%, 01/30/19 (b)
|
|
|
2,507,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,290,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CABLE/WIRELESS VIDEO - 0.9%
|
|
|
|
1,093,368
|
|
|
WideOpenWest Finance, LLC
Term B Loan,
4.750%, 04/01/19 (b)
|
|
|
1,100,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHEMICALS - 4.5%
|
|
|
|
1,478,087
|
|
|
Axalta Coating Systems
Initial Term B Loan,
4.750%, 02/01/20
|
|
|
1,490,946
|
|
|
|
1,637,324
|
|
|
Ineos US Finance, LLC
Cash Dollar Term Loan,
4.000%, 05/04/18
|
|
|
1,645,854
|
|
|
|
645,113
|
|
|
PQ Corporation
2013 Term Loan,
4.500%, 08/07/17
|
|
|
650,677
|
|
|
|
1,932,169
|
|
|
Univar, Inc.
Term B Loan,
5.000%, 06/30/17
|
|
|
1,920,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,707,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSUMER NON-DURABLES - 0.1%
|
|
|
|
92,143
|
|
|
Spectrum Brands, Inc.
Tranche C Term Loan,
3.500%, 09/04/19
|
|
|
92,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSUMER PRODUCTS - 0.8%
|
|
|
|
214,150
|
|
|
Revlon Consumer Products Corp.
Replacement Term Loan,
4.000%, 11/20/17
|
|
|
215,823
|
|
|
|
776,897
|
|
|
Serta Simmons Super Holdings, LLC
Term Loan,
5.000%, 10/01/19
|
|
|
782,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
998,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
DIVERSIFIED MEDIA - 0.2%
|
|
|
|
468,008
|
|
|
R.H. Donnelley, Inc.
Loan,
9.750%, 12/31/16
|
|
|
287,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ENERGY - 1.9%
|
|
|
|
1,400,000
|
|
|
Chesapeake Energy Corp.
Loan,
5.750%, 12/02/17
|
|
|
1,431,402
|
|
|
|
250,000
|
|
|
Energy Transfer Equity, LP
Loan,
3.250%, 12/02/19
|
|
|
249,562
|
|
|
|
700,000
|
|
|
FTS International, Inc.
Term Loan,
8.500%, 05/06/16
|
|
|
704,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,385,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL - 1.8%
|
|
|
|
1,750,000
|
|
|
Nuveen Investments, Inc.
Tranche B First-Lien Term Loan,
4.164%, 05/13/17
|
|
|
1,745,625
|
|
|
|
496,250
|
|
|
Ocwen Loan Servicing
Initial Term Loan,
5.000%, 02/15/18
|
|
|
503,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,248,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD & DRUG - 1.1%
|
|
|
|
309,541
|
|
|
Roundy’s Supermarkets, Inc.
Tranche B Term Loan,
5.750%, 02/13/19
|
|
|
310,025
|
|
|
|
1,040,980
|
|
|
Supervalu, Inc.
New Term Loan,
5.000%, 03/21/19 (b)
|
|
|
1,052,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,362,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD/TOBACCO - 6.8%
|
|
|
|
246,875
|
|
|
Burger King Corporation
Tranche B Term Loan (2012),
3.750%, 09/28/19
|
|
|
248,349
|
|
|
|
1,358,315
|
|
|
Del Monte Foods Company
Initial Term Loan,
4.000%, 03/08/18
|
|
|
1,365,100
|
|
|
|
1,282,606
|
|
|
Dunkin Brands, Inc.
Term B-3 Loan,
3.750%, 02/14/20
|
|
|
1,288,615
|
|
|
|
1,741,250
|
|
|
HJ Heinz Company
Term B-1 Loan,
3.250%, 06/07/19
|
|
|
1,754,214
|
|
|
|
2,239,373
|
|
|
HJ Heinz Company
Term B-2 Loan,
3.500%, 06/05/20
|
|
|
2,259,864
|
|
|
|
467,500
|
|
|
OSI Restaurant Partners, LLC
2013 Replacement Term Loan,
3.500%, 10/28/19
|
|
|
468,610
|
|
|
|
894,245
|
|
|
Pinnacle Foods Finance, LLC
New Term Loan G,
3.250%, 04/29/20
|
|
|
894,639
|
|
|
|
249,375
|
|
|
Pinnacle Foods Finance, LLC
Tranche H Term Loan,
3.250%, 04/29/20 (b)
|
|
|
249,462
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
|
|
|
|
|
|
3
|
INVESTMENT PORTFOLIO (unaudited) (continued)
|
|
|
|
|
As of December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
US Senior Loans (continued)
|
|
|
|
|
|
FOOD/TOBACCO (continued)
|
|
|
|
341,087
|
|
|
Wendy’s International, Inc
Term B Loan,
3.250%, 05/15/19
|
|
|
342,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,870,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREST PRODUCTS/CONTAINERS - 2.3%
|
|
|
|
593,901
|
|
|
Berry Plastics Corp.
Term C Loan,
2.164%, 04/03/15
|
|
|
594,230
|
|
|
|
997,487
|
|
|
Berry Plastics Corp.
Term D Loan,
3.500%, 02/08/20 (b)
|
|
|
996,241
|
|
|
|
1,392,351
|
|
|
Reynolds Group Holdings Inc.
Incremental U.S. Term Loan,
4.000%, 12/31/18 (b)
|
|
|
1,407,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,997,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAMING/LEISURE - 5.1%
|
|
|
|
750,000
|
|
|
Caesars Entertainment
Operating Co., Inc.
Term B-5 Loan,
4.488%, 01/28/18
|
|
|
711,562
|
|
|
|
3,316,535
|
|
|
Caesars Entertainment
Operating Co., Inc.
Term B-6 Loan,
5.488%, 01/28/18
|
|
|
3,176,445
|
|
|
|
1,120,000
|
|
|
Hilton Worldwide Finance
Initial Term Loan,
3.750%, 10/25/20(b)
|
|
|
1,131,402
|
|
|
|
495,000
|
|
|
MGM Resorts International
(MGM Grand Detroit, LLC)
Term Loan B,
3.500%, 12/20/19
|
|
|
496,703
|
|
|
|
739,115
|
|
|
Seaworld Parks & Entertainment, Inc.
Term B-2 Loan,
3.000%, 05/14/20
|
|
|
731,724
|
|
|
|
247,500
|
|
|
Six Flags Theme Parks, Inc.
Tranche B Term Loan,
5.250%, 12/20/18
|
|
|
248,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,496,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEALTHCARE - 8.5%
|
|
|
|
1,187,773
|
|
|
Biomet
Dollar Term B-2 Loan,
3.665%, 07/25/17
|
|
|
1,196,805
|
|
|
|
1,750,000
|
|
|
CHS/Community Health Systems, Inc.
Extended Term Loan,
3.748%, 01/25/17
|
|
|
1,766,266
|
|
|
|
792,509
|
|
|
Envision Healthcare Corporation
Initial Term Loan,
4.000%, 05/25/18
|
|
|
796,360
|
|
|
|
988,539
|
|
|
Grifols, Inc.
New U.S. Tranche B Term Loan,
4.250%, 06/01/17(b)
|
|
|
996,308
|
|
|
|
1,246,875
|
|
|
HCA, Inc.
Tranche B-4 Term Loan,
2.914%, 05/01/18
|
|
|
1,249,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
HEALTHCARE (continued)
|
|
|
|
1,047,375
|
|
|
HCA, Inc.
Tranche B-5 Term Loan,
2.998%, 03/31/17
|
|
|
1,049,119
|
|
|
|
784,450
|
|
|
Health Management Associates, Inc. Replacement Term B Loan,
3.500%, 11/16/18
|
|
|
785,572
|
|
|
|
643,738
|
|
|
Hologic, Inc. Refinancing
Tranche B Term Loan,
3.750%, 08/01/19
|
|
|
648,634
|
|
|
|
998,788
|
|
|
IMS Health Incorporated
Tranche B-1 Dollar Term Loan,
3.750%, 09/01/17
|
|
|
1,004,252
|
|
|
|
438,234
|
|
|
MultiPlan, Inc.
Term B-1 Loan,
4.000%, 08/26/17
|
|
|
441,795
|
|
|
|
996,237
|
|
|
Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)
2013 Term Loan,
4.250%, 12/05/18 (b)
|
|
|
1,004,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,938,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOUSING - 0.4%
|
|
|
|
496,222
|
|
|
HD Supply, Inc.
Term Loan,
4.500%, 10/12/17
|
|
|
501,581
|
|
|
|
30,081
|
|
|
Realogy Group, LLC
Extended Synthetic Commitment,
4.400%, 10/10/16
|
|
|
30,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION TECHNOLOGY - 9.4%
|
|
|
|
990,744
|
|
|
Alcatel-Lucent USA, Inc.
U.S. Term Loan,
5.750%, 01/30/19
|
|
|
996,877
|
|
|
|
1,484,318
|
|
|
Avaya, Inc.
Term B-3 Loan,
4.736%, 10/26/17
|
|
|
1,456,116
|
|
|
|
729,593
|
|
|
Avaya, Inc.
Term B-5 Loan,
8.000%, 03/31/18
|
|
|
741,631
|
|
|
|
2,000,000
|
|
|
BMC Software Finance
Initial US Term Loan,
5.000%, 09/10/20
|
|
|
2,014,070
|
|
|
|
986,339
|
|
|
CDW LLC
Term Loan,
3.250%, 04/29/20
|
|
|
985,195
|
|
|
|
2,500,000
|
|
|
Dell International
Term B Loan,
4.500%, 04/29/20 (b)
|
|
|
2,511,612
|
|
|
|
1,489,997
|
|
|
Freescale Semiconductor, Inc.
Tranche B-4 Term Loan,
5.000%, 02/28/20
|
|
|
1,508,220
|
|
|
|
1,767,106
|
|
|
Infor (US), Inc.
Tranche B-2 Term Loan,
5.250%, 04/05/18 (b)
|
|
|
1,775,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,989,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
|
INVESTMENT PORTFOLIO (unaudited) (continued)
|
|
|
|
|
As of December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
US Senior Loans (continued)
|
|
|
|
|
|
MANUFACTURING - 2.1%
|
|
|
|
398,000
|
|
|
Apex Tool Group, LLC
Term Loan,
4.500%, 01/31/20
|
|
|
400,563
|
|
|
|
1,246,875
|
|
|
Gardner Denver, Inc.
Initial Dollar Term Loan,
4.250%, 07/30/20 (b)
|
|
|
1,249,606
|
|
|
|
997,500
|
|
|
Rexnord LLC/RBS Global, Inc
Term B Loan,
4.000%, 08/21/20 (b)
|
|
|
1,001,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,651,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDIA/TELECOMMUNICATIONS - 13.7%
|
|
|
|
744,864
|
|
|
Affinion Group, Inc.
Tranche B Term Loan,
6.750%, 10/09/16
|
|
|
735,766
|
|
|
|
546,443
|
|
|
Cengage Learning Acquisitions, Inc. (Thomson Learning)
Original Term Loan,
4.750%, 07/03/14 (c)
|
|
|
428,138
|
|
|
|
744,080
|
|
|
Cengage Learning Acquisitions, Inc. (Thomson Learning)
Tranche B Term Loan (Extending),
7.750%, 07/05/17 (c)
|
|
|
583,757
|
|
|
|
1,585,398
|
|
|
Cequel Communications, LLC
Term Loan,
3.500%, 02/14/19
|
|
|
1,590,519
|
|
|
|
1,490,616
|
|
|
Crown Castle Operating Company
New Tranche B Term Loan,
3.250%, 01/31/19
|
|
|
1,495,818
|
|
|
|
217,391
|
|
|
Crown Castle Operating Company
Term Loan B2,
0.070%, 01/31/21 (b)
|
|
|
218,292
|
|
|
|
1,364,302
|
|
|
Getty Images, Inc.
Initial Term Loan,
4.750%, 10/18/19 (b)
|
|
|
1,276,236
|
|
|
|
1,925,923
|
|
|
Intelsat Jackson Holdings
Tranche B-2 Term Loan,
3.750%, 06/30/19
|
|
|
1,943,979
|
|
|
|
500,000
|
|
|
Level 3 Financing
Tranche B-III 2019 Term Loan,
4.000%, 08/01/19
|
|
|
503,697
|
|
|
|
1,493,089
|
|
|
Nielsen Finance, LLC
Class E Dollar Term Loan,
2.918%, 05/01/16
|
|
|
1,499,435
|
|
|
|
547,056
|
|
|
Regal Cinemas Corp.
Term Loan,
2.748%, 08/23/17
|
|
|
550,034
|
|
|
|
731,888
|
|
|
SuperMedia Inc.
Loan,
11.600%, 12/30/16
|
|
|
548,462
|
|
|
|
849,460
|
|
|
TWCC Holding Corp.
Term Loan,
3.500%, 02/13/17
|
|
|
853,903
|
|
|
|
1,390,747
|
|
|
Univision Communications, Inc.
2013 Converted Extended First-Lien
Term Loan,
4.500%, 03/01/20
|
|
|
1,399,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
MEDIA/TELECOMMUNICATIONS (continued)
|
|
|
|
994,987
|
|
|
Univision Communications, Inc.
2013 Incremental Term Loan,
4.000%, 03/01/20
|
|
|
1,000,997
|
|
|
|
1,750,000
|
|
|
Virgin Media Investment Holdings
Limited B Facility,
3.500%, 06/07/20
|
|
|
1,756,125
|
|
|
|
1,134,884
|
|
|
West Corporation
Term B-8 Loan,
3.750%, 06/30/18
|
|
|
1,141,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,526,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
METALS/MINERALS - 1.5%
|
|
|
|
1,239,327
|
|
|
Arch Coal, Inc.
Term Loan,
6.250%, 05/16/18
|
|
|
1,225,130
|
|
|
|
692,052
|
|
|
Walter Energy, Inc.
B Term Loan,
6.750%, 04/02/18
|
|
|
680,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,905,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAIL - 5.8%
|
|
|
|
495,609
|
|
|
Academy, Ltd.
Initial Term Loan (2012),
4.500%, 08/03/18
|
|
|
499,676
|
|
|
|
498,750
|
|
|
American Builders & Contractors Supply Co.
Term B Loan,
3.500%, 04/16/20 (b)
|
|
|
500,481
|
|
|
|
746,241
|
|
|
BJ’s Wholesale Club
New 2013 (November) Replacement Loan (First Lien),
4.500%, 09/26/19
|
|
|
751,729
|
|
|
|
500,000
|
|
|
Gymboree Corporation
Term Loan,
5.000%, 02/23/18
|
|
|
468,750
|
|
|
|
818,671
|
|
|
J. Crew Group, Inc.
Term B-1 Loan,
4.000%, 03/07/18 (b)
|
|
|
824,807
|
|
|
|
1,493,123
|
|
|
J.C. Penney Corporation, Inc.
Loan,
6.000%, 05/22/18
|
|
|
1,463,261
|
|
|
|
1,250,000
|
|
|
Neiman Marcus Group Inc.
Term Loan,
5.000%, 10/25/20 (b)
|
|
|
1,267,450
|
|
|
|
594,250
|
|
|
Party City Holdings, Inc.
2013 Replacement
Term Loan,
4.250%, 07/27/19
|
|
|
597,732
|
|
|
|
598,906
|
|
|
PVH Corp.
Tranche B Term Loan,
3.250%, 02/13/20
|
|
|
603,164
|
|
|
|
486,506
|
|
|
Toys ‘R’ Us - Delaware, Inc.
Initial Loan,
6.000%, 09/01/16
|
|
|
441,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,418,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICE - 9.6%
|
|
|
|
1,246,851
|
|
|
ADS Waste Holdings, Inc.
Tranche B Term Loan,
4.250%, 10/09/19 (b)
|
|
|
1,255,423
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
|
|
|
|
|
|
5
|
INVESTMENT PORTFOLIO (unaudited) (continued)
|
|
|
|
|
As of December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
US Senior Loans (continued)
|
|
|
|
|
|
SERVICE (continued)
|
|
|
|
2,408,396
|
|
|
Asurion, LLC
Incremental Tranche B-1 Term Loan,
4.500%, 05/24/19 (b)
|
|
|
2,412,250
|
|
|
|
598,687
|
|
|
Ceridian Corporation
2013 New Replacement US Term Loan,
4.415%, 05/09/17
|
|
|
602,054
|
|
|
|
570,764
|
|
|
Education Management, LLC
Tranche C-2 Term Loan,
4.250%, 06/01/16 (b)
|
|
|
549,420
|
|
|
|
1,500,000
|
|
|
First Data Corporation
2017 New Term Loan,
4.166%, 03/24/17
|
|
|
1,504,973
|
|
|
|
2,300,000
|
|
|
First Data Corporation
2018 Dollar Term Loan,
4.166%, 03/23/18
|
|
|
2,307,498
|
|
|
|
500,000
|
|
|
First Data Corporation
2018B New Term Loan,
4.166%, 09/24/18
|
|
|
501,320
|
|
|
|
1,288,922
|
|
|
Sabre, Inc.
Term B Loan,
5.250%, 02/19/19
|
|
|
1,300,606
|
|
|
|
545,220
|
|
|
ServiceMaster Company
Tranche B Term Loan,
4.420%, 01/31/17 (b)
|
|
|
542,666
|
|
|
|
1,467,668
|
|
|
Weight Watchers International, Inc.
Initial Tranche B-2 Term Loan,
3.750%, 04/02/20
|
|
|
1,313,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,289,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELECOMMUNICATIONS - 2.0%
|
|
|
|
997,494
|
|
|
Cricket Communications, Inc.
C Term Loan,
4.750%, 03/08/20
|
|
|
1,003,000
|
|
|
|
397,000
|
|
|
Fairpoint Communications, Inc.
Term Loan,
7.500%, 02/14/19
|
|
|
411,193
|
|
|
|
1,093,103
|
|
|
Zayo Group, LLC
Term Loan,
4.500%, 07/02/19
|
|
|
1,095,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,509,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION - 2.8%
|
|
|
|
495,006
|
|
|
Allison Transmission, Inc.
Term B-3 Loan,
3.750%, 08/23/19
|
|
|
498,565
|
|
|
|
1,496,164
|
|
|
Chrysler Group, LLC
Term Loan B,
4.250%, 05/24/17
|
|
|
1,508,941
|
|
|
|
1,047,196
|
|
|
Federal-Mogul Corporation
Tranche B Term Loan,
2.108%, 12/29/14 (b)
|
|
|
1,036,562
|
|
|
|
603,083
|
|
|
Federal-Mogul Corporation
Tranche C Term Loan,
2.108%, 12/28/15 (b)
|
|
|
596,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,641,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
UTILITY - 6.0%
|
|
|
|
441,149
|
|
|
AES Corporation
2013 Other Term Loan,
3.750%, 06/01/18
|
|
|
444,643
|
|
|
|
893,125
|
|
|
Calpine Corporation
Term Loan (3/11),
4.000%, 04/01/18
|
|
|
900,855
|
|
|
|
745,603
|
|
|
Calpine Corporation
Term Loan,
4.000%, 10/09/19
|
|
|
752,000
|
|
|
|
1,240,603
|
|
|
NRG Energy, Inc.
Term Loan (2013),
2.750%, 07/01/18
|
|
|
1,239,412
|
|
|
|
2,650,000
|
|
|
Texas Competitive Electric Holdings Co., LLC
2014 Term Loan (Non-Extending),
3.739%, 10/10/14
|
|
|
1,883,487
|
|
|
|
3,500,000
|
|
|
Texas Competitive Electric Holdings Co., LLC
2017 Term Loan (Extending),
4.739%, 10/10/17
|
|
|
2,429,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,649,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total US Senior Loans (Cost $120,991,786)
|
|
|
120,441,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Domiciled Senior Loans (a) - 5.4%
|
|
|
|
|
|
AUSTRALIA - 1.6%
|
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
1,983,116
|
|
|
FMG Resources (August 2006) (FMG America Finance, Inc.)
Loan,
4.250%, 06/30/19
|
|
|
2,011,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CANADA - 1.1%
|
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
377,143
|
|
|
Bombardier Recreational Products Inc.
Term B Loan,
4.000%, 01/30/19
|
|
|
378,961
|
|
|
|
1,000,000
|
|
|
Hudson’s Bay Company
Initial Term Loan (First Lien),
4.750%, 11/04/20 (b)
|
|
|
1,017,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,396,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GERMANY - 1.0%
|
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
Ina Beteiligungsegesellschaft
Mit Beschrankter Haftung
Facility C (USD),
4.250%, 01/27/17
|
|
|
252,551
|
|
|
|
997,500
|
|
|
Springer SBM Two GmbMBH
Initial Term B2 Loan,
5.000%, 08/15/20 (b)
|
|
|
1,003,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,255,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
|
INVESTMENT PORTFOLIO (unaudited) (continued)
|
|
|
|
|
As of December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($)
|
|
Value
($)
|
|
|
|
|
|
Foreign Domiciled Senior Loans (continued)
|
|
|
|
|
|
NETHERLANDS - 1.3%
|
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
842,196
|
|
|
Tronox Pigments BV
New Term Loan,
4.500%, 03/19/20
|
|
|
854,619
|
|
|
|
750,000
|
|
|
UPC Financing Partnership
Facility AH,
3.250%, 06/30/21 (b)
|
|
|
749,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED KINGDOM - 0.4%
|
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
498,744
|
|
|
Alpha Topco Limited
New Facility B (USD),
6.000%, 04/30/19 (b)
|
|
|
504,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign Domiciled Senior Loans (Cost $6,735,150)
|
|
|
6,773,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments - 99.6%
|
|
|
127,214,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Cost $127,726,936) (d)
|
|
|
|
|
|
|
Other Assets & Liabilities, Net - 0.4%
|
|
|
563,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets - 100.0%
|
|
|
127,777,912
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Highland/iBoxx Senior Loan ETF (the “Fund”) invests generally pay interest
at rates which are periodically determined by reference to a base lending rate plus a spread. (Unless otherwise denoted as a fixed rate loan, all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime
Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown
represents the weighted average rate at December 31, 2013. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior
secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with
accuracy less than the stated maturity shown.
|
|
(b)
|
All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
|
|
(c)
|
Security is in default on interest payments as of December 31, 2013.
|
|
(d)
|
Cost for U.S. federal income tax purposes is $127,726,936.
|
|
|
|
|
|
LLC
|
|
Limited Liability Company
|
|
LP
|
|
Limited Partnership
|
|
Ltd.
|
|
Limited
|
|
USD
|
|
United States Dollar
|
|
|
|
|
|
|
|
Foreign Domiciled Senior Loans
Industry Concentration Table:
(% of Net Assets)
|
|
|
Chemicals
|
|
|
0.8
|
%
|
|
Gaming/Leisure
|
|
|
0.3
|
%
|
|
Media/Telecommunications
|
|
|
1.0
|
%
|
|
Metals/Minerals
|
|
|
1.5
|
%
|
|
Retail
|
|
|
0.8
|
%
|
|
Technology
|
|
|
0.8
|
%
|
|
Transportation
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
Note 1. Organization
Highland Funds I (the “Trust”) was organized as a Delaware statutory trust on February 28, 2006. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940
Act”), as an open-end management investment company with four separate portfolios. The financial statements herein are those of the Highland/iBoxx Senior Loan ETF (the “Fund”). The Fund is a non-diversified exchange-traded fund
(“ETF”). The financial statements of the remaining funds of the Trust are presented separately. On November 6, 2012, the Fund issued 1,500,000 shares. The beginning net assets of the Fund on such date were $30,000,000.
Investment Objective
The investment objective of the Fund
is to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Markit iBoxx USD Liquid Leveraged Loan Index (the “Underlying Index”).
Fund Shares
Shares of the Fund are listed and traded on the
NYSE Arca, Inc. Market prices for the shares of the Fund may be different from their net asset value (“NAV”). The Fund issues and redeems shares on a continuous basis at NAV only to authorized participants who have entered into agreements
with the Fund’s distributor (“Authorized Participants”) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which comprises 100,000 shares. Once
created, shares will trade in a secondary market at market prices that change throughout the day in amounts less than a Creation Unit.
Note 2.
Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation
of its financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Valuation of Investments
In computing the Fund’s net assets attributable to shares, securities with readily available market quotations use those quotations for valuation. When portfolio securities are traded on the relevant day of
valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers.
If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service.
Investments in mutual funds are valued at their respective net asset values as determined by those mutual funds each business day. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a
mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management Fund Advisors, L.P. (the “Investment Adviser”) has determined generally have the capability to provide
appropriate pricing services and have been approved by the Fund’s Board of Trustees (the “Board”).
Securities for which market quotations
are not readily available and for which the Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events occur between the time when market price
is determined and calculation of the Fund’s net asset value materially affect the value of securities), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by
the Board, taking into account factors reasonably determined to be relevant, including: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and
(iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s net asset value will reflect the affected portfolio securities’ fair value as determined in the
judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices
used by other investment companies to calculate their net asset values. Determination of fair value is uncertain because it involves subjective judgments and estimates not easily substantiated.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
upon the sale of such security. Short-term debt investments, that is, those with a remaining maturity of 60 days or less, are valued at cost adjusted for amortization of premium and accretion of
discounts, a method of valuation which approximates market values. Repurchase agreements are valued at cost plus accrued interest.
Fair Value
Measurements
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair
value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the
investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
|
Level 1
—
|
Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
|
|
Level 2
—
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed
trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with
market data at the measurement date; and
|
|
Level 3
—
|
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may
include securities for which the Fund has obtained indicative quotes from broker-dealers that do not
|
|
|
necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the
Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.
|
The fair value of the Fund’s loans are generally based on quotes received from brokers or independent pricing services. Loans and bonds with quotes that are
based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are
classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
At the end of
each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third
party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the
Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially
from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
The inputs or methodology used for valuing
securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s
assets as of December 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Market
Value at
12/31/13
|
|
|
Level 1
Quoted
Prices
|
|
|
Level 2 Other
Significant
Observable
Inputs
|
|
|
Level 3
Significant
Unobservable
Inputs
|
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Senior Loans*
|
|
$
|
120,441,352
|
|
|
$
|
—
|
|
|
$
|
120,441,352
|
|
|
$
|
—
|
|
|
Foreign Domiciled Senior Loans*
|
|
|
6,773,378
|
|
|
|
—
|
|
|
|
6,773,378
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
127,214,730
|
|
|
$
|
—
|
|
|
$
|
127,214,730
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Please refer to the Investment Portfolio for industry/country breakout.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
For the six months ended December 31, 2013, there were no transfers between Level 1 and Level 2. For the six
months ended December 31, 2013, there were no Level 3 securities.
Security Transactions
Security transactions are accounted for on the trade date. Cost and gains/(losses) are determined based upon the specific identification method for both financial
statement and U.S. federal income tax purposes.
Cash and Cash Equivalents
The Fund considers liquid assets deposited with a bank, and certain short term debt instruments with original maturities of 3 months or less, to be cash equivalents. These investments represent amounts held with
financial institutions that are readily accessible to pay Fund expenses or investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates fair value.
Creation Units
Except when aggregated in Creation Units, shares are not redeemable securities of the Fund.
Shares of the Fund may only be purchased or redeemed by Authorized Participants. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National
Securities Clearing Corporation or (ii) a Depository Trust Company (“DTC”) participant and, in each case, must have executed an Authorized Participant Agreement with the Fund’s distributor. Most retail investors will not qualify
as Authorized Participants or have the resources to buy and sell whole Creation Units. Therefore, they will be unable to purchase or redeem the shares directly from the Fund. Rather, most retail investors will purchase shares in the secondary market
with the assistance of a broker and will be subject to customary brokerage commissions or fees.
Income Recognition
Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of
premiums of debt instruments.
U.S. Federal Income Tax Status
The Fund intends to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and will distribute substantially all of its taxable income
and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Fund intends to distribute, in each calendar year, all of their net investment income, capital gains and certain other amounts, if
any, such that
the Fund should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.
Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (current tax year), and has concluded that no provision for federal income tax is required in the
Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and
state departments of revenue.
Offering Costs
Offering costs, including costs of printing initial prospectus, legal and registration fees, are amortized over twelve months from inception of the Fund. As of
December 31, 2013, the Fund had fully amortized its offering costs.
Distributions to Shareholders
The Fund intends to pay distributions from net investment income, if any, on a monthly basis. The Fund intends to pay net realized capital gains, if any, on an
annual basis.
Note 3. U.S. Federal Tax Information
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. As a result, net investment income/(loss) and net realized
gain/(loss) on investment transactions for a reporting period may differ significantly from distributions during such period.
Reclassifications are made
to the Fund’s capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations.
The tax character of distributions paid during the period ended June 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Income*
|
|
|
Distributions
paid from:
Long-Term
Capital Gains
|
|
|
Distributions
in
Excess
|
|
|
Highland/iBoxx Senior Loan ETF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
1,817,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
*
|
For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.
|
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
As of June 30, 2013, the Fund’s tax year end, the components of accumulated losses on a tax basis were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Capital
and
Other Losses
|
|
|
Undistributed
Ordinary
Income
|
|
|
Undistributed
Long-Term
Capital Gains
|
|
|
Net
Unrealized
Appreciation/
(Depreciation)
|
|
|
Highland/iBoxx Senior Loan ETF
|
|
$
|
—
|
|
|
$
|
365,483
|
|
|
$
|
—
|
|
|
$
|
(1,124,024
|
)
|
Unrealized appreciation and depreciation at December 31, 2013, based on cost of investments for U.S. federal income tax
purposes, was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Appreciation
|
|
|
Gross
Depreciation
|
|
|
Net
Appreciation/
(Depreciation)
|
|
|
Cost
|
|
|
Highland/iBoxx Senior Loan ETF
|
|
$
|
765,222
|
|
|
$
|
(1,277,428
|
)
|
|
$
|
(512,206
|
)
|
|
$
|
127,726,936
|
|
Note 4. Advisory, Administration, Service and Distribution, Trustee, and Other Fees
Investment Advisory Fees
The Investment Adviser receives
from the Fund monthly investment advisory fees, computed and accrued daily based on the Average Daily Managed Assets of each Fund, at the annual rate of 0.45%.
“Average Daily Managed Assets” of a Fund means the average daily value of the total assets of the Fund less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding
borrowings constituting financial leverage).
Administration Fees
SEI Investments Global Funds Services (the “Administrator”) serves as the Fund’s Administrator pursuant to an Administration Agreement. The Administrator receives a monthly administration fee from
the Fund, calculated and assessed monthly in arrears based on the aggregate net assets of the Fund at an annual rate of 0.10% on the first $250 million of net assets, 0.09% on the next $750 million of net assets, and 0.08% on all net assets
exceeding $1 billion, subject to an annual minimum fee of $85,000. The Fund will be charged the greater of the asset based fee or the annual minimum fee.
Service and Distribution Fees
SEI Investments Distribution
Co. (the “Distributor) serves as the Fund’s underwriter and distributor of shares pursuant to a Distribution Agreement. Under the Distribution Agreement, the Distributor, as agent, receives orders to create and redeem shares in Creation
Unit Aggregations
and transmits such orders to the Fund’s custodian and transfer agent. The Distributor has no obligation to sell any specific quantity of Fund shares. The Distributor bears the following
costs and expenses relating to the distribution of shares: (i) the costs of processing and maintaining records of creations of Creation Units; (ii) all costs of maintaining the records required of a registered broker/dealer; (iii) the
expenses of maintaining its registration or qualification as a dealer or broker under Federal or state laws; (iv) filing fees; and (v) all other expenses incurred in connection with the distribution services as contemplated in the
Distribution Agreement. The Distributor receives $100 per Authorized Participant transaction for its distribution services under the Distribution Agreement. The Distributor does not maintain any secondary market in Fund shares.
Expense Limits and Fee Reimbursements
The Investment
Adviser contractually agreed to limit total annual operating expenses to 0.55% of average daily net assets. The expense cap will continue through at least October 31, 2014, and may not be terminated prior to this date without the action or
consent of the Board. For the six months ended December 31, 2013, the Investment Adviser waived $246,217 of investment advisory fees and reimbursed $45,793 of other operating expenses.
If at any point it becomes unnecessary for the Investment Adviser to reduce fees or make expense reimbursements, the Investment Adviser may retain the difference between the Fund’s total annual operating
expenses and 0.55% to recapture all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement was in place. As of December 31, 2013, pursuant to the above, fees which
were previously waived and reimbursed by the Investment Adviser which may be subject to possible future reimbursement to the Investment Adviser were $371,764, expiring in 2016 and $292,010 expiring in 2017.
Fees Paid to Officers and Trustees
Each Trustee who is not
an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex
based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser as of the date of this report. The Fund pays no compensation to their one interested Trustee
or any of their officers, all of whom are employees of the Investment Adviser.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
Note 5. Portfolio Information
For the six months ended December 31, 2013, the cost of purchases and the proceeds from sales of the Fund’s portfolio securities (excluding in-kind transactions, long-term U.S. government securities and
short-term investments) amounted to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
|
|
|
U.S.
Government*
|
|
|
Other
|
|
|
U.S.
Government*
|
|
|
Other
|
|
|
Highland/iBoxx Senior Loan ETF
|
|
$
|
—
|
|
|
$
|
58,738,375
|
|
|
$
|
—
|
|
|
$
|
11,961,442
|
|
|
*
|
The Fund did not have any purchases or sales of U.S. government securities for the six months ended December 31, 2013.
|
Note 6. Indemnification
The Fund has a variety of
indemnification obligations under contracts with their service providers. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of
loss to be remote.
Note 7. Disclosure of Significant Risks and Contingencies
Counterparty Risk
A counterparty (the other party to a transaction or an agreement or the party with whom the
Fund executes transactions) to a transaction with the Fund may be unable or unwilling to make timely principal, interest or settlement payments, or otherwise honor its obligations.
Credit Risk
The Fund invests all or substantially all of its assets in senior loans of other securities that
are rated below investment grade and unrated senior loans of comparable quality. Investments rated below investment grade are commonly referred to as “high yield securities” or “junk securities”. They are regarded as
predominantly speculative with respect to the issuing company’s continuing ability to meet principal and interest payments. Investments in high-yield securities may result in greater NAV fluctuation than if the Fund did not make such
investments.
Debt Securities and Leveraged Loans Risk
The market prices of debt securities generally fluctuate inversely with changes in interest rates so that the value of investments in such securities can be expected to decrease as interest rates rise and increase
as interest rates fall. Such changes may be greater among debt securities with longer maturities. Leveraged loans are subject to
the same risks typically associated with debt securities. In addition, leveraged loans, which typically hold a senior position in the capital structure of a borrower, are subject to the risk that
a court could subordinate such loans to presently existing or future indebtedness or take other action detrimental to the holders of leveraged loans. Leveraged loans are also especially subject to the risk that the value of the collateral, if any,
securing a loan may decline, be insufficient to meet the obligations of the borrower or be difficult to liquidate.
Focused Investment Risk
The Fund’s investments in senior loans arranged through private negotiations between a borrower and several financial institutions may expose
the Fund to risks associated with the financial services industry. The financial services industry is subject to extensive government regulation, which can limit both the amounts and types of loans and other financial commitments financial services
companies can make and the interest rates and fees they can charge. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Because financial services companies
are highly dependent on short-term interest rates, they can be adversely affected by downturns in the U.S. and foreign economies or changes in banking regulations. Losses resulting from financial difficulties of borrowers can negatively affect
financial services companies.
Lender Liability Risk
A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories founded upon the premise that an institutional lender has violated a
duty of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in a creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Because of the nature of certain
of the Fund’s investments, the Fund or the Investments Adviser could be subject to such liability.
Market Risk
The Fund’s share price will fluctuate with changes in the market value of its portfolio securities. Many factors can affect this value and you may lose money
by investing in the Fund.
Non-Diversification Risk
Due to the nature of the Fund’s investment strategy and its non-diversified status, it is possible that a material amount of the Fund’s portfolio could be invested in the securities of one or a few
issuers. Investing a significant portion of the
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
|
|
|
|
|
December 31, 2013
|
|
Highland/iBoxx Senior Loan ETF
|
Fund’s portfolios in any one or a few issuers may result in the Fund’s shares being more sensitive to the economic results of those few issuers.
Regulatory Risk
To the extent that legislation or state or
federal regulators impose additional requirements or restrictions with respect to the ability of financial institutions to make loans in connection with highly leveraged transactions, the availability of Senior Loan interests for investment by the
Fund may be adversely affected.
Non-Payment Risk
Debt securities are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a
reduction in the value of the obligation experiencing non-payment and a potential decrease in the Fund’s NAV and the market price of the Fund’s shares.
Ongoing Monitoring Risk
On behalf of the several lenders, the agent generally will be required to administer
and manage the senior loans and, with respect to collateralized senior loans, to service or monitor the collateral. Financial difficulties of agents can pose a risk to the Fund. Unless, under the terms of the loan, the Fund has direct recourse
against the borrower, the Fund may have to rely on the agent or other financial intermediary to apply appropriate credit remedies against a borrower.
Note 8. Credit Agreement
Effective November 2, 2012,
the Fund entered into a $25,000,000 credit agreement (the “Credit Agreement”) with State Street Bank, with an expiration date of November 1, 2013. On May 24, 2013, the Credit Agreement expiration date was extended to May 23,
2014. Interest is charged at a rate equal to the higher of the federal funds rate or adjusted LIBOR plus 1.25% per annum based on any outstanding borrowings. In addition, a commitment fee of 0.10% per annum is charged. Included in the
Statement of Operations is $503 of Commitment fees.
During the six months ended December 31, 2013, the Fund did not have any outstanding
borrowings.
Note 9. Recent Accounting Pronouncement
In June 2013, the Financial Accounting Standards Board issued an update (“ASU 2013-08”) to ASC Topic 946, Financial Services—Investment Companies (“Topic 946”). ASU 2013-08 amends the
guidance in Topic 946 for determining whether an entity qualifies as an investment company and requires certain additional disclosures. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after
December 15, 2013. Management is currently evaluating the impact, if any, of ASU 2013-08 on the Fund’s financial statements.
Note 10.
Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued,
and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
ADDITIONAL INFORMATION (unaudited)
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December 31, 2013
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Highland/iBoxx Senior Loan ETF
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Additional Portfolio Information
Net asset value, or “NAV,” is the price per share at which the Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares. The “Market
Price” of the Fund generally is determined using the midpoint between the highest bid and the lowest offer on the stock exchange on which the shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. The
Fund’s Market Price may be at, above or below its NAV. The NAV of the Fund will fluctuate with changes in the market value of its holdings. The Market Price of the Fund will fluctuate in accordance with changes in its NAV, as well as market
supply and demand. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of the Fund on a given day, generally at the time NAV is calculated. A premium is the amount that the Fund is trading above the
reported NAV, expressed as a percentage of the NAV. A discount is the amount that the Fund is trading below the reported NAV, expressed as a percentage of the NAV. Further information regarding premiums and discounts is available on the Fund’s
website at www.highlandfunds.com.
The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual
accounts. Although investment decisions for the Fund are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the
same or different from those made to the Fund, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital
structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are
designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client
accounts. When the Fund and one or more of such other accounts are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to
be equitable to the Fund and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits
of participating in volume transactions and negotiating lower transaction costs
should benefit all accounts including the Fund, in some cases these activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by
the Fund.
Disclosure of Fund Expenses
As a
shareholder of a Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, and other Fund expenses. This example is intended to help you understand the ongoing costs (in dollars) of
investing in your Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of
$1,000 invested at the beginning of the period and held for the six-month period July 1, 2013 through December 31, 2013, unless otherwise indicated. This table illustrates your Fund’s costs in two ways:
Actual Expenses:
The first part of the table provides information about actual account values and actual expenses. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the
first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes:
The second part of the table provides information about hypothetical account values and hypothetical expenses
based on your Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund’s actual return. The actual expense ratio includes voluntary fee waivers or expense reimbursements by the
Fund’s investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder
reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any
transactional costs. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your
costs would have been higher.
ADDITIONAL INFORMATION (unaudited) (continued)
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December 31, 2013
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Highland/iBoxx Senior Loan ETF
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Beginning
Account
Value
07/01/13
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Ending
Account
Value
12/31/13
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Annualized
Expense
Ratios
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Expenses
Paid
During
Period*
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Actual
Returns
for
Period
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Highland/iBoxx Senior Loan ETF
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Actual Fund Return
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$
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1,000.00
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$
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1,028.50
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0.55
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%
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$
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2.81
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2.85
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%
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Hypothetical
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$
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1,000.00
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$
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1,022.43
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0.55
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%
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$
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2.80
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2.24
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%
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*
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Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the hypothetical six-month period, multiplied by 184/365 (to reflect
the one-half year period.)
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IMPORTANT INFORMATION ABOUT THIS REPORT
Investment Adviser
Highland Capital Management
Fund Advisors, L.P.
200 Crescent Court, Suite 700
Dallas, TX 75201
Transfer Agent
State Street Bank and Trust Company
200 Clarendon Street,
16
th
Floor
Boston, MA 02116
Distributor
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, PA 19456
Custodian
State Street Bank and Trust Company
200 Clarendon Street, 16
th
Floor
Boston, MA 02116
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
2001 Ross Avenue, Suite 1800
Dallas, TX 75201
Fund Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
This report has been prepared for shareholders of the Highland/iBoxx Senior Loan ETF (the “Fund”). The Fund
mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-855-799-4757 to request that additional reports be sent to you.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund’s proxy
voting records for the most recent 12-month period ended December 31, are available (i) without charge, upon request, by calling 1-855-799-4757 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “Commission”) for the first and
third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC.
Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Fund’s website at www.highlandfunds.com.
The Statement of Additional Information includes additional information about the Fund’s Trustees and are available upon request without charge by calling 1-855-799-4757.
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