The following table is intended to assist investors in understanding the
fees and expenses (annualized) that an investor in Common Shares would bear, directly or indirectly. The table is based on the capital
structure of the Trust as of September 30, 2022.
The table shows Trust expenses as a percentage of net assets attributable
to the Common Shares. The following table should not be considered a representation of the Trust’s future expenses. Actual expenses
may be greater or less than those shown below.
The above tables and the assumption in the hypothetical
example of a 5% annual return are required by regulations of the SEC applicable to all investment companies. The example should not be
considered a representation of future expenses and includes the expenses of the offering under this Prospectus Supplement and the accompanying
Prospectus. The example assumes that the estimated “Other Expenses” set forth in the table are accurate and that all dividends
and distributions are reinvested at the NAV per Common Share. Actual expenses may be greater or less than those assumed. Moreover, the
Trust’s actual rate of return may be greater or less than the hypothetical 5% annual return shown in the example below. The assumed
5% annual return is not a prediction of, and does not represent, the projected or actual performance of the Trust’s Common Shares.
EXPERTS
The Trust’s financial statements as of and for the fiscal year ended
September 30, 2021, incorporated by reference in the SAI, have been incorporated in reliance on the report of Deloitte & Touche
LLP, an independent registered public accounting firm, given on the authority of such firm as experts in auditing and accounting.
REPORTS
TO SHAREHOLDERS
The Trust will send unaudited semi annual reports and audited annual reports,
including a list of investments held, to Shareholders.
Incorporation
by Reference
This Prospectus is part of the registration statement that has been filed
with the SEC. Pursuant to the final rule and form amendments adopted by the SEC on April 8, 2020 to implement certain provisions
of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Trust may “incorporate by reference” the information
that it files with the SEC, which means that the Trust can disclose important information by referring to those documents. The information
incorporated by reference is considered to be part of this Prospectus, and later information that the Trust files with the SEC will automatically
update and supersede this information.
The documents listed below, and any reports and other documents subsequently
filed with the SEC pursuant to Rule 30(b)(2) under the 1940 Act and Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, prior to the termination of this offering, are incorporated by reference into this Prospectus and deemed to be part of this Prospectus
from the date of the filing of such reports and documents:
|
● |
the Trust’s SAI, dated December 6, 2022, filed with this Prospectus; |
|
● |
the Trust’s
definitive Proxy Statement, dated April 18, 2022, filed on April 12, 2022; |
|
● |
the
Trust’s annual report on Form N-CSR for the fiscal year ended September 30, 2022, filed with the SEC on December 8,
2022; |
|
● |
the Trust’s
semi-annual report on Form N-CSR for the fiscal period ended March 31, 2022, filed with the SEC on June 3, 2022; |
|
● |
the Trust’s
description of Common Shares on Form 8-A, filed on June 19, 2015 |
The Trust will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon written or oral request, a copy of any and all of the documents that have been or may
be incorporated by reference in this Prospectus or an accompanying Prospectus Supplement.
You should direct requests for documents by calling the Investment Adviser
at (617) 772-8500 or by writing to the Trust at c/o Tekla Capital Management LLC, 100 Federal Street, 19th Floor Boston, MA 02110. The
Trust makes available this Prospectus, SAI and the Trust’s annual and semi-annual reports, free of charge, on the Trust’s
website (www.teklacap.com). You may also obtain this Prospectus, the SAI, other documents incorporated by reference and other information
the Trust files electronically, including reports and proxy statements, on the SEC website (http://www.sec.gov) or with the payment of
a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trust’s
website is not incorporated by reference into this Prospectus and should not be considered to be part of this Prospectus or the accompanying
prospectus supplement.
ADDITIONAL
INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act and in accordance therewith is required to file reports, proxy statements
and other information with the Commission. Any such reports, proxy statements and other information filed by the Trust can be inspected
and copied (at prescribed rates) at the public reference facilities of the Commission, 100 F Street, NE, Washington, D.C. 20549. The Trust’s
Shares are listed on the NYSE. Reports, proxy statements and other information concerning the Trust can also be inspected and copied at
the Library of the NYSE, 20 Broad Street, New York, NY 10005.
This Prospectus constitutes a part of a registration statement on Form N-2
(together with the SAI and all the exhibits and appendices thereto, the “Registration Statement”) filed by the Trust with
the Commission under the Securities Act and the Investment Company Act. This Prospectus and the SAI do not contain all of the information
set forth in the Registration Statement. Reference is hereby made to the Registration Statement and related exhibits for further information
with respect to the Trust and the Shares offered hereby. Statements contained herein concerning the provisions of documents are necessarily
summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed
with the Commission.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking statements,
which involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance
or achievements of the Trust to be materially different from any future results, levels of activity, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, among others, those listed under “Risk Factors” and elsewhere
in this Prospectus. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity
or achievements, and neither the Trust nor any other person assumes responsibility for the accuracy and completeness of such statements.
To the extent required by law, the Trust undertakes to supplement this Prospectus to reflect any material changes to the Trust after the
date of this Prospectus.
TABLE
OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
|
PAGE |
Additional Information About Investments, Investment Techniques and Risks |
1 |
Investment Restrictions |
19 |
Trustees and Officers |
20 |
The Trust |
28 |
Investment Adviser and Investment Advisory Agreement |
31 |
Proxy Voting Policy and Procedures |
33 |
Code of Ethics |
34 |
Net Asset Value |
34 |
Portfolio Transactions and Brokerage |
36 |
Tax Matters |
37 |
Administrator, Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar |
44 |
Incorporation By Reference |
44 |
Financial Statements |
45 |
Appendix A — Proxy Voting Policies and Procedures |
A-1 |
See “Risks Factors” beginning
on page 15 of the accompanying Prospectus for a discussion of factors you should carefully consider before deciding to invest in
the Trust’s Common Shares. |
TEKLA WORLD HEALTHCARE FUND
STATEMENT OF ADDITIONAL INFORMATION
December 6, 2022
Tekla World Healthcare Fund (the “Trust”) is a non-diversified,
closed-end management investment company. The Trust’s investment objective is to seek current income and long-term capital appreciation.
Under normal market conditions, the Trust expects to invest at least 80% of its Managed Assets (as defined below) in U.S. and non-U.S.
companies engaged in the healthcare industry (“Healthcare Companies”) including equity securities and debt securities. “Managed
Assets” means the total assets of the Trust (including any assets attributable to borrowings for investment purposes) minus the
sum of the Trust’s accrued liabilities (other than liabilities representing borrowings for investment purposes). The Trust’s
80% policy may only be changed with 60 days’ prior notice to the Trust’s shareholders (“Shareholders”). The Trust
will concentrate its investments in the healthcare industries. No assurance can be given that the Trust will achieve its investment objective.
A company will be deemed to be a Healthcare Company if, at the time the
Trust makes an investment in the company, 50% or more of such company’s sales, earnings or assets arise from or are dedicated to
healthcare products or services or medical technology activities. Healthcare Companies may include companies in one or more of the following
sub-sectors: pharmaceuticals, biotechnology, managed care, life science and tools, healthcare technology, healthcare services, healthcare
supplies, healthcare facilities, healthcare equipment, healthcare distributors and Healthcare REITs (as defined below). The Investment
Adviser (defined below) determines, in its discretion, whether a company is a Healthcare Company.
Under normal market conditions, the Trust expects to invest at least 40%
of its Managed Assets in companies organized or located outside the United States or companies that do a substantial amount of business
outside the United States. The Trust may invest up to 5% of its Managed Assets in securities of issuers located in emerging market countries
(“Emerging Markets”). The Trust may hedge its non-U.S. dollar exposure from 0%-100% at any given time, though it typically
expects to do so between 0% and 50% of such exposure.
The Trust expects to invest 60-90% of its Managed Assets in equity securities
(which may include common stock, preferred stock and warrants or other rights to acquire common or preferred stock). The Trust will invest
in foreign securities and may buy and sell currencies for the purpose of settlement of transactions in foreign securities. The Trust may
invest up to 30% of its Managed Assets in convertible securities which may include securities that are non-investment grade. The Trust
may invest up to 20% of its Managed Assets as measured at the time of investment in non-convertible debt securities, including corporate
debt obligations and debt securities that are rated non-investment grade (that is, rated Ba1 or lower by Moody’s Investors Service, Inc.
(“Moody’s”), BB+ or lower by Standard & Poor’s Ratings Group (“S&P”), or BB+ by Fitch, Inc.
(“Fitch”) or comparably rated by another nationally recognized statistical rating organization (“NRSRO”), or,
if unrated, determined by the Investment Adviser to be of comparable credit quality) and not including convertible securities. The Trust
may invest up to 15% of its Managed Assets in non-convertible debt securities that are, at the time of investment, rated Caa1 or lower
by Moody’s and CCC+ or lower by S&P or Fitch, or comparably rated by another nationally recognized statistical rating organization,
or, if unrated, determined by the Investment Adviser to be of comparable credit quality. Such securities are subject to a very high credit
risk. The Trust’s investments in non-investment grade investments and those deemed to be of similar quality are considered speculative
with respect to the issuer’s capacity to pay interest and repay principal and are commonly referred to as “junk” or
“high yield” securities.
The Trust may invest in derivatives, including but not limited to options,
futures, options on futures, forwards, swaps (including credit default, index, basis, total return, volatility and currency swaps), options
on swaps and other derivatives. Initially, the Trust intends to employ a strategy of writing (selling) covered call options on a portion
of the common stocks in its portfolio, writing (selling) put options on a portion of the common stocks in its portfolio and, to a lesser
extent, writing (selling) covered call and writing (selling) put options on indices of securities and sectors of securities generally
within the healthcare industry. This option strategy is intended to
generate current income from option premiums as a means to enhance distributions
payable to the Trust’s Shareholders and will be limited to 30% of the Trust’s Managed Assets. These option strategies are
not always profitable. The sale of a covered call option exposes the Trust during the term of the option to possible loss of opportunity
to realize appreciation in the market price of the underlying security or to possible loss due to continued holding of a security that
might otherwise have been sold to protect against depreciation in the market price of the security. Therefore, the Investment Adviser
may choose to decrease its use of the option writing strategy to the extent that it may negatively impact the Trust. Other than the Trust’s
option strategy and use of derivatives for hedging purposes, the Trust may invest up to 10% of its Managed Assets in derivatives.
The Trust may invest up to 10% of its Managed Assets in restricted securities,
including private investments in public equity (“PIPEs”) and venture capital investments.
The Trust may invest up to 20% of its Managed Assets in real estate investment
trusts that derive their income from the ownership, leasing, or financing of properties in the healthcare sector (“Healthcare REITs”).
The Trust may also invest in equity-linked notes, exchange-traded funds
and special purpose acquisition companies (“SPACs”).
The Trust may from time-to-time lend its portfolio securities. In addition,
the Trust may enter into when-issued and delayed delivery transactions, forward foreign currency contracts and repurchase agreements.
The Trust’s investment adviser is Tekla Capital Management LLC (the
“Investment Adviser”).
This Statement of Additional Information (“SAI”) is not a
prospectus, but should be read in conjunction with the prospectus for the Trust dated December 6, 2022 (the “Prospectus”),
and as it may be supplemented. This SAI does not include all information that a prospective investor should consider before purchasing
shares of beneficial interest (“Shares”) of the Trust, and investors should obtain and read the Prospectus prior to purchasing
Shares. A copy of the Prospectus may be obtained without charge, by calling the Investment Adviser at (617) 772-8500. This SAI incorporates
by reference the entire Prospectus.
The Trust’s annual report may be obtained upon request by calling
(617) 772-8500.
The Prospectus and this SAI omit certain of the information contained
in the Trust’s registration statement filed with the Securities and Exchange Commission (“SEC” or “Commission”).
Information about the Trust can be reviewed on the Commission’s Internet site at www.sec.gov.
TABLE OF CONTENTS
|
PAGE |
Additional Information About Investments, Investment Techniques and Risks |
1 |
Investment Restrictions |
19 |
Trustees and Officers |
20 |
The Trust |
28 |
Investment Adviser and Investment Advisory Agreement |
31 |
Proxy Voting Policy and Procedures |
33 |
Code of Ethics |
34 |
Net Asset Value |
34 |
Portfolio Transactions and Brokerage |
36 |
Tax Matters |
37 |
Administrator, Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar |
44 |
Incorporation By Reference |
44 |
Financial Statements |
45 |
Appendix A — Proxy Voting Policies and Procedures |
A-1 |
ADDITIONAL
INFORMATION ABOUT INVESTMENTS,
INVESTMENT TECHNIQUES AND RISKS
Some of the different types of securities in which the Trust may invest,
subject to its investment objective, policies and restrictions, are described in the Prospectus under “Investment Objectives and
Policies” and “Risk Factors.” Additional information concerning certain of the Trust’s investments, investment
techniques and investment restrictions is set forth below. The Trust may utilize the following investment practices:
Healthcare Companies
The Trust expects to invest in U.S. and non-U.S. equity and debt securities
of companies in the healthcare industry, including, but not limited to, biotechnology, pharmaceutical, medical devices and healthcare
services companies. These investments are designed to take advantage of recent developments in certain healthcare sectors. For example,
demographic changes are driving an increase in medical products due to the high growth rate of the population of Americans age 65 and
older. Recent developments in the pharmaceutical, biotechnology, and medical technology industries have produced a series of products
that will extend or improve the quality of patients’ lives, especially in the areas of oncology, infectious disease, inflammation
and orphan diseases. The Investment Adviser also believes that the following trends have investment potential: (i) biopharmaceuticals,
including products for novel targets; (ii) treatments for orphan and ultra-orphan (i.e., rare and extremely rare) diseases,
including gene therapy; (iii) specialty pharmaceuticals; (iv) generic pharmaceuticals; (v) novel medical devices; (vi) life
sciences tools and diagnostics; and (vii) products that will benefit from changes in the regulatory landscape.
Healthcare Companies provide multiple diverse investment opportunities
in a number of subsectors including, but not limited to, the following: (i) pharmaceuticals, which includes large and small pharmaceutical,
specialty pharmaceutical and generic drug companies; (ii) biotechnology, which includes companies engaged in research into, and development
of, biological substances for the purposes of drug discovery and diagnostic development; (iii) managed care, which is a segment that
represents HMOs and insurers; (iv) life sciences and tools, which includes research organizations that help design and run clinical
trials, as well as life sciences research tools companies that offer instruments, reagents and services to scientists in academic, BioPharma
and applied market laboratories; (v) healthcare technology, which include companies involved in automating various processes for
hospitals and HMOs; (vi) healthcare services, which includes pharmacy benefits managers, alternative site care providers and laboratory
services companies; (vii) healthcare supplies, which include companies that provide products such as tubes and bandages used every
day in healthcare facilities and laboratories; (viii) healthcare facilities, which include hospitals and other brick and mortar facilities
used to treat patients; (ix) healthcare equipment, which include medical diagnostic and device companies; (x) healthcare distributors,
which distribute drugs and products to patients, hospitals and other facilities; and (xi) healthcare REITs, which are REITs that
derive their income from the ownership, leasing, or financing of properties in the healthcare sector.
Equity Securities
The Trust expects to invest 60-90% of its Managed Assets in equity securities,
which may include common stock, preferred stock and warrants or other rights to acquire common or preferred stock. Common stock represents
shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the entity, if any, without preference
over any other Shareholder or class of Shareholders, including holders of the entity’s preferred stock and other senior equity.
Common stock usually carries with it the right to vote and frequently an exclusive right to do so. The Trust may invest in preferred stocks,
which represent shares of a corporation or other entity that pay dividends at a specified rate and have precedence over common stock in
the payment of dividends. If the corporation or other entity is liquidated or declares bankruptcy, the claims of owners of preferred stock
will have precedence over the claims of owners of common stock, but not over the claims of owners of bonds. Some preferred stock dividends
are non-cumulative, but some are “cumulative,” meaning that they require that all or a portion of prior unpaid dividends be
paid to preferred shareholders before any dividends are paid to common shareholders. Certain preferred stock dividends are “participating”
and include an entitlement to a dividend exceeding the specified dividend rate in certain cases. Investments in preferred stocks carry
many of the same risks as investments in common stocks and debt securities.
Debt Securities
The Trust may invest up to 20% of its Managed Assets as measured at the
time of investment in non-convertible debt securities, including corporate debt obligations and debt securities that are rated non-investment
grade (that is, rated Ba1 or lower by Moody’s, BB+ or lower by S&P, or BB+ by Fitch or comparably rated by another NRSRO, or,
if unrated, determined by the Investment Adviser to be of comparable credit quality) and not including convertible securities. The Trust
may invest up to 15% of its Managed Assets in
non-convertible debt securities that are, at the time of investment, rated
Caa1 or lower by Moody’s and CCC+ or lower by S&P or Fitch, or comparably rated by another nationally recognized statistical
rating organization, or, if unrated, determined by the Investment Adviser to be of comparable credit quality. Such securities are subject
to a very high credit risk. To the extent the Trust invests in the following types of debt securities, its net asset value may change
as the general levels of interest rates fluctuate. When interest rates decline, the value of debt securities can be expected to rise.
Conversely, when interest rates rise, the value of debt securities can be expected to decline. The Trust’s investments in debt securities
with longer terms to maturity are subject to greater volatility than the Trust’s shorter-term obligations. Debt securities may have
all types of interest rate payment and reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Corporate debt obligations include bonds, notes, debentures and other
obligations of corporations to pay interest and repay principal. Corporate debt obligations are subject to the risk of an issuer’s
inability to meet principal and interest payments on the obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Corporate debt obligations rated BBB or Baa are considered medium grade
obligations with speculative characteristics, and adverse economic conditions or changing circumstances may weaken their issuers’
capacity to pay interest and repay principal. Medium to lower rated and comparable non-rated securities tend to offer higher yields than
higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not
have been as strong as that of other issuers. The price of corporate debt obligations will generally fluctuate in response to fluctuations
in supply and demand for similarly rated securities. In addition, the price of corporate debt obligations will generally fluctuate in
response to interest rate levels. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash
income from such securities but will be reflected in the Trust’s net asset value (“NAV”).
Because medium to lower rated securities generally involve greater risks
of loss of income and principal than higher rated securities, investors should consider carefully the relative risks associated with investment
in securities which carry medium to lower ratings and in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Investment Adviser will attempt to reduce these risks through portfolio diversification
and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends and corporate
developments.
The Trust may invest in obligations issued or guaranteed by U.S. or foreign
banks. Bank obligations, including without limitation, time deposits, bankers’ acceptances and certificates of deposit, which may
be general obligations of the parent bank or may be limited to the issuing branch by the terms of the specific obligations or by government
regulation. Banks are subject to extensive but different governmental regulations which may limit both the amount and types of loans which
may be made and interest rates which may be charged. In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the
operation of this industry.
Certificates of deposit are certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time at a specified rate. Certificates of deposit are negotiable instruments
and are similar to saving deposits but have a definite maturity and are evidenced by a certificate instead of a passbook entry. Banks
are required to keep reserves against all certificates of deposit. Fixed time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. The Trust may invest in
deposits in U.S. and European banks satisfying the standards set forth above.
Foreign Securities
The Trust will invest in securities of foreign issuers, including securities
quoted or denominated in a currency other than U.S. dollars. Investments in foreign securities may offer potential benefits not available
from investments solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits may include the opportunity
to invest in foreign issuers that appear, in the opinion of the Investment Adviser, to offer the potential for better long term growth
of capital and income than investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business
cycles different from those of the United States and the opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign issuers
also involves, however, certain special risks, including those discussed in the Prospectus and those set forth below, which are not typically
associated with investing in U.S. dollar-
denominated securities or quoted securities of U.S. issuers. Many of these
risks are more pronounced for investments in emerging economies.
With respect to investments in certain foreign countries, there exist
certain economic, political and social risks, including the risk of adverse political developments, nationalization, military unrest,
social instability, war and terrorism, confiscation without fair compensation, expropriation or confiscatory taxation, limitations on
the movement of funds and other assets between different countries, or diplomatic developments, any of which could adversely affect the
Trust’s investments in those countries. Governments in certain foreign countries continue to participate to a significant degree,
through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on
market prices of securities and dividend payments.
Many countries throughout the world are dependent on a healthy U.S. economy
and are adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily
dependent on international trade and are adversely affected by protective trade barriers and economic conditions of their trading partners.
Protectionist trade legislation enacted by those trading partners could have a significant adverse effect on the securities markets of
those countries. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position.
Economic sanctions or other similar measures may be, and have been, imposed
against certain countries, organizations, companies, entities and/or individuals. Economic sanctions and other similar governmental actions
or developments could, among other things, effectively restrict or eliminate the Trust’s ability to purchase or sell certain foreign
securities or groups of foreign securities, and thus may make the Trust’s investments in such securities less liquid or more difficult
to value. In addition, as a result of economic sanctions and other similar governmental actions or developments, the Trust may be forced
to sell or otherwise dispose of foreign investments at inopportune times or prices. The type and severity of sanctions and other similar
measures, including counter sanctions and other retaliatory actions, that have been impacted against Russia and other countries and that
may further be imposed could vary broadly in scope, and their impact is difficult to accurately predict. For example, the imposition of
sanctions and other similar measures likely would, among other things, cause a decline in the value and/or liquidity of securities issued
by the sanctioned country or companies located in or economically tied to the sanctioned country and increase market volatility and disruption
in the sanctioned country and throughout the world. Sanctions and other similar measures could significantly delay or prevent the settlement
of securities transactions or their valuation, and significantly impact the Trust’s liquidity and performance. Sanctions and other
similar measures may be in place for a substantial period of time and enacted with limited advanced notice.
Investments in foreign securities often involve currencies of foreign
countries. Accordingly, the Trust may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations
and may incur costs in connection with conversions between various currencies. The Trust may be subject to currency exposure independent
of its securities positions. To the extent that the Trust is fully invested in foreign securities while also maintaining net currency
positions, it may be exposed to greater combined risk. Currency exchange rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments
or central banks or by currency controls or political developments in the United States or abroad.
Because foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies, there may be
less publicly available information about a foreign company than about a U.S. company. Volume and liquidity in most foreign securities
markets are less than in the United States markets and securities of many foreign companies are less liquid and more volatile than securities
of comparable U.S. companies. The securities of foreign issuers may be listed on foreign securities exchanges or traded in foreign over-the-counter
(“OTC”) markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Trust endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of foreign securities markets and exchanges, brokers, dealers and listed and unlisted companies
than in the United States, and the legal remedies for investors may be more limited than the remedies available in the United States.
For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that
apply with respect to securities transactions consummated in the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing the risk of delayed settlement of portfolio transactions
or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when some of the Trust’s
assets are uninvested and no return is earned on such assets. The inability of the Trust to make intended security purchases due to settlement
problems could cause the Trust to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Trust due to subsequent declines in value of the portfolio securities or, if the Trust has
entered into a contract to sell the securities, in possible liability to the purchaser.
The Trust may invest in foreign securities which take the form of sponsored
and unsponsored American depositary receipts (“ADRs”), global depositary receipts (“GDRs”), European depositary
receipts (“EDRs”) or other similar instruments representing securities of foreign issuers (together, “Depositary Receipts”).
ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded
on domestic exchanges or in the U.S. OTC market and, generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement
with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily
quoted in the same currency as the underlying security. To the extent the Trust acquires Depositary Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security underlying the Depositary Receipts to issue and service such unsponsored
Depositary Receipts, there may be an increased possibility that the Trust would not become aware of and be able to respond to corporate
actions such as stock splits or rights offerings involving the foreign issuer in a timely manner. In addition, the lack of information
may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks
inherent in investing in securities of non-U.S. issuers. The market value of Depositary Receipts is dependent upon the market value of
the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the underlying
securities are quoted. However, by investing in Depositary Receipts, such as ADRs, which are quoted in U.S. dollars, the Trust may avoid
currency risks during the settlement period for purchases and sales.
As described more fully below, the Trust may invest in countries with
emerging economies or securities markets. Political and economic structures in many of such countries may be undergoing significant evolution
and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries.
Certain of such countries have in the past failed to recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of assets,
may be heightened.
Investing in Europe. The Trust may operate in euros and/ or may
hold euros and/or euro-denominated bonds and other obligations. The euro requires participation of multiple sovereign states forming the
Euro zone and is therefore sensitive to the credit, general economic and political position of each such state, including each state’s
actual and intended ongoing engagement with and/or support for the other sovereign states then forming the European Union, in particular
those within the Euro zone. Changes in these factors might materially adversely impact the value of securities that the Trust has invested
in.
European countries can be significantly affected by the tight fiscal and
monetary controls that the European Economic and Monetary Union (“EMU”) imposes for membership. Europe’s economies are
diverse, its governments are decentralized, and its cultures vary widely. Several EU countries, including Greece, Ireland, Italy,
Spain and Portugal have faced budget issues, some of which may have negative long-term effects for the economies of those countries and
other EU countries. There is continued concern about national-level support for the euro and the accompanying coordination of fiscal and
wage policy among EMU member countries. Member countries are required to maintain tight control over inflation, public debt, and budget
deficit to qualify for membership in the EMU. These requirements can severely limit the ability of EMU member countries to implement monetary
policy to address regional economic conditions.
Investing in Canada. The Trust may invest in issuers located in
Canada or that have significant exposure to the Canadian economy. The Canadian market is relatively concentrated in issuers involved in
the production and distribution of natural resources, and therefore the Canadian economy is very dependent on the supply and demand for
natural resources. There is a risk that any changes in these sectors could have an adverse impact on the Canadian economy. The Canadian
economy is dependent on the economy of the United States as the United States is Canada’s largest trading partner and foreign investor.
Reduction in spending on Canadian products and services or changes in the U.S. economy may cause an impact in the Canadian economy. Past
periodic demands by the Province of Quebec for sovereignty have also significantly affected equity valuations and foreign currency movements
in the Canadian market.
Investing in Emerging Countries. The securities markets of emerging
countries (“Emerging Markets”) are less liquid and subject to greater price volatility, and have a smaller market capitalization,
than the U.S. securities markets. In certain countries, there may be
fewer publicly traded securities and the market may be dominated by a
few issues or sectors. Issuers and securities markets in such countries are not subject to as extensive and frequent accounting, financial
and other reporting requirements or as comprehensive government regulations as are issuers and securities markets in the U.S. In particular,
the assets and profits appearing on the financial statements of Emerging Markets issuers may not reflect their financial position or results
of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available about
Emerging Markets issuers than is available about issuers in the United States.
Emerging Markets are typically marked by a high concentration of market
capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration
of ownership of such securities by a limited number of investors. The markets for securities in certain Emerging Markets are in the earliest
stages of their development. Even the markets for relatively widely traded securities in Emerging Markets may not be able to absorb, without
price disruptions, a significant increase in trading volume or trades of a size customarily undertaken by institutional investors in the
securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons
apart from factors that affect the soundness and competitiveness of the securities issuers. For example, prices may be unduly influenced
by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive
in such markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of Emerging
Markets securities may also affect the Trust’s ability to accurately value its portfolio securities or to acquire or dispose of
securities at the price and time it wishes to do so or in order to meet redemption requests.
With respect to investments in certain Emerging Markets, antiquated or
poorly established legal systems may have an adverse impact on the Trust. For example, while the potential liability of a shareholder
of a U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholder’s investment,
the notion of limited liability is less clear in certain emerging market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
Transaction costs, including brokerage commissions or dealer mark-ups,
in Emerging Markets may be higher than in the United States and other developed securities markets. In addition, existing laws and regulations
are often inconsistently applied. As legal systems in Emerging Markets develop, foreign investors may be adversely affected by new or
amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement
of the law.
Custodial and/or settlement systems in Emerging Markets may not be fully
developed. To the extent the Trust invests in emerging markets, Trust assets that are traded in such markets and which have been entrusted
to such sub-custodians in those markets may be exposed to risks for which the sub-custodian will have no liability.
Foreign investment in Emerging Markets is restricted or controlled to
varying degrees. These restrictions may limit the Trust’s investment in Emerging Markets and may increase the expenses of the Trust.
Certain Emerging Markets require governmental approval prior to investments by foreign persons or limit investment by foreign persons
to only a specified percentage of an issuer’s outstanding securities or a specific class of securities which may have less advantageous
terms (including price) than securities of the company available for purchase by nationals. In addition, the repatriation of both investment
income and capital from Emerging Markets may be subject to restrictions which require governmental consents or prohibit repatriation entirely
for a period of time. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect
certain aspects of the operation of the Trust. The Trust may be required to establish special custodial or other arrangements before investing
in certain Emerging Markets.
Emerging Markets may be subject to a substantially greater degree of economic,
political and social instability and disruption than is the case in the United States, Japan and most Western European countries. This
instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political
and economic decision making, including changes or attempted changes in governments through extra-constitutional means; (ii) popular
unrest associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; (v) ethnic, religious and racial disaffection or conflict; and (vi) the absence of developed
legal structures governing foreign private investments and private property. Such economic, political and social instability could disrupt
the principal financial markets in which the Trust may invest and adversely affect the value of the Trust’s assets. The Trust’s
investments can also be adversely affected by any increase in taxes or by political, economic or diplomatic developments.
The Trust may seek investment opportunities within former “Eastern
bloc” countries. Most of these countries had a centrally planned, socialist economy for a substantial period of time. The governments
of many of these countries have more recently been implementing
reforms directed at political and economic liberalization, including efforts
to decentralize the economic decision-making process and move towards a market economy. However, business entities in many of these countries
do not have an extended history of operating in a market-oriented economy, and the ultimate impact of these countries’ attempts
to move toward more market-oriented economies is currently unclear. In addition, any change in the leadership or policies of these countries
may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment
opportunities.
The economies of Emerging Markets may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and
balance of payments. Many Emerging Markets have experienced in the past, and continue to experience, high rates of inflation. In certain
countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative interest rate environment and sharply
eroding the value of outstanding financial assets in those countries. Other Emerging Markets, on the other hand, have recently experienced
deflationary pressures and are in economic recessions. The economies of many Emerging Markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners. In addition, the
economies of some Emerging Markets are vulnerable to weakness in world prices for their commodity exports.
The Trust’s income and, in some cases, capital gains from foreign
stocks and securities will be subject to applicable taxation in certain of the countries in which it invests, and treaties between the
U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates.
From time to time, certain of the companies in which the Trust may invest
may operate in, or have dealings with, countries subject to sanctions or embargos imposed by the U.S. government and the United Nations
and/or countries identified by the U.S. government as state sponsors of terrorism. A company may suffer damage to its reputation if it
is identified as a company which operates in, or has dealings with, countries subject to sanctions or embargoes imposed by the U.S. government
as state sponsors of terrorism. As an investor in such companies, the Trust would be indirectly subject to those risks.
REITs
The Trust may invest up to 20% of its Managed Assets in Healthcare REITs.
The value of a REIT is affected by changes in the value of the properties owned by the REIT or securing mortgage loans held by the REIT.
REITs are dependent upon the ability of the REITs’ managers, and are subject to heavy cash flow dependency, default by borrowers
and the qualification of the REITs under applicable regulatory requirements for favorable income tax treatment. REITs are also subject
to risks generally associated with investments in real estate including possible declines in the value of real estate, general and local
economic conditions, environmental problems and changes in interest rates. To the extent that assets underlying a REIT are concentrated
geographically, by property type or in certain other respects, these risks may be heightened. The Trust will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it invests. Healthcare REITs are REITs that derive their income
from the ownership, leasing, or financing of properties in the healthcare sector.
Derivatives
The Trust may use various types of financial instruments, some of which
are derivatives, to attempt to manage the risk of the Trust’s investments or for investment purposes (e.g., as a substitute
for investing in securities). These financial instruments include, among others, options, futures, options on futures, forwards, swaps
(including credit default, index, basis, total return, volatility and currency swaps), and options on swaps. Positions in these financial
instruments may expose the Trust to an obligation to another party. The Trust will not enter into any such transaction unless it owns
(1) an offsetting (“covered”) position in securities, currencies or other options, futures contracts or forward contracts
or (2) cash or liquid assets with a value, marked-to-market daily, sufficient to cover their obligations to the extent not covered
as provided in (1) above. The Trust will comply with Commission guidelines regarding cover for these instruments and will, if the
guidelines so require, designate the prescribed amount of cash or liquid assets as segregated.
Assets used as cover or held as segregated cannot be sold while the position
in the corresponding financial instrument is open unless they are replaced with other appropriate assets.
The Trust intends to employ a strategy of writing (selling) covered call
options on a portion of the common stocks in its portfolio, writing (selling) put options on a portion of the common stocks in its portfolio
and, to a lesser extent, writing (selling) covered call and writing (selling) put options on indices of securities and sectors of securities
generally within the healthcare industry. This option
strategy is intended to generate current income from option premiums as
a means to enhance distributions payable to the Trust’s Shareholders and will be limited to 30% of the Trust’s Managed Assets.
These option strategies are not always profitable. The sale of a covered call option exposes the Trust during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the underlying security or to possible loss due to continued
holding of a security that might otherwise have been sold to protect against depreciation in the market price of the security. To the
extent the Trust writes a covered put option, the Trust has assumed the obligation during the option period to purchase the security or
securities from the put buyer at the option’s exercise price if the put buyer exercises its option, regardless of whether the value
of the underlying investment falls below the exercise price. This means that a Trust that writes a put option may be required make payment
for such investment at the exercise price. This may result in losses to the Trust and may result in the Trust holding securities for some
period of time when it is disadvantageous to do so. Therefore, the Investment Adviser may choose to decrease its use of the option writing
strategy to the extent that it may negatively impact the Trust. Other than the Trust’s option strategy and use of derivatives for
hedging purposes, the Trust may invest up to 10% of its Managed Assets in derivatives. Derivative instruments can be illiquid, may disproportionately
increase losses, and may have a potentially large adverse impact on Trust performance.
Derivatives markets have been subject to increased regulation over the
past several years, which may continue, and consequently, may make derivatives trading more costly, may limit the availability of and
reduce the liquidity of derivatives or may otherwise adversely affect the value or performance of derivatives. Such potential adverse
future developments could increase the risks reduce the effectiveness of the Trust’s derivative transactions, and cause the Trust
to lose value. For instance, the Commission has adopted new regulations related to a registered investment company’s use of derivatives
and related instruments. These regulations may significantly impact the Trust’s ability to invest in derivatives and other instruments,
limit the Trust’s ability to employ certain strategies that use derivatives and/or adversely affect the Trust’s performance,
efficiency in implementing its strategy, liquidity and/or ability to pursue its investment objectives.
Initial Public Offerings
The Trust may invest a portion of its assets in shares of IPOs, if consistent
with the Trust’s investment objective and policies. IPOs may have a magnified impact on the performance of a fund with a small asset
base. The impact of IPOs on a fund’s performance likely will decrease as such fund’s asset size increases, which could reduce
such fund’s returns. IPOs may not be consistently available to the Trust for investing. IPO shares frequently are volatile in price
due to the absence of a prior public market, the small number of shares available for trading and limited information about the issuer.
Therefore, the Trust may hold IPO shares for a very short period of time. This may increase turnover and may lead to increased expenses,
such as commissions and transaction costs all of which will be borne indirectly by the holders of Shares. In addition, IPO shares
can experience an immediate drop in value if the demand for the securities does not continue to support the offering price.
Convertible Securities
The Trust may invest up to 30% of its Managed Assets in convertible securities.
Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for
a specified amount of common stock (or other securities) of the same or different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest that is generally paid or accrued on debt or a dividend
that is paid or accrued on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible
securities have unique investment characteristics, in that they generally (i) have higher yields than common stocks, but lower yields
than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying common stock due to
their fixed income characteristics and (iii) provide the potential for capital appreciation if the market price of the underlying
common stock increases.
The value of a convertible security is a function of its “investment
value” (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not
have a conversion privilege) and its conversion value (the security’s worth, at market value, if converted into the underlying common
stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value normally declining
as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors may also have
an effect on the convertible security’s investment value. The conversion value of a convertible security is determined by the market
price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security
is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security’s governing instrument. If a convertible security held by the Trust is
called for redemption, the Trust will be required to convert the security into the underlying common stock, sell it to a third party or
permit the issuer to redeem the security. Any of these actions could have an adverse effect on the Trust’s ability to achieve its
investment objective, which, in turn, could result in losses to the Trust. To the extent that the Trust holds a convertible security,
or a security that is otherwise converted or exchanged for common stock (e.g., as a result of a restructuring), the Trust may, consistent
with its investment objective, hold such common stock in its portfolio.
In evaluating a convertible security, the Investment Adviser will give
primary emphasis to the attractiveness of the underlying common stock. Convertible debt securities are equity investments for purposes
of the Trust’s investment policies.
Restricted Securities
The Trust may invest up to 10% of its Managed Assets in U.S. securities
and other U.S. financial instruments that are not registered or that are offered in an exempt non-public offering (“Restricted Securities”)
under the Securities Act of 1933, as amended (the “Securities Act”), including securities eligible for resale to “qualified
institutional buyers” pursuant to Rule 144A under the Securities Act, PIPEs and venture capital investments.
The purchase price and subsequent valuation of Restricted Securities may
reflect a discount from the price at which such securities trade when they are not restricted, because the restriction makes them less
liquid. The amount of the discount from the prevailing market price is expected to vary depending upon the type of security, the character
of the issuer, the party who will bear the expenses of registering the Restricted Securities and prevailing supply and demand conditions.
Pooled Investment Vehicles
The Trust may invest in securities of pooled investment vehicles, including
other investment companies, ETFs and exchange-traded notes (“ETNs”). The Trust will indirectly bear its proportionate share
of any management fees and other expenses paid by pooled investment vehicles in which it invests, in addition to the management fees (and
other expenses) paid by the Trust. The Trust’s investments in pooled investment vehicles are subject to statutory limitations prescribed
by the Investment Company Act, including in certain circumstances a prohibition on the Trust acquiring more that 3% of the voting shares
of any other investment company, and a prohibition on investing more than 5% of the Trust’s total assets in securities of any one
investment company or more than 10% of its total assets in the securities of all investment companies. Many ETFs, however, have obtained
exemptive relief from the Commission to permit unaffiliated funds (such as the Trust) to invest in their shares beyond these statutory
limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. The Trust may
rely on these exemptive orders it invest in unaffiliated ETFs. Under an exemptive rule adopted by the Commission, the Trust may invest
in certain other investment companies and money market funds beyond the statutory limits described above.
The Trust may purchase shares of investment companies investing primarily
in foreign securities, including “country funds.” Country funds have portfolios consisting primarily of securities of issuers
located in specified foreign countries or regions.
ETFs are pooled investment vehicles issuing shares which are traded like
traditional equity securities on a stock exchange. An ETF represents a portfolio of securities or other assets, which is often designed
to track a particular market segment or index. An investment in an ETF, like one in any pooled investment vehicle, carries the risks of
its underlying securities or other assets. An ETF may fail to accurately track the returns of the market segment or index that it is designed
to track, and the price of an ETF’s shares may fluctuate or lose money. In addition, because they, unlike other pooled investment
vehicles, are traded on an exchange, ETFs are subject to the following risks: (i) the market price of the ETF’s shares may
trade at a premium or discount to the ETF’s NAY; (ii) an active trading market for an ETF may not develop or be maintained;
and (iii) there is no assurance that the requirements of the exchange necessary to maintain the listing of the ETF will continue
to be met or remain unchanged. In the event substantial market or other disruptions affecting ETFs should occur in the future, the liquidity
and value of the Trust’s shares could also be substantially and adversely affected.
Options on Securities and Securities Indices
Writing Covered Options. The Trust may write (sell) covered call
and put options on any securities in which it may invest or any securities index consisting of securities in which it may invest. The
Trust may write such options on securities that are listed on
national domestic securities exchanges or foreign securities exchanges
or traded in the OTC market. A call option written by the Trust obligates the Trust to sell specified securities to the holder of the
option at a specified price if the option is exercised on or before the expiration date. Depending upon the type of call option, the purchaser
of a call option either (i) has the right to any appreciation in the value of the security over a fixed price (the “exercise
price”) on a certain date in the future (the “expiration date”) or (ii) has the right to any appreciation in the
value of the security over the exercise price at any time prior to the expiration of the option. If the purchaser does not exercise the
option, the Trust pays the purchaser the difference between the price of the security and the exercise price of the option. The premium,
the exercise price and the market value of the security determine the gain or loss realized by the Trust as the seller of the call option.
The Trust can also repurchase the call option prior to the expiration date, ending its obligation. In this case, the cost of entering
into closing purchase transactions will determine the gain or loss realized by the Trust. All call options written by the Trust are covered,
which means that the Trust will own the securities subject to the option as long as the option is outstanding or the Trust will use the
other methods described below. The Trust’s purpose in writing covered call options is to realize greater income than would be realized
on portfolio securities transactions alone. However, the Trust may forego the opportunity to profit from an increase in the market price
of the underlying security.
A put option written by the Trust would obligate the Trust to purchase
specified securities from the option holder at a specified price if, depending upon the type of put option, either (i) the option
is exercised at any time on or before the expiration date or (ii) the option is exercised on the expiration date. All put options
written by the Trust would be covered, which means that the Trust will segregate cash or liquid assets with a value at least equal to
the exercise price of the put option (less any margin on deposit) or will use the other methods described below. The purpose of writing
such options is to generate additional income for the Trust. However, in return for the option premium, the Trust accepts the risk that
it may be required to purchase the underlying securities at a price in excess of the securities’ market value at the time of purchase.
In the case of a call option, the option is “covered” if the
Trust owns the instrument underlying the call or has an absolute and immediate right to acquire that instrument without additional cash
consideration (or, if additional cash consideration is required, liquid assets in such amount are segregated) upon conversion or exchange
of other instruments held by it. A call option is also covered if the Trust holds a call on the same instrument as the option written
where the exercise price of the option held is (i) equal to or less than the exercise price of the option written, or (ii) greater
than the exercise price of the option written provided the Trust segregates liquid assets in the amount of the difference. A put option
is also covered if the Trust holds a put on the same instrument as the option written where the exercise price of the option held is (i) equal
to or higher than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the
Trust segregates liquid assets in the amount of the difference. The Trust may also cover options on securities by segregating cash or
liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit that is equal to the market value of
the securities in the case of a call option. Segregated cash or liquid assets may be quoted or denominated in any currency.
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security.
The Trust may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional consideration which has been segregated by the Trust) upon conversion
or exchange of other securities in its portfolio. The Trust may also cover call and put options on a securities index by segregating cash
or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit, that is equal to the market value
of the underlying securities in the case of a call option, or the exercise price in the case of a put option, or by owning offsetting
options as described above.
The Trust may terminate its obligations under an exchange traded call
or put option by purchasing an option identical to the one it has written. Obligations under OTC options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such purchases are referred to as “closing purchase transactions.”
Purchasing Options. The Trust may purchase put and call options
on any securities in which it may invest or any securities index comprised of securities in which it may invest. The Trust may also enter
into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
The Trust may purchase call options in anticipation of an increase, or
put options in anticipation of a decrease, in the market value of securities or other instruments of the type in which it may invest (“protective
puts”). The purchase of a call option would entitle the Trust, in return for the premium paid, to purchase specified securities
or other instruments at a specified price during the option period.
The Trust would ordinarily realize a gain on the purchase of a call option
if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs;
otherwise the Trust would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle
the Trust, in exchange for the premium paid, to sell specified securities at a specified price during the option period. The purchase
of protective puts is designed to offset or hedge against a decline in the market value of the Trust’s securities. Put options may
also be purchased by the Trust for the purpose of affirmatively benefiting from a decline in the price of securities which it does not
own. The Trust would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the
exercise price sufficiently to cover the premium and transaction costs; otherwise the Trust would realize either no gain or a loss on
the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of
the underlying portfolio securities.
The Trust would purchase put and call options on securities indices for
the same purposes as it would purchase options on individual securities.
Risks Associated with Options Transactions. There is no assurance
that a liquid secondary market on an options exchange will exist for any particular exchange-traded option or at any particular time.
If the Trust is unable to effect a closing purchase transaction with respect to covered options it has written, the Trust will not be
able to sell the underlying securities or dispose of segregated assets until the options expire or are exercised. Similarly, if the Trust
is unable to effect a closing sale transaction with respect to options it has purchased, it will have to exercise the options in order
to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange
on opening or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue
the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
There can be no assurance that higher trading activity, order flow or
other unforeseen events will not, at times, render certain of the facilities of the Options Clearing Corporation or various exchanges
inadequate. Such events have, in the past, resulted in the institution by an exchange of special procedures, such as trading rotations,
restrictions on certain types of order or trading halts or suspensions with respect to one or more options. These special procedures may
limit liquidity.
The Trust may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded OTC with broker-dealers who make markets in these options. The ability to terminate OTC options is
more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not
fulfill their obligations.
Transactions by the Trust in options will be subject to limitations established
by each of the exchanges, boards of trade or other trading facilities on which such options are traded governing the maximum number of
options in each class which may be written or purchased by a single investor or group of investors acting in concert regardless of whether
the options are written or purchased on the same or different exchanges, boards of trade or other trading facility or are held in one
or more accounts or through one or more brokers. Thus, the number of options which the Trust may write or purchase may be affected by
options written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of options
to seek to increase total return involves the risk of loss if the Investment Adviser is incorrect in its expectation of fluctuations in
securities prices or interest rates. The successful use of options for hedging purposes also depends in part on the ability of the Investment
Adviser to manage future price fluctuations and the degree of correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or determination of the correlation between the securities or
securities indices on which options are written and purchased and the securities in the Trust’s investment portfolio, the Trust
may incur losses that it would not otherwise incur. The writing of options could increase the Trust’s portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
Futures Contracts and Options and Swaps on Futures Contracts
Futures Contracts. The Trust may enter into contracts for the purchase
or sale for future delivery (a “futures contract”) of baskets of securities, financial indices, financial instruments or foreign
currencies. The Trust may purchase or sell futures contracts to attempt to protect the value of its securities from market-wide price
movements and fluctuations in interest or foreign exchange rates without actually buying or selling securities or foreign currency.
A “sale” of a futures contract (or a “short” futures
position) means the assumption of a contractual obligation to deliver the securities or currency underlying the contract at a specified
price and at a specified future time. A “purchase” of a futures contract (or a “long” futures position) means
the assumption of a contractual obligation to acquire the securities or currency underlying the contract at a specified price and at a
specified future time.
Margin Requirements. At the time a futures contract is purchased
or sold, the Trust must allocate cash or securities as a deposit payment (“initial margin”). It is expected that the initial
margin on U.S. exchanges may range from approximately 1% to approximately 10% of the value of the securities or commodities underlying
the contract. Under certain circumstances, however, such as periods of high volatility, the Trust may be required by an exchange to increase
the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory
action. An outstanding futures contract is valued daily and the payment in cash of “variation margin” may be required, a process
known as “mark to the market.”
Considerations Concerning Futures Contracts and Options on Futures
Contracts. Futures contracts entail special risks. The ordinary spreads between values in the cash and futures markets, due to differences
in the character of these markets, are subject to distortions relating to (1) investor’s obligations to meet additional variation
margin requirements, (2) decisions to make or take delivery, rather than entering into offsetting transactions, and (3) the
difference between margin requirements in the securities markets and margin deposit requirements in the futures markets. The possibility
of such distortion means that a correct forecast of general market, foreign exchange rate or interest rate trends by the Investment Adviser
may still not result in a successful transaction. The Trust’s ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and maintenance of a liquid market. Although the Trust generally will
purchase or sell only those futures contracts and options for which there appears to be a liquid market, there is no assurance that a
liquid market on an exchange will exist for any particular futures contract or option at any particular time. Under certain circumstances,
exchanges may establish daily limits in the amount that the price of a futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that
limit.
Forward Contracts
Forward contracts involve the purchase or sale of a specific quantity
of a commodity, government security, foreign currency, or other asset at a specified price, with delivery and settlement at a specified
future date. Because it is a completed contract, a purchase forward contract can be a cover for the sale of a futures contract. The Trust
may enter into forward contracts for hedging purposes and non-hedging purposes (i.e., to increase returns). Forward contracts may
be used by the Trust for hedging purposes to protect against uncertainty in the level of future foreign currency exchange rates, such
as when the Trust anticipates purchasing or selling a foreign security. For example, this technique would allow the Trust to “lock
in” the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of the Trust’s
existing holdings of foreign securities. There may be, however, an imperfect correlation between the Trust’s foreign securities
holdings and the forward contracts entered into with respect to those holdings. Forward contracts may also be used for non-hedging purposes
to pursue the Trust’s investment objective, such as when the Trust’s Investment Adviser anticipates that particular foreign
currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the Trust’s
portfolio. There is no requirement that the Trust hedge all or any portion of its exposure to foreign currency risks.
Forward contracts, unlike futures contracts, are not traded on exchanges
and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual
basis. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they
trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which
certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an
unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can
occur in any market traded by the Investment Adviser due to unusually high trading volume, political intervention or other factors. Arrangements
to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if
such arrangements were made with numerous counterparties. The imposition of controls by governmental authorities might also limit such
forward (and futures)
trading to less than that which the Investment Adviser would otherwise
recommend, to the possible detriment of the Trust. Market illiquidity or disruption could result in major losses to the Trust. In addition,
the Trust will be exposed to credit risks with regard to counterparties with which it trades as well as risks relating to settlement default.
Such risks could result in substantial losses to the Trust.
Equity Swaps
The Trust may enter into equity swap contracts to invest in a market without
owning or taking physical custody of securities in various circumstances, including circumstances where direct investment in the securities
is restricted for legal reasons or is otherwise impracticable. Equity swaps may also be used for hedging purposes or to seek to increase
total return. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may agree to pay the Trust the amount, if any, by which the
notional amount of the equity swap contract would have increased in value had it been invested in particular stocks (or an index of stocks),
plus the dividends that would have been received on those stocks. In these cases, the Trust may agree to pay to the counterparty a floating
rate of interest on the notional amount of the equity swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to the Trust on the equity swap contract should be the gain
or loss on the notional amount plus dividends on the stocks less the interest paid by the Trust on the notional amount. In other cases,
the counterparty and the Trust may each agree to pay the other the difference between the relative investment performances that would
have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or indices of stocks).
The Trust will generally enter into equity swaps on a net basis, which
means that the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the
two payments.
Payments may be made at the conclusion of an equity swap contract or periodically
during its term. Equity swaps normally do not involve the delivery of securities or other underlying assets. Accordingly, the risk of
loss with respect to equity swaps is normally limited to the net amount of payments that the Trust is contractually obligated to make.
If the other party to an equity swap defaults, the Trust’s risk of loss consists of the net amount of payments that the Trust is
contractually entitled to receive, if any. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated
cash or liquid assets to cover the Trust’s exposure, the Trust and the Investment Adviser believe that such transactions do not
constitute senior securities under the Investment Company Act and, accordingly, will not treat them as being subject to the Trust’s
borrowing restrictions under the Investment Company Act but will count them against the Trust’s overall leverage limit.
The Trust will not enter into swap transactions unless the unsecured commercial
paper, senior debt or claims paying ability of the other party thereto is considered to be investment grade by the Investment Adviser.
The Trust’s ability to enter into certain swap transactions may be limited by tax considerations.
Index Swaps, Interest Rate Swaps, Credit Swaps, Total Return
Swaps, Options on Swaps and Interest Rate Caps, Floors and Collars
The Trust may enter into index, interest rate, credit and total return
swaps for both hedging purposes and to seek to increase total return. As examples, the Trust may enter into swap transactions for the
purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases
and/or sales of instruments in other markets, as a duration management technique, to protect against any increase in the price of securities
the Trust anticipates purchasing at a later date, or to gain exposure to certain markets in an economical way. The Trust may also enter
into interest rate caps, floors and collars. The Trust may also purchase and write (sell) options contracts on swaps, commonly referred
to as swaptions.
In a standard “swap” transaction, two parties agree to exchange
the returns, differentials in rates of return or some other amount earned or realized on particular predetermined investments or instruments,
which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally
calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular security, or in a “basket” of securities representing a particular
index. Bilateral swap agreements are two party contracts entered into primarily by institutional investors. Cleared swaps are transacted
through futures commission merchants (“FCMs”) that are members of central clearinghouses with the clearinghouse serving as
a central counterparty similar to transactions in futures contracts. The Trust posts initial and variation margin by making payments to
its clearing member FCMs.
Interest rate swaps involve the exchange by the Trust with another party
of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Index
swaps involve the exchange by the Trust with another party of the respective amounts payable with respect to a notional principal amount
at interest rates equal to two specified indices. Credit swaps involve the exchange of a floating or fixed rate payment in return for
assuming potential credit losses of an underlying security, or pool of securities. Credit swaps involve the exchange of a floating or
fixed rate payment in return for assuming potential credit losses of an underlying security, or pool of securities. Total return swaps
are contracts that obligate a party to pay or receive interest in exchange for payment by the other party of the total return generated
by a security, a basket of securities, an index or an index component.
A swaption is an option to enter into a swap agreement. Like other types
of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter
into an underlying swap or to modify the terms of an existing swap on agreed-upon terms. The seller of a swaption, in exchange for the
premium, becomes obligated (if the option is exercised) to enter into or modify an underlying swap on agreed-upon terms, which generally
entails a greater risk of loss than the Trust incurs in buying a swaption. The purchase of an interest rate cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling
the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined
range of interest rates.
A great deal of flexibility may be possible in the way swap transactions
are structured. However, generally the Trust will enter into interest rate, total return, credit and index swaps on a net basis, which
means that the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the
two payments. Interest rate, total return, credit and index swaps do not normally involve the delivery of securities, other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate, total return, credit and index swaps is normally limited
to the net amount of interest payments that the Trust is contractually obligated to make. If the other party to a bilateral swap agreement
defaults, the Trust’s risk of loss consists of the net amount of interest payments that the Trust is contractually entitled to receive.
A credit swap may have as reference obligations one or more securities
that may, or may not, be currently held by the Trust. The protection “buyer” in a credit swap is generally obligated to pay
the protection “seller” an upfront or a periodic stream of payments over the term of the swap provided that no credit event,
such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par
value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity
described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. The Trust may
be either the protection buyer or seller in the transaction. If the Trust is a buyer and no credit event occurs, the Trust may recover
nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive
the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value
may have significantly decreased. As a seller, the Trust generally receives an upfront payment or a rate of income throughout the term
of the swap provided that there is no credit event. As the seller, the Trust would effectively add leverage to its portfolio because,
in addition to its total net assets, the Trust would be subject to investment exposure on the notional amount of the swap.
If a credit event occurs, the value of any deliverable obligation received
by the Trust as seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it
pays to the buyer, resulting in a loss of value to the Trust.
To the extent that the Trust’s exposure in a transaction involving
a swap, a swaption or an interest rate floor, cap or collar is covered by identifying on its books cash or liquid assets or is covered
by other means in accordance with Commission guidance, the Trust and the Investment Adviser believe that the transactions do not constitute
senior securities under the Investment Company Act and, accordingly, will not treat them as being subject to the Trust’s borrowing
restrictions under the Investment Company Act but will count them against the Trust’s overall leverage limit.
The Trust will not enter into bilateral transactions involving swaps,
caps, floors or collars unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto (with respect
to bilateral swap transactions) is considered to be investment grade by the Investment Adviser. If there is a default by the other party
to such a transaction, the Trust will have contractual remedies pursuant to the agreements related to the transaction.
The use of swaps, swaptions and interest rate caps, floors and collars
is a highly specialized activity which creates effective leverage and involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The use of
a swap requires an understanding not only of the referenced asset, reference
rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions.
If the Investment Adviser is incorrect in its forecasts of market values, credit quality and interest rates, or in its evaluation of the
creditworthiness of swap counterparties (with respect to bilateral swap transactions) and the issuers of the underlying assets, the investment
performance of the Trust would be less favorable than it would have been if these investment techniques were not used.
Currently, certain standardized swap transactions are subject to mandatory
central clearing. Although central clearing is expected to decrease counterparty risk and increase liquidity compared to bilaterally negotiated
swaps, central clearing does not eliminate counterparty risk or illiquidity risk entirely.
When-Issued and Delayed Delivery Transactions
The Trust may purchase securities on a “when issued” basis
or a “delayed delivery” basis. “When-issued” securities are securities whose terms are available and for which
a market exists, but which are not available for immediate delivery. “Delayed delivery” transactions are those in which the
Trust purchases a security but settlement of the transaction is to occur after the customary settlement date. The Trust will enter into
such transactions for the purpose of acquiring securities that it wishes to purchase but that are not currently available for purchase.
The Trust may dispose of a commitment to purchase prior to settlement. However, the Trust does not intend to make such purchases for speculative
purposes. When such transactions are negotiated, the purchase price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. During the period between commitment and settlement, no payment is made for the securities
purchased, and no interest or dividends accrue to the Trust. However, the securities are subject to market fluctuation, and the value
at settlement may be less than the purchase price. While awaiting settlement, the Trust will maintain with its custodian a segregated
account consisting of liquid securities, which may include cash, obligations of the U.S. Government, its agencies or instrumentalities
(“U.S. Government Securities”), debt obligations or equity securities having a value at least equal to its purchase commitments.
The commitment to purchase a security for which payment will be made on a future date may be deemed a separate security and involves a
risk of loss if the security declines prior to the settlement date, which risk is in addition to the risk of decline of the Trust’s
other assets.
Repurchase Agreements
A repurchase agreement is an agreement under which the Trust acquires
a security subject to the obligation of the seller to repurchase and the Trust to resell such security at a fixed time and price (representing
the Trust’s cost and interest). It is the Trust’s present intention to enter into repurchase agreements for a relatively short
period (usually not more than one week) only with commercial banks and registered broker-dealers and only with respect to U.S. Government
Securities and money market instruments. Repurchase agreements may also be viewed as loans made by the Trust, which are collateralized
by the securities subject to repurchase. The Trust intends to take possession of collateral, and the Investment Adviser will monitor repurchase
transactions to ensure that the value of the underlying securities will at all times be at least equal to the total amount of the repurchase
obligation, including the interest factor. If the seller defaults the Trust could realize a loss on the sale of the underlying security
to the extent that the proceeds of sale, including accrued interest, are less than the resale price provided in the agreement, including
interest. In addition, if the seller should be involved in bankruptcy or insolvency proceedings, the Trust may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest if the Trust is treated as an unsecured creditor and required
to return the underlying collateral to the seller.
Reverse Repurchase Agreements
Reverse repurchase agreements involve the sale of securities held by the
Trust with an agreement by the Trust to repurchase the securities at an agreed upon price, date and interest payment. At the time the
Trust enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing cash
and/or liquid assets having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains
such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Trust; however, under certain circumstances
in which the Trust does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing
for the purpose of the Trust’s limitation on borrowings. Reverse repurchase agreements create effective leverage. If the securities
held by the Trust decline in value while these transactions are outstanding, the NAY of the Trust’s outstanding shares will decline
in value by proportionately more than the decline in value of the securities. In addition, reverse repurchase agreements involve the risk
that the investment return earned by the Trust (from the investment of the proceeds) will be less than the interest expense of the transaction,
that the market value of the securities sold by the Trust will decline below the price the Trust is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Trust.
The Trust may “set aside” liquid assets, or engage in other
appropriate measures to “cover” its obligations with respect to its transactions in reverse repurchase agreements. As a result
of such segregation, the Trust’s obligations under such transactions will not be considered senior securities representing indebtedness
for purposes of the Investment Company Act, and the Trust’s use of leverage through reverse repurchase agreements will not be limited
by the Investment Company Act, although it will be limited by the Trust’s overall limitation on leverage as described in the Prospectus.
However, the Trust’s use of leverage through reverse repurchase agreements will be considered to be financial leverage for purposes
of determining compliance with the Trust’s maximum overall leverage levels approved by the Board. The Trust’s use of leverage
through reverse repurchase agreements may be further limited by the availability of cash or liquid securities to earmark or segregate
in connection with such transactions.
If the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce
the Trust’s obligation to repurchase the securities, and the Trust’s use of the proceeds of the reverse repurchase agreement
may effectively be restricted pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the
reverse repurchase agreement are less than the value of the securities subject to such agreement.
With respect to any reverse repurchase agreement or similar transaction,
the Trust’s Managed Assets shall include any proceeds from the sale of an asset of the Trust to a counterparty in such a transaction,
in addition to the value of the underlying asset as of the relevant measuring date.
Short Sales
The Trust may engage in short sales and short sales against the box in
an amount not to exceed 5% of Managed Assets. Short sales are transactions in which the Trust sells a security it does not own in anticipation
of a decline in the market value of that security. To complete such a transaction, the Trust must borrow the security to make delivery
to the buyer. The Trust then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement.
The price at such time may be more or less than the price at which the security was sold by the Trust. Until the security is replaced,
the Trust is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security,
the Trust also may be required to pay a premium, which would increase the cost of the security sold. There will also be other costs associated
with short sales, which will be borne solely by the Trust’s common Shareholders.
The Trust will incur a loss, which may be unlimited, as a result of the
short sale if the price of the security increases between the date of the short sale and the date on which the Trust replaces the borrowed
security. The Trust will realize a gain if the security declines in price between those dates. This result is the opposite of what one
would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest the Trust may be required to pay in connection with a short sale,
and will be also decreased by any transaction or other costs.
Until the Trust replaces a borrowed security in connection with a short
sale, the Trust will (a) segregate cash or liquid assets at such a level that the segregated assets plus any amount deposited with
the broker as collateral will equal the current value of the security sold short or (b) otherwise cover its short position in accordance
with applicable law.
There is no guarantee that the Trust will be able to close out a short
position at any particular time or at an acceptable price. During the time that the Trust is short a security, it is subject to the risk
that the lender of the security will terminate the loan at a time when the Trust is unable to borrow the same security from another lender.
If that occurs, the Trust may be “bought in” at the price required to purchase the security needed to close out the short
position, which may be a disadvantageous price.
The Trust may engage in short sales against the box. As noted above, a
short sale is made by selling a security the seller does not own. A short sale is “against the box” to the extent that the
seller contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. The Trust may enter
into a short sale against the box, for example, to lock in a sales price for a security the Trust does not wish to sell immediately. If
the Trust sells securities short against the box, it may protect itself from loss if the price of the securities declines in the future,
but will lose the opportunity to profit on such securities if the price rises. If the Trust effects a short sale of securities at a time
when it has an unrealized gain on the securities, it may be required to recognize that gain as if it had actually sold the securities
(as a “constructive sale”) on the date it effects the short sale. However, such constructive sale treatment may not apply
if the Trust closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if
certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which
the Trust may effect short sales.
Preferred Stock, Warrants and Stock Purchase Rights
The Trust may invest in preferred stock, warrants and stock purchase rights
(or “rights”). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the
issuer’s earnings and assets before common stock owners but after creditors and other debt holders. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other payment obligations, may not typically be accelerated by the
holders of such preferred stock on the occurrence of an event of default (such as a covenant default or filing of a bankruptcy petition)
or other non-compliance by the issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event of default
or non-compliance by the issuer, preferred shareholders will be entitled to gain representation on the issuer’s board of directors
or increase their existing board representation. In addition, preferred shareholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Warrants and other rights are securities/contracts that are similar to
options but with different terms that entitle the holder to buy equity securities at a specific price for a specific period of time. The
Trust will invest in warrants and rights only if such equity securities are deemed appropriate by the Investment Adviser for investment
by the Trust. Warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer.
Exchange-Traded Notes (“ETNs”)
ETNs are a type of senior, unsecured, unsubordinated debt security issued
by financial institutions that combines both aspects of bonds and ETFs. An ETN’s returns are based on the performance of a market
index minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an
ETF, an ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to the performance of the market
index to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments and principal is
not protected. ETNs are subject to credit risk and the value of an ETN may drop due to a downgrade in the issuer’s credit rating,
despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity,
level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates,
changes in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced underlying
asset. When the Trust invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. The Trust’s
decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed
on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist
for an ETN.
Unseasoned Companies
The Trust may invest in companies (including predecessors) which have
operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher
or lower than might otherwise be the case. In addition, investments in unseasoned companies are more speculative and entail greater risk
than do investments in companies with a longer and more established operating history.
U.S. Government Securities
The Trust may invest in securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities. Although U.S. Government securities issued directly by the U.S. Government are guaranteed by the
U.S. Treasury, other U.S. Government securities issued by an agency or instrumentality of the U.S. Government may not be. No assurance
can be given that the U.S. Government would provide financial support to its agencies and instrumentalities if not required to do so by
law.
Custodial Receipts and Trust Certificates
The Trust may invest in custodial receipts and trust certificates, which
may be underwritten by securities dealers or banks, representing interests in securities held by a custodian or trustee. The securities
so held may include U.S. Government Securities, municipal securities or other types of securities in which the Trust may invest. The custodial
receipts or trust certificates are underwritten by securities dealers or banks and may evidence ownership of future interest payments,
principal payments or both on the underlying securities, or, in some cases, the payment obligation of a third party that has entered into
an interest rate swap or other arrangement with the custodian or trustee. For purposes of certain securities laws, custodial receipts
and trust certificates may not be considered obligations of the U.S. government or other issuer of the securities held by the custodian
or trustee. As a holder of
custodial receipts and trust certificates, the Trust will bear its proportionate
share of the fees and expenses charged to the custodial account or trust. The Trust may also invest in separately issued interests in
custodial receipts and trust certificates.
Although under the terms of a custodial receipt or trust certificate the
Trust would typically be authorized to assert its rights directly against the issuer of the underlying obligation, the Trust could be
required to assert through the custodian bank or trustee those rights as may exist against the underlying issuers. Thus, in the event
an underlying issuer fails to pay principal and/or interest when due, the Trust may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Trust had purchased a direct obligation of the issuer. In addition, in the event
that the trust or custodial account in which the underlying securities have been deposited is determined to be an association taxable
as a corporation, instead of a non-taxable entity, the yield on the underlying securities would be reduced in recognition of any taxes
paid.
Certain custodial receipts and trust certificates may be synthetic or
derivative instruments that have interest rates that reset inversely to changing short-term rates and/or have embedded interest rate floors
and caps that require the issuer to pay an adjusted interest rate if market rates fall below or rise above a specified rate. Because some
of these instruments represent relatively recent innovations, and the trading market for these instruments is less developed than the
markets for traditional types of instruments, it is uncertain how these instruments will perform under different economic and interest-rate
scenarios. Also, because these instruments may be leveraged, their market values may be more volatile than other types of fixed income
instruments and may present greater potential for capital gain or loss. The possibility of default by an issuer or the issuer’s
credit provider may be greater for these derivative instruments than for other types of instruments. In some cases, it may be difficult
to determine the fair value of a derivative instrument because of a lack of reliable objective information and an established secondary
market for some instruments may not exist. In many cases, the Internal Revenue Service (the “IRS”) has not ruled on the tax
treatment of the interest or payments received on the derivative instruments and, accordingly, purchases of such instruments are based
on the opinion of counsel to the sponsors of the instruments.
Non-Investment Grade Securities
The Trust may invest up to 20% of its Managed Assets in non-convertible
bonds rated BB+ or below by S&P, Ba1 or below by Moody’s, or BB+ by Fitch or comparable rated and unrated securities. The Trust
may invest up to 15% of its Managed Assets in non-convertible debt securities that are, at the time of investment, rated Caa1 or lower
by Moody’s and CCC+ or lower by S&P or Fitch, or comparably rated by another nationally recognized statistical rating organization,
or, if unrated, determined by the Investment Adviser to be of comparable credit quality. Such securities are subject to a very high credit
risk. These bonds are commonly referred to as “junk bonds” and are considered speculative. The ability of issuers of non-investment
grade securities to make principal and interest payments may be questionable because such issuers are often less creditworthy or are highly
leveraged and generally less able than more established or less leveraged entities to make scheduled payments of principal and interest.
Non-investment grade securities are also issued by governmental issuers that may have difficulty in making all scheduled interest and
principal payments. In some cases, non-investment grade securities may be highly speculative, have poor prospects for reaching investment
grade standing and be in default. As a result, investment in such bonds will entail greater risks than those associated with investment
in investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard & Poor’s, Aaa, Aa, A or Baa by Moody’s,
or AAA, AA, A, or BBB by Fitch). Analysis of the creditworthiness of issuers of non-investment grade securities may be more complex than
for issuers of higher quality debt securities, and the ability of the Trust to achieve its investment objective may, to the extent of
its investments in non-investment grade securities, be more dependent upon such creditworthiness analysis than would be the case if the
Trust were investing in higher quality securities.
The market values of non-investment grade securities tend to reflect individual
corporate or municipal developments to a greater extent than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Issuers of non-investment grade securities that are highly leveraged may not be able to make use
of more traditional methods of financing. Their ability to service debt obligations may be more adversely affected by economic downturns
or their inability to meet specific projected business forecasts than would be the case for issuers of high-rated securities. Negative
publicity about the junk bond market and investor perceptions regarding lower-rated securities, whether or not based on fundamental analysis,
may depress the prices for non-investment grade securities. In the lower quality segments of the fixed income securities market, changes
in perceptions of issuers’ creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed income securities market, resulting in greater yield and price volatility. Another factor which causes fluctuations
in the prices of non-investment grade securities is the supply and demand for similarly rated securities. In addition, the prices of investments
fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be reflected in the Trust’s NAY.
The risk of loss from default for the holders of non-investment grade
securities is significantly greater than is the case for holders of other debt securities because non-investment grade securities are
generally unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by the Trust
in already defaulted securities poses an additional risk of loss should nonpayment of principal and interest continue in respect of such
securities. Even if such securities are held to maturity, recovery by the Trust of its initial investment and any anticipated income or
appreciation is uncertain. In addition, the Trust may incur additional expenses to the extent that it is required to seek recovery relating
to the default in the payment of principal or interest on such securities or otherwise protect its interests. The Trust may be required
to liquidate other portfolio securities to satisfy annual distribution obligations of the Trust in respect of accrued interest income
on securities which are subsequently written off, even though the Trust has not received any cash payments of such interest.
The secondary market for non-investment grade securities is concentrated
in relatively few markets and is dominated by institutional investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities may not be as liquid as and may be more volatile than the secondary
market for higher-rated securities. In addition, the trading volume for non-investment grade securities is generally lower than that of
higher rated securities. The secondary market for non-investment grade securities could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on the ability
of the Trust to dispose of particular portfolio investments when needed to meet redemption requests or other liquidity needs. The Investment
Adviser could find it difficult to sell these investments or may be able to sell the investments only at prices lower than if such investments
were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the NAY of the Trust. A less liquid secondary market also may make it more difficult for the Trust to obtain
precise valuations of the non-investment grade securities in its portfolio.
The adoption of new legislation could adversely affect the secondary market
for non-investment grade securities and the financial condition of issuers of these securities. The form of any future legislation, and
the probability of such legislation being enacted, is uncertain.
Non-investment grade securities also present risks based on payment expectations.
Non-investment grade securities frequently contain “call” or buy-back features which permit the issuer to call or repurchase
the security from its holder. If an issuer exercises such a “call option” and redeems the security, the Trust may have to
replace such security with a lower-yielding security, resulting in a decreased return for investors. In addition, if the Trust experiences
net redemptions of its shares, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality
of its portfolio and increasing its exposure to the risks of non-investment grade securities.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of non-investment
grade securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may
not make timely changes in a rating to reflect changes in the economy or in the conditions of the issuer that affect the market value
of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Investment Adviser’s credit analysis than would be the case
with investments in investment-grade debt obligations. The Investment Adviser employs its own credit research and analysis, which includes
a study of an issuer’s existing debt, capital structure, ability to service debt and to pay dividends, sensitivity to economic conditions,
operating history and current earnings trend. The Investment Adviser continually monitors the investments in the Trust’s portfolio
and evaluates whether to dispose of or to retain non-investment grade and comparable unrated securities whose credit ratings or credit
quality may have changed. If after its purchase, a portfolio security is assigned a lower rating or ceases to be rated, the Trust may
continue to hold the security if the Investment Adviser believes it is in the best interest of the Trust and its Shareholders.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bond investments to service their debt obligations or to repay their obligations upon maturity. Factors having an adverse
impact on the market value of junk bonds will have an adverse effect on the Trust’s NAV to the extent it invests in such investments.
In addition, the Trust may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal
or interest on its portfolio holdings.
Loans of Portfolio Securities
The Trust may lend its portfolio securities, subject to the limitation
that the Trust will not lend a security if, as a result of such loan, all securities then subject to loans would exceed 30% of the Trust’s
Managed Assets. Under applicable regulatory requirements (which are subject to change), the loan collateral must, on each business day,
be at least equal to the value of the loaned securities and must consist of cash, bank letters of credit or U.S. Government Securities.
To be acceptable as collateral, letters of credit must obligate a bank to pay amounts demanded by the Trust if the demand meets the terms
of the letter. Such terms and the issuing bank must be satisfactory to the Trust. When the Trust lends a security, it is entitled to receive
substitute payments in the amount of any dividends or interest on the loaned security and also receive one or more of: (1) a negotiated
loan fee; (2) interest on securities used as collateral for the loan; or (3) interest on short-term debt securities purchased
with the loan collateral. Either type of interest may be shared with the borrower of the security. The Trust may also pay reasonable finder’s,
custodian and administrative fees. The terms of the Trust’s loans of securities must meet certain requirements under the Internal
Revenue Code of 1986, as amended (the “Code”), such as providing that the Trust may terminate the loan upon no more than five
days’ notice, and must permit the Trust to reacquire loaned securities in time to vote on any important matter. The Trust will make
such loans only to banks and dealers with which it may enter into repurchase agreements. If the borrower fails to return the loaned security,
the Trust’s risks include: (1) any costs in disposing of the collateral; (2) loss from a decline in value of the collateral
to an amount less than 100% of the securities loaned; (3) being unable to exercise its voting or consent rights with respect to the
security; (4) any loss arising from a delay in the Trust’s ability to recover such securities in a timely manner; (5) the
inability of the Trust to reacquire the loaned securities; and (6) counterparty risk.
INVESTMENT
RESTRICTIONS
The Trust has adopted certain fundamental restrictions, which may not
be changed without the affirmative vote of the holders of a majority of the Trust’s outstanding Shares. As used in this SAI, a “majority
of the Trust’s outstanding Shares” means the lesser of (1) 67% of the Shares represented at a meeting at which more than
50% of the outstanding Shares are represented or (2) more than 50% of the outstanding Shares. For purposes of the following limitations
(except for the asset coverage requirement with respect to borrowings), all percentage limitations apply immediately after a purchase
and any subsequent change in any applicable percentage resulting from market conditions does not require any action. With respect to the
limitations on the issuance of senior securities and in the case of borrowings, the percentage limitations apply at the time of issuance
and on an ongoing basis. The Trust may not:
|
1. |
Invest 25% or more of its Managed Assets in the securities of one or more issuers conducting their principal business activities in the
same industry (excluding the U.S. Government or any of its agencies or instrumentalities); except that the Trust will invest more than
25% of its Managed Assets in companies conducting their principal business in healthcare industries. |
|
2. |
Purchase or sell commodities or commodities contracts. The prohibition on the purchase or sale of commodities applies to the purchase
or sale of “physical” commodities; the Trust may invest in currency and financial instruments and contracts in accordance
with its investment objective and policies, including, without limitation, structured notes, futures contracts, swaps, options on commodities,
currencies, swaps and futures, ETFs, ETNs, investment pools and other instruments, regardless of whether such instrument is considered
to be a commodity. |
|
3. |
Purchase or sell real estate; although the Trust may purchase and sell securities or instruments that are secured by real estate or interests
therein or that reflect the return of an index of real estate values, securities of real estate investment trusts and mortgage-related
securities, and may hold and sell real estate acquired by the Trust as a result of the ownership of securities. |
|
4. |
Underwrite securities of other issuers, except to the extent that, in connection with the disposition of its portfolio securities, the
Trust may be deemed an underwriter under federal or state securities law. See “Portfolio Transactions and Brokerage.” |
|
5. |
Issue senior securities to the extent such issuance would violate applicable law. |
|
6. |
Borrow money, except as permitted by the Investment Company Act, or interpretations or modifications by the Commission, Commission staff
or other authority with appropriate jurisdiction. |
|
7. |
Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Trust, except
as may be necessary in connection with permitted borrowings under 6 above. |
|
8. |
Make loans of money, except (a) by the purchase of debt obligations in which the Trust may invest consistent with its investment
objective and policies, or (b) as may otherwise be permitted by the Investment Company Act, as amended from time to time, the rules and
regulation promulgated by the Commission under the Investment Company Act, as amended from time to time, or an exemption or other relief
applicable to the Trust from the provisions of the Investment Company Act, as amended from time to time. The Trust reserves the authority
to enter into repurchase agreements, reverse repurchase agreements and to make loans of its portfolio securities to qualified institutional
investors, brokers, dealers, banks or other financial institutions, so long as the terms of the loans are not inconsistent with the requirements
of the Investment Company Act. |
In addition, the Trust has adopted the following investment policies,
which may be changed by the action of the Board of Trustees (the “Board”) without Shareholder approval:
|
1. |
The Trust, under normal circumstances, will have at least 80% of its Managed Assets invested in Healthcare Companies. This investment
policy may only be changed with 60 days’ prior notice to Shareholders. |
|
2. |
The Trust may invest up to 10% of the Trust’s Managed Assets in Restricted Securities. |
Except as otherwise noted, all percentage limitations set forth above
apply immediately after a purchase and a subsequent change in the applicable percentage resulting from market fluctuations does not require
elimination of any security from the portfolio. Other than the restrictions identified above as fundamental, the Trust’s investment
objective, policies and restrictions may be changed without Shareholder approval.
TRUSTEES
AND OFFICERS
Overall responsibility for general oversight of the Trust rests with the
Board. The Board is comprised of seven individuals, six of whom are not “interested persons” of the Trust (as that term is
defined in Section 2(a)(19) of the Investment Company Act) (“Independent Trustee”). The Chairman of the Board is an Independent
Trustee. The Chairman presides at meetings of the Trustees, participates in the preparation of the agenda for meetings of the Board, and
acts as a liaison between the Independent Trustees and the Trust’s management between Board meetings. Except for any duties specified
herein, the designation as Chairman does not impose any obligations or standards greater than or different from other Trustees.
The Board holds regular quarterly meetings each year to consider and address
matters involving the Trust. The Board also may hold special meetings to address matters arising between regular meetings. The Independent
Trustees also meet outside the presence of management in executive session at least quarterly and have engaged independent legal counsel
to assist them in performing their oversight responsibilities.
The Board has established Audit, Governance and Nominating, Valuation
and Qualified Legal Compliance Committees to assist the Board in the oversight of the management and affairs of the Trust. All of the
members of these Committees are Independent Trustees, except for Dr. Omstead, who serves on the Valuation Committee. From time to
time the Board may establish additional committees or informal working groups to deal with specific matters.
The Trust is subject to a number of risks including investment, compliance,
operational and valuation risks. Although the Investment Adviser and the officers of the Trust are responsible for managing these risks
on a day-to-day basis, the Board has adopted, and periodically reviews, policies and procedures designed to address these risks. As part
of its regular oversight of the Trust, the Board, directly or through a Committee, interacts with the Trust’s Chief Compliance Officer,
the Trust’s independent public accounting firm, and legal counsel to the Trust. These interactions include discussing the Trust’s
risk management and controls with the independent registered public accounting firm engaged by the Trust, reviewing valuation policies
and procedures and the valuations of specific restricted securities, and receiving periodic reports from the Trust’s Chief Compliance
Officer regarding compliance matters relating to the Trust and its major service providers, including results of the implementation and
testing of the Trust’s and such providers’ compliance programs. The Board’s oversight function is facilitated by management
reporting processes designed to provide information to the Board regarding the identification, assessment, and management of critical
risks and the controls and policies and procedures used to mitigate those risks. The Board reviews its role in supervising the Trust’s
risk management from time to time and may change the manner in which it fulfills its oversight responsibilities at its discretion at any
time.
The Board has determined that its leadership structure is appropriate
for the Trust because it enables the Board to exercise informed and independent judgment over matters under its purview, allocates responsibility
among committees in a manner that fosters effective oversight and allows the Board to devote appropriate resources to specific issues
in a flexible manner as they arise. The Board periodically reviews its leadership structure as well as its overall structure, composition,
and functioning, and may make changes at its discretion at any time.
The Trust’s Declaration of Trust provides that the Trust will indemnify
Trustees and officers and may indemnify employees and agents of the Trust against liabilities and expenses incurred in connection with
claims or litigation in which they may be involved because of their offices with the Trust. However, nothing in the Declaration of Trust
or the By-laws of the Trust protects or indemnifies a Trustee, officer, employee or agent against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
The names of the Trustees and officers of the Trust, their addresses,
ages and principal occupations during the past five years, and, in the case of the Trustees, their positions with certain other organizations
and publicly-held companies, are provided in the tables below. Trustees that are deemed “interested persons” (as that term
is defined in Section 2(a)(19) of the Investment Company Act) of the Trust or the Investment Adviser are included in the table titled
“Interested Trustees.” Trustees who are not interested persons as described above are referred to as Independent Trustees.
The Trust and Tekla Healthcare Investors (“HQH”), Tekla Life Sciences Investors (“HQL”), and Tekla Healthcare
Opportunities Fund (“THQ”), other closed-end investment companies advised by the Investment Adviser, are the only four portfolios
in the “Fund Complex.” Each Trustee also serves as a trustee for HQL, HQH and THQ.
Trustees
NAMES, ADDRESSES(1) AND DATES OF BIRTH |
|
POSITION WITH THE TRUST, TERM OF OFFICE(2) AND
LENGTH OF TIME SERVED |
|
PRINCIPAL OCCUPATION(S) AND OTHER
DIRECTORSHS HELD DURING PAST 5 YEARS |
|
NUMBER OF PORTFOLIOS IN TRUST COMPLEX OVERSEEN
BY TRUSTEE |
|
|
|
|
|
|
|
INDEPENDENT TRUSTEES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey A. Bailey 4/1962 |
|
Trustee since 2020
Chairman since 2022 |
|
CEO, IlluminOss Inc. (2018-2020); Vice President, Janssen Pharmaceutica (Johnson & Johnson) (1984-2006); Board Chairperson,
Aileron Therapeutics Inc. (since 2018); Director, Madison Vaccines, Inc. (since 2018); Director and CEO, BioDelivery Systems, Inc.
(2020-2022). |
|
4 |
|
|
|
|
|
|
|
Kathleen L. Goetz
4/1966 |
|
Trustee since 2021 |
|
Independent Consultant (Since 2020); Vice President and Head of Sales, Novartis Pharmaceuticals (2017-2019); Executive Director of Strategic
Account Management, Novartis Pharmaceuticals (2015-2016). |
|
4 |
|
|
|
|
|
|
|
Rakesh K. Jain, Ph.D. 12/1950 |
|
Trustee since 2015 |
|
Director, Steele Lab of Tumor Biology at Massachusetts General Hospital (since 1991); A.W. Cook Professor of Tumor Biology (Radiation
Oncology) at Harvard Medical School (since 1991); Ad hoc Consultant/Scientific Advisory Board Member for pharmaceutical/biotech companies
(various times since 2002); Ad hoc Consultant, Gershon Lehman Group (since 2004); Director, Co-Founder, XTuit Pharmaceuticals, Inc.
(2012-2018). |
|
4 |
Thomas M. Kent, CPA 6/1953 |
|
Trustee since 2017 |
|
Director, Principal Global Investors Trust Co. (since 2014); Trustee, Thayer Academy (2009-2018); Director, New England
Canada Business Council (since 2017). |
|
4 |
|
|
|
|
|
|
|
W. Mark Watson, CPA
7/1950 |
|
Trustee since 2022 |
|
Director, BioDelivery Sciences International, Inc. (2017-2022); Director, Inhibitor Therapeutics, Inc. (since 2014); Director,
Global Health MCS, (since 2014); Director, Sykes Enterprises, Inc. (2018-2021); Director, The Moffitt Cancer Center (since 2009). |
|
4 |
NAMES, ADDRESSES(1) AND DATES OF BIRTH |
|
POSITION WITH THE TRUST, TERM OF OFFICE(2) AND
LENGTH OF TIME SERVED |
|
PRINCIPAL OCCUPATION(S) DURING PAST 5
YEARS AND OTHER DIRECTORSHIPS HELD |
|
NUMBER OF PORTFOLIOS IN TRUST COMPLEX OVERSEEN
BY TRUSTEE |
|
|
|
|
|
|
|
INTERESTED TRUSTEES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel R. Omstead, Ph.D.(3) 7/1953 |
|
President since 2015
Trustee since 2015 |
|
President of the Fund (since 2015), Tekla Healthcare Investors (HQH) (since 2001), Tekla Life Sciences Investors (HQL) (since 2001), Tekla
Healthcare Opportunities Fund (THQ) (since 2014); President, Chief Executive Officer and Managing Member of Tekla Capital Management LLC
(since 2002); Director: Palyon Medical Corporation (2009-2015); Tibion Corporation (2011-2013); Celladon Corporation (2012-2014); IlluminOss
Medical, Inc. (2011-2020); Magellan Diagnostics, Inc.(2006-2016); Dynex Corporation (2011-2017); Insightra Medical, Inc.
(2015-2016); Neurovance, Inc. (2015-2017); EBI Life Sciences, Inc. (2015-2017); Euthymics Biosciences, Inc. (2015-2017);
Veniti, Inc. (2015-2018);Joslin Diabetes Center (2016-2019); Decipher Biosciences, Inc. (2016-2018). |
|
4 |
|
(1) |
The address for each Trustee is: c/o Tekla World Healthcare, 100 Federal Street, 19th Floor, Boston, Massachusetts, 02110,
617-7728500. |
|
(2) |
Each Trustee currently is serving a three year term. |
|
(3) |
Trustee considered to be an “interested person” within the meaning of the Investment Company Act of 1940 through his position
or affiliation with the Investment Adviser. |
The Board believes that each Trustee’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of other Trustees lead to the conclusion that each Trustee
should serve in such capacity. Among the attributes or skills common to all Trustees are their ability to review critically and to evaluate,
question and discuss information provided to them, to interact effectively with the other Trustees, the Trust’s Investment Adviser,
the administrator and other service providers, counsel and independent registered public accounting firm, and to exercise effective and
independent business judgment in the performance of their duties as Trustees. Each Trustee’s ability to perform the duties of a
trustee effectively has been attained and enhanced through the Trustee’s education, professional training and other life experiences,
such as business, consulting or public service positions and through experience from service as a member of this Trust’s Board and
that of HQH, HQL and THW, public companies, or non-profit entities or other organizations.
Jeffrey A. Bailey: Mr. Bailey is a seasoned operational healthcare
executive with over 30 years of leadership experience within the healthcare industry. Mr. Bailey serves as Chairman of the Board
of Trustees of the Trust and also serves as Chairman of the Trust’s
Valuation Committee and serves on the Trust’s Governance and Nominating
Committee. Mr. Bailey has extensive business development and transactional expertise, with diverse leadership experiences in commercial
and supply chain management, finance, business development and product development for various pharmaceutical medical device companies.
Most recently, Mr. Bailey served as chief executive officer and director of IlluminOss Medical, Inc.,
a medical device company, from 2018 to 2020. From December 2015 until March 2017, Mr. Bailey served as chief executive
officer of Neurovance, Inc., a biotechnology company. Previously, from January 2013 through June 2015, Mr. Bailey
served as president and chief executive officer and as a director of Lantheus Medical Imaging, Inc., a public medical diagnostic
company. Prior to 2013, Mr. Bailey held various leadership positions with several public and private pharmaceutical and medical device
companies, including president and general manager at Novartis Pharmaceuticals, a multinational pharmaceutical company, and a 22-year
career with Johnson & Johnson, multinational medical devices, pharmaceutical and consumer packaged goods manufacturing company.
Mr. Bailey also has extensive board member experience, having previously served on boards of directors for eight companies.
Mr. Bailey currently serves as a director for Aileron Therapeutics Inc. and Madison Vaccines, Inc. Mr. Bailey holds a BA
in business administration from Rutgers University.
Kathleen Goetz: Ms. Goetz was Vice President Head of Sales
at Novartis Pharmaceuticals, a global healthcare company until 2019. Ms. Goetz serves on the Audit Committee and Valuation Committee
of the Trust. Ms. Goetz brings over 30 years of healthcare business and leadership experience, including experience working within
a spectrum of diverse healthcare stakeholders and ecosystems. She brings extensive knowledge of the healthcare provider, a deep understanding
of payor interests and the needs of the patient. During her 28 years with Novartis, Ms. Goetz held positions of increasing responsibility,
leading marketing, sales and reimbursement teams through various stages of commercialization from pre-launch planning through to loss
of exclusivity across diverse therapeutic areas. Other key roles during her time at Novartis also include National Executive Director
of Strategic Accounts, Integrated Market Planning and Marketing Director, providing her with valuable experience leading organizational
transformation, resourcing, forecasting, and analytics. Early in her career Ms. Goetz spent time working at Centocor Biologics. She
continues to act as a mentor to future leaders and as a champion for diversity through her past work as an Executive Leadership Development
mentor and a former Novartis Pharmaceuticals Women in Leadership Chair. Ms. Goetz has won numerous healthcare and business leadership
awards and recognition throughout her career, including being recognized with the Healthcare Women's Business Association Rising Star
Award. She continues to act as an independent consultant within the pharmaceutical and biotech industry. Ms. Goetz holds a Business
Finance degree from Iowa State University.
Rakesh K. Jain, Ph.D.: Dr. Rakesh Jain is the A. W. Cook Professor
of Radiation Oncology (Tumor Biology) at Harvard Medical School and the Director of the E. L. Steele Laboratories of Tumor Biology at
Massachusetts General Hospital, providing the Trust with a valuable perspective on emerging life sciences technologies. Dr. Jain
is Chairperson of the Governance and Nominating Committee of the Trust. Dr. Jain co-founded XTuit Pharmaceuticals, Inc. in 2012,
where he also served as a board member until 2018. He serves as Chairman of the Trust’s Governance
and Nominating Committee. Prior to joining Harvard, he was professor of chemical engineering at Columbia University and Carnegie Mellon
University. Dr. Jain is regarded as a pioneer in the fields of tumor biology, drug delivery, in vivo imaging and bioengineering.
Dr. Jain has authored more than 750 publications. He serves on advisory panels to government, industry and academia, and has served
or continues to serve on editorial advisory boards of twenty journals, including Journal of Clinical Oncology and Nature Reviews Clinical
Oncology. He has received more than 90 major awards and lectureships, including the United States National Medal of Science, a Guggenheim
Fellowship, the Humboldt Senior Scientist Award, the National Cancer Institute’s Research Career Development Award and Outstanding
Investigator Grant, the Academic Scientist of the Year Award from the Pharmaceutical Achievements Awards, the Distinguished Service Award
from Nature Biotechnology and the Innovator Award from the DoD Breast Cancer Program. He is a member of all three branches of U.S. National
Academies – the Institute of Medicine, the National Academy of Engineering and the National Academy of Sciences and is a member
of both the National Academy of Investors and the American Academy of Arts and Sciences. In May 2016, Dr. Jain received the
National Medal of Science from President Obama at the White House.
Thomas M. Kent, CPA: Mr. Kent was a Partner at PricewaterhouseCoopers,
LLP, where he served the Investment Management Industry for over 30 years, 24 years as a Partner. In so doing, he worked with and for
more than 20 different and distinct Investment Company Boards, and alongside several of those Boards’ service providers, including
Advisors, Custodians, Accounting Agents, Transfer Agents, Security Pricing Providers, Tax advisors and others. His clients included both
large and small fund groups, with both open-end and closed-end fund structures. Therefore, he provides Trust with deep expertise in audit,
valuation, operational and governance matters. He serves as Chairman of the Trust’s Audit Committee and
serves on the Trust’s Governance and Nominating Committee. Mr. Kent also serves as a Director of Principal Global Investors
Trust Co., and a Director of the New England Canada Business Council. Mr. Kent is a member of the American Institute of CPA’s
and the Massachusetts Society of CPA’s where he serves on the Registered Investment Company Committee. He received his AB cum laude
from Harvard College, where he majored in Economics and his MS in Accountancy from the Stern School of Business at New York University.
Daniel R. Omstead, Ph.D.: Dr. Omstead is President and Chief
Executive Officer of Tekla Capital Management LLC, a registered investment adviser that serves as investment adviser to the Trust. Dr. Omstead
is also President of the Trust and serves on its Valuation Committee. Dr. Omstead is portfolio manager for the public and restricted/venture
portfolios within the Trust. As part of these responsibilities, Dr. Omstead is a member of the Board of Directors of a portfolio
company, IlluminOss Medical, Inc. Prior to joining the Adviser, Dr. Omstead was President and CEO of Reprogenesis, Inc.,
a private development stage biotech company which developed therapies in the field of tissue engineering and regenerative medicine. Before
joining Reprogenesis, Dr. Omstead was Senior Vice President, Research and Development, at Cytotherapeutics, Inc, a public biotech
company. Prior to entering the biotech industry, Dr. Omstead was employed for fourteen years in positions of increasing responsibility
within the pharmaceutical industry at Ortho Pharmaceutical Corporation and at the R.W. Johnson Pharmaceutical Research Institute, both
divisions of Johnson & Johnson, and at Merck, Sharp and Dohme Research Laboratories, a division of Merck & Co., Inc.
Dr. Omstead provides the Trust with insights into both pharmaceutical and biotech companies. Dr. Omstead holds Ph.D. and Master’s
Degrees in Chemical Engineering and Applied Chemistry from Columbia University and a B.S. degree in Civil Engineering from Lehigh University.
He is an emeritus member of the Board of Directors of a non-profit agency that provides emergency shelter, housing and supportive services
to homeless and low-income individuals and families in the Boston area. Dr. Omstead was also a member of the Board of Trustees at
the Joslin Diabetes Center.
W. Mark Watson, CPA: Mr. Watson is a Certified Public Accountant
with over 40 years of experience in public accounting and auditing, having spent his entire career from January 1973 to June 2013
at Deloitte Touche Tohmatsu, the multinational professional services network, and its predecessor, most recently as Central Florida Marketplace
Leader. Mr. Watson serves on the Valuation Committee and the Audit Committee of the Trust. Mr. Watson provides the Trust with
a particular expertise in the health and life sciences sector, having played a significant role in the development of Deloitte's audit
approach for health and life sciences companies and leading its national healthcare regulatory and compliance practice. He has served
as lead audit partner and advisory partner on the accounts of many public companies ranging from middle market firms to Fortune 500 enterprises.
Mr. Watson is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants.
Mr. Watson is a member of the Board of Directors of Inhibitor Therapeutics, Inc., Global Health MCS and the Moffitt Cancer Center.
He received his undergraduate degree in Accounting from Marquette University.
Officers
NAME, ADDRESS(1) AND
DATE OF BIRTH |
|
POSITION(S) HELD
WITH THE TRUST, TERM OF OFFICE(2) AND LENGTH OF TIME SERVED |
|
PRINCIPAL OCCUPATION(S) AND OTHER
DIRECTORSHIPS
HELD DURING PAST 5 YEARS |
Daniel R. Omstead, Ph.D. 7/1953 |
|
President since 2015 |
|
President of the Fund, HQH (since 2001), HQL (since 2001), THQ (since 2014); President,
Chief Executive Officer and Managing Member of Tekla Capital Management LLC (since 2002). |
Laura Woodward, CPA 11/1968 |
|
Chief Compliance Officer, Secretary and Treasurer since 2015 |
|
Chief Compliance Officer, Secretary and Treasurer of the Fund, HQH (since 2009), HQL (since 2009), THQ (since 2014); Chief Compliance
Officer and Vice President of Fund Administration, Tekla Capital Management LLC (since 2009); Senior Manager, PricewaterhouseCoopers LLP
(1990-2009). |
____________________
|
(1) |
The address for each Officer is: c/o Tekla World Healthcare Fund, 100 Federal Street, 19th Floor, Boston, Massachusetts, 02110,
617-772-8500. |
|
(2) |
Each Officer serves in such capacity for an indefinite period of time at the pleasure of the Trustees. |
Ownership of Securities
As of September 6, 2022, the Trust’s Trustees and executive
officers, as a group, beneficially owned less than 1% of the Trust’s outstanding Shares. The information as to beneficial ownership
of securities which appears below is based on statements furnished to the Trust by its Trustees and executive officers.
To the knowledge of the Trust, as of September 6, 2022, there were
no control persons of the Trust and no persons were known to own, either beneficially or of record, 5% or more of the Shares of the Trust.
As of March 31, 2022, the dollar range of equity securities owned
beneficially by each Trustee in the Trust and in any registered investment companies overseen by the Trustee within the same family of
investment companies as the Trust is as follows:
Independent Trustees
Name of Trustee |
|
Dollar Range
of Equity Securities in the Trust |
|
Aggregate Dollar
Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies* |
Jeffrey A. Bailey |
|
$10,001-$50,000 |
|
$50,001-$100,000 |
Kathleen L. Goetz |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
Rakesh K. Jain, Ph.D. |
|
None |
|
None |
Thomas M. Kent |
|
$10,001-$50,000 |
|
Over $100,000 |
W. Mark Watson, CPA |
|
None |
|
None |
Interested Trustees
Name of Trustee |
|
Dollar Range
of Equity Securities in the Trust |
|
Aggregate Dollar
Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies* |
Daniel R. Omstead, Ph.D. |
|
Over $100,000 |
|
Over $100,000 |
_______________
|
* |
The Family of Investment Companies includes the four funds that the Adviser serves as investment adviser. This includes the Trust,
HQH, HQL and THQ. |
Dr. Omstead and Ms. Woodward serve as officers of the Trust.
As of September 7, 2022, the officers of the Trust beneficially owned 30,768 Shares of the Trust, or less than 1% of the Shares outstanding
on that date.
Independent Trustee Transactions/Relationships with Trust Affiliates
As of December 31, 2021, neither the Independent Trustees nor members
of their immediate families owned securities, beneficially or of record, of the Advisor, or an affiliate or person directly or indirectly
controlling, controlled by, or under common control with the Advisor. In addition, over the past five years, neither Independent Trustees
nor members of their immediate families have had any direct or indirect interest, the value of which exceeds $120,000, in the Advisor
or any of its affiliates. Further, during each of the last two fiscal years, neither Independent Trustees nor members of their immediate
families have conducted any transactions (or series or transactions) or maintained any direct or indirect relationship in which the amount
involved exceeds $120,000 and to which the Advisor or any of its affiliates was a party.
Standing Committees
Audit Committee. The Trust has an Audit Committee comprised solely
of Independent Trustees who are “independent” as defined in the New York Stock Exchange (“NYSE”) Listing Standards.
The Board has adopted a written charter for the Audit Committee. The Audit Committee charter is available at www.teklacap.com/funds/thw/info/literature.
The principal purpose of the Trust’s Audit Committee is to assist the Board in fulfilling its responsibility to oversee management’s
conduct of the Trust’s financial reporting process, including reviewing the financial reports and other financial information provided
by the Trust, the Trust’s systems of internal accounting and financial controls and the annual independent audit process.
For the Trust, the Audit Committee’s role is one of oversight, and
it is recognized that the Trust’s management is responsible for preparing the Trust’s financial statements and that the outside
auditor is responsible for auditing those financial statements. Although the Audit Committee member must be financially literate and one
member must have accounting or financial management expertise (as determined by the Board in its business judgment), Audit Committee members
are not professionally engaged in the practice of accounting or auditing and are not experts in the fields of accounting or auditing,
including with respect to auditor independence. Audit Committee members rely, without independent verification, on the information provided
to them and on the representations made by management and the Trust’s independent public accountants.
The members of the Trust’s Audit Committee are Mr. Kent, Ms. Goetz,
and Mr. Watson. Mr. Kent is the Chairman of the Trust’s Audit Committee. The Trust’s Audit Committee held four meetings
during the fiscal year ended September 30, 2021.
Governance and Nominating Committee. The Trust has a Governance
and Nominating Committee comprised solely of Independent Trustees who are “independent” as defined in the NYSE Listing Standards.
The principal missions of the Committee are to (i) review, evaluate,
and enhance the effectiveness of the Board in its role in governing the Trust and overseeing the management of the Trust and (ii) promote
the effective participation of qualified individuals on the Board, on committees of the Board, and as executive officers of the Trust.
The Committee reviews, discusses and makes recommendations to the Board
relating to those issues that pertain to the effectiveness of the Board in carrying out its responsibilities in governing the Trust and
overseeing the Trust’s management. The Committee makes nominations for trustees and officers of the Trust and for membership on
all committees of the Board and submits such nominations to the full Board for consideration.
The Trust’s By-Laws require that each prospective trustee candidate
have a college degree or equivalent business experience and provide a list of minimum qualifications for trustees, which include expertise,
experience or relationships relevant to the business of the Trust. The Trust’s By-Laws also require that a candidate is not serving
in any of various positions with another investment company (as defined in the Investment Company Act) that focuses its investments in
the healthcare and/or life sciences industries, unless such investment company is managed by the Trust’s Investment Adviser or an
affiliate, or in various positions with the investment adviser, sponsor or equivalent of such an investment company. The Committee may
also take into account other factors when considering and evaluating potential trustee candidates, including but not limited to: (i) availability
and commitment to attend meetings and perform responsibilities of the Board; (ii) relevant industry and related experience; (iii) educational
background; (iv) financial expertise; (v) the candidate’s ability, judgment and expertise; and (vi) the overall diversity
of the Board’s composition.
The Committee may identify prospective trustees from any reasonable source,
including, but not limited to, the consultation of third-party trustee search services. The Committee will consider potential trustee
candidates recommended by Shareholders, provided that the proposed candidates (i) satisfy any minimum qualifications of the Trust
for its trustees; (ii) are not “interested persons” (as that term is defined in Section 2(a)(19) of the Investment
Company Act) of the Trust or the Investment Adviser; and (iii) are “independent” as defined in the NYSE Listing Standards.
In order to be evaluated by the Committee, trustee candidates recommended by Shareholders must also meet certain eligibility requirements
as set out in the Committee’s Charter. Other than those eligibility requirements, the Committee shall not evaluate Shareholder trustee
nominees in a different manner than other nominees. The standard of the Committee is to treat all equally qualified nominees in the same
manner.
All recommendations by Shareholders must be received by the Trust by the
deadline for submission of any Shareholder proposals which would be included in the Trust’s proxy statement for the next annual
meeting of the Trust. Each Shareholder or Shareholder group must meet the requirements stated in the Committee’s charter in order
to recommend a candidate. A Shareholder or Shareholder group may not submit more than one candidate per year. When recommending a trustee
candidate, Shareholders must include in their notice to the Trust’s Secretary: (i) the Shareholder’s contact information;
(ii) the trustee candidate’s contact information and the number of Trust shares owned by the proposed candidate; (iii) all
information regarding the candidate that would be required to be disclosed in solicitations of proxies for elections of trustees required
by Regulation 14A of the Securities Act of 1934, as amended; and (iv) a notarized letter executed by the trustee candidate, stating
his or her intention to serve as a nominee and be named in the Trust’s proxy statement, if nominated by the Board, and to serve
as a trustee, if so elected. Once a recommendation has been timely received in proper form, the candidate will be asked to complete an
eligibility questionnaire to assist the Trust in assessing the candidate’s qualifications as a potential Independent Trustee and
as someone who is “independent” under the NYSE Listing Standards. The Committee will make such determinations in its sole
discretion and such determinations shall be final.
The members of the Committee are Mr. Bailey, Dr. Jain, and Mr. Kent.
Dr. Jain is the Chairman of the Committee. During the fiscal year ended September 30, 2021, the governance and nominating committee
held four meetings.
Valuation Committee. The Board has delegated to the Trust’s
Valuation Committee general responsibility for determining, subject to final Board ratification, in accordance with the Trust’s
valuation procedures, the value of assets held by the Trust on any day on which the net asset value per share is determined. The Valuation
Committee may appoint, and has appointed, a Sub-Committee made up of employees and officers of the Investment Adviser, to deal in the
first instance with day to day valuation decisions, subject to oversight by the Valuation Committee. The Valuation Committee shall meet
as often as necessary to ensure that each action taken by the Sub-Committee is reviewed within a calendar quarter of the occurrence. In
connection with its review, the Valuation Committee shall
ratify or revise the pricing methodologies authorized by the Sub-Committee
since the last meeting of the Valuation Committee. The Valuation Committee is charged with the responsibility of determining the fair
value of the Trust’s securities or other assets in situations set forth in the Trust’s valuation procedures.
The members of the Trust’s Valuation Committee are Mr. Bailey,
Ms. Goetz, Mr. Watson, and Dr. Omstead. Mr. Bailey is the Chairman of the Trust’s Valuation Committee. The Trust’s
Valuation Committee held four meetings during the fiscal year ended September 30, 2021.
Qualified Legal Compliance Committee. The Trust has a Qualified
Legal Compliance Committee (“QLCC”) comprised solely of Independent Trustees. The Board has adopted a written charter for
the QLCC. The principal purpose of the Trust’s QLCC is to review and respond to reports of Evidence of a Material Violation (as
defined in the QLCC charter). Reporting Evidence of a Material Violation is required under the Standards of Professional Conduct for Attorneys
adopted by the Commission under the Sarbanes-Oxley Act of 2002 (the “Standards”). Under the Standards, if an attorney appearing
and practicing before the Commission in the representation of an issuer, such as the Trust, becomes aware of Evidence of a Material Violation
by the issuer or by any officer, trustee, employee or agent of the issuer, the Standards provide for the attorney to report such evidence
to the issuer’s QLCC forthwith. In discharging its role, the QLCC is granted the power to investigate any Evidence of a Material
Violation brought to its attention with full access to all books, records, facilities and personnel of the Trust and the power to retain
outside counsel, auditors or other experts for this purpose.
The members of the Trust’s QLCC are Dr. Jain and Mr. Kent.
Mr. Kent is the Chairman of the Trust’s QLCC. The Trust’s QLCC had no cause to meet during the fiscal year ended September 30,
2021.
Compensation of Trustees and Officers
The Trust pays each of the Trustees not affiliated with the Investment
Adviser an annual fee of $17,500. Independent Trustees are also paid $1,000 for each Board meeting attended in person and $750 for each
Committee meeting. The Chairman of the Board receives an additional annual fee of $5,000, the Chairmen of the Audit and Valuation Committees
receive an additional annual fee of $2,000, and the Chairman of the Governance and Nominating Committee receives an additional annual
fee of $2,000. Independent Trustees are also reimbursed for travel expenses incurred in connection with attending such meetings. Trustees
and officers of the Trust who hold positions with the Investment Adviser receive indirect compensation from the Trust in the form of the
investment advisory fee paid to the Investment Adviser.
The Trust has entered into a Services Agreement with the Investment Adviser.
Pursuant to the terms of the Services Agreement, the Trust reimburses the Investment Adviser for a portion of the payment of salary and
provision of benefits to the Trust's Chief Compliance Officer. Trustees and officers of the Trust who hold positions with the Investment
Adviser receive indirect compensation from the investment advisory fee paid to the Investment Adviser by the Trust.
The following table sets forth information regarding the estimated compensation
of Trustees by the Trust and other funds managed by the Investment Adviser for the fiscal year ending September 30, 2021, but does
not include expenses. As of the date of this SAI, the Fund Complex was comprised of the Trust, HQH, HQL, and THQ (the “Funds”).
COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2021
NAME OF TRUSTEE |
|
AGGREGATE COMPENSATION FROM
TRUST |
|
PENSION OR RETIREMENT BENEFITS
ACCRUED AS PART OF TRUST EXPENSES |
|
ESTIMATED ANNUAL BENEFITS
UPON RETIREMENT |
|
TOTAL COMPENSATION FROM TRUST
AND FUND COMPLEX PAID TO TRUSTEES(1) |
INDEPENDENT TRUSTEES(2) |
|
|
|
|
|
|
|
|
Jeffrey A. Bailey |
|
$ |
26,438 |
|
N/A |
|
N/A |
|
$ |
104,250 |
Rakesh K. Jain, Ph.D. |
|
$ |
23,438 |
|
N/A |
|
N/A |
|
$ |
92,250 |
Thomas M. Kent, CPA |
|
$ |
26,438 |
|
N/A |
|
N/A |
|
$ |
104,250 |
Oleg M. Pohotsky, M.B.A., J.D.(3) |
|
$ |
31,688 |
|
N/A |
|
N/A |
|
$ |
126,000 |
William S. Reardon, M.B.A.(4) |
|
$ |
28,438 |
|
N/A |
|
N/A |
|
$ |
112,250 |
Lucinda H. Stebbins, M.B.A., CPA(5) |
|
$ |
21,875 |
|
N/A |
|
N/A |
|
$ |
86,000 |
|
|
|
|
|
|
|
|
|
INTERESTED TRUSTEES |
|
|
|
|
|
|
|
|
Daniel R. Omstead, Ph.D. |
|
$ |
0 |
|
N/A |
|
N/A |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
EXECUTIVE OFFICER |
|
|
|
|
|
|
|
|
Laura Woodward. |
|
$ |
50,900 |
|
N/A |
|
N/A |
|
|
N/A |
_____________
|
(1) |
The Fund Complex consists of four funds: the Trust, HQH, HQL and THQ. |
|
(2) |
Kathleen L. Goetz was appointed as a Trustee effective December 9, 2021. W. Mark Watson was appointed as a Trustee effective June 9,
2022. |
|
(3) |
Mr. Pohotsky served as an Independent Trustee until he passed away on July 14, 2022. |
|
(4) |
Mr. Reardon served as an Independent Trustee until he retired on June 9, 2022. |
|
(5) |
Ms. Stebbins served as an Independent Trustee until she retired on June 10, 2021. |
THE TRUST
The Trust’s capitalization consists of an unlimited number of Shares,
$0.01 par value. Each Share represents an equal proportionate beneficial interest in the Trust and, when issued and outstanding, will
be fully paid and non-assessable by the Trust. Upon any liquidation of the Trust, Shareholders will be entitled to share pro rata in the
net assets of the Trust available for distribution after paying or adequately providing for the payment of all liabilities. The Trust
will send annual and semi-annual financial statements to Shareholders and may also issue more abbreviated interim reports to update Shareholders
on a quarterly basis. The Trust will hold annual meetings of its Shareholders in accordance with the provisions of the Trust’s By-laws
and the rules of the NYSE.
Shareholders are entitled to one vote for each whole Share held and a
proportionate fractional vote for each fractional Share held. The Trust’s Shares do not have cumulative voting rights, which means
that the holders of more than 50% of the Shares of the Trust voting for the election of Trustees can elect all of the Trustees, and, in
such event, the holders of the remaining Shares will not be able to elect any Trustees. The Trust has a staggered Board, whereby one class
of Trustees is elected each year.
The Trust is an entity of the type commonly known as a “Massachusetts
business trust.” Under Massachusetts law, shareholders of such a trust under certain circumstances may be determined to be personally
liable as partners for the Trust’s obligations. However, the Trust’s Declaration of Trust contains an express disclaimer of
shareholder liability for the acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of the
Trust’s property for any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of a Trust liability is limited to circumstances in which the Trust is unable to meet its obligations from the
liquidation of its portfolio investments.
The overall management of the Trust is vested in the Board. The Board
approves all significant agreements between the Trust and persons or companies furnishing services to it, including the Trust’s
agreements with its Investment Adviser, Custodian, any foreign sub-custodians, Registrar and Transfer Agent. The management of the day-to-day
operations of the Trust is delegated to its officers and to the Investment Adviser, subject always to the investment objective and policies
of the Trust and to general supervision by the Board.
In addition, the Declaration of Trust requires the affirmative vote or
consent of the holders of 75% of the Shares of the Trust to authorize certain transactions with a person or entity that is directly, or
indirectly through affiliates, the beneficial owner of 5% or more of the outstanding Shares of the Trust unless the Board takes certain
actions to approve such a transaction. These provisions could make it more difficult to change the management of the Trust and could have
the effect of depriving Shareholders of an opportunity to sell their Shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Trust in a tender offer or similar transaction.
Preferred Shares
The Declaration of Trust provides that the Trust has the power to issue
additional Shares by action of the Board without the approval of the holders of the Trust’s common Shareholders. This power may
be deemed to include the issuance of Preferred Shares with such rights and privileges as may be determined by the Board.
The Trust may elect to issue Preferred Shares as part of its leverage
strategy though it does not currently intend to do so. The Trust has the ability to issue Preferred Shares representing up to 50% of the
Trust’s total assets (less the Trust’s obligations under senior securities representing indebtedness). The Investment Company
Act permits the issuance of Preferred Shares if, immediately after such issuance, the liquidation value of the Trust’s outstanding
Preferred Shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the
value of the Trust’s assets must be at least 200% of the liquidation value of its outstanding Preferred Shares). In addition, the
Trust would not be permitted to declare any cash dividend or other distribution on its Shares unless, at the time of such declaration,
the value of the Trust’s assets less liabilities other than borrowings is at least 200% of such liquidation value. Notwithstanding
the Investment Company Act requirement listed above with respect to asset coverage of any Preferred Shares, if Preferred Shares are issued,
the Trust intends to maintain an asset coverage ratio of at least 300%. Although the terms of any Preferred Shares, including dividend
rate, liquidation preference and redemption provisions, would be determined by the Board, subject to applicable law and the Declaration
of Trust, it is likely that the Preferred Shares would be structured to carry a relatively short-term dividend rate reflecting interest
rates on short-term bonds, by providing for the periodic redetermination of the dividend rate at relatively short intervals through an
auction, remarketing or other procedure. The Trust also believes that it is likely that the liquidation preference, voting rights and
redemption provisions of any Preferred Shares would be similar to those stated below.
Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust, the holders of Preferred Shares would
be entitled to receive a preferential liquidating distribution, which would be expected to equal the original purchase price per Preferred
Share plus accrued and unpaid dividends, whether or not declared, before any distribution of assets is made to common shareholders. After
payment of the full amount of the liquidating distribution to which they are entitled, the holders of Preferred Shares would not be entitled
to any further participation in any distribution of assets by the Trust.
Voting Rights.
The Investment Company Act requires that the holders of any Preferred Shares, voting separately as a single class, have the right to elect
at least two Trustees at all times. The remaining Trustees would be elected by holders of Shares and Preferred Shares, voting together
as a single class. In addition, subject to the prior rights, if any, of the holders of any other class of senior securities outstanding,
the holders of any Preferred Shares have the right to elect a majority of the Trustees of the Trust at any time in the event that two
years of dividends on any Preferred Shares are unpaid. The Investment Company Act also requires that, in addition to any approval by shareholders
that might otherwise be required, the approval of the holders of a majority of any outstanding
Preferred Shares, voting separately as a class, would be required to:
(i) adopt any plan of reorganization that would adversely affect the Preferred Shares; and (ii) take any action requiring a
vote of security holders under Section 13(a) of the Investment Company Act, including, among other things, changes in the Trust’s
subclassification as a closed-end investment company or changes in its fundamental investment restrictions. As a result of these voting
rights, the Trust’s ability to take any such actions may be impeded to the extent that there are any Preferred Shares outstanding.
The Board presently intends that, except as otherwise indicated in the Prospectus or the SAI and except as otherwise required by applicable
law or the Declaration of Trust, if Preferred Shares were issued, holders of Preferred Shares would have equal voting rights with common
shareholders (one vote per share, unless otherwise required by the Investment Company Act) and would vote together with common shareholders
as a single class.
The affirmative vote of the holders of a majority of the outstanding Preferred
Shares, voting as a separate class, would be required to amend, alter or repeal any of the preferences, rights or powers of holders of
Preferred Shares so as to affect materially and adversely such preferences, rights or powers, or to increase or decrease the authorized
number of Preferred Shares. The class vote of holders of Preferred Shares described above would in each case be in addition to any other
vote required to authorize the action in question.
Redemption, Purchase
and Sale of Preferred Shares by the Trust. The terms of any Preferred Shares issued
would be expected to provide that: (i) they are redeemable by the Trust in whole or in part at the original purchase price per share
plus accrued dividends per share; (ii) the Trust may tender for or purchase Preferred Shares; and (iii) the Trust may subsequently
resell any shares so tendered for or purchased. Any redemption or purchase of Preferred Shares by the Trust would reduce any leverage
applicable to the Shares, while any resale of shares by the Trust would increase that leverage.
The discussion above describes the possible offering of Preferred Shares
by the Trust. If the Board determines to proceed with such an offering, the terms of the Preferred Shares may be the same as, or different
from, the terms described above, subject to applicable law and the Trust’s Declaration of Trust. The Board, without the approval
of the common shareholders, may authorize an offering of Preferred Shares or may determine not to authorize such an offering, and may
fix the terms of the Preferred Shares to be offered. Shareholders will bear all expenses in connection with the offering and issuance
of Preferred Shares.
Repurchases of Shares and Tender Offers
The Trust is a closed-end management investment company and as such its
Shareholders do not, and will not, have the right to redeem their Shares of the Trust. The Trustees, however, intend to consider, from
time to time, but not less frequently than annually, the desirability of open market purchases or tender offers. Any such repurchases
will be made in accordance with the applicable provisions of the Investment Company Act and Massachusetts law in open market transactions.
Shares repurchased by the Trust will be held in its treasury. The share repurchase program is intended to enhance shareholder value and
potentially reduce the discount between the market price of the Trust’s shares and the Trust’s NAV. There is no assurance
that any action undertaken to repurchase Shares will result in the Shares trading at a price which approximates net asset value. Although
the Trust has no present intention of doing so, it reserves the right to incur debt to finance such repurchases or tender offers. Interest
on any borrowings to finance Share repurchase transactions will increase the Trust’s expenses and will reduce the Trust’s
net income. There can be no assurance that Share repurchases, if any, will cause the Shares to trade at a price equal to or in excess
of their net asset value. Nevertheless, the possibility that a portion of the Trust’s outstanding Shares may be the subject of repurchases
may reduce the spread between market price and net asset value that might otherwise exist. The Trust may not repurchase Shares except
(1) on a securities exchange and after notification to Shareholders of its intent to purchase Shares within the six months preceding
the purchase, (2) pursuant to a tender offer to all Shareholders, or (3) as otherwise permitted by the Commission.
The Shares of the Trust will trade in the open market at a price which
will be a function of several factors, including their supply, demand, investment performance and yield. The shares of closed-end investment
companies generally sell at market prices varying from their NAV and such shares frequently trade at a discount to NAV, but in some cases
trade at a premium. The market price of the Shares will be determined by factors including trading volume of
such Shares, general market and economic conditions and other factors
beyond the control of the Trust. Therefore, the Trust cannot predict whether its Shares will trade at, below or above NAV. When the Trust
repurchases its Shares for a price below their NAV, the NAV of those Shares that remain outstanding will increase, but this does not necessarily
mean that the market price of those outstanding Shares will be affected, either positively or negatively.
Conversion to Open-End Investment Company
Under the Declaration of Trust, the conversion of the Trust from a closed-end
to an open-end investment company would require (1) the approval of the Board, and (2) the affirmative vote or consent of the
holders of 75% of the Shares outstanding and entitled to vote. Such a vote would be in addition to any vote or consent required in addition
to the vote or consent of Shareholders otherwise required by law or any agreement between the Trust and the NYSE. The Investment Company
Act requires that the Trust receive a vote of a majority of its outstanding voting Shares in order to convert the Trust from a closed-end
to an open-end investment company.
The conversion of the Trust from a closed-end to an open-end investment
company would have to be approved by the Board prior to its submission to Shareholders. A proposal to convert the Trust to an open-end
company might be supported or opposed by the Board depending on the Board’s judgment as to its advisability in light of circumstances
prevailing at the time.
Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their NAV,
less such redemption charge, if any, as might be in effect at the time of a redemption. Conversion to an open-end investment company could
require the disposal of illiquid investments to meet current requirements of the Commission that no more than 15% of an open-end investment
company’s assets consist of illiquid securities, and would likely require involuntary liquidation of portfolio securities, and the
inherent realization of net long-term capital gains in connection therewith, to meet periodic requests for redemption. Moreover, Shares
of the Trust would no longer be listed on the NYSE.
INVESTMENT
ADVISER AND INVESTMENT ADVISORY AGREEMENT
Tekla Capital Management LLC, a limited liability company formed under
the laws of the State of Delaware, serves as the Investment Adviser to the Trust. The Investment Adviser is an investment adviser registered
under the Investment Advisers Act of 1940, as amended.
The Investment Adviser is located at 100 Federal Street, 19th Floor,
Boston, MA 02110.
The Investment Adviser is owned by Daniel R. Omstead and Mary N. Omstead.
Dr. Omstead is currently the President and Chief Executive Officer of the Investment Adviser. Mary N. Omstead is Dr. Omstead’s
wife.
The Investment Advisory Agreement between the Investment Adviser and the
Trust (the “Advisory Agreement”) provides that, subject to the supervision and direction of the Board, the Investment Adviser
is responsible for the actual management of the Trust’s portfolio. The Investment Adviser is also obligated to supervise or perform
certain administrative and management services for the Trust and is obligated to provide the office space, facilities, equipment and personnel
necessary to perform its duties under the Advisory Agreement. The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser. However, the Investment Adviser may consider investment analysis from various sources, including
broker-dealers with which the Trust does business. See “Portfolio Transactions and Brokerage.”
Subject to the supervision and direction of the Board, the Investment
Adviser manages the Trust’s portfolio in accordance with the Trust’s investment objective and policies as stated in the Prospectus;
makes investment decisions for the Trust; places purchase and sale orders for portfolio transactions for the Trust; supplies the Trust
with office facilities (which may be in the Investment Adviser’s own offices), statistical and research data, data processing services,
clerical, internal executive and administrative services, and stationery and office supplies; supplies or directs and supervises a third
party administrator or custodian in the provision to the Trust of accounting and bookkeeping services, the calculation of the net asset
value of shares of the Trust, internal auditing services, and other clerical services in connection therewith; and prepares or supervises
and directs a third party administrator or custodian in the preparation of reports to Shareholders of the Trust, tax returns and reports
to and filings with the Commission and state securities authorities. In providing these services, the Investment Adviser provides investment
research and supervision of the Trust’s investments and conducts a continual program of investment, evaluation and, if appropriate,
sale and reinvestment of the Trust’s assets. In addition, the Investment Adviser furnishes the Trust with whatever statistical information
the Trust may reasonably request with respect to the securities that the Trust may hold or contemplate purchasing.
For the services provided by the Investment Adviser under the Advisory
Agreement, the Trust will pay a fee, computed and payable monthly, equal when annualized to (1) 1.00% of the average daily value
of the Trust’s Managed Assets. “Managed Assets” means the total assets of the Trust (including any assets attributable
to borrowings for investment purposes) minus the sum of the Trust’s accrued liabilities (other than liabilities representing borrowings
for investment purposes).
The Advisory Agreement provides that the Investment Adviser shall not
be liable for any loss incurred by any act or omission of any broker. The Advisory Agreement also provides that the Investment Adviser
shall not be liable to the Trust or to any Shareholder of the Trust for any error or judgment or for any loss suffered by the Trust in
connection with rendering services under the Advisory Agreement except (1) a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act) or (2) a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Investment Adviser, or reckless disregard of its obligations and duties under the Advisory Agreement.
Subject to the foregoing, the Advisory Agreement also provides that the Trust shall indemnify the Investment Adviser, and any officer,
director and employee of the Investment Adviser to the maximum extent permitted by Article V of the Trust’s Declaration of
Trust.
For the fiscal years ended September 30, 2021, September 30,
2020 and September 30, 2019, the Trust paid the Adviser $6,283,994, $5,475,071 and $5,382,722, respectively, in advisory fees.
The services of the Investment Adviser to the Trust are not deemed to
be exclusive, and nothing in the Advisory Agreement prevents the Investment Adviser, or any affiliate thereof, from providing similar
services to other companies and other clients or from engaging in other activities.
Under the Advisory Agreement, the Investment Adviser has agreed to bear
all expenses in connection with the performance of its services under the Advisory Agreement, including compensation of and office space
for officers and employees of the Trust connected with investment and economic research, trading and investment management of the Trust,
as well as the fees of all Trustees of the
Trust who are “affiliated persons” of the Investment Adviser,
as that term is defined in the Investment Company Act, or any of its “affiliated persons.”
Under the Advisory Agreement, the Trust must pay (or, in the event that
such expenses are paid by the Investment Adviser, shall reimburse the Investment Adviser for) all other expenses incurred in the operation
of the Trust including, among other things, expenses for legal and auditing services, costs of printing proxy statements, prospectuses,
stock certificates and shareholder reports, charges of the custodian, any sub-custodian and transfer agent, expenses in connection with
the Dividend Reinvestment and Stock Purchase Plan, the Commission, and the Financial Regulatory Authority (“FINRA”) fees,
fees and expenses of the Trustees who are not “affiliated persons” of the Investment Adviser or any of its “affiliated
persons,” accounting and valuation costs, administrator’s fees, membership fees in trade associations, fidelity bond coverage
for the Trust’s officers and employees, errors and omissions insurance coverage for Trustees and officers, interest, brokerage costs,
taxes, stock exchange listing fees and expenses, expenses of qualifying the Trust’s Shares for sale in various states, expenses
associated with personnel performing exclusively shareholder servicing functions, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Trust.
Unless earlier terminated as described below, the Advisory Agreement will
remain in effect from year to year if approved annually (1) by the Board or by the holders of a majority of the Trust’s outstanding
Shares and (2) by the majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreement may be terminated without penalty by (1) the Trust or the Investment Adviser at any time without penalty upon
not less than 30 and no more than 60 days’ written notice or (2) a vote of the holders of a majority of the Trust’s outstanding
Shares, and will automatically terminate in the event of its assignment. Action by the Trust under (1) above may be taken either
by (i) vote of a majority of its Trustees, or (ii) the affirmative vote of a majority of the outstanding shares of the Trust.
Portfolio Management
Daniel R. Omstead, Ph.D., Jason C. Akus, M.D./M.B.A., Timothy Gasperoni,
M.B.A., Ph.D., Ashton L. Wilson, Christopher Abbott, Robert Benson, Richard Goss, Loretta Tse, Ph.D., Jack Liu, M.B.A., Ph.D., Christopher
Seitz, M.B.A., Graham Attipoe, M.B.A., M.D. and Kelly Girskis, Ph.D. are members of a team that analyzes investments on behalf of the
Trust. Dr. Omstead exercises ultimate decision making authority with respect to investments.
Other Accounts Managed
The information below lists other accounts for which the portfolio management
team was primarily responsible for the day to day management as of September 30, 2021.
Portfolio Managers Name |
|
Registered Investment Companies(1) |
|
Other Pooled Investment Vehicles(1) |
|
Other Accounts(1) |
Daniel R. Omstead, Ph.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Jason C. Akus, M.D./M.B.A |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Timothy Gasperoni, M.B.A., Ph.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Ashton L. Wilson |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Christopher Abbott |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Robert Benson |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Richard Goss |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Loretta Tse, Ph.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Jack Liu, M.B.A., Ph.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Christopher Seitz, M.B.A. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Graham Attipoe, M.B.A., M.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
Kelly Girskis, Ph.D. |
|
3 |
$2,657,706,608 |
|
0 |
$0 |
|
0 |
$0 |
__________
|
(1) |
None of the accounts managed by the portfolio managers are subject to a performance fee. |
Security Ownership of Portfolio Managers
As of September 30, 2021, the dollar range of Trust securities beneficially
owned by Dr. Omstead was over $100,000 and the dollar range of Trust securities beneficially owned by Dr. Gasperoni was $10,001
- $50,000. As of September 30, 2021, none of the other members of the team owned securities of the Trust.
Portfolio Manager Compensation Structure
The Investment Adviser offers employees what it believes are competitive
salaries and benefits in order to attract and retain adequate staff to provide services to the Trusts. The Investment Adviser feels the
current staff level is adequate in size, experience and qualifications to effectively manage both the public and restricted portfolios
of the Trust, HQH, HQL and THQ. The Investment Adviser further believes that the staff has the unique qualifications and experience to
be effective in making purchase and sale decisions.
Dr. Omstead is an owner of the Investment Adviser. He receives compensation
for his contribution to the portfolio management team and for his contribution to the general management of the Investment Adviser. As
a member of the Investment Adviser, Dr. Omstead also receives distributions made to members. Currently, such distributions are principally
the result of the investment advisory fees paid to the Investment Adviser by the Trust, HQH, HQL and THQ.
Conflicts of Interest
Actual or apparent conflicts of interest may arise when a portfolio manager
has day-to-day management responsibilities with respect to more than one fund or other accounts. More specifically, portfolio managers
who manage multiple funds are presented with the potential conflicts discussed below.
The management of multiple accounts may result in a portfolio manager
devoting unequal time and attention to the management of each account. The management of multiple funds and accounts also may give rise
to potential conflicts of interest if the funds and accounts have different objectives, benchmarks, time horizons, and fees as the portfolio
manager must allocate his time and investment ideas across multiple funds and accounts. Another potential conflict of interest may arise
where another account has the same investment objective as the Trust, whereby the portfolio manager could favor one account over another.
With respect to securities transactions for the Trust, the Adviser determines
which broker to use to execute each order, consistent with the duty to seek best execution of the transaction. A portfolio manager may
execute transactions for another fund or account that may adversely impact the value of securities held by the Trust. Securities selected
for funds or accounts other than the Trust may outperform the securities selected for the Trust. Further, a potential conflict could include
the portfolio managers’ knowledge about the size, timing and possible market impact of Trust trades, whereby they could use this
information to the advantage of other accounts and to the disadvantage of the Trust. These potential conflicts of interest could create
the appearance that a portfolio manager is favoring one investment vehicle over another.
The appearance of a conflict of interest may arise where the Adviser has
an incentive, such as a performance-based management fee. The management of personal accounts may give rise to potential conflicts of
interest; there is no assurance that the Trust’s Code of Ethics will adequately address such conflicts.
The Adviser and the Trust have each adopted a code of ethics that, among
other things, permits personal trading by employees (including trading in securities that can be purchased, sold or held by the Trust)
under conditions where it has been determined that such trades would not adversely impact client accounts. Nevertheless, the management
of personal accounts may give rise to potential conflicts of interest, and there is no assurance that these codes of ethics will adequately
address such conflicts. See “Code of Ethics” for more information.
PROXY
VOTING POLICY AND PROCEDURES
The Board has adopted a proxy voting policy and procedure (the “Proxy
Voting Policy”), pursuant to which the Trustees have delegated proxy voting responsibility to the Investment Adviser. A copy of
the Proxy Voting Policy is attached as Appendix A to this SAI.
A description of the Trust’s proxy voting policies and procedures
and information on how the Trust voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
is available (1) without charge, upon request, by calling the Trust at (617) 772-8500, and (2) on the Securities and Exchange
Commission’s website at http://www.sec.gov.
CODE
OF ETHICS
The Board has approved a joint Code of Ethics under Rule 17j-1 of
the Investment Company Act that covers certain personnel of the Trust and the Investment Adviser. The joint Code of Ethics establishes
procedures for personal investing and restricts certain transactions by certain personnel covered by the joint Code of Ethics. Employees
subject to the joint Code of Ethics may invest in securities for their personal investment accounts, including, in certain cases, securities
that may be purchased or held by the Trust. The joint Code of Ethics applies to investments by covered persons in their personal accounts,
the accounts of family members living in the same household, and accounts in which the covered person has a beneficial interest (i.e.,
ownership, voting or investment control). Some of the restrictions set forth in the joint Code of Ethics do not apply to the Trust’s
Independent Trustees. In general terms, the joint Code of Ethics is designed to ensure that the investing activities of covered personnel
are conducted in a manner that avoids potential or actual conflicts of interest with the Trust and its Shareholders and that covered personnel
conduct their personal investing in a manner consistent with their fiduciary duty towards the Trust and its Shareholders.
The joint Code of Ethics requires pre-clearance for certain investments
in equities (not including mutual funds), imposes reporting requirements, and imposes sanctions for violations. Specifically, among other
things, the joint Code of Ethics prohibits sales of securities to or purchases of securities from the Trust and prohibits the purchase
or sale of any security under consideration for trading by the Trust within seven days before or after the Trust trades in the security
The joint Code of Ethics is available on the EDGAR Database on the Commission
Internet site at www.sec.gov. You may obtain copies of the joint Code of Ethics, after
paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.
NET ASSET
VALUE
The NAV of the Trust’s Shares is calculated at the close of regular
trading on the NYSE (generally 4:00 p.m., Eastern time) every day that the NYSE is open. The Trust makes this information available daily
by telephone (800) 451-2597, via its web site www.teklacap.com). and through electronic
distribution for media publication, including major internet-based financial services web sites and portals (e.g., bloomberg.com,
yahoo.com, cbsmarketwatch.com, etc.). Currently, The Wall Street Journal, The New York Times and Barron’s publish NAVs
for closed-end investment companies periodically.
NAV is calculated by dividing the Trust’s total assets (the value
of the securities held by the Trust plus any cash or other assets, including interest and dividends earned but not yet received) minus
all liabilities (including accrued expenses, dividends payable and any borrowings of the Trust) by the total number of Shares outstanding
at such time. If any preferred shares are outstanding, net assets available for common shareholders are determined by deducting from net
assets the liquidation preference and any accrued dividends on the preferred shares.
Securities for which market quotations are readily available are valued
at market price. Portfolio securities that are traded on one or more U.S. national securities exchanges or in the over-the-counter market
that are National Market System securities are valued at the last sale price or, lacking any sales, at the mean between last bid and asked
prices or at the last sale price. Other over-the-counter securities are valued at the most recent bid prices as obtained from one or more
dealers that make markets in the securities. Redeemable securities issued by a registered open-end investment company are valued at net
asset value per share. Other securities are valued at the mean between the closing bid and asked prices. Short- term investments that
mature in 60 days or less are valued at amortized cost, unless the Board determines that such valuation does not constitute fair value.
Bonds, other than convertible bonds, are valued using a third-party pricing
system when such valuations are available. Convertible bonds are generally valued using this pricing system only on days when there is
no sale reported. Temporary cash investments with maturity of 60 days or less are valued at amortized cost. Puts and calls generally are
valued at the close of regular trading on the securities or commodities exchange on which they are primarily traded. Options on securities
generally are valued at their last bid price in the case of exchange-traded options or, in the case of OTC-traded options, the average
of the last bid price as obtained from two or more dealers unless there is only one dealer, in which case that dealer’s price is
used. Forward foreign currency contracts are generally valued on the basis of the value of the underlying currencies at the prevailing
currency exchange rates. The prevailing
currency exchange rate shall generally
be determined within one hour of when the most recently available exchange rate information has been received based on information obtained
from a bank or banks.
Securities that are primarily traded on foreign securities exchanges are
generally valued at the last sale price on the exchange on which they are primarily traded. Foreign securities that are primarily traded
on the foreign over-the-counter market are generally valued at the last sale quotation, if market quotations are available, or the last
reported bid price if there is no active trading in a particular security on a given day. However, if intervening events result in market
volatility that significantly affects the value of any such foreign securities after the close of trading on the relevant foreign market,
but before the Trust values its Shares on any particular day on which the Trust is required to value its Shares, the Trust may, but is
not required to, determine the value of such securities at “fair value,” as determined in good faith by or under the direction
of the Board.
Quotations of foreign securities in foreign currencies are converted,
at current exchange rates, to their U.S. dollar equivalents in order to determine their current value. In addition, to the extent that
the Trust values its foreign securities (other than ADR and American Depositary Shares (“ADS”)) as of the close of trading
on various exchanges and over-the-counter markets throughout the world, the calculation of the Trust’s net asset value may not take
place contemporaneously with the valuation of foreign securities held by the Trust.
The value of any security or other asset for which market quotations are
not readily available shall be determined in a manner that most fairly reflects the security’s (or asset’s) “fair value,”
which is the amount that the Trust might reasonably expect to receive for the security (or asset) upon its current sale. Each such determination
is based on a consideration of all relevant factors, which are likely to vary from one pricing context to another. Examples of such factors
may include, but are not limited to: (1) the type of the security; (2) the size of the holding (including percent of outstanding
securities of issuer held by the Trust); (3) the initial cost of the security; (4) the existence of any contractual restrictions
on the security’s disposition and the time to freedom from such restrictions; (5) the price and extent of public trading in
similar securities of the issuer or of comparable companies; (6) quotations or prices from broker-dealers and/or pricing services;
(7) information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); (8) an
analysis of the company’s financial statements; (9) an evaluation of the forces that influence the issuer and the market(s) in
which the security is purchased and sold (e.g., the existence of pending merger activity, public offerings or tender offers that might
affect the value of the security); and (10) the price of securities in a subsequent round of financing of an issuer in an arm’s-length
transaction, if the round includes a new third party investor.
Sometimes a “significant valuation event” may cause the market
value of a security to differ from the fair market value of that security. A “significant valuation event” is an event that
causes or is likely to cause a market quotation to be unavailable or unreliable, and may include: situations relating to a single issue
in a market sector; significant fluctuations in U.S. or foreign markets; market disruptions or closings caused by human error, equipment
failures, natural disasters, armed conflicts, acts of God, governmental actions or other developments, as well as the same or similar
events which may affect specific issues or the securities markets even though not tied directly to the securities markets. A significant
valuation event occurring after the close of trading but before the time of valuation may mean that the closing price for the security
does not constitute a readily available market quotation. If a significant valuation event has occurred, the security will be valued at
fair value as determined in good faith by the Board in accordance with the procedures described above. Such valuations and procedures
will be reviewed periodically by the Board.
The Trust shall value an investment in a private placement or in a private
company at cost. The valuation of an investment in a private placement or in a private company will be adjusted to reflect its fair valuation,
as internal and external events are deemed to have a known or likely impact on the financial condition or market value of the investment.
Internal or external factors affecting the fair valuation may include items such as a subsequent financing round, a material deviation
from the business plan, or a change in market conditions that may impair the company’s ability to meet its capital requirements.
If a subsequent round of financing includes a new third-party investor in an arms-length transaction, then the securities shall be marked
up or down to the value used in that financing round. Equity investments in exchange for marketing or development rights do not constitute
arms-length transactions. Venture investments that have an initial public offering shall be generally valued at a discount to the public
market value of the securities. The discount in each case is determined by appraisal, considering such factors as market liquidity, time
to freedom from restrictions, fundamental outlook for the company and such other factors as are enumerated above that are deemed to be
relevant. Private placements in public companies are similarly priced at a discount to the public market generally until the restrictions
on sale of the security expire.
Other assets, which include cash, prepaid and accrued items, accounts
receivable and income on investments and from the sale of portfolio securities, are carried in accordance with generally accepted accounting
principles, as are all liabilities. Liabilities primarily include accrued expenses, sums owed for securities purchased and dividends payable.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board, the Investment Adviser is
primarily responsible for the execution of the Trust’s portfolio transactions and the allocation of brokerage. In executing transactions
for the portfolio and selecting brokers or dealers (which brokers or dealers may include any affiliate of the Investment Adviser to the
extent permitted by the Investment Company Act), the Investment Adviser will use its best efforts to obtain the best price and execution
for the Trust. In assessing the best price and execution available for any portfolio transaction, the Investment Adviser will consider
all factors it deems relevant including, but not limited to, price (including any applicable brokerage commission or dealer spread), size
of order, difficulty of execution, and operational facilities of the firm involved and the firm’s risk in positioning a block of
securities. The Investment Adviser may cause the Trust to pay a broker-dealer that furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that the Investment
Adviser determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided
by such broker-dealer, viewed in terms of either the particular transaction or the overall responsibilities of the Investment Adviser
to the Trust. In selecting brokers or dealers to execute a particular transaction and in evaluating the best price and execution available,
the Investment Adviser may consider the brokerage and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided to the Trust and/or other accounts over which the Investment Adviser exercises investment
discretion. Such brokerage and research services might consist of reports and statistics on specific companies or industries, general
summaries of groups of bonds and their comparative earnings and yields, or broad overviews of the securities markets and the economy.
It is further understood that such services may be useful to the Investment Adviser in connection with its services to other clients.
While the Investment Adviser generally seeks reasonably competitive commission rates, the Trust will not necessarily pay the lowest commission
available.
The Trust has no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. Brokers who provide supplemental research, market and statistical information to the
Investment Adviser may receive orders for transactions by the Trust. The term “research, market and statistical information”
includes advice as to the value of securities, the advisability of purchasing or selling securities and the availability of securities
or purchasers or sellers of securities, and furnishing analyses and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and the performance of accounts. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the Advisory Agreement and the expenses of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental information. Such information may be useful to the Investment
Adviser in providing services to clients other than the Trust, and not all such information may be used by the Investment Adviser in connection
with the Trust. Conversely, such information provided to the Investment Adviser by brokers and dealers through whom other clients of the
Investment Adviser in the future may effect securities transactions may be useful to the Investment Adviser in providing services to the
Trust. To the extent the Investment Adviser receives valuable research, market and statistical information from a broker-dealer, the Investment
Adviser intends to direct orders for Trust transactions to that broker-dealer, subject to the foregoing policies, regulatory constraints
and the ability of broker dealers to provide competitive prices and commission rates.
The Investment Company Act restricts transactions involving the Trust
and its “affiliates,” including among others, the Trust’s Trustees, officers and employees, the Investment Adviser and
any “affiliates” of such affiliates. Subject to any such restrictions, investment companies advised by the Investment Adviser
may concurrently invest with the Trust in Restricted Securities, and the Trust may also invest in companies in which directors of the
Investment Adviser or Trustees of the Trust have invested or for which they serve as directors or executive officers. A substantial portion
of the securities in which the Trust may invest are traded in the over-the-counter markets, and the Trust intends to deal directly with
the dealers who make markets in the securities involved, except as limited by applicable law and in those circumstances where better prices
and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Trust are generally prohibited from
dealing as principal with the Trust in the purchase and sale of securities. Under certain circumstances, affiliated persons of the Trust
are permitted to serve as its broker in over-the-counter transactions conducted on an agency basis.
It is likely that, subject to applicable law, the Trust may invest in
securities concurrently being purchased by other investment companies advised by the Investment Adviser. Such purchases would be made
on terms no less favorable than those under which such investment companies would be acquiring the securities. In the case of concurrent
purchases by the Trust and another investment company or companies managed by the Investment Adviser, such purchases would be made where
the Investment Adviser has made an independent decision on behalf of the Trust and such other company that the purchase is appropriate
in light of the investment objectives, policies, restrictions, current holdings, available cash and portfolio structure of and other factors
affecting each. Such investments will be allocated among clients in a manner believed by the Investment Adviser to be equitable to each.
The Trust may
also from time to time invest in securities of companies in which affiliated
persons of the Trust have invested, subject to the provisions of the Investment Company Act and the rules and regulations promulgated
thereunder.
The Trust’s portfolio transactions in Restricted Securities are
generally subject to Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, if the Trust has
beneficially owned Restricted Securities of a publicly held issuer for a minimum of six months, it will be entitled to sell in any three-month
period that number of such securities that will not exceed the greater of 1% of the then outstanding securities of that class or the average
weekly trading volume in securities of that class in any national securities exchange and/or in the over-the-counter market during the
four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. These volume limitations
also apply to sales by the Trust of the securities of any issuer as to which it is deemed an affiliate, regardless of whether securities
of such issuer are publicly traded. The above-described sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about the issuer. If the Trust is not deemed to have been an affiliate
of the issuer at any time during the 90 days immediately preceding the sale and has beneficially owned Restricted Securities for at least
one year, it is entitled to sell such securities under Rule 144(k) without regard to whether the issuer is publicly-held or
to the volume limitations or other requirements described above. When Restricted Securities are sold to the public other than pursuant
to Rule 144 or 144A, the Trust may be deemed an “underwriter” with respect thereto for purposes of the Securities Act
and subject to liability as such thereunder.
On occasions when the Investment Adviser deems the purchase or sale of
a security to be in the best interest of the Trust as well as other clients, the Investment Adviser, to the extent permitted by applicable
laws and regulations, may, but shall be under no obligation to, aggregate the securities to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be
the most equitable and consistent with its fiduciary obligations to the Trust and to such other clients.
Allocation of transactions, including their frequency, to various broker-dealers
is determined by the Investment Adviser with respect to the Trust, based on their best judgment and in a manner deemed fair and reasonable
to Shareholders. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Certain investments
may be appropriate for the Trust and also for other clients advised by the Investment Adviser. Investment decisions for the Trust and
for other investment accounts managed by the Investment Adviser are made independently of each other in the light of differing conditions.
However, the same investment decision may be made for two or more of such accounts. When a purchase or sale of the same security is made
at substantially the same time on behalf of the Trust and one or more other accounts, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner the Investment Adviser believes to be equitable to each such account. Although
the Investment Adviser seeks the most favorable overall net results for all of the accounts in any aggregated transaction, in some cases,
this practice may adversely affect the price paid or received by the Trust or the size of the position obtained or sold by the Trust.
To the extent permitted by law, the Investment Adviser may aggregate the securities to be sold or purchase for the Trust with those to
be sold or purchased for other investment companies or accounts in order to obtain best execution.
For the fiscal years ended September 30, 2021, September 30,
2020 and September 30, 2019, the Trust paid $251,449, $220,597 and $300,459, respectively, of brokerage commissions.
As stated in the Prospectus, the Trust’s portfolio turnover rate
for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019 was 69.37%, 48.11% and 55.17%,
respectively. For a description of the Trust’s portfolio turnover policies, see “Portfolio Transactions and Brokerage”
in the Prospectus.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax considerations
generally affecting the Trust and its Shareholders. The discussion is based on laws, regulations, rulings and decisions currently in effect,
all of which are subject to change (possibly with retroactive effect) or different interpretations. No attempt is made to present a detailed
explanation of the tax treatment of the Trust or its Shareholders, and the following discussion is not intended as a substitute for careful
tax planning. Shareholders should consult with their own tax advisers regarding the specific federal, state, local, foreign and other
tax consequences of investing in the Trust.
Taxation of the Trust
The Trust intends to qualify and has elected to be treated in each of
its taxable years as a regulated investment company (“RIC”) under the Code. As a RIC, the Trust generally will not be required
to pay U.S. federal income taxes on any ordinary income or capital gains that the Trust distributes to its Shareholders. To qualify as
a RIC and maintain RIC status, the Trust must meet specific source-of-income and asset diversification requirements and must generally
distribute an amount at least equal to the sum of 90% of its investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital losses), but determined without regard to the deduction for
dividends paid) plus 90% of any net tax-exempt income for the Trust’s taxable year. If, in any year, the Trust fails to qualify
as a RIC under U.S. federal income tax laws, the Trust would be taxed as an ordinary corporation. In such circumstances, the Trust could
be required to recognize unrealized gains, pay substantial taxes and make substantial distributions before re-qualifying as a RIC that
is accorded special tax treatment.
To qualify as a RIC, the Trust must, among other things, (a) derive
in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, net income derived from an interest in a qualified publicly
traded partnership and other income derived with respect to its business of investing in such stock, securities or currencies (the “Qualifying
Income Requirement”); (b) diversify its holdings so that, at the end of each quarter of the taxable year, (1) at least
50% of the market value of the Trust’s assets is represented by cash and cash items, U.S. Government Securities, the securities
of other RICs and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount
not greater than 5% of the value of the Trust’s total assets and not greater than 10% of the outstanding voting securities of such
issuer, and (2) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S.
Government Securities or the securities of other RICs); and (c) distribute at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) each
taxable year. The U.S. Treasury Department has authority to promulgate regulations pursuant to which gains from foreign currency (and
options, futures and forward contracts on foreign currency) not directly related to a RIC’s business of investing in stocks and
securities would not be treated as qualifying income for purposes of the Qualifying Income Requirement. To date, such regulations have
not been promulgated.
If for any taxable year the Trust were to fail to qualify as a RIC, all
of the Trust’s taxable income would be subject to federal income tax at the rates applicable to corporations (with no deduction
for distributions to Shareholders), and Trust distributions would be taxable to Shareholders as dividends to the extent of the Trust’s
earnings and profits.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To avoid the excise tax, the Trust must generally distribute
during each calendar year an amount at least equal to the sum of (1) 98% of its ordinary income (taking into account certain deferrals
and elections) for the calendar year, (2) 98.2% of its capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the one-year period ending on October 31 of the calendar year, and (3) all ordinary income and capital gains for
previous years that were not distributed during such years. To avoid application of the excise tax, the Trust intends to make its distributions
in accordance with the calendar year distribution requirement. A dividend will be treated as paid on December 31 of the calendar
year if it is declared by the Trust in October, November or December of the year, payable to Shareholders of record on a date
in such a month and paid by the Trust during January of the following year. Such dividends will be taxable to Shareholders as of
December 31 of the calendar year in which the dividends are declared, rather than during the calendar year in which the dividends
are received. If the Trust elects to retain net capital gains and treat such gains as having been distributed, all or a portion of such
gains may not be treated as having been timely distributed for purposes of satisfying the excise tax calendar year distribution requirement.
If the Trust utilizes leverage through the issuance of Preferred Shares
or borrowings, it will be prohibited from declaring a distribution or dividend if it would fail the applicable asset coverage test(s) under
the 1940 Act after the payment of such distribution or dividend. In addition, certain covenants in credit facilities or indentures may
impose greater restrictions on the Trust’s ability to declare and pay dividends on Shares. Limits on the Trust’s ability to
pay dividends on Shares may prevent the Trust from meeting the distribution requirements described above and, as a result, may affect
the Trust’s ability to be subject to tax as a RIC or subject the Trust to the 4% excise tax. If the Trust is precluded from making
distributions on Shares because of any applicable asset coverage requirements, the terms of Preferred Shares (if any) may provide that
any amounts so precluded from being distributed, but required to be distributed by the Trust to enable the Trust to satisfy the distribution
requirements that would enable the Trust to be subject to tax as a RIC, will be paid to the holders of Preferred Shares as a special distribution.
This distribution can be expected to decrease the amount that holders of Preferred Shares would be entitled to receive upon redemption
or liquidation of such Preferred Shares.
Distributions
Dividends paid from investment company taxable income as calculated for
federal income tax purposes generally will be taxable to Shareholders as ordinary income whether paid in cash or reinvested in the Trust’s
Shares. The Trust intends to distribute to its Shareholders substantially all of its investment company taxable income, if any, for each
year. It is anticipated that the Trust’s income distributions will be paid monthly in cash.
A portion of the dividends received by non-corporate Shareholders may
be treated as “qualified dividend income” which is taxable to individuals at the same rates that are applicable to long-term
capital gains. A Trust distribution is treated as qualified dividend income to the extent that the Trust receives dividend income from
taxable domestic corporations and certain qualified foreign corporations, provided that certain holding period and other requirements
are met. Holding periods may be affected by certain of the Trust’s transactions in options (including covered call options) and
other derivatives. Trust distributions generally will not qualify as qualified dividend income to the extent attributable to interest,
capital gains, REITs distributions and distributions from certain non-U.S. corporations.
Distributions of the excess, if any, of net long-term capital gains over
net short-term capital losses (“net capital gains”) reported by the Trust as capital gain dividends will be taxable to Shareholders
as long-term capital gains, whether paid in cash or reinvested in the Trust’s Shares, regardless of how long the Shareholders have
held the Trust’s Shares, and will not be eligible for the dividends received deduction for corporations. The Trust may elect to
retain net capital gains. In such event, the Trust will be required to pay federal income taxes on the undistributed net capital gains,
but intends to elect to treat such capital gains as having been distributed to Shareholders. As a result, such amounts will be included
in the gross income of the Shareholders as long-term capital gains and Shareholders will be able to claim their proportionate share of
federal income taxes paid by the Trust on such gains as a credit against their own federal income tax liabilities, and will be entitled
to increase the adjusted tax basis of their Shares of the Trust by an amount equal to 65% of the amount of the undistributed capital gains
included in their gross income. Organizations or persons not subject to federal income tax on such capital gains (such as, generally,
qualified pension and profit-sharing funds, including Individual Retirement Accounts and Keogh plans, and certain trusts, nonresident
aliens and foreign corporations) will be entitled to a refund of their pro rata share of such taxes paid by the Trust upon filing appropriate
returns or claims for refund with the IRS. Even if the Trust makes such an election, it is possible that the Trust may incur an excise
tax as a result of not having distributed sufficient net capital gains.
A distribution of an amount in excess of the Trust’s current and
accumulated earnings and profits will be treated by a Shareholder as a return of capital which is applied against and reduces the Shareholder’s
basis in his or her Shares. To the extent that the amount of any such distribution exceeds the Shareholder’s basis in his or her
Shares, the excess will be treated by the Shareholder as gain from a sale or exchange of the Shares. The Trust has returned investor capital
over each of the past three years.
The price of Shares purchased at this time may reflect the amount of the
forthcoming distribution. Those purchasing just prior to a distribution of investment company taxable income or net capital gains will
receive a distribution which will nevertheless be taxable to them.
Dividends (not including capital gain dividends) received by corporate
Shareholders from the Trust qualify for the dividends received deduction for corporate Shareholders to the extent the Trust reports the
amount distributed as eligible for the deduction. The aggregate amount reported by the Trust cannot exceed the aggregate amount of dividends
received by the Trust from domestic corporations for the taxable year, and the reporting of dividend income must generally be the same
for all Shares. Thus, unless 100% of the Trust’s gross income constitutes qualified dividends, a portion of the dividends paid to
corporate Shareholders will not qualify for the dividends received deduction. The dividends received deduction for corporate Shareholders
may be further reduced if the Shares with respect to which dividends are received are treated as debt-financed or if either those Shares
or the Shares of the Trust are deemed to have been held by the Trust or its Shareholders, respectively, for less than 46 days.
Certain distributions reported by the Trust as Section 163(j) interest
dividends may be treated as interest income by Shareholders for purposes of the tax rules applicable to interest expense limitations
under Section 163(j) of the Code. Such treatment by Shareholders is generally subject to holding period requirements and other
potential limitations, although the holding period requirements are generally not applicable to dividends declared by money market funds
and certain other funds that declare dividends daily and pay such dividends on a monthly or more frequent basis. The amount that the Trust
is eligible to report as a Section 163(j) dividend for a tax year is generally limited to the excess of the Trust’s business
interest income over the sum of the Trust’s (i) business interest expense and (ii) other deductions properly allocable
to the Trust’s business interest income.
The IRS currently requires that a RIC that has two or more classes of
stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon
the percentage of total dividends paid to each class for the tax year. Accordingly, if the Trust issues Preferred Shares, the Trust intends
each year to allocate capital gain dividends, if any, between its Common Shares and Preferred Shares in proportion to the total dividends
paid to each class with respect to such tax year.
In addition to furnishing any other required tax statements, the Trust
intends to report in written notices to Shareholders regarding the tax status of all distributions made during such taxable year, the
amount qualifying for the dividends received deduction for corporations and the amount, if any, of undistributed net capital gains and
related tax credits.
Sale or Exchange of Shares
Generally, gain or loss realized upon the sale or exchange of Shares will
be capital gain or loss if the Shares are capital assets in the shareholder’s hands and generally will be long-term or short-term,
depending upon the Shareholder’s holding period for the Shares. Investors should be aware that any loss realized upon the sale or
exchange of Shares held for six months or less will be treated as a long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gain to the Shareholder with respect to such Shares. In addition, any loss realized on a sale or exchange
of Shares will be disallowed to the extent the Shares disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after the Shares are disposed of, such as pursuant to the Plan. In such case, the basis of Shares acquired will be adjusted
to reflect the disallowed loss.
Reporting of adjusted cost basis information is required for covered securities,
which generally include shares of a regulated investment company, to the IRS and to taxpayers. Shareholders should contact their financial
intermediaries with respect to reporting of cost basis and available elections for their accounts.
Investments of the Trust — General
The application of certain requirements for qualification as a RIC and
the application of certain other federal income tax rules may be unclear in some respects in connection with certain investments.
As a result, the Trust may be required to limit the extent to which it invests in such investments, and it is also possible that the IRS
may not agree with the Trust’s treatment of such investments. In addition, the tax treatment of certain investments may be affected
by future legislation, Treasury regulations and guidance issued by the IRS (which could apply retroactively) that could affect the timing,
character and amount of the Trust’s income and gains and distributions to shareholders, affect whether the Trust has made sufficient
distributions and otherwise satisfied the requirements to maintain its qualification as a RIC and avoid federal
income and excise taxes or limit the extent to which the Trust may invest in certain investments in the future.
Certain of the Trust’s investment practices are subject to special
and complex federal income tax provisions that may, among other things, (1) convert distributions that would otherwise constitute
qualified dividend income into ordinary income taxed at the higher rate applicable to ordinary income; (2) treat distributions that
would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment; (3) disallow, suspend
or otherwise limit the allowance of certain losses or deductions; (4) convert long-term capital gain into short-term capital gain
or ordinary income; (5) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited); (6) cause
the Trust to recognize income or gain without a corresponding receipt of cash; (7) adversely affect the time as to when a purchase
or sale of stock or securities is deemed to occur; (8) adversely alter the characterization of certain complex financial transactions;
and (9) produce income that will not be included in the sources of income from which a RIC must derive at least 90% of its gross
income each year. While it may not always be successful in doing so, the Trust will seek to avoid or minimize any adverse tax consequences
of its investment practices.
Passive Foreign Investment Companies
The Trust may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies (“PFICs”). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets produce passive income, or 75% or more of its gross income is passive income. If the Trust receives
a so-called “excess distribution” with respect to PFIC stock, the Trust itself may be subject to a tax on a portion of the
excess distribution, whether or not the corresponding income is distributed by the Trust to Shareholders. In general, under the PFIC rules,
an excess distribution is treated as having been realized ratably over the period during which the Trust held the PFIC shares. The Trust
itself will be subject to tax on the portion, if any, of an excess distribution that is so allocated to prior Trust taxable years and
an interest factor will be added to the tax, as if the tax had been payable in such prior taxable years. Gain from the sale of PFIC shares
is treated in the same manner as an excess distribution. Excess
distributions and gain from the sale of PFIC shares are characterized
as ordinary income even though, absent application of the PFIC rules, such gains and certain excess distributions might have been classified
as capital gain.
The Trust may elect to mark to market any PFIC shares in lieu of being
subject to U.S. federal income taxation. At the end of each taxable year to which the election relates, the Trust would report as ordinary
income the amount by which the fair market value of the PFIC stock exceeds the Trust’s adjusted basis in the stock. Any mark-to-market
losses and any loss from an actual disposition of shares would be deductible as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years. The effect of the election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a Trust-level tax when distributed to Shareholders as a dividend. Alternatively, the Trust may
elect to include as income and gain its share of the ordinary earnings and net capital gain of certain PFICs in lieu of being taxed in
the manner described above.
Currency Fluctuations — “Section 988” Gains
or Losses
Under the Code, the gains or losses attributable to fluctuations in exchange
rates which occur between the time the Trust accrues receivables or liabilities denominated in a foreign currency and the time the Trust
actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition
of foreign currency or debt securities denominated in a foreign currency and on disposition of certain futures and forward contracts,
gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the currency, security
or contract and the date of disposition also are treated as ordinary gain or loss. These gains or losses, referred to under the Code as
“Section 988” gains or losses, may increase or decrease the amount of the Trust’s investment company taxable income
to be distributed to its Shareholders as ordinary income.
Hedging Transactions
Certain futures, foreign currency contracts and options in which the Trust
may invest are “section 1256 contracts.” While gains or losses on section 1256 contracts are considered 60% long-term and
40% short-term capital gains or losses, certain foreign currency futures and foreign currency contracts may give rise to ordinary income
or loss, as described above. Also, section 1256 contracts held by the Trust at the end of each taxable year (and, generally, for purposes
of the 4% excise tax, on October 31 of each year) are “marked-to-market” with the result that unrealized gains or losses
are treated as though they were realized.
Generally, the hedging transactions undertaken by the Trust (including
certain covered call options) may result in “straddles” for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Trust. In addition, losses realized by the Trust on positions that are part
of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the
taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated,
the tax consequences to the Trust of engaging in hedging transactions are not entirely clear.
The Trust may make one or more of the elections available under the Code
which are applicable to straddles. If the Trust makes any of the elections, the amount, character and timing of the recognition of gains
or losses from the affected straddle positions will be determined under the rules that vary according to the election(s) made.
The rules applicable under certain of the elections may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Notwithstanding any of the foregoing, the Trust may recognize gain (but
not loss) from a constructive sale of certain “appreciated financial positions” if the Trust enters into a short sale, offsetting
notional principal contract, futures or forward contract transaction with respect to the appreciated position or substantially identical
property. Appreciated financial positions subject to this constructive sale treatment are interests (including options, futures and forward
contracts and short sales) in stock, partnership interests, certain actively traded trust instruments and certain debt instruments. Constructive
sale treatment does not apply to certain transactions closed before the end of the thirtieth day after the close of the taxable year,
if certain conditions are met.
High Yield Debt Investments
Investments in debt obligations that are at risk of or in default present
tax issues for the Trust. Tax rules are not entirely clear about issues such as whether and to what extent the Trust should recognize
market discount on a debt obligation, when the Trust may cease to accrue interest, original issue discount or market discount, when and
to what extent the Trust may take deductions for bad debts or worthless securities and how the Trust should allocate payments received
on obligations in default between principal and income.
These and other related issues will be addressed by the Trust in order
to ensure that it distributes sufficient income to preserve its status as a RIC.
REITs
The Trust may invest in REITs. Investments in REIT equity securities may
require the Trust to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions,
the Trust may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would
have continued to hold. The Trust’s investments in REIT equity securities may at other times result in the Trust’s receipt
of cash in excess of the REIT’s earnings; if the Trust distributes such amounts, such distribution could constitute a return of
capital to Trust shareholders for federal income tax purposes. Dividends received by the Trust from a REIT generally will not constitute
qualified dividend income.
Under applicable Treasury regulations, properly reported dividends paid
by the Trust that are attributable to the Trust’s “qualified REIT dividends” (generally, ordinary income dividends paid
by a REIT, not including capital gain dividends or dividends treated as qualified dividend income) may be eligible for the 20% deduction
described in Section 199A of the Code in the case of non-corporate U.S. Shareholders, provided that certain holding period and other
requirements are met by the Shareholder and the Trust. There can be no assurance as to what portion of the Trust’s distributions
will qualify for such deduction.
Foreign Withholding Taxes
Income received by the Trust from non-U.S. sources may be subject to withholding
and other taxes imposed by other countries. Because it is not expected that more than 50% of the value of the Trust’s total assets
at the close of its taxable year will consist of stock and securities of non-U.S. corporations, it is not expected that the Trust will
be eligible to elect to “pass-through” to the Trust’s Shareholders the amount of foreign income and similar taxes paid
by the Trust. In the absence of such an election, the foreign taxes paid by the Trust will reduce its investment company taxable income,
and distributions of investment company taxable income received by the Trust from non-U.S. sources will be treated as U.S. source income.
Medicare Tax
A Shareholder that is an individual or estate, or a trust that does not
fall into a special class of trusts that is exempt from such tax, will generally be subject to a 3.8% tax on the lesser of (i) the
Shareholder’s “net investment income” (or “undistributed net investment income” for an estate or trust)
for a taxable year and (ii) the excess of the Shareholder’s modified adjusted gross income for such taxable year, over a certain
threshold, which for individuals is $200,000 in the case of single filers ($250,000 in the case of joint filers). For these purposes,
“net investment income” will generally include taxable distributions and deemed distributions paid with respect to Shares
and net gain attributable to the disposition of Shares (in each case, unless such Shares are held in connection with certain trades or
businesses), but will be reduced by any deductions properly allocable to such distributions or net gain.
Tax Shelter Reporting Regulations
Under applicable Treasury regulations, if a Shareholder recognizes a loss
with respect to Shares of $2 million or more for a non-corporate Shareholder or $10 million or more for a corporate Shareholder in any
single taxable year (or a greater loss over a combination of years), the Shareholder must file with the IRS a disclosure statement on
Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but, under current
guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to
shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting
requirement. States may also have a similar reporting requirement. Shareholder should consult their own tax advisers to determine the
applicability of these Treasury regulations in light of their individual circumstances.
Backup Withholding
The Trust (or applicable withholding agent) may be required to withhold
U.S. federal income tax at the rate of 24% of all taxable distributions payable to Shareholders who fail to provide the Trust with their
correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject
to backup withholding. Backup withholding is not
an additional tax. Any amounts withheld may be credited against a shareholder’s
U.S. federal income tax liability. Certain persons are exempt from the backup withholding requirements. Questions relating to backup withholding
should be directed to your tax adviser.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the U.S., is a non-resident
alien individual, a foreign trust or estate, a foreign corporation or foreign partnership (“Foreign Shareholder”) depends
on whether the income from the Trust is “effectively connected” with a U.S. trade or business carried on by such shareholder.
As a RIC is a corporation for U.S. federal income tax purposes, its business
activities generally will not be attributed to its shareholders for purposes of determining their treatment under current law. Therefore,
a foreign shareholder should not be considered to earn income “effectively connected” with a U.S. trade or business solely
as a result of activities conducted by the Fund.
If the income from the Trust is not “effectively connected”
with a U.S. trade or business carried on by the Foreign Shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions.
Distributions of capital gain dividends and amounts retained by the Trust
which are designated as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the
Foreign Shareholder is a non-resident alien individual and is physically present in the U.S. for more than 182 days during the taxable
year and meets certain other requirements. However, this 30% tax on capital gains of non-resident alien individuals who are physically
present in the U.S. for more than the 182-day period only applies in exceptional cases, because any individual present in the U.S. for
more than 182 days during the taxable year is generally treated as a resident for U.S. federal income tax purposes; in that case, he or
she would be subject to U.S. federal income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. tax. In the case of a Foreign Shareholder who is a nonresident alien individual, the Trust may be required to withhold
U.S. federal income tax at a rate of 24% of distributions of net capital gains unless the Foreign Shareholder certifies his or her non-U.S.
status under penalties of perjury or otherwise establishes an exemption. See “Backup Withholding” above. If a Foreign Shareholder
is a non-resident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder’s Shares of
the Trust in the U.S. will ordinarily be exempt from U.S. tax unless such shareholder is physically present in the U.S. for more than
182 days during the taxable year and meets certain other requirements.
Two categories of dividends, however, “short-term capital gain dividends”
and “interest-related dividends,” if reported by the Trust in writing to its shareholders, will be exempt from that tax. “Short-term
capital gain dividends” are dividends that are attributable to net short-term capital gain, computed with certain adjustments. “Interest-related
dividends” are dividends that are attributable to “qualified net interest income” (i.e., “qualified interest income,”
which generally consists of certain original issue discount, interest on obligations “in registered form,” and interest on
deposits, less allocable deductions) from sources within the United States. Depending on the circumstances, the Trust may report all,
some or none of the Trust’s potentially eligible dividends as eligible for exemption from withholding tax, and a portion of the
Trust’s distributions (e.g. interest and dividends from non-U.S. sources or any non-U.S. currency gains) would be ineligible for
such exemption. In the case of shares held through an intermediary, the intermediary may withhold on a payment even if the Trust reports
the payment as eligible for the exemption from withholding. In order to qualify for this exemption from withholding, a non-U.S. shareholder
must have provided appropriate withholding certificates (e.g., an executed W-8BEN, etc.) certifying foreign status.
If the income from the Trust is “effectively connected” with
a U.S. trade or business carried on by a Foreign Shareholder, then distributions of investment company taxable income and capital gain
dividends, amounts retained by the Trust which are designated as undistributed capital gains and any gains realized upon the sale or exchange
of Shares of the Trust will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic
corporations. Such Foreign Shareholders that are corporations may also be subject to the branch profits tax imposed by the Code.
Withholding of U.S. tax is required (at a 30% rate) on payments of taxable
dividends paid to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements
designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide
additional information to enable the applicable withholding agent to determine whether withholding is required.
The tax consequences to a Foreign Shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein. Foreign Shareholders may also be subject to U.S. estate tax
with respect to their Trust shares. Foreign Shareholders are advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in the Trust.
Other Taxes
Distributions may also be subject to state, local and foreign taxes and/or
the alternative minimum tax depending on each Shareholder’s particular situation. Shareholders should consult their own tax advisers
with respect to their particular situation.
ADMINISTRATOR,
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Trust’s securities and cash are held under a custodian contract
by State Street Bank and Trust Company (the “Custodian”), whose principal business address is One Lincoln Street, Boston,
MA 02111. Rules adopted under the Investment Company Act permit the Trust to maintain its securities and cash in the custody of certain
eligible banks and securities depositories. Pursuant to those Rules, the Trust’s portfolio of securities and cash, when invested
in
Foreign Securities, will be held by sub-custodians who have been approved
by the Board in accordance with the rules and regulations of the Commission following consideration of a number of factors, including,
but not limited to, the relationship of the institution with the Custodian, the reliability and financial stability of the institution,
the ability of the institution to perform capably custodial services for the Trust, the reputation of the institution in its national
market, the political and economic stability of the countries in which the sub-custodians will be located and the risks of potential nationalization
or expropriation of Trust assets. The Custodian also performs certain accounting related functions for the Trust, including calculation
of NAV and net income.
State Street Bank and Trust Company (the “Administrator”)
also serves as administrator to the Trust pursuant to an Administration Agreement. Under the Administration Agreement the Trust’s
assets are combined with assets of HQH, HQL and THW. The combined assets are charged a fee computed and payable monthly at an annual rate
of (i) 3.4% of the first $150 million; (ii) 2.4% of the next $150 million; and (iii) 1.4% on assets in excess of $300 million,
subject to annual minimum fee of $77,500. The Administrative Agreement covers administrative costs, including out-of-pocket expenses incurred
in the ordinary course of providing services under the Administration Agreement.
Computershare Inc. serves as Dividend Disbursing Agent for the Trust.
Computershare Trust Company, N.A., a fully owned subsidiary of Computershare Inc., serves as (1) the Plan Agent for the Trust’s
Dividend Reinvestment Plan and (2) the Transfer Agent and Registrar for Shares of the Trust. Computershare Trust Company, N.A. and
Computershare Inc. have their principal business at 150 Royall Street, Canton, MA 02021.
INCORPORATION
BY REFERENCE
This SAI is part of a registration statement filed with the SEC. Pursuant
to the final rule and form amendments adopted by the SEC on April 8, 2020 to implement certain provisions of the Economic Growth,
Regulatory Relief, and Consumer Protection Act, the Trust may “incorporate by reference” the information that it files with
the SEC, which means that the Trust can disclose important information by referring to those documents. The information incorporated by
reference is considered to be part of this SAI, and later information that the Trust files with the SEC will automatically update and
supersede this information.
The documents listed below, and any reports and other documents subsequently
filed with the SEC pursuant to Rule 30(b)(2) under the 1940 Act and Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, prior to the termination of this offering, are incorporated by reference into this Prospectus and deemed to be part of this registration
statement from the date of the filing of such reports and documents:
|
● |
the Trust’s Prospectus, dated December 6, 2022, filed with this SAI; |
|
● |
the Trust’s
definitive Proxy Statement, dated April 18, 2022, filed on April 12, 2022; |
|
● |
the
Trust’s annual report on Form N-CSR for the fiscal year ended September 30, 2022, filed with the SEC on December 8,
2022; |
|
● |
the Trust’s semi-annual report
on Form N-CSR for the fiscal period ended March 31, 2022, filed with the SEC on June 3, 2022; |
The Trust will provide without charge to each person, including any beneficial
owner, to whom this SAI is delivered, upon written or oral request, a copy of any and all of the documents that have been or may be incorporated
by reference in this SAI.
You should direct requests for documents by calling the Investment Adviser
at (617) 772-8500 or by writing to the Trust at c/o Tekla Capital Management LLC, 100 Federal Street, 19th Floor Boston, MA 02110. The
Trust makes available this SAI, Prospectus and the Trust’s annual and semi-annual reports, free of charge, on the Trust’s
website (www.teklacap.com). You may also obtain this SAI, the Prospectus, other documents incorporated by reference and other information
the Trust files electronically, including reports and proxy statements, on the SEC website (http://www.sec.gov) or with the payment of
a duplication fee, by electronic request at publicinfo@sec.gov. Information contained in, or that can be accessed through, the Trust’s
website is not incorporated by reference into this SAI and should not be considered to be part of this SAI.
FINANCIAL
STATEMENTS
The Trust’s audited financial statements as of and for the fiscal
year ended September 30, 2021, together with the report thereon of Deloitte & Touche LLP, an independent registered public accounting
firm, given on the authority of such firm as experts in auditing and accounting, are incorporated in this SAI by reference to the Trust’s
September 30, 2021 Annual Report to Shareholders, including the Schedule of Investments, the Statement of Assets and Liabilities,
the Statement of Operations, the Statement of Changes in Net Assets, the Statement of Cash Flows and the five-year Financial Highlights.
The Trust’s unaudited financial statements as of and for the six-month period ended March 31, 2022 are also incorporated in
this SAI by reference to the Trust’s March 31, 2022 Semi-Annual Report to Shareholders. A copy of the Trust’s 2021 Annual
Report to Shareholders and the Trust’s 2022 Semi-Annual Report to Shareholders are available at the SEC’s website (www.sec.gov).
Copies may also be obtained free of charge upon request from the Trust at (617) 772-8500.
APPENDIX
A
PROXY
VOTING POLICIES AND PROCEDURES
Policy
The following are the policies and procedures adopted and implemented
by Tekla Capital Management LLC (“TCM”) for voting proxies with respect to portfolio securities held by Tekla Healthcare Investors,
Tekla Life Sciences Investors, Tekla Healthcare Opportunities Fund, and Tekla World Healthcare Fund (each a “Fund” and together
the “Funds”). The policies and procedures are reasonably designed to ensure that proxies are voted in the best interest of
the Funds and the Funds’ shareholders, in accordance with TCM’s fiduciary duties and Rule 206(4)-6 under the Investment
Advisers Act of 1940 (the “Investment Advisers Act”). TCM considers the “best interests” of the Funds and their
shareholders to mean their best long-term economic interests.
TCM shall vote proxies for the exclusive benefit, and in the best economic
interest, of the Funds and their shareholders. Such exercise of voting rights shall be subject to the same standard of care as is generally
applicable to TCM’s performance of its duties, as set forth in the advisory agreements with the Funds. The policies and procedures
contained herein are designed to be guidelines, however each vote is ultimately cast on a case-by-case basis, taking into consideration
the relevant facts and circumstances at the time of the vote. Any material conflicts that may arise will be resolved in the best interests
of the Funds and their shareholders.
A proxy committee has been designated and is responsible for administering
and overseeing the proxy voting process. The committee consists of the President of TCM, TCM’s Chief Compliance Officer (“CCO”),
and the analyst responsible for oversight of the company that is the subject of the proxy. The committee considers proxy questions and
determines the vote on behalf of the Funds.
Procedures
Logistics
TCM’s CCO shall be responsible for maintaining the proxy log, monitoring
corporate actions and confirming the timely voting of proxies. The proxy log shall contain the following information, in accordance with
Form N-PX:
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the name of the issuer; |
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the exchange ticker symbol, if available; |
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the CUSIP number, if available; |
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the shareholder meeting date; |
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a brief identification of the matter voted on; |
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whether the matter was proposed by the issuer or a security holder; |
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whether TCM cast its vote on the matter; |
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how TCM cast its vote on the matter (for, against, abstain; for or withhold regarding the election of directors);
and |
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whether TCM cast its vote for or against management. |
TCM’s CCO shall also record whether any conflicts of interest have
been identified and, if so, what action was taken to resolve the conflict with respect to each vote cast and each abstention.
Substantive Voting Decisions
TCM’s substantive voting decisions turn on the particular facts
and circumstances of each proxy vote. The following is a list of common proxy vote issues and TCM’s standard considerations when
determining how to vote such proxies.
Routine Matters/Corporate Administrative Items. After an initial
review, TCM generally votes with management on routine matters related to the operation of the issuer that are not expected to have a
significant economic impact on the issuer and/or its shareholders.
Potential for Major Economic Impact. TCM may review and analyze
on a case-by-case basis, non-routine proposals that are more likely to affect the structure and operation of the issuer and to have a
greater impact on the value of the investment.
Corporate Governance. TCM may review and consider corporate governance
issues related to proxy matters and generally supports proposals that foster good corporate governance practices.
Special Interest Issues. TCM may consider: (i) the long-term
benefit to shareholders of promoting corporate accountability and responsibility on social issues; (ii) management’s responsibility
with respect to special interest issues; (iii) any economic costs and restrictions on management; and (iv) the responsibility
of TCM to vote proxies for the greatest long-term shareholder value.
Limitations on Director Tenure and Retirement. TCM may consider:
(i) a reasonable retirement age for directors, e.g. 70 or 72; (ii) the introduction of new perspectives on the board;
and (iii) the arbitrary nature of such limitations and the possibility of detracting from the board’s stability and continuity.
Directors’ Minimum Stock Ownership. TCM may consider: (i) the
benefits of additional vested interest; (ii) the ability of a director to serve a company well regardless of the extent of his or
her share ownership; and (iii) the impact of limiting the number of persons qualified to be directors.
D&O Indemnification and Liability Protection. TCM may consider:
(i) indemnifying directors for acts conducted in the normal course of business; (ii) limiting liability for monetary damages
for violating the duty of care; (iii) expanding coverage beyond legal expenses to acts that represent more serious violations of
fiduciary obligation than carelessness (e.g. negligence); and (iv) providing expanded coverage in cases when a director’s
legal defense was unsuccessful if the director was found to have acted in good faith and in a manner that he or she reasonably believed
was in the best interests of the issuer.
Director Nominations in Contested Elections. TCM may consider:
(i) long-term financial performance of the issuer relative to its industry; (ii) management’s track record; (iii) background
to proxy contest; (iv) qualifications of both slates of nominees; (v) evaluations of what each side is offering shareholders
as well as the likelihood that the proposed objectives and goals can be met; and (vi) stock ownership positions.
Cumulative Voting. TCM may consider: (i) the ability of significant
stockholders to elect a director of their choosing; (ii) the ability of minority shareholders to concentrate their support in favor
of a director or directors of their choosing; and (iii) the potential to limit the ability of directors to work for all shareholders.
Classified Boards. TCM may consider: (i) providing continuity;
(ii) promoting long-term planning; and (iii) guarding against unwanted takeovers.
Poison Pills. TCM may consider: (i) TCM’s position on
supporting proposals to require a shareholder vote on other shareholder rights plans; (ii) ratifying or redeeming a poison pill in
the interest of protecting the value of the issuer; and (iii) other alternatives to prevent a takeover at a price demonstrably below
the true value of the issuer.
Fair Price Provisions. TCM may consider: (i) the vote required
to approve the proposed acquisition; (ii) the vote required to repeal the fair price provision; (iii) the mechanism for determining
fair price; and (iv) whether these provisions are bundled with other antitakeover measures (e.g., supermajority voting requirements)
that may entrench management and discourage attractive tender offers.
Equal Access. TCM may consider: (i) the opportunity for significant
shareholders of the issuer to evaluate and propose voting recommendations on proxy proposals and director nominees, and to nominate candidates
to the board; and (ii) the added complexity and burden.
Charitable Contributions. TCM may consider: (i) the potential
benefits to shareholders; (ii) the potential to detract the issuer’s resources from more direct uses of increasing shareholder
value; and (iii) the responsibility of shareholders to make individual contributions.
Stock Authorizations: TCM may consider: (i) the need for the
increase; (ii) the percentage increase with respect to the existing authorization; (iii) voting rights of the stock; and (iv) overall
capitalization structures.
Preferred Stock. TCM may consider: (i) whether the new class
of preferred stock has unspecified voting, conversion, dividend distribution, and other rights; (ii) whether the issuer expressly
states that the stock will not be used as a takeover defense or carry superior voting rights; (iii) whether the issuer specifies
the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable; and (iv) whether
the stated purpose is to raise capital or make acquisitions in the normal course of business.
Director Compensation. TCM may consider: (i) whether director
shares are at the same market risk as those of the shareholders; and (ii) how option programs for outside directors compare with
the standards of internal programs.
Golden and Tin Parachutes. TCM may consider: (i) whether they
will be submitted for shareholder approval; and (ii) the employees covered by the plan and the quality of management.
Compensation. TCM may consider: (i) Whether the company has
an independent compensation committee; (ii) whether the compensation committee engaged independent consultants; (iii) whether
the compensation committee has lapsed or waived equity vesting restrictions; and (iv) whether the company has adopted or extended
a Golden Parachute without shareholder approval. TCM will generally support annual advisory votes on executive compensation.
Limitations
TCM may abstain from voting a proxy if it concludes that the effect on
shareholders’ economic interests or the value of the portfolio holding is indeterminable or insignificant. TCM may abstain from
voting a proxy if it concludes that the cost of voting is disproportionate to the economic impact the vote would have on the portfolio
holdings. With respect to certain privately held companies, TCM may not have the opportunity to vote or may have a limitation on its ability
to vote. For example, in certain cases a company may be permitted by its charter or other governing documents to take action without a
shareholder meeting and with written consent of fewer than all shareholders.
Conflicts of Interest
The Proxy Committee identifies any potential conflicts of interest. Each
potential conflict must be addressed in a manner which will be in the best interest of the Funds and their shareholders. If any potential
conflict is identified the Proxy Committee consults with the Funds’ counsel. Where conflicts of interest arise between clients and
TCM, TCM may convene an ad-hoc committee to debate the conflict and to give a ruling on a preferred course of action. If the ad-hoc committee
determines that TCM has a conflict of interest in any instance, TCM’s CCO shall disclose the conflict to the Board and seek voting
instructions.
TCM may cause the proxies to be voted in accordance with the recommendations
of an independent third party service provider that TCM may use to assist in voting proxies.
Disclosure
The following disclosure shall be provided in connection with these policies
and procedures:
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TCM shall provide a description or a copy of these policies and procedures to the Boards of Trustees of the
Funds annually and upon request. |
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TCM shall make available to the Funds its proxy voting records, for inclusion on the Funds’ Form N-PX. |
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TCM shall include its proxy voting policies and procedures in its annual filing on Form N-CSR. |
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TCM shall cause the Funds’ shareholder reports to include a statement that a copy of these policies and
procedures is available upon request (i) by calling a toll-free number; (ii) on the Funds’ website, (if the Funds choose);
and (iii) on the SEC’s website. |
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TCM shall cause the Funds’ annual and semi-annual reports to include a statement that information is
available regarding how the Funds voted proxies during the most recent twelve-month period (i) without charge, upon request, either
by calling a toll-free number or on or through the Funds’ website, or both; and (ii) on the SEC’s website. |
Recordkeeping
TCM shall maintain records of proxies voted in accordance with Section 204-2
of the Advisers Act, including proxy statements, a record of each vote cast, and a copy of any document created by TCM that was material
to making a decision of how to vote the proxy, or that memorializes the basis for TCM’s decision on how to vote the proxy. TCM shall
also maintain a copy of its policies and procedures and each written request from a client for proxy voting records and TCM’s written
response to any client request, either written or oral, for such records. Proxy statements that are filed on EDGAR shall be considered
maintained by TCM. All such records shall be maintained for a period of five years in an easily accessible place, the first two year in
the offices of TCM.